Endava plc

Good day, and welcome to the Endava third quarter fiscal year 2023 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lawrence Madison, head of investor relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's third quarter of fiscal year 2023 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 presentation and our accompanying remarks today include forward-looking statements including our guidance for Q4 fiscal year 2023 and for the full fiscal year 2023, our ability to grow revenue, and in particular, growth and expansion in our industry verticals, the company's continued business optimization actions, enhancement to our technology and offerings, the impact of adverse macroeconomic conditions, and other forward-looking statements regarding our business strategies, plans, and operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained 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 October 31st, 2022. Also, during the call, will 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 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.

Thank you, Laurence. 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 three months ended March the 31st, 2023. Despite the challenging macroeconomic environment, we reported another solid quarter with revenue totaling 203.5 million pounds, the Q3 of our fiscal year, 2023. representing a 20.3% year-on-year increase from £169.2 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of £43.4 million, representing a 21.3% adjusted profit before tax margin. While the near-term outlook might be more challenging, We are managing the business for the long term. We remain very focused on our vision 30, which is our planned scale up as we head to 2030. And we are gearing in Darva for exciting market opportunities. Post COVID, we experienced an increase in demand, which made it difficult to undertake some business optimization actions required to deliver on this vision. The recent cooling down in demand has given us a chance to recalibrate the business and to better position ourselves for continued growth into the next decade. Over the past three years, we've been building our industry vertical focus, establishing teams who market, sell, ideate, and deliver into specific industries. This enables the incubation of technologies and capabilities attuned to the specific needs of clients and differentiates our solutions from generic horizontal technologies. We have now reorganized internally into our industry verticals and continue to invest in talent to help our clients adapt to the new disruptive technological waves, including AI and ML. As I highlighted in our last earnings call, last December we saw a change in behavior as some clients added another level of due diligence to their decision-making cycles, slowing the commencement of new projects, and in some cases, pausing existing spend as they reassessed their priorities. I also noted that we'd seen an uptick in activity in February, which resulted in March being our highest revenue month in our history. Unfortunately, the recent bank failures triggered another wave of caution, and as a result, the momentum going into March stalled, and we now see lower demand than our previous guidance. To give this some color, the banking failures triggered a significant change in behavior in our PE portfolio company clients, where they curtailed spend sharply. The drop in revenue in Q4 from Q3 is down to PE portfolio company reductions, with the rest of the business flat allowing for lower working days in Q4. We believe that this now pent up demand will return when economic conditions recover. In the last quarter, our revenue growth year on year was driven primarily by both the expansion of work for our existing clients and the acquisition of new ones during the quarter. We continue to prioritize our efforts on larger relationships that can grow and scale. As a result, we continued growing the number of larger clients, with a total of 155 clients each paying us in excess of £1 million per year, compared to 118 in the same period last year, representing a 31% year-on-year increase. We also saw the cohort of our largest clients, those who each spend over £5 million per year with us, grow by 35%, from 23 in the same period last year to 31 last quarter. Moving on to technology, it will be of surprise to no one that data and AI-related work has been an important part of our business for a long time and has continually grown in scale, value, and complexity as we engaged in larger and more involved pieces of work for our clients in recent years. Today, I'll highlight some of the work we've been doing using this technology. It's important to note that the inherently exploratory and iterative nature of generative AI work aligns with Endava's natural way of working. We strive to work in an exploratory way with our clients from ideation to production, working iteratively to understand their needs and opportunities, applying the right technology in the right way and deepening our knowledge and the client's understanding as we progress together. This allows us to achieve a rapid time to initial value, but also lasting and sustainable value for the client in the long term. We deliberately bracket data and AI together, as AI is dependent on data to train its models to extract patterns and insights. So our skills across the data spectrum directly support our work in the AI field. Our work in data and AI is varied, both in business domain, where we work across a wide range of industries, and in the technical nature of the work. This area is varied, being a continuum from traditional BI-based data work at one end to AI-based analytics and generative AI at the other, with the different aspects complementing each other. Our projects vary from data warehousing and reporting through modern data engineering where we solve the big problems clients have in organizing their data so that it can be used profitably, through building leading edge data platforms to provide clients with environments to exploit the potential of their data. We also provide advanced analytical work to unlock the value of data and AI projects, where we harness the latest advantages in AI technology to solve practical problems in ways that simply wouldn't have been possible a few years ago. The first example I'd like to share is work we did for a dynamic New York-based digital marketing agency who were struggling to manage and capitalize on the large amount of data they were collecting. We created a cloud-based data platform to allow advertising budget allocation across different marketing channels based on real-time channel performance during an advertising campaign. This revolutionized our clients' understanding of their in-flight campaigns avoiding the long delays associated with traditional approaches by providing immediate insight into campaign performance through visual dashboards and analytics, allowing them to seize opportunities by responding immediately to trends and insights. In a completely different domain, we created a novel solution for bad debt collection for an international insurer. Our client recognized an opportunity to improve the bad debt collection process by analyzing data from a range of older systems. We implemented a data platform solution that materially improved their understanding of this difficult part of their business by providing analysis and visualization of patterns and trends in bad debt collection. This allows tactical response to immediate problems, as well as strategic optimization of the process. Sophia Genetics, a global cloud-native data-driven software company in the healthcare space, engaged us to optimize a federated data query processing implementation to increase throughput and lower cloud costs. Our team did a cost performance comparative analysis between various technologies and designed the architecture and implementation. Moving on to a more AI-centric example, We applied modern AI to a very traditional industry when we worked with a central European bank, NLP Banker, to supply AI to modernize their retail banking experience. Our client's goal was to make their customer's financial management insight proactive, engaging, and empowering. To do this, they needed a powerful mechanism to classify banking transactions. We created a crash categorization engine that classifies very large numbers of retail bank transactions into categories, such as grocery, shopping, health, and leisure, adapting the categories over time by learning from customer input. The categorization is an important component of the bank's new digital customer experience, driving customer loyalty, a push for new customers, and new cross-selling opportunities by allowing the bank to better understand their customers and the customers to understand and optimize their spending patterns. We've also done ideation work in the AI area. For example, we completed a project for a management consultancy firm to encode data from medical records into knowledge graphs, which could then be analyzed using a graph neural network for anomaly detection. This is designed to drive better patient outcomes and help medical practitioners to improve their medical practice. by identifying potential mistakes in treatment and insights into physician behavior and decision-making. Another advanced project example is one of our internal R&D projects in the area of generative AI, which developed a system to allow game designers to generate 3D visual assets, such as characters and gameplay environments using natural language, significantly improving the productivity of the game designers by providing them with a rich source of inspiration, as well as an artistic digital assistant to rapidly perform many of the routine graphical design tasks for them. Indaba is currently engaged in the development of two distinct accelerators, concentrating on large language models. Leveraging our partnership with Google, we've been given early access to their enterprise generative AI tooling. We've applied this against the insurance industry. successfully demonstrating the practical utility of generative AI within a business environment. We developed an interactive workshop highlighting the optimization of interactions between brokers, underwriters, and compliance officers by employing instruction-based tasks and chain of thought reasoning prompts. This innovative approach has the potential to transform complex business processes. ultimately enhancing clients' operational efficiency and positively impacting their bottom line. The second accelerator involves a comparative analysis of cost, performance, features, and industry-specific capabilities of various commercial and open-source LLMs. Endava is currently evaluating models from OpenAI, Google, and open-source within the context of three industry verticals. healthcare, financial services, and insurance. The analysis evaluates the strengths and capabilities of each model in relation to industry-specific client implementations. The knowledge we gain from this exercise is foundational in delivering effective applications of AI for our clients because the nuanced understanding we are gaining of how the different models behave in different industry scenarios will allow us to apply the right technology to each client scenario. so de-risking the work and avoiding lengthy experimentation phases for model selection. The hunger for data to train computer vision-based machine learning models has prompted us to build a synthetic data generation accelerator. This highly customizable pipeline can generate tens of thousands of uniquely rendered images tailored to specific scenarios all geared to accelerate the training and continued performance enhancement of these models. Paired with our comprehensive data science and machine learning expertise, this new capability has opened up new opportunities with both existing and new clients. Finally, we're working with large language model technologies like ChatGPT and GitHub Copilot, trialing them within the firm and building proof of concept applications with them to explore their potential, understand their limitations, and identify the problems that we can apply them to in our business and with our clients. In summary, data has been an important area for us for a long time, and we see more and more interest and an increasing variety of work in this area, which is being accelerated further by the recent advances and interest in AI, which we are well-placed to respond to. We believe these latest technological developments will be an important source of additional work opportunities for Indala. Clients will spend less on legacy work, leaving larger budgets for complex transformation work that will continue to need delivery by experienced high-performing cross-functional teams who will deliver results faster using generative AI tools. Additionally, this new technology will improve productivity across the board, allowing for higher spend And finally, we expect lots of high-value projects to emerge as our clients try to apply generative AI to their businesses for which they are likely to need our help. I'm excited about our recent acquisition of Mudbath, an Australian-based technology firm specializing in strategy, design, and engineering services. Mudbath partners with businesses to build new digital solutions, enhance user experiences, and accelerate digital transformation programs across enterprise systems, web, and mobile products using their proven, agile delivery methodology. Mudbath's clients span broad industry verticals, including retail, mining, and adjacent activities, including rail and tools, health, insurance, banking, and travel, and will help in our strategic intent to diversifying away from the UK and from payments and financial services. The acquisition follows our organic entry into Australia in 2021 and the acquisition of Lexicon, an Australian based consulting design and engineering firm in 2022. We continue to see Australia as a growing and attractive market with strong demand for high quality technology product creation delivered both onshore and near shore by multidisciplinary delivery teams. Mud bath teams and strong client relationships are expected to complement Endava's expanding nearshore capability in Malaysia and Vietnam to continue to deliver innovative high quality digital solutions. I remain excited about our growth prospects in the Asia Pacific region. We're delighted to share some highlights of our WeCare sustainability approach over the past few months. To mark International Women's Day throughout March, we recognized the impactful work and contribution of women across our global organization. We featured some of these amazing women and their stories internally and on social media. We also organized internal and external events to support our women in tech focus. We brought together some of the most senior women at Indava across geographies and business functions to talk about the importance of diversity. the role women play in the working world, sharing some of their career journeys and giving advice to women in the tech space. To celebrate Earth Day, we rallied behind this year's theme, Invest in Our Planet, which highlights the importance of dedicating our time, resources and energy to understand and address climate change and other environmental challenges. As an example, we started to engage with our suppliers for awareness and joint actions reduce the environmental impact of our operations. We ended the quarter with 11,742 employees, a 6.7% increase from 11,001 in the same period last year. We've made the strategic decision to increase our selectivity regarding our recruitment efforts and are focusing on areas of strong demand plus sales and marketing. In summary, despite the recent challenges, Based on our conversations, we believe clients continue to prioritize digital transformation in their IT budgets. 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, John. Endava's revenue totaled 203.5 million pounds for the three months ended March 31, 2023, compared to 169.2 million pounds in the same period in the prior year, a 20.3% increase over the same period in the prior year. Profit for tax for Q3 fiscal year 2023 was 30.4 million pounds compared to 25.9 million pounds in the same period in the prior year. Our adjusted profit before tax for the three months ended March 31st 2023 was £43.4 million compared to £34.2 million for the same period in the prior year. Our adjusted profit before tax margin was 21.3% for the three months ended March 31st 2023 compared to 20.2% 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 realized and unrealized foreign currency exchange gains and losses, structuring costs, and fair value movements of contingent consideration, all of which are non-cash items except for the restructuring costs and realize foreign currency exchange gains and losses. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Adjusted diluted earnings per share or EPS is 59 pence for the three months ended March 31st, 2023, calculated on 58.2 million diluted shares as compared to 48 pence for the same period in the prior year calculated on 58.0 million diluted shares. Revenue from our 10 largest clients accounted for 33% of revenue for the three months ended March 31st, 2023, compared to 35% for the same period last fiscal year. Additionally, the average spend per client from our 10 largest clients increased from 5.8 million pounds to 6.8 million pounds for the three months ended March 31st, 2023, representing a 17% year over year increase. In the three months ended March 31st, 2023, North America accounted for 32% of revenue compared to 33% in the same period last fiscal year. Europe accounted for 24% of revenue compared to 21% in the same period last fiscal year. And the UK accounted for 38% of revenue compared to 43% in the same period last fiscal year. While the rest of the world accounted for 6%, compared to 3% in the same period last fiscal year. Revenue from North America grew 15.4% for three months ended March 31st, 2023, over the same quarter of fiscal year 2022. Comparing the same periods, revenue from Europe grew 35.6%, the UK grew 7.2%, and the rest of the world grew 173.4%. Revenue from Payments and Financial Services grew 24.3% for the three months ended March 31st, 2023. Revenue from Payments and Financial Services accounted for 53% of revenue compared to 51% in the same period last fiscal year. Revenue from TMT grew 1.2% for the three months ended March 31st, 2023 over the same quarter of fiscal year 2022. and accounted for 21% of revenue compared to 25% in the same period in the prior year. Revenue from other grew 32.2% for three months ended March 31st, 2023, over the same quarter of fiscal year 2022, and now accounts for 26% of revenue compared to 24% 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 £21.2 million for the three months ended March 31st, 2023, compared to £16.1 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period remained strong at 199.2 million pounds at March 31st, 2023 compared to 162.8 million pounds at June 30th, 2022. Capital expenditure for the three months ended March 31st, 2023 as a percentage of revenue was 2.0% compared to 1.6% in the same period last fiscal year. During the quarter, we took a restructuring charge of 2.6 million pounds and a total of 3.7 million pounds for the nine months of FY23 related to business optimization actions. Our guidance for Q4 fiscal 2023 is as follows. Endava expects revenue to be in the range of 187 million pounds to 189 million pounds. representing constant currency revenue growth of between 3% and 4%. Endava expects adjusted diluted EPS to be in the range of 44 to 45 pence per share. Our guidance for full year fiscal year 2023 is as follows. Endava expects revenue to be in the range of 792 million pounds to 794 million pounds. representing constant currency growth of between 16.0% and 16.5%. And DAVA expects adjusted diluted EPS to be in the range of 215 pence to 216 pence per share. This above guidance for Q4 fiscal year 2023 and the full fiscal year 2023 assumes the exchange rates at the end of April 2023, when the exchange rate was one British pound to 1.26 US dollar and 1.13 euro. This guidance seeks to take into account the current macroeconomic headwinds highlighted by John in his comments. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Ashwin Shrivakar from Citi. Please go ahead.

Thank you, and good morning. Yes, my first question here is with regards to, John, your comment that you expect the fall-off in demand to be temporary, and I think you characterized it as there's going to be now pent-up demand. If you could maybe give us some color around what gives you the confidence that it is pent-up demand and over what time frame you expect that to potentially come back.

Sure. Thanks, Ashwin. So just to play out a little bit again what happened, we had the end of December slowdown. The business picked up. actually pretty strongly through Q3, resulting in March being our highest revenue month in our history, and actually helping us to beat the high guide that we had for Q3. However, as we got to the end of March, we saw this pullback triggered by the bank failures that we're going through economically. And it was particularly true, it was almost entirely true, that it was our private equity portfolio clients who pulled back. And they acted very fast following the bank failures. And that meant that our pipeline business that we were expecting from those clients failed to convert as they curtailed and spent. And that has now stabilized as we've gone through Q4. Just to give the context on the other clients, they flattened off so they didn't continue the growth that we saw being sustained through Q3. And that's the other half of why we've had to lower the guide. Now, in terms of the color on the PE portfolio clients, seeing as those are the guys who deferred spend and pulled back, they're generally large organizations, so not early stage businesses. And the pause has been governed by their owner, PE, evaluation of their business models and the returns, given the macro, the access to capital, the interest rates and so on that are developing across the economies. Now, we believe that about 50% of that delayed work will go ahead once they've re-evaluated it. And we're starting to see that come through. So in summary, on the PE side, they were quick to take action, and that was particularly visible after the bank failures, and things have stabilized since. Our sales teams are starting to see renewed interest in investing in those projects from those clients and others, and mainly focused on building capabilities that directly support top line growth or helping controlling costs. So that's the reason why we're looking at that PE pullback as being the macro has hit them a bit harder than our general client base because of access to capital and interest rates changing. And so they've taken a much harder look at their portfolio of projects and that's created a backlog. That is creating a huge amount of activity. Q4 sales activity is the highest we've ever seen by some distance. You know, the slippage from Q3, the PE that I've described, plus new opportunities is giving a bulge of opportunity in Q4. And, you know, while some of that might slip into Q1, it's actually a clear indicator of a very strong level of market activity and interest in things that we do. So there's quite a bit of color there, but hopefully that helps you understand what's been going on.

Yeah, no, no. It's interesting that you gave a very explicit reason as opposed to a general macro weakness as the rationale. So that's helpful. With your comments on generative AI, if you could maybe... describe what sorts of talent you are now looking for and I do agree with the data and AI combination, but what sorts of talent and are you beginning to see primarily sort of pilot projects or is this more of a, you know, let's go back and incorporate AI into work that's already in progress or are clients

potentially going whole hog into you know we need to we need to be up on this yeah sure so i mean just to re-emphasize again so we've we've been working in this space for um over eight years i think the big change that's uh coming through um you know with the with the recent advances in the technology is that the speed with which you can implement some of the uh the benefits and so on is is much higher and the potency of the technology is much higher with a sort of step change from what we saw with previous generations. Now that is creating a lot more interest in the market. There is a mixture of interest in exploring what technology can do with business models So the things we're doing in the ideation space of what we do with clients is driving quite a lot of activity around that. There is currently still a nervousness around some of the challenges with generative AI, some of the IP issues and so on. The IP issue being that if you don't do it right, it gobbles the information that you give it. And if you want to use it against your proprietary databases, You don't want the generative AI to take that off you. Now, that is rapidly changing. So we see it as a little bit like the shift to public cloud that happened a few years ago with the nervousness that clients had around that. It will get fixed. I think it will get fixed much more rapidly than the nervousness around public cloud has fixed. And that will then open up the opportunities to then take those ideation phases into large-scale implementations. Now, quite a lot of the examples that I gave were ideation phase examples during the opening remarks. But the power of what they can do to organizations is becoming very visible through that. On the questions around specific talent areas, there are sort of data-oriented capabilities, things like Python, PyTorch, et cetera, that are growing in demand so that you can clean up the underlying corporate data that you're going to train the AI models against. And then there are new areas, things like prompt engineering is going to become something that people become very familiar with. You know, prompt engineering is how you prime your AI to work properly by asking it the right questions. And so, you know, we're starting to see an expansion in demand for that and how we train people in order to do that.

Got it. Thank you very much.

Thanks, Justin. The next question comes from Brian Bergen from TD Cowan. Please go ahead.

Hi, thank you. Can you give us a sense of how you're expecting the trajectory of the June quarter growth to progress? So meaning, have you built in a relatively steady performance assumption over April, May, and June? What do you expect June to exit at a faster rate of expansion? And I'm just trying to get a sense of how that current pipeline and contracting activity may set you up beyond the June quarter and whether that is expected to be a growth trough.

Yeah, so let me contrast it with Q3. Whereas Q3 we had a big drop in December and then a rapid build-up through the quarter, in Q4 it's a shallower drop-off. So we had a drop-off at the end of March, another little drop-off smaller at the end of April. May looks flat, and June we're looking at a small uptick. So if you project that forward, which is what I'm sure you're looking at doing, the Q1 uptick is dependent on us closing some of these large numbers of sales opportunities that we have in Q4 and seeing that push into Q1. The bigger uptick I would expect to see come through in Q2.

Yeah, I agree with that, Ryan. We're a very limited pipeline in this guide. It's about 1% or so, seeing what we've seen through the course of March and April. It's a very sort of fluid environment at the moment, but we do think the PE business side has stabilized, as indeed has the non-PE side. So those opportunities that John's alluding to, they may give us an impetus to Q1, to lift us up, or they may delay into Q2.

Okay, that's helpful. And then follow-up on the PE client portfolio. Can you remind us the mix of the revenue scale of that cohort? And within that group, did clients all broadly act in a similar way, or were there pockets that may have been more pronounced in the spending pullback than others based on, you know, underlying portfolio company industry or region?

Yeah, so at the PE portfolio, It gives you a sort of sense of the decline. We had a decline of about 21% quarter on quarter, going from Q3 to Q4. So, you know, we've gone from something like Q3 22% of revenue to guiding 19%, so significant sort of contraction. It was pretty broad across payments and financial services. The pullback there was stronger. 29 overall particularly uh in payments so it's about a third of what we think is pe for um q4 but we also saw a significant pullback um in tnt particularly in tech as well so high teams there another so it was it was very broad basically uh across the piece so everybody It seems like the pullback was strongest in financial services and particularly sort of payments.

Okay, understood.

Thank you. Our next question comes from James Fossett from Morgan Stanley. Please go ahead.

Great, thank you. I wanted to follow up on a couple of things there. You know, I understand the comments around fee-backed firms, et cetera. But, you know, I think that when we look at the numbers, it seemed like the U.K. was also a little bit weaker. Can you talk a little bit about what's happening in that demand arena, the particular area or region within that? And can you talk through, are you seeing a similar plateauing or stabilization out of the U.K.? ?

That's right, James. I mean, the UK sequentially was down on Q2. It will continue to decline, probably about 6%. Again, we're seeing a big sort of pullback on PEs, about 25% actually sequentially. The non-PE business is reasonably sort of stable. There's a modest sort of decline, but again, We've got some ups and downs in terms of the pence financial services in the non-PE space. Moderate decline is strongest in TMT, but other is relatively strong, seeing some sequential growth. So we see a continual decline in the UK. It's being led by PE. And if non-PE, the main reason is weakness in TMT.

Got it, got it. And then I wanted to ask about client and client count. It looked like the client roster decreased year on year. And if we're looking at kind of, it sounds like you're actually having a really good quarter from a sales perspective and an engagement perspective. Do we expect that to continue to increase or to rebound, I should say? Or are we going to go through a period, do you think, of increasing sales? customer concentration where you're doing more for existing customers before starting to flatten and then eventually, I would imagine, rebroaden that customer count. Just trying to understand what that should look like from a cadence and how you're engaging with clients more broadly.

Yeah, so, I mean, on the client side, our big focus is on growing the big ones. And, you know, over the last 18 months or so, we've actually been focusing quite hard alongside that on trimming out the smaller clients. It's one of the things that happens when we do M&A. For instance, we pick up a roster of small clients and obviously for a period of time, you continue to look after those clients. But over time, if they're not going to grow and go somewhere, we actually want to focus our efforts on the larger clients. Now, if you look at the numbers for larger clients, we've been particularly strong in the larger ones. So the greater than 5 million, those increased to 31 compared to 23 last year. And we don't publish the band, but if you look at the 2 to 5 million client band, that moved up to 56 compared to 35 last year. So it's all about us putting the energy into the larger clients that have the opportunity to scale. Obviously, we're still bringing in a good number of new smaller clients, but they get outweighed or have done over the last two or three quarters by the trimming of the very small ones.

And I think that's something you'll see, James. I think our top 10, certainly in the near term, will increase the percentage of revenue And it looks like they're also slowing at not the same rate as the rest of the business, sequentially.

Got it, got it. That's really helpful. Thank you.

Thanks, James. Our next question comes from Jamie Friedman from Susquehanna. Please go ahead.

Hi, John. Thank you for your comments on generative AI. They were really helpful with the use cases. I had a question for Mark, though. How should we be thinking about inputs like utilization and headcount growth for the remainder of the year? And if you have an outlook or if it's too soon for, say, the calendar, what are you guys thinking about boarding headcount?

So, I mean, you've seen in the quarter, current one reported that our average headcount is down 3%. We put in place a transformation program, so headcount will sequentially decrease as we go into Q4, anticipate average about sort of 3%. Utilization is going to fall as a consequence, probably about three percentage points or so. But actually, I think the gross margin after we've taken those restructuring costs is exceptional, will remain, you know, basically stable in that sort of high 30s, around sort of 38% or so. We haven't concluded our budget process. I'm not going to add any color beyond June. And it's dependent on the sequential growth that we see in Q1, Q2, as to how quickly or otherwise we rebuild headcount.

Okay, and then just as a follow-up, John, with your 2030 outlook commentary, how do you see the company at a high level different then than it is now, whether it's, you know, based on geographies or verticals or practices? Just any high-level comments as you see the company over the long view. Thank you.

Yeah, sure. So, I mean, some of the things that we're focused on is becoming more global, more spread. So the UK becoming a smaller proportion of our overall revenue. By contrast, the US in particular and the rest of the world stepping up sharply as percentages of the business. We likewise see diversification from a sector point of view. So moving from around 50% in the payments financial space Seeing that move down quite substantially at the expense of increasing our investment in the other spaces, including TMT and that. We will start to see some of what we classify as other segments grow to a scale where we can pull them out and start disclosing individual segments. And that's certainly something we're looking at for next year, being able to do that and give a little bit more color on how things are moving. So, diversification, a big theme there. You know, the focus that we have on industry verticals, the way in which we put multidisciplinary teams together to create and solution opportunities and how technology can impact clients in different segments. We see that growing in maturity and impact with our clients. As I mentioned, we've been underway with that for three years now. The change that we've just pushed through means organizationally we become much more oriented in terms of how we execute on that vision. meaning that the multidisciplinary teams of marketing, sales, ideation, subject matter experts, delivery people and so on are now organized into teams focused on each of the industry segments as opposed to collaborating as previously done from their different organizational slots. So we believe that if we look forward to 2030, that that's going to make a significant difference in us maturing our position in the market and, you know, maintaining a differentiation against our competitors.

Thank you. Thank you, Jack.

Thanks, Tim. Our next question comes from Maggie Nolan from William Blair. Please go ahead.

Thank you. You commented on a portion of work within the PE cohort that you expected would go ahead post kind of evaluation by the companies. What is the nature of the work that you don't place within that bucket? And then are you expecting these to be kind of outright cancellations of projects or just a deferral to a later date comparatively?

So there is a bundle of stuff, which as we look at it, and obviously it's a client call at the end of the day, but as we look at it and we look at what the clients are seeking to do with their business, where we think given the more challenging environment in terms of access to capital, in terms of the interest rates that they are peddling against, if you like, where we think they will decide to pull back and not go for the investment and return that they previously saw as attractive. And so, you know, we think about 50% of what we've seen pull back on with the PE clients just won't happen at all. You know, given the timeframes for them delivering returns to their owners, et cetera, it feels like around about that it's just not going to happen.

Okay, thank you. And then you recently acquired another Australian company. Can you just comment a little bit about the demand environment in APAC, maybe how that's progressed over the last several months, and then again, the kind of long-term opportunity that you see there?

Yeah, so, I mean, we've mainly been focused on Australia so far under the APAC banner. And we see demand as being excellent in Australia. So we've seen good organic growth over the last 12 months, and that is continuing to come through. And then that has been augmented by the M&A deals that we've done, Lexicon One and now recently Mudbath. Now, you know, part of the attraction of the Australian market is that the maturity of genuine digital suppliers is actually lower than we see in Europe and in North America. And so putting ourselves together with some of the emerging digital players in that market is creating a lot of interest, a lot of sales opportunities. And so we are anticipating outsized growth out of our APAC and Australian-based business. The other area that's in the rest of the world, just to pick up on it while we're talking about it, is the Middle East. And that's another area where we're seeing outsized growth with the client opportunities. They're in a different sort of macro to the rest of the world. And so we're seeing great opportunities there as well. So those two things put together have driven a large part of the step up in the proportion of our businesses in rest of the world from 3% up to 6% that you've seen. A lot of that is organic. It isn't just the M&A coming through.

Thanks for the update.

Again, if you have a question, please press star then one. Our next question comes from Brian Keane from Deutsche Bank. Please go ahead.

Hi, thanks for taking my question. Wanted to ask about your post-COVID comments, where you guys saw an increase in demand. Do you think there was, you know, kind of a bubble in demand? And why is that demand that you saw there made it difficult to undertake some business optimization actions?

Sure. So, yes, there was definitely a bubble in demand. If you remember, we were delivering 50%, 60% year-on-year growth through that period, which is much higher than our sort of normal expected growth rates. And so, you know, that was stretching the business really hard as we were growing at those sorts of rates. So the ability to optimize, to make reorganization when you're actually being stretched by growing at 50% was something that we deferred and chose not to do. Also, we had some people in the business who weren't performing as well, but actually taking them out at that point where where we are absolutely against the wall in terms of growing our headcount was difficult to do. So we optimized what we could achieve with them rather than actually making the decisions that would keep us in the fittest state for growth. So as that pressure has come off, which has essentially been coming into this new calendar year, we've actually been able to make the decisions on those people to reorientate to the higher performers, to the people who we get high billability from with clients and so on. And so that's what's driven the restructure, the reorientation that Mark touched on.

Got it. No, that's helpful. And then just to make sure I have it right, was there any weakness that you're seeing in the guide that's outside the PE portfolios? I think you talked about flat maybe sequentially in revenues, but just trying to think about are there any specific areas outside those PE companies that also showed some weakness, you know, as you look at the guide in Q4?

Yeah, I mean, what we're saying about flat, it's the revenue generated per working day that is stable and continues to grow. So there are less days in Q4 available to us than Q3. So there will be what will look like a slowdown in the non-PE business sequentially. But when you dedupe the number of working days available, it's actually pretty stable. And again, the weakness is across the piece. It's not as pronounced as with the PE business. So we're still continuing to see weakness in payments of financial services. It's mainly impacting the non-PE business actually in tech, in TMT. That's the real one to sort of notice. So TMT is weaker in the non-PE elements of the business.

Got it. Thanks for taking the questions.

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

Thank you, and thank you all for joining us today. You can see that we're excited about the market opportunities that we have over the medium to long term from all the technological waves that continue to emerge, some of which we outlined on this call. We're gearing Endava to continue as a leader as these tech waves gather strength. I look forward to speaking to you in September on our next earnings call.

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