All right, so I guess good morning, everyone. My name is Andrew Estes. I'm from the payments team under Darrin Peller at Wolfe, and we're glad to have Mark here, the CFO of Endava, and head of IR Laurence is in the front row for the audience. First I'll let Mark do a quick introduction of the company for those not aware and why it resonates so much with our FinTech conference while being an IT services provider. And then we'll jump right into Q&A. So Mark, thanks for having us, or thanks for being here. Why don't you kick things off?
Yeah, yeah, yep. So, Endava's next-gen IT services business. We work with large clients, helping them basically react to some of the disruptive sort of technologies that are passing through. We have a strong franchise in payments and financial services, so about 50% of our revenue comes from that particular area. In terms of the solutions we build, we use a nearshore delivery model, so it's agile. And we're mainly about building sort of product for clients. So it's about growth and helping them engage with their customer base. And I think that's about it. Let's see if we can dig into a bit more detail, as you see.
I'm curious. That makes me wonder, though, how long has the 50% been kind of a static figure in terms of penetration with that sector before we get into?
It's been that level for a very long time, actually. I mean, I've been with the business since 2015. I think it was higher. I think it was probably about 60% there. I think we're particularly sort of overweight in, you know, payments. And since we listed in 2018, there's been a push to diversify either geographically or sector-wise. 'Cause we, you know, at the time we had a preponderance of our revenue was in the UK and Europe, and it still is. It's about sort of 60%. And despite diversifying mainly through M&A, payments and financial services, because of the growth that we've had in that segment has kept pace with the onboarding of, you know, different industry verticals and different sort of companies. So it still roughly remains at that moment. It's the headwind at the moment.
So payments was typically about 30% of revenue, it's about 20% on a pro forma basis for Q4. So it's an important part of the company's growth, you know, thus far.
Makes sense. I guess taking a step back, you know, with this recent quarter having, you know, recently been released, you know, where are you having investors focus their attention? And if any, you know, moving parts around, you know, the changes in guidance and the outlook that you could provide would be would be great.
Yeah. I think there were two reactions. One was we pulled the guide back quite severely. We had a sequential growth in our guide when we were guiding back in November, going from our Q2, which is the quarter to December to March, about sort of 6%. It's actually about 5 minus 5%. Similarly, we've got a wider range around Q4 as well, which is the quarter to June. There's been a big reduction in the full-year outlook from 8.5% to 7.5% at the top of the range. There's been a number of things that have driven that. When we were guiding back in November, we saw a large number of deals building up for us, and also with existing clients, a big backlog of work.
So on the big deal front, we had about 15 big deals, which is anything over $5 million, you know, for us basically still. So we had about 15 progressing through the pipe. We had landed 1 at that stage. And what we've seen with the ones that we have landed, they've been slow to progress through the pipe from making a proposal to contract into actually starting work. So, you know, an example is a UK retailer where we've been in what we call the ideation phase, which is discovery before you start to sort of scale, sort of build. That has been going on a lot longer than anticipated. And then actually progressing deals has been long. So we announced on the earnings call a 5-year, $70 million deal with Equiniti, which is in banking capital markets.
We expected to sign that in December, and we signed it within 24 hours of the earnings call, so there was a two-month delay. So we've seen a lot of the new clients being slow to progress for various reasons through that sort of pipeline. And then with existing clients, so we've got them, we're going through that discovery phase before we ramp. They are taking longer to ramp. And we know that they intend to sort of spend with us because they're still working on the backlog of work, shaping it, but they're just taking their time. And so, you know, some comments we have are, you know, we've got the budget, but we're holding back because of macro uncertainty. In other areas, it can be about, you know, technology, you know, decisions.
So I think in the sort of payments, industry vertical in particular, you know, we've done a lot of work around merchant acquiring sort of platforms. The sort of strategic direction is more about real-time payments, open banking. So people are just kicking the tires a lot more with it before they sort of ramp up the work that we expect them to do. So that pipeline of work that we were seeing has been slow to come through. It's still there, and the pipeline is building. The bigger deals, we've got 17, which is, you know, two higher, but we've, you know, 5 have come into the pipe. We've lost, you know, 3. 5 have converted. But the absolute value is over 50% higher than it was back in November. So it's building.
It's just that people aren't, you know, pressing the button to execute on it.
So it's really a dynamic of not lost revenue, just kind of delayed in terms of when it's coming through?
That's what we're seeing. We're not seeing people pull stuff, and we're not seeing people saying, "I'm not sure about my budget. I'm going to stop," and, you know, people, you know, they do a discovery piece of work with us. They are continuing to do it. It's not like they say, "Okay, we know what we think we're going to do. We're just going to put it on the shelf and, you know, reactivate that in the autumn or something like that." They're continuing to, you know, think through what they're going to do, which to us implies that they are going to ramp at some stage. But there's a little bit of can kicking down the road with it.
Mm-hmm. Understood. I guess on the more, you know, positive side, you mentioned open banking and RTP seeing signs of slowness. Are there areas in payments you're seeing kind of more stable demand?
I'd say that those are the sort of shifts that we're seeing, or pivots, which I think is giving people pause for thought. And I think, you know, there are various sort of clients in the payments space where they're definitely sort of under pressure. I think the volumes are still there, but the margins that they're able to make is giving people pause for thought about whether they actually do double down on a, let's call it, a new direction or a pivot in direction. And it's pretty across the piece. I mean, Mastercard is our largest client. So we're seeing slight headwinds there. I think it's mainly around the technology, you know, route that they're trying to line up on. And we have come off a very high level of spend with them through 2022 and 2023.
So there's a little bit of a pause in considering the direction. Our next biggest client, which is Worldpay, who's just spun out of FIS. That's a little bit more specific to them because they're now under private equity ownership. There's been a perception that with the Worldpay product, which is what we build, you know, as I was sort of saying in the preamble, has lost competitiveness under FIS. I know that there was a move to push the work to India for them, and I think the new philosophy under the PE owner is to bring it back nearshore. They may do some of it themselves, but we anticipate they will work with us. Now we, in terms of that outlook, it's flat, and it has been for the year because we didn't have any visibility.
We still don't have any visibility yet on the direction of travel with them, but that potentially augurs well. That sort of delay in decision-making about a product set is, you know, particular to their circumstance. Our next biggest client, again, is a payments client. Again, they're being cautious, and that seems to be more macro-driven or economic outlook-driven.
Understood. I guess on that note, how does the vertical mix evolve as, you know, as Worldpay becomes really PE-owned? Will that cause a mix shift in terms of?
I don't think so. I mean, I said there were two things in terms of the earnings call. So there's a pullback on the guide, which I think shocked people. And the other thing was announcing a big acquisition. So we announced GalaxE, which for about $405 million is based in India. And this is part of the diversification play, so it's healthcare, it's US. I think what gave people pause for thought was you know Indian sort of you know delivery. I don't think with Worldpay in particular the change in PE ownership I think it'll be a positive thing because it's exactly what we do. We tend to accelerate product in a market for a particular client.
And we do it because we've got smart engineers, we have a strategic viewpoint, and certainly in, you know, payments and financial services, you have sort of strong credentials. Through the distributed agile delivery, we can deliver that product and that scaling, you know, super sort of quick, and we can respond to that, how that product plays out in the marketplace, you know, very quickly. So I think with Worldpay, I think there's a great opportunity there, basically, for them to take this is the PEO to take that product and bring it up to par compared to the marketplace, make it more competitive, and us to come alongside and help them do that.
Understood. Okay. Going back to kind of the M&A profile of the business, can you just outline and remind us of your capital allocation strategy and, you know, maybe what attracted you to the recent acquisition you made of GalaxE? Obviously, it was quite sizable.
Yeah.
You focused on APAC historically, I believe. So.
Yeah.
Your approach, and then how you consider kind of regional versus capability focus.
Yeah. Yeah. So, M&A for us has been a means of diversification. It's quite difficult to do it organically, especially if it's diversifying away from a European core base. So we focused on the Americas and Asia-Pacific, as you know, you just touched on. So we tended to do it in smaller steps with bolt-on acquisitions, which is sort of no more than 10% of revenue and headcount. With APAC, what we were doing there, because of our nearshore delivery model, which is basically we have, say in North America, we have nearshore capability in South America, delivering into North America. In Europe, it is Central Europe, so countries like Romania delivering into Germany. Asia-Pacific, it is Vietnam, Malaysia, delivering into Singapore, Australia.
So when we're buying businesses, we look at it through the lens of the end vertical from a geography perspective and the industry vertical, but it's also building that geographic nearshore capability. So in terms of capital allocation, it's been about M&A for us, basically. We're a cash-generative business. We have a big revolving credit facility. And until recently, we still have $200 million on the balance sheet. So M&A has been the sort of common thing. This latest acquisition, again, is in that strategic lens of diversifying away from the U.K. and Europe in particular. So it's all U.S. revenue. It is in a different industry vertical, so it's healthcare. From a delivery angle, it brings India, and it was quite sizable, and I think that worried the market.
It was about 14%-15%, and it's a big, you know, cash element for us. I think on the back of results in terms of the guide that were disappointing, it's been bothersome, for want of a better word. I mean, to put it in context, though, we're the only one of the peers who doesn't have a presence in India. And I think the way that we will use India is going to be quite different to the way that we do our nearshore delivery model. So the nearshore delivery model is about quick communication, same time zone proximity, and product work. For us, India, I think, will be adjacency. In terms of what they bring, this is GalaxE.
They have a set of tools, we would call them that, that are diagnostic in nature, so they can be run across a client's enterprise estate, and they can allow a diagnostic approach to making simple sort of changes. So for clients that want to engage in, you know, a digital sort of journey but don't have the faith to do what we normally do through our distributed agile process, you know, build new, which is tends to be what we do, it's small changes to the core at the top of it, the enterprise level. So in my view is it's adjacency. It takes us down into the core, which will give clients, you know, confidence to, you know, engage with us in terms of the digital nearshore offering that we have.
So it's a strategic move, and it's not a cannibalization move. It's not, "We're going to India because it's cheaper," because it doesn't play to quick turnaround and that ideation to production sort of process. So I think a number of those things, we probably didn't articulate as well as we could have done, and that has worried the market as well.
Understood. I guess that makes me, you know, think of two things. I guess one is how is the wage inflation, you know, dynamic right now by region? And, two, I guess, how do you manage headcount in a time like this when.
Yeah.
You know, you have just the current backlog situation?
So, the wage inflation is pretty subdued at the moment. I mean, if we compare it with COVID, it was nutty, to be quite frank. We had too much work, more work than we could actually deliver. There was a scarcity of good engineering talent. And wage inflation was high. It wasn't an issue because we could pass it on to clients, because they knew the situation, the people who buy from us understand, you know, the markets in which we operate. It's a lot more subdued at the moment. You know, there's a well-trodden path, I think, the last sort of 12, 18 months where people have been let go. So it's a reduced level of wage inflation. And in terms of us internally, we base it on what we can hope to achieve in terms of rate increases with clients.
At the moment, pricing for us is stable. That's quite different to what some of our peers have said. And, and when I say stable, it's an average sort of metric. We look at the, the average day rate that we are able to charge clients. So it's been static for about 3-4 quarters, which is quite different to what it was prior to them. We used to see it move up, you know, 1%-2%, you know, Q-on-Q. So pricing is stable, but it's, it's, it's not strong. And you have to, put wage inflation in that sort of context, what you can get. So at the moment, it's, it's subdued. In terms of, the people side of it, it's about, reading the demand right.
So if I go back to November, where we were seeing quite a big ramp because we had this buildup in pipeline and project work to be done, we were carrying quite a large bench. We typically aim to carry about between, you know, 5%-8% at any one time, you know, people ready to go on to new work that we see in the pipeline. So we took it up quite high to about sort of 10% or so in the anticipation that you get the work, and those people become active in fee generating. So we were taking a view to carry that bench, which hurts the gross margin because you're paying people who aren't generating sort of fees.
But as soon as you see that the work isn't going to come through, you have to take action on the bench, which is what we've done. So we, as part of the announcement, we're losing about 450 people. This is mainly bench. So we look at the utilization and the skills that people have for the work that we see coming. And if there's no likelihood of deployment in a sort of three-six-month window, then people, unfortunately, you know, have gone. So it's a more extreme example of what we traditionally do. When we have good visibility and good pipeline conversion or normal pipeline conversion, you can balance the recruitment engine of people and the bench so that you don't get this sort of stop-start dynamic that goes on.
So if the demand falls away and you have too many people, you have to sort of take action. It's similar with COVID in some respects, in that it was the opposite. You know, we didn't see any work for about eight weeks or so. Got very sort of foggy. It's been like, "Well, do we keep people or let them go?" But then the demand came back super strong, and then you have to sort of, you know, crank up the recruitment engine. So it's always this, this balance. We try and get on top of it by reforecasting every month to see the dynamics of what is happening.
Attrition in general was pretty stable, pretty stable.
Yeah, yeah, yeah. Yeah. So I think.
I know it's usually.
I think we got to a peak, 14% or so. I think it was in the COVID time, but we're about 10% at the moment. So it's pretty stable. We have gone as low as 8.5%, which probably says that maybe you need to move people on. But we've always had very low attrition, which I think is due to the sort of culture that we have. And you're continually sort of balancing those metrics, operational metrics, deliver good gross margin.
Do you think pricing can influence the pace at which some of these customers kind of move through the ideation phase like you referenced, or is it not really correlated and more so kind of macro in the business segment?
I think the customers buy us because of the value prop. We're seen as strategic. So I was talking about sort of products. We're doing something that they will struggle to do. So they see the value in what we do. And shaving on price, I know it's a more competitive environment, is typically not the way that we would win work.
Makes sense.
I've, you know, I think some of our peers are being competitive on price to, you know, tip things, you know, towards them. I don't think that we, you know, we try and compete, obviously.
Obviously.
But it's not the way that we are going to sort of unblock some of that work. I think it is. Customers know they need to do it. It's strategic. To a certain extent, it's must-do. It's not the same as keep the lights on. And if they have a, you know, a tough environment, which some of them are having, then they will postpone some of those strategic decisions. So we're more discretionary than we have been previously, I'd say.
Understood. I guess, why do you think your kind of commentary on pricing differs from competitors? Is it just the nature at which you all pursue business in different areas?
Well, it must be something to do with business mix, I think.
Business mix.
One of our biggest peers has got a lot more competitive. We've seen that. I think they have talked about rampdowns, etc., and they've had their own specific issues in terms of moving people around. It may be something to do with the quality of work being delivered. We have seen them in the marketplace, and we have won work from them. And so I think that, that commentary is about them, you know, fighting back. They, I think they'll essentially be doing something slightly nuanced to us. It won't be exactly like for like.
I guess that makes me wonder, how do you view the competitive landscape today versus, you know, five, 10 years ago, given your kind of niche focus? Pretty unchanged?
I'd say. I think the thing is we're a lot bigger than we were five years ago, and I think we're sort of, you know, about a billion-dollar revenue now. We have bigger engagements with clients. And I think the nature of the services that we're going to offer is going to change. So increasingly, in some of the bigger clients, you know, when you're talking about Mastercard and, you know, Worldpay, for instance, they will buy for us from a, let's call it, the change part of the IT budget or the accelerate change of the budget, which could be discretionary. But increasingly, because of the quality and insights that they get, they do want us to play in adjacent areas, which is in, you know, as I was referring to, the sort of core.
So we've typically said, "We don't do that. You know, we do this." But increasingly, if a client wants you to and we want a larger share of their wallet, we are going to have to play in that space, which is, you know, partially the reason for the GalaxE, you know, acquisition. You know, it's adjacency to what we do in terms of nearshore delivery and ideation. So I think that is a dynamic that comes from scale. As we get bigger, we will be expected to do more. And indeed, it's not just, you know, getting into the core. It's also more a consulting-led sale. It will potentially become as well. We do consulting, but we probably need to be higher up into the C-suite and driving the strategic conversations than we are today. So I think it's an evolution.
So we're quite different in that respect to what we were five years ago.
Understood. I guess one more on M&A. Do you foresee, you know, more acquisitions as necessary in regions like India or select areas over the next 12, 24 months, or is it really organic?
We've probably got indigestion at the moment. We've done quite a lot. It's a different region from.
There were two last year as well, right?
Yes. Yeah. So I think we've got a little bit of indigestion at the moment, and we need to sort of bed it, bed it down, get ways of working, etc. But I think M&A will always be part of the agenda. And again, it's, we want to be stronger in North America. So on a pro forma basis, this more recent acquisition, it will make North America our biggest region, about 40% if I was looking at our Q4. Europe's still big, but it will pass, continentally if we make we make this distinction moment and, and the UK. So it's a, it's a big change in that regard. And, payments, which has, you know, been like at 30% forever, will probably go down to about sort of 20%. And healthcare will move from something like 4% to about 15, 14%. And we'll and we will pull that out.
So we will start to look a bit more diversified from an industry vertical perspective. You know, we'll have about six and think about sort of next year. And we'll start to look more, you know, U.S.-centric than we have, you know, historically. And, and I think that's been part of the, the reason for, you know, people say, "Why are you hurting more than, you know, the other digital players?" And I think it is because, you know, we're overweight in Europe. You know, the U.K.'s in recession. You know, 60% of our revenues is Europe-U.K. And also this overweight, position that we have in, in payments and financial services. You compare it with the likes of, the others, they you know, they'll be about 20% in financial services. So they're not going to be as hit as much.
They're also a lot more overweight in North America than we are.
Understood. Thank you. I guess how much visibility do you feel, you know, you have today on things ramping eventually in the second half relative to, you know, past periods of relatively economic-sensitive times?
It's weaker, I'd say. We and you, you can sort of see that in the guide that we've got, June. We've got quite a big range, actually. So we've got it either sequentially; it doesn't really move much from Q3. In Q3, we should land because, you know, we're almost there. So it doesn't grow, or we get, you know, 6% growth. And a lot of it is to do with that pipeline conversion. So we're taking a more conservative view on the pipeline conversion. At the bottom of the guide, we typically go for if we're giving a number for a quarter, it's about 30% of it will be pipeline and 70% will be contracted and committed. So at the top of the guide, you know, the pipe is 20% compared to 30%, and the bottom is 15%-30%.
The conversion rates are the same, you know, win rates, etc., but we're just taking a more cautious view on it. If you've got that range that we have in Q4, which is about $10 million, we typically go for $5 million. It gives you an indication of the uncertainty of when budgets are going to be unleashed, basically. But there is this sort of pressure we sense building up. We just don't know when it's going to come through.
Understood. Going back to payments, just because this is, I guess, a fintech, you know, conference, you've referenced embedded finance and payment digitization often.
Yeah.
Is that helping Endava become more horizontal than?
Yeah. Yeah, definitely. I mean, people often ask, "Well, how are you going to diversify away and, you know, establish your credentials in other industry verticals?" And payments is always the last stage in any sort of transaction cycle. So if we, you know, go to, you know, a retailer or we go to sort of logistics, why on earth would they engage with us, on a particular project? This is the edge that we have. It's the tip of the spear. Now, we have some smart people in these industry verticals who can, you know, speak the same language as the client, and we have technological insights, but it will come down to, "Well, tell me about the work that you've actually done in this area," and we can't point a lot in some, you know, particular, industry verticals.
But if it's payments, it's very sort of compelling, the experience that we've had. So, you know, retailers, we could talk to them about, you know, buy now, pay later. Why not actually build it yourself rather than, you know, outsource it to somebody else and, you know, capture that sort of value? That is where sort of clients listen to us. It's particularly compelling. There's another one of our industry verticals called mobility, which is the movement of things and people. So it's got travel, which is mainly airlines. It's got automotive. So increasingly, we're talking with the big carmakers, global ones, I think five out of 10, about the payments platforms that they would want to build into the cars themselves in terms of the in-car software. So it's the car that is paying for the parking.
It is the car that is paying for the road toll, etc., and that's where we have an edge over the sort of peer group. And then when they can see what we do and the way we deliver, it will take us into other areas.
Interesting. Okay. How do you think about rest of the world, I guess, in terms of, you know, promising geographies, maybe in particular to payments too, if you can?
Yeah.
where you're seeing, you know, more or less innovation?
Yeah. So I think rest of the world is two. It's Asia-Pacific, which is mainly Australia. They are slightly overweight in payments financial services because when we go to a new geography, you know, we want to be in an industry vertical that we understand. There it's a little bit subdued there at the moment. I think it's been a bit later than what we've seen globally in terms of the downturn in spend. But actually, the response that we've had from the customer is customer base is very strong because we're bringing nearshore delivery to them. So it resonates quite strongly. The other area is the Middle East. We have a very small presence there, but it is predominantly in payments and financial services because of that franchise strength that we have.
And again, there's a lot of money in the Middle East looking, you know, to go to work. So we see the Middle East as being pretty sort of exciting, actually. And it's a difficult sort of region to operate in, but there's a lot of appetite in payments and financial services.
Understood. Helpful. Any questions from the audience?
Aside from the opportunities with GalaxE, I guess, can you touch on what you're seeing the most opportunity in terms of diversifying revenue as?
So it's going to be geography. I think in terms of delivery, which is, you know, where do you deliver from, it's unlikely that we will buy something. Never say never. We'll buy something to add a country. You know, so like in South America, we'd buy a business that would have delivery from Chile, maybe not. You know, we should be able to build that ourselves. The thing is, it's it takes time to do it because you've got to establish a brand, an employee brand that resonates with people. So it just takes longer. So if you can buy a business that has a similar sort of culture, a way of doing things, it can kickstart it. We tend to mainly focus on the end markets, which is North America is where we want to push.
We now have a sort of a at the moment a well-distributed footprint from a you know geography perspective from a delivery perspective. But we want to push more on North America. It's the biggest IT services market in the world. So we're a bit of an anomaly that we're so overweight in Europe in that regard. And it's about the industry vertical diversification. So businesses that we've actually done two that we were thinking about even two three years ago. We thought it would be mobility for us, and we thought it would be healthcare. So we've ticked those. But there are others that we you know have our eyes on to push on basically. So it's about the end clients the industry verticals and to get that sort of spread. It will probably revert back to a 10% bolt-on.
This one was quite a big move, but we did something similar actually before the IPO, which was a bit crazy in hindsight. But we bought a business in South America for South American delivery into North America. And that was about 15% of headcount, and revenue at the time. But it was exactly the right strategic thing to do. And that's why I believe with GalaxE. So I think from now on, we need to digest what we've got, make it sing, and then we will get back to it. And you know, and it's the first time we've been leveraged, since on the, you know, the public markets as well. So we want to rebuild, you know, the firepower as well.
How are you thinking about margins in the medium term, and then kind of how do you expect margin recovery to correlate with demand and revenue recovery?
Yeah. So margins are pretty depressed for us at the moment. We, I think our gross margin is going to be in the sort of low 30s for Q3. That's the sort of guide, about 31.5%, which compares, you know, we used to be at 40%, and more recent history saw 38%. Part of that is the dynamic of carrying too much bench for the demand. So if, you know, the demand changes, you carry, quite frankly, too many people for the work that you have. As that recovery starts to take place, the margin should rebuild quite quickly, the gross margin I'm talking about here. So if we at the top end of the guide, we move up to that 6% sequential growth, the gross margin moves up to about 36%.
So the gross margin can recover quite quickly once you get that momentum in the top line. This quarter, Q3, we have a high level of SG&A spend as well for us. I think it's about 20%-21%. And it's a conspiracy of a number of things happening all at once. We've got the fees on the deal that we just done with GalaxE. We have a lot of integration activity going on from the Asia-Pacific deals that we did towards the back end of our fiscal last year. So we have a lot of activity going on at the moment, which makes that a high sort of level of spend. But it should abate, you know, quite quickly.
And then as you sort of start to move, you know, the top line up and you get that visibility comes back where you're recruiting and carrying adequate bench, the gross margin, I think, will improve to the levels that we've seen historically. So, you know, the high 30s. We have seen 40s, but let's say sort of high 30s. And then as you grow, we're, you know, cost-conscious around our SG&A, and we can get leverage over it. Then I expect the adjusted PBT margins to move up towards what we've seen in the high teens, you know, historically. So I think it's just this momentum, just needs to build. The gross margin recover, the visibility comes back, and then being cost-conscious, basically, about the SG&A spend.
All right. Well, I believe we're at time, but is there anything you want to leave the audience with, before we go? Touch on?
Not really. I think we said it all. I mean, the pullback on the guide, you know, very unfortunate, but it is due to the visibility that we have at the moment and these budget delays that we're seeing. But we see the demand sort of building. And then we've got our large acquisition to bed down, but we've got, we're building very good foundations for the future.
Great. Thank you, Mark.
Okay.
Appreciate it.
Thank you.