Endava - Earnings Call - Q2 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to Endava's Earnings Release for the Second Quarter Fiscal Year twenty twenty one. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Owens Madsen, Investor Relations Manager.

Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to Endava's Second Quarter of Fiscal Year twenty twenty one 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 twenty twenty one and for the full fiscal year 2021, our expected near and medium term revenue growth, the potential impact of the COVID-nineteen pandemic and associated global economic uncertainty, our expectations regarding digital transformation of existing businesses and industries, the necessity of digital transformation for many companies and Endava's ability to benefit therefrom, anticipated client demand for Endava services, our expected ability to leverage our intellectual property to provide more cost effective deliverables to our clients with greater speed and our expectation regarding expansion opportunities 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 09/15/2020, 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 the Investor 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.

Speaker 2

Thank you, Lars. I'd like to thank you all for joining us today and I hope you're all staying safe and healthy. Mark and I are pleased to be here to provide an update on our business and financial performance for the three months ended 12/31/2020. And while the coronavirus vaccination campaign has started in many countries around the globe, life is far from normal with many countries including The UK still in lockdown or facing similar restrictions. Whilst we continue to adjust to the impact of the pandemic, demand for our services continues to increase.

As we've seen the acceleration of digital transformation clearly differentiating the leaders from the laggards. When the second surge of COVID-nineteen cases hit our main markets in the Northern Hemisphere at the end of last year, I mentioned to you that our customers were much clearer on their priorities than they had been immediately following the declaration of the pandemic and that we were seeing more business as usual type stability and decision making. We did not see sudden decisions to stop or reduce project activity and demand for our services continues to grow. Endava had a solid Q2 for our fiscal year 2021 with revenue of GBP105.2 million, a growth of 22.5% year on year from GBP85.9 million in the same period in the prior year. Our strong revenue growth was once again driven by the expansion of work for our existing clients and the acquisition of new ones during the quarter.

During the quarter, we continued to broaden our client base and ended the quarter with five twenty one active clients, up from three sixty seven at the end of the same period in the prior year, a 42 year on year increase. Average revenue from our top 10 clients grew by 21% year on year and revenue from clients who paid us above GBP 5,000,000 over the past twelve months increased 34.3% year on year. Additionally, we ended the quarter with 75 clients who paid us over GBP 1,000,000 per year compared to GBP 65 in the same period last year, representing a 15% year on year increase. We have adjusted our sales and marketing approaches in response to the reduced travel and in person attendance at industry events. In September, we highlighted that we were seeing 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.

We're continuing to observe this trend with a greater number of new clients in the second quarter and with expanded GBP 1,000,000 plus and GBP 5,000,000 plus cohorts, the top 10 revenue growth as engagements expand. On the technology side, Endava possesses significant intellectual property embodied in our know how and reusable assets. One type of Endava IP is our accelerators. These are reusable project delivery assets that allow us to provide clients with deliverables of greater value more quickly and at less risk than starting from scratch. We develop our accelerators in response to repeated demand on our projects.

So they are practical tools to accelerate our clients' success by packaging our hard won experience. The accelerators reduce the time required for delivery and know how within the accelerator allows us to leverage higher margin deliverables at lower cost for our clients. Some of the accelerators we have developed recently are reusable components, payment systems, testing frameworks and programming frameworks for data engineering projects. For example, over the past nine months, we built 15 payment accelerators that many payment implementation projects require, but that don't create differentiation or competitive advantage for our clients, such as tokenization, self-service onboarding, fraud engines and cloud processing. We've implemented accelerators in four client programs, including for ClearCourse and Jidea so far, and we're seeing an accelerating adoption.

We provide these components in source code form to accelerate delivery of a larger program, enabling us to provide our clients with greater value in a shortened timeframe. With time to market being a key differentiator, these accelerators can provide our clients with an edge. I'd also like to highlight today some of the work we're doing in the fast growing health tech sector. We believe digital transformation presents opportunities to transform the quality of services provided in health by making them more efficient, more secure and more data driven, whether in direct patient care settings or in the context of researching better ways to provide care. And this is where we have focused our energies.

Hindalco has been partnering with WebMD Health Services for nearly ten years, assisting them in digital journey. We've helped WebMD develop corporate wellness solutions to help companies improve the health of their employees. We have also utilized our experience in distributed agile delivery to support the development of Pleo's new digital platform, Lyft. Pleo builds meaningful relationships with patients on drug therapy using artfully scripted live patient centric conversations supported by digital outreach. Playo's purpose built LIFT technology platform brings science into the art of human engagement with pretty cool data science to craft a mindful patient journey.

A leading health tech provider partnered with Endava to develop a number of apps, allowing clinicians and patients to make the most of their time together. We built a triage app that configures online questionnaires, allowing clinicians to create a workflow through which patients can interact with a body map to highlight different areas of the human body, where musculoskeletal pain is occurring before the patient is physically examined by the clinician. We built another tool allowing clinicians and patients to connect remotely via audio or video chat on computers and mobile devices. Additionally, we helped create a program called Patient Outcomes to allow clinicians to use home exercise or remote resolution programs in tandem with a patient's profile and match them up to increase the likelihood of patient enrollment and adherence to the program. Endava has recently been chosen by a leading provider of advanced healthcare solutions for the management of blood, plasma, tissue and cells to support them with the design and implementation of the application infrastructure in AWS for one of their clients in Germany.

We are leveraging our in-depth technical expertise in cloud infrastructure and AWS partnership to minimize implementation costs while migrating their on premises software into the cloud. Our solution will allow faster future cloud implementation for their clients as we automate the provisioning of infrastructure by building an infrastructure as code pipeline. Underlying all health tech is evidence based practice drawn from scientific research. And we've been working with one of the pioneers in that area, eLife Sciences Publications Limited. ELife is profit organization inspired by research funders and led by scientists.

Their mission is to help scientists accelerate discovery by operating platform for research communication that encourages and recognizes the most responsible behaviors in science. This means building technology to help scientists share their findings quickly and effectively. So we helped build an article hosting platform that used modern web front end techniques. The result was the launch of a new journal website, transforming the way scientists share their research, including two groups focusing on COVID-nineteen research. It's been a privilege to build a solution that helps healthcare providers have a positive social impact in transforming patient care.

Many of these examples have been innovative entrants to the health tech space. It was setting the pace in the transformation of health services and patient outcomes. Similar to our experiences with the FinTech space, we believe this innovation will cascade up to larger providers in health as the dramatic benefits of digital transformation are demonstrated, providing a long runway of expansion opportunities for next gen providers such as ourselves. Our client growth continues to translate into strong employee growth. We ended the quarter with 7,464 employees, a 19.1% increase from 6,267 in the same period last year.

We have increased our headcount organically every quarter since the start of the pandemic and our attrition rate remains low. We recently added two employees in Sydney, Australia to support clients in the region. And in Q3 for our fiscal year 2021, we also added one employee in Singapore. As lockdowns and similar restrictions ease, we expect to add to our headcount in Asia Pac. The majority of our workforce continues to work from home and productivity remains high.

We're still defining our post pandemic hybrid model for the new work environment. And we continue to recruit people on the basis that they must be able to regularly attend an Endava office. With this in mind, last quarter, I mentioned the launch of the Endava well-being program, which is designed to ensure that Endavans can access the well-being support that's right for them, be it through workshops, digital content or master classes. We're delighted at how this has been welcomed by our people with overall engagement levels continuing to increase. Since launch, close to 70% of in gardens have participated in at least one of these events.

As shown by these results, client demand for our services continues to be strong as digital transformation continues to increase in strategic importance. Mark and I and the entire team are extremely pleased with our performance for the quarter just ended despite the challenging pandemic situation. And we are excited about the opportunities emerging and remain confident in our ability to deliver value for all of our stakeholders. Let me end by thanking our people who in these turbulent times continue to deliver excellence, quality and value to our clients in diverse home working contexts and who thereby enable the performance just outlined. We appreciate your dedication and loyalty.

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.

Speaker 3

Thanks, John. Endava's revenue totaled £105,200,000 for the three months ended 12/31/2020, compared to £85,900,000 in the same period last year, a 22.5% increase over the same period in the prior year. In constant currency, our revenue growth rate was 21.4. Profit before tax for Q2 fiscal year twenty twenty one was £10,600,000 compared to loss before tax of £17,300,000 in the same period in the prior year. The loss during the same period in the prior year was the result of the declaration of a non recurring discretionary employee bonus, which we refer to as the discretionary EBT bonus of £27,700,000 in December 2019.

Our adjusted profit before tax for the three months ended 12/31/2020 was GBP 20,600,000.0 compared to GBP 20,500,000.0 for the same period last year. Our adjusted profit before tax margin was 19.6% for the three months ended 12/31/2020 compared to 23.8% for the same period last year. Adjusted profit before tax, adjusted PBT is defined as the company's profit before tax adjusted to exclude the impact of share based compensation expense, discretionary EBT bonus, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, net gain on disposal of subsidiary. Share based compensation expense, amortization required intangible assets and unrealized foreign currency gains on non cash expenses. Adjusted PBT margin is adjusted PBT as a percentage of total revenue.

Our adjusted diluted EPS was 29p for the three months ended 12/31/2020, calculated on 57,100,000.0 diluted shares as compared to 30p for the same period last year, calculated on 56,000,000 diluted shares. Revenue from our 10 largest clients accounted for 37% of revenue for the three months ended 12/31/2020, unchanged from the same period last year. Additionally, the average spend per client from our top 10 largest clients increased from GBP 3,200,000.0 to GBP 3,900,000.0 for the three months ended 12/31/2020. In the three months ended 12/31/2020, North America accounted for 29 of revenue unchanged from the same period last year. Europe accounted for 27% of revenue compared to 23% in the same period last year and The UK accounted for 42% of revenue compared to 45% in the same period last year, while the rest of the world accounted for 2% of revenue compared to 3% in the same period last year.

Revenue from North America grew 23.7% for the three months ended 12/31/2020 over the same quarter of 2019. Comparing the same periods, revenue from Europe grew 40.7% and The UK grew 14.2%.

Speaker 2

We grew in all three of

Speaker 3

our industry verticals during the quarter. Revenue from Payments and Financial Services grew 12.3% for the three months ended 12/31/2020. Revenue from Payments and Financial Services accounted for 49% of revenue compared to 53% in the same period last year. Revenue from TMT grew 42.7% for the three months ended 12/31/2020 over the same quarter of 2019 and accounted for 28% of revenue compared to 24% in the same period last year. Revenue from other grew 25.1% for the three months ended 12/31/2020 over the same quarter of 2019 and now accounts for 23% of revenue unchanged from the same period last year.

This growth was mainly driven by clients in the mobility and health tech sectors. 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 GBP 18,700,000.0 for the three months ended 12/31/2020 compared to GBP 8,000,000 during the same period last year. The prior comparative period included the first tranche of a one off discretionary EBT bonus cash payment of GBP 10,700,000.0. Our cash and cash equivalents at the end of the period remained strong at GBP 84,200,000.0 at 12/31/2020, compared to GBP 101,300,000.0 at 06/30/2020.

We spent GBP 50,500,000.0 net of cash acquired in the six months on our acquisition of Comtrade Digital Services in August. CapEx for the three months ended 12/31/2020 as a percentage of revenue was 1.6 compared to 3.7% in the same period last year. Our guidance for Q3 fiscal year twenty twenty one is as follows: Endava expects revenues will be in the range of £110,000,000 to £111,500,000 representing constant currency revenue growth of between 2021.5%. Endava expects adjusted diluted EPS to be in a range of £0.27 to £0.28 per share. Our guidance for the full year fiscal year 2021 is as follows: Endava expects revenues to be in the range of £423,000,000 to £426,000,000 representing constant currency growth of between 2222.5%.

Endava expects adjusted diluted EPS to be in the range of 110 to 113 per share. The constant currency growth figure quoted for the full fiscal year 2021 guidance still includes the pro form a adjustment for the Worldpay Captive as it remains in the full year comparative. The above guidance for Q3 fiscal twenty twenty one and the full fiscal year 2021 assumes the exchange rates at the January, and the exchange rate was 1 British pound to 1.37 US dollars and EUR 1.13. This concludes our prepared comments. Operator, we are now ready to open the line for Q and A.

Speaker 0

Your first question this morning comes from Brian Bergen from Cowen. Please go ahead.

Speaker 4

Hoping to dig in around the client expansion metrics and also North America traction. So there's a notable sequential uptick here in the greater than 1,000,000 clients. Can you provide some color there as far as the verticals you're seeing the most momentum and the types of those programs? And I'm curious about North America specifically. Can you provide detail around that client activity such as new logo wins and existing relationship expansion?

Speaker 3

So North American growth we're very pleased with. We made quarter on quarter year on year growth of 23.7%. Most of that is organic. It's been across the piece. We've had strength in payments and particularly, hence the financial services.

So great progress. We're very sort of pleased with it. And in terms of number of clients, we're very pleased over GBP 1,000,000, very pleased with the uptick that we've had there as well, achieving sort of GBP 75,000,000 sequentially on a quarter. Last quarter, 66 has been great. We've seen a big influx in the bottom of that over $1,000,000 and $1,000,000 to $2,000,000 So it's basically good evidence of, again, traction in terms of growing the existing sort of client base.

Speaker 2

Brian. I think one of the things that's visible in the numbers is the trend that I was touching on over the last couple of quarters, which is that way Endava works is we start off with an ideation phase or proof of concept where we're helping our clients to get their heads around how our technologies could impact their business models and the way in which they operate. And then, as they see that brought to life, the engagement can expand into production phases where we're actually building systems that are going to go live. And that's visible. So you can see the broadening footprint of new clients coming in that I was touching on.

And you can see some of that starting to come through into the larger client base with some of those moving up into the £1,000,000 client cohort that Mark was touching on. And then of course, we continue to see the expansion into the higher cohorts with the spend levels of the top 10 and the 5,000,000 plus clients also claiming. So that's the dynamic of what's going on.

Speaker 4

Okay. Good to see. And then just on the margin strength, can you talk about the key factors contributing there and your confidence in sustaining these elevated levels? And I'm curious how will your push around the accelerators that you described impact profitability? Are you able to gain more leverage through these?

Speaker 3

Yes. So the gross margin adjusted gross margin was actually sequentially in line with Q1. And whilst we Q1, benefited from R and D tax credit. So that was a slight headwind of about 50 basis points coming into Q2. It was offset by helpful FX as the pound strengthened against the dollar and the euro.

But basically, the margin sequentially, we saw utilization pick up slightly, the bench reduced, people were taking less holiday. And we're seeing an improvement in the pricing outlook as well. So gross margins were strong. I think going forward, it will follow the typical pattern because we have our major sort of pay round, which goes through in the July 1. So there'll be some pegging back from that level, roughly about sort of two percentage points, I think.

And I think we will see utilization start to improve during the course of the year. In terms of Q3, I mean, do have less working days, which does have a margin impact when you compare it with Q1 and Q2. But generically, I think the margins gross margins are in a good place. You see also we have a sequential reduction in our SG and A. I think that's going to be a theme as we grow the top line and keep our SG and A spend under control.

We will expand our adjusted PBT margin.

Speaker 2

Just on your question about accelerators, we use those to help demonstrate value and win business with clients because we're able to show them how we're going to get that product to market faster through use of the accelerator. We roll it into, the cost of the services provided to the client. It's not done on an ongoing license basis. It's done on a delivered capability basis similar to if we were building it from scratch. So does help us to get projects going faster with clients, demonstrate more value and therefore, win business.

There is a small margin improvement overall on the projects, but we win that way. Obviously, because we're not having to build that code from scratch. We did some of that to the client, and we bank some of it in improved margin.

Speaker 4

Okay. Understood. Thank you.

Speaker 3

Thanks Brian. Thank you.

Speaker 0

Your next question comes from Ashwin Schuager from Citi. Please go ahead.

Speaker 5

Thank you. Good morning, folks. Good quarter here. Just wanted to just follow-up a little bit to start on the accelerator question. I just want to understand the IP if the IP belongs to you, if there's a potential to expand the concept from tool sets to full scale solutions and perhaps even start start doing more along the lines of sort of a software model down the road?

And if that is if the accelerator concept is limited to any particular verticals?

Speaker 2

Right. So our focus around the accelerators has been to put them into places where there's a standardization. It's a sort of thing that every project in that space requires, and there's little differentiation between clients, that comes from those accelerators. So that then you can focus the energy with the client around building their differentiation, rather than just the underlying services that come through the accelerators. So they're not full package services and products that we would take to market and we have no intention of building them out as such.

One of the huge benefits that we're able to offer to our clients is the knowledge that we're not going to take the IP that we develop with them or the know how that comes from it and turn that into differentiated products that we sell to their competitors in the market. So it is very, very consciously focused on the non competitive arenas, so that we're not causing any concerns with our clients, of it migrating across to their competitors. We've done it in a few areas. Payments is the one that I've called out this time. We'll be touching on some of the areas of many quarters ahead, where we've pushed accelerators out, doing different things, some domain related, some of data transformation framework, some testing related, others around looking at clients' existing code bases and the challenges in transforming that as we introduce digital transformation into their services.

Speaker 5

Got it. Got it. Second question was on headcount. I see the very healthy headcount growth. But could you kind of break that down a bit and talk about headcount growth by geography?

Does sort of the regional response or the country response to COVID impact your decision to hire or not hire in a particular place. And it was good to see the APAC headcount additions that you talked about. Is that with the intention of sort of being a bit more Asia focused in the future? Or is that just a one off with a couple of clients?

Speaker 2

Yeah. So the, the the headcount growth, has not been restricted, in any of our locations by, the pandemic backdrop. I was still able to recruit, albeit a lot of it is done in virtual context. Although it's in some of our jurisdictions, it's been fine to do interviewing over the past nine months as well face to face. So there hasn't been a restriction around, the pandemic in terms of where we've grown.

And we tend to push work to places where we get access to the talent, that we need, where and we do it in a fairly even way. If we focus too much on one or two cities, then the demand that we would place on those cities would drive cost inflation, because because we're a big player in the markets where we operate. So the more even and distributed that we are, the more it helps us to control cost inflation with recruits and expand in a balanced fashion. In fact, as the business grows, one of the things that we're always planning ahead for is provisioning new locations into geographies, so that we're never going to be overloading any individual cities that we're growing into. The Asia Pac question.

Yes. So that is absolutely around building client relationships in the more advanced locations across Asia Pac, Singapore, Australia, Japan, etcetera in due course. Being therefore, being able to support some of our clients on a on a global basis. And that's constant task that we experienced that we've, we had pushed back on until we were ready to expand into Asia Pac. So we will build out that close to client capability.

In due course, we also expect in line with our near shore delivery model that we will put the delivery centers in the Asia Pac time zone as well, that enables agile delivery to operate with that good time zone overlap. So we're just starting on that. It's been existing clients that have pulled us into that growth in the rest of the world figure that you've seen over the last couple of years. And now we're ready to start putting people on the ground, looking for new clients as well as expanding existing ones in that geography.

Speaker 5

Got it. Thank you. This is good performance in a in a pending. Your

Speaker 0

next question comes from Mayank Tandon from Needham. Please go ahead.

Speaker 6

Thank you. Congrats on the quarter. John, I wanted to just maybe talk a little bit about the contribution from new clients versus growth from the existing account base, just how that's been trending. And I'm really curious to sort of hear your thoughts on what is the penetration today of Endava of the existing installed base? Is there a way to maybe put that into perspective?

How much more room to grow within your core clients?

Speaker 2

Okay. So actually, even through this pandemic, our model that we've experienced for the last, well, years visibly in the numbers, but before that as well, which is between 8990% of our growth of our revenue each year comes from our existing clients growing. Then the 10% that sits on top of it is new clients that we acquire during the year. And that model is still largely true over the last nine to twelve months. What that means is essentially existing clients are growing and driving a big chunk of the organic growth.

Then the new clients are taking it up to about over 20% mark that we target each year. If you look across the final part of your question around growth opportunities in the existing clients, There's very large ongoing growth opportunities in that client base. Many of them are very large Fortune 100 type organizations, who looking for partners to work within this digital transformation space, and who are expanding their budgets and their spend in this space and where we are getting the opportunity to expand with them as they do more. Having said that, it remains very important to us to also be working with some of the smaller clients,

Speaker 3

the disruptors, who are

Speaker 2

entering industries. That's often where we put away with the technologies, find new business models, do things with those players that causes disruption in the market and gives us the capability to then take to the larger players as they also seek to respond to the transformation that's being driven by it. It. So think That's a part. Okay.

Speaker 6

Sorry. I just wanted to follow-up with one more question around, it's good to see the hiring strength, but I'm interested in terms of how should we think about the contribution from pricing and utilization to revenue growth going forward? How much more room do you have on both those fronts to drive revenue?

Speaker 2

So let me pick up the pricing and then Mark talk a little bit about the utilization. So on the pricing side, we did see a planning, actually a slight drop in our pricing in our quarter four of last year, the April June period as the pandemic was at its height. But since then, pricing has been picking back up again, steadily, actually following historic norms from that slight drop back then. And the last quarter utilization picked up. Do you want to pick up from that?

Speaker 3

Yes. So our utilization did pick up in Q2 as we started to reduce the bench, which we built through the pandemic. And utilization will continue to rise. It won't be impactful in the current quarter in Q3 because there are less working days. So that needs to be taken into account.

But utilization will start to rise. It will still be heading towards the typical sort of 70%, 71% I've talked about as a sort of high watermark. And we're still in the sort of high 60s at the moment. So there is the ability to increase or flex the gross margin for utilization. And in terms of sort of the you can see that in terms of our revenue per head, looking at that again sequentially.

So I think it's around sort of $63,500 this quarter compared to 61,300,000.0 the quarter before. And that's sort of the function of the two drivers that we've been alluding to, which is utilization and price.

Speaker 6

Thank you so much. Congrats on the quarter.

Speaker 0

Thank you. Your next question comes from Charlie Brennan from Credit Suisse. Please go ahead.

Speaker 7

Great. Thanks for taking my questions. I've got two, if I can. One medium term and one shorter term. Just in terms of the medium term outlook for margins, it feels like you touched on a few points here that all suggest upward pressure on margins, whether it's increasing pricing or the use of accelerators or SG and A leverage.

It all feels like future margins should be going higher. Are you in a position to talk about where you think medium term margins should settle for Endava? And then on the assumption there is some upward pressure on margins, philosophically, would you rather see that come through in the margin line? Or would you rather reinvest that for faster top line growth? And then just on a more short term question, if I try and back out acquisitions, it looks like your third quarter guidance is assuming underlying revenue growth that's 2% or 3% higher than you delivered in Q2.

Are there any metrics you can give us around your order book or bookings that gives you comfort that we're going to see that underlying acceleration?

Speaker 2

Thanks, Charlie. Let me just kick off and then Mark will pick up some of the detail. So yes, you picked up on the mindset that we have, which is actually, as we drive some improved margins, whether that be gross margin level or indeed for the reasons that you highlighted, or indeed leverage against G and A, we do intend to, pull some of that, if not all of it into the sales and marketing arena, to sustain and perhaps even accelerate our top line growth rate. Obviously, as we get larger, our expectation is that we'll need to push more into the sales and marketing line to sustain our growth rate.

Speaker 3

Let me also just pick

Speaker 2

up on the bookings question, then I'll let Mark pick up some of the detail on that. So without going into any detail, our bookings in Q2 were in good shape, running ahead of both the Q1 and the previous year, in line with the acceleration, in client demand that I've been touching on in these reviews. Mark, do you want to pick a three and two, Phil?

Speaker 3

Yes. I think, I've noticed when I look at some analyst models, they flat line our gross margin quarter to quarter. It doesn't flow that way mainly because of main sort of pay round, which is going through this sort of quarter. So we do get a step down as we get to the second half. But if you look at it year on year, it's robust and it's a function basically of utilization.

And as I said, I think as we went into COVID, utilization went down and the bench built. And we have started to eat into that bench and utilization is coming up. So we're getting back to more normal levels of utilization. We've got a little bit further to go, to get to that sort of high 60s, 70%, 71, etcetera. And also, we're seeing pricing, although we're cautious about it, seeing pricing start to improve.

So our gross margins have the ability to expand. But again, we have to focus on the cost side, which is basically the people that we employ to deliver the services. So as long as we keep that in balance and we've been through with a few of you that model to contain cost, then I think we have a robust gross margin outlook. And then just to repeat what I've always said as well, as we grow the top line, we will get leveraging over our SG and A. We may get an acceleration of that because of the change that COVID has put us through in terms of the property footprint.

So the change in terms of spend on property may come down a tad. But then again, we may decide that we want to reinvest that in accelerating sales through investments in sales and marketing. So I think at the adjusted PBT level, we've then delivered a good level of margin for this quarter at 19.6%. It will come down somewhat in the second half. But I think we're a business that can generate towards that 20% adjusted PBT margin.

We have that capability.

Speaker 7

And just one very small follow-up. You touched on potential property decisions. Are there any obvious big lease expiries coming up that are going to crystallize decisions for you?

Speaker 3

No. What we've got actually, I mean, it's related to our CapEx. Our CapEx has been pretty low. Certainly, last quarter, it's relatively low this quarter, but it's starting to pick up again. And part of that is because the property element, basically everybody's at home, so we haven't expanded the property footprint.

We are committed though in a couple of locations to some buildings, which we are going to fulfill and fit out. But we are thinking about how we fit those buildings out to accommodate a new model that John was referring to. So I think you'll get some savings on the property line, but it will probably take a little while and a little while, maybe a year or two, two point five years for it to work its way through to something that is noticeable in SG and A as a percentage of revenue.

Speaker 7

Perfect. Thanks so much. Well done on the quarter.

Speaker 2

Thanks, Sterling.

Speaker 0

Next question comes from Maggie Nolan from William Blair. Please go ahead.

Speaker 4

Hey, this is Ted on for Maggie. Thanks for taking our question. So earlier, we were discussing how you're seeing higher volume small initial projects. I was curious, how does how does the overall mix of project stages compare to normalized levels maybe pre COVID as kind of a benchmark?

Speaker 2

So it a little higher than it has been pre COVID. And that to some extent is visible in those new customer numbers that we published.

Speaker 0

Ladies and gentlemen, this is the operator. I apologize, but there's a slight delay in today's conference. Please stand by, and we'll resume as soon as possible. Thank you for your patience. Lawrence, I pulled you in separately.

Are you able to hear me?

Speaker 4

Yes. I'm here.

Speaker 0

Hi. Just letting you know that, we lost the main speaker line. They actually disconnected.

Speaker 4

Oh, okay.

Speaker 0

So if you just hang on, I'm just looking to reconnect them here.

Speaker 4

Okay. And am I am still in the question queue?

Speaker 0

You absolutely are. Give me just one moment here, please. Alright. And we have returned.

Speaker 2

Return. Great. So this is Mark and John back. Sorry about that. We dropped out, for some reason.

So I'm not sure what you heard from me, so I'm gonna start from the beginning. So, yes, the the opportunities that we have with the new clients coming through is expanding. You can see that in the numbers of new clients that we're adding to our roster. And for many of those, that is the initial quite small ideation or proof of concept work that we do in the early days of working with them. The numbers of those is higher than usual, and that is what has depressed our average client spend across the wider portfolio, outside the top 10.

But the opportunity for us is that many of those will get traction and grow into larger deliverables as we move those systems into a production type service. So that's the big opportunity for us over the next nine to twelve months is to see many of those, clients convert into, larger opportunities and begin to scale. Obviously, alongside our existing large customers continuing to scale.

Speaker 4

Okay. Thanks. That's that's that's helpful. I wanted to, as a follow-up, I wanted to dig in on the hiring trend. So with with the better visibility in the second half of the year, should we expect to see any change in the hiring volumes in the second half of the year?

Speaker 2

Yes. So we are gearing up to slightly faster levels of hiring. That is some of that was visible in the last quarter. We're pushing a little bit harder on the accelerator for this quarter and expect that to continue into Q4. Obviously, we've been expanding our footprint as well.

The contract digital services business gave us a lot of the locations across the Adriatic, and we're tapping into those as well, in terms of our ability to do that expansion.

Speaker 4

Great. And if I could just slip in a quick housekeeping question. What was the organic growth rate embedded in the third quarter and full year guidance? Well,

Speaker 3

third quarter, you're sort of middle double digits, so around a sort of 14%, 16% as for Q3. And then we accelerate from there. Q4, you can do the math.

Speaker 4

All right, great. Thank you.

Speaker 0

Next question comes from James Faucette from Morgan Stanley. Please go ahead.

Speaker 8

Great. Thanks very much. I just want to follow-up on a couple of questions that have already been addressed. But when you look at your incremental opportunities and growing opportunities in the APAC region combined with the hiring expansion that you just talked about looking to do, how should we think about organic versus inorganic needs and perhaps opportunities to supplement both regional opportunities as well as headcount and additions, etcetera?

Speaker 2

Great. Thanks, James. So obviously, the underlying business model that we have is to drive as we come out of the slight dip that we had with the pandemic to drive 20% plus organic growth and then supplement that with tuck ins through M and A. Also using the M and A route to help rebalance our portfolio from a geographic as well as sector point of view. So as we get traction in Asia Pacific, we will look to some M and A as an opportunity to establish a more significant presence there.

That could well be a year or two down the line. So I don't see anything as rushing through there. But also, we'll be looking at M and A in terms of pushing ahead in The U. S. As well, which is we've been doing really well from an organic growth point of view, as Mark highlighted.

But actually pushing that a little bit faster through M and A is also something that we're considering.

Speaker 4

Yes. That makes sense.

Speaker 8

And just to build on that quickly is that, are you seeing I mean, kinds of opportunities are you seeing? And are you looking at things or would you be considering things that largely complement your existing vertical exposures? Or, is is is act or acquisitions, going to be a key way to to expand, kind of the the industries that you're targeting and can address?

Speaker 2

Yes. So the priorities for us, as we look at, targets are, number one, there's a good cultural fit. The way in which they do things is very, very aligned with the way that Endava does things. They have the right DNA, if you like. Meaning that they have that ideation to production approach that they utilize Agile right through the way that they operate and that they've got their teeth into next gen technology in the way that they do it.

So we see a lot of companies, I think, in run up to Christmas, three or four months running up to Christmas, we're seeing about five companies a week pushed past us. But very few of them have the right DNA. So we remain pretty choosy. And what we're looking for is organizations that will help our geographic rebalancing. So as I just touched on, looking into The U.

S. Is one of the areas and downstream, looking at Asia Pac. That focus because we've given Europe a really good push over the last fifteen to eighteen months. The sector side of it is also important. Obviously, we have a big weighting in the payments financial services side.

So often looking for businesses that are in other sectors. What we're looking for there is we have a thesis around long, waves of technology change. The sectors are being driven over a long period of time by technology in terms of the way that their business models operate and so on. Payments being historically one that we've been in that still has a world to run. But also mobility, insurance, the way in which technology is starting to drive change in that and so on and many others that I've gone through over the years.

So we're looking for businesses that add in those sectors rather than just any sector. And occasionally, we start a business that has a technology capability that we want to add. But I have to say normally, we've been able to develop our own technology capability rather than having needed to buy that in. So that's the focus around M and A where it comes up.

Speaker 8

That's great color. Thank you very much.

Speaker 0

Your next question comes from Brian Keane from Deutsche Bank. Please go ahead.

Speaker 9

Hi, guys. I wanted to ask John just on thinking about any pent up demand as vaccines rollout and we get into the second half of this calendar year. Do you see any pent up demand with clients in the pipeline as we get a

Speaker 2

little bit

Speaker 9

further ahead and get COVID behind us?

Speaker 2

So the short answer to that is yes. There is demand where some clients are still holding back because of sensitivity over the outcome of the pandemic. Particularly, this is true in travel related activities, which isn't just the travel industry. There's travel insurance. There's the cross border payment type activities in the payment world and so on.

So the restrictions on travel and hospitality actually spill over into other sectors that are not obviously in the travel industry. In those areas, you see some restraint on budgets being released. Whilst in other areas, which is what's driving our growth, clients are hitting the accelerator quite hard. So I do expect that as we get through the pandemic and some of things start to open up, some of those other budget areas will open up as well, providing that incremental opportunity for us. Got it.

That's all I had. Thanks so much.

Speaker 3

Thanks Brian.

Speaker 0

Your next question comes from Jamie Friedman from Susquehanna. Please go ahead.

Speaker 10

Hi. Thanks for taking my question. John, I was just curious and I'll ask one question, drop back in the queue. But being the time of year that it is calendar year, any view at this point on IT budgets for 2021, especially in a couple of your key verticals? Have those come together yet?

And how how are things work?

Speaker 2

Yes. Thanks, Jamie. I hear a lot of other players in the IT services world talking about client IT budgets at this time of year and how it impacts them. To be honest, we see less of that. We don't tend to see clients restraining themselves in terms of spend that they funnel into digital transformation based on the annual review cycle that they're having as they're kicking off each financial year.

I mean, there's a small amount of it. But largely, as you've seen in the last quarter, there's acceleration that comes throughout the year. And in many cases, that's not decisions and issues that clients have decided on at the beginning of their financial year when they were budgeting. So clients do make money available, for the sorts of services and initiatives that we're involved in, and that continues to happen through the year. Of course, there is a little bit of it and some and that is that is visible and coming through, you know, as as clients are making their decisions through January and February.

But it's a much, much smaller dynamic for us than than we hear from, other players in the IT services world.

Speaker 3

So I think that's it for questions upfront. Yes. There

Speaker 0

are no further questions. Thank

Speaker 2

So thank you all for joining us today. As you'll have noted, even although the pandemic is still reaping a terrible impact, we are confident that our clients have incorporated those challenges into their investment plans and therefore seeing good demand in our main verticals. And so we remain positive about our business position looking forward. I look forward to seeing you all at our next earnings call. Thank you.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.