Endava - Q3 2024
May 23, 2024
Transcript
Operator (participant)
Good day, and welcome to Endava's third quarter of fiscal year 2024 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then one on your telephone keypad. To withdraw your question, please press Star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Laurence Madsen, Head of Investor Relations and ESG. Please go ahead.
Laurence Madsen (Head of Investor Relations)
Thank you. Good afternoon, everyone, and welcome to Endava's third quarter of fiscal year 2024 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava's Chief Executive Officer, and Mark Thurston, Endava's Chief Financial Officer. Before we begin, a quick reminder to our listeners.
Our presentation and our accompanying remarks today include forward-looking statements, including but not limited to statements regarding our guidance for Q4 fiscal year 2024, and for the full fiscal year 2024, the impacts of headwinds facing our industry and business, our ability to capitalize on market opportunities and trends in our industry, including with respect to development of artificial intelligence, our expectations regarding the impact of our recent acquisition of Galax on our business, enhancements to our technology and offerings, demand from clients for our technology services, our ability to create long-term value for our clients, our people, and our shareholders, and our business strategies, plans, and operations. These statements are subject to 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 Securities and Exchange Commission on September 19, 2023. Also, during the call, we'll present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS.
Reconciliation of such non-IFRS measures to the most directly comparable IFRS measures are included in today's earnings press release, as well as the investor presentation, both of which you can find on our investor relations site or on the SEC website. A link to the replay of this call will also be available on our website. With that, I'll turn the call over to John.
John Cotterell (CEO)
Thank you, Laurence. I'd like to thank you all for joining us today, and I hope that you're all well. As we get started, I want to share some perspective on the current environment, which I think we all understand has been very challenging. My sense is that we have come off a period of aggressive tech spending post-COVID. Clients now find themselves trying to sort through their spending priorities as they continue to face meaningful macroeconomic uncertainty. However, we believe that there is also significant pent-up demand for technology services to undertake and complete digital transformation and to get ready for generative AI. Every industry needs to reinvent itself to some extent to take advantage of generative AI, but it first requires meaningful investments in technology and data stacks to be ready. This transformation goes beyond the digital systems, which mostly sit above the core and enhance customer interactions.
AI requires access to the right data and systems to be truly effective, and therefore, transformation work must go much deeper into the core of the enterprise. Due to the complexity, uncertainty, and risk involved in reengineering and opening up these core systems, the planning work is therefore taking much longer before scale production-ready projects can be commenced. All of this has created a pause, a deceleration, but I also think pent-up demand that may be more meaningful than what we have experienced in prior periods. While we aren't happy with our share price or multiple, I believe these are temporary as long as we maintain our competitive positioning. Our approach to this environment has been to continue to invest in our people and our ability to serve our clients and be ready for when the market turns.
That's why we moved to diversify our footprint and delivery with GalaxE.Solutions and continue to build accelerators that will give us a nimble and very relevant set of solutions for this emerging market. Our history has been centered around leading-edge technology capabilities, agile development in very fast-growing areas, characterized by meaningful demand and helping our clients ideate and innovate. The key to long-term success in services is a high-quality talent pool that adds real value to clients, and with a scale that is relevant to clients as they move from proof of concept to production, but staying nimble and agile. We see our size as a competitive advantage as our entire industry gets ready to pivot yet again.
Our systems analysis capabilities, patent technology, and deep understanding of the industries in which we operate, enable a truly comprehensive enterprise modernization solution that supports our clients' overall business transformation, and which we refer to as Enterprise transformation. We have been working with our clients to build a truly unique approach to Enterprise transformation, which addresses this need for AI to reach the data and processes at the core of the enterprise. We use patent technology that facilitates a low risk and controlled end-to-end transformation of core systems through data-driven decision-making. With these capabilities, we help transform clients' underlying technology so it becomes more efficient and agile. Our bespoke data-led approach not only helps re-engineer core technology, but also any legacy business processes the technology supports, ensuring that we continue to deliver holistic, market-leading enterprise and business modernizations.
With this tried and tested approach, we decrease overall impact and risk for the customer, and to date, have delivered visible results to over 150 clients across more than 1,300 systems, and with over 650 million lines of code. Clients trust us at a time when they feel very uncertain. In the coming quarters, we will discuss more, and we are seeing signs that our strategic thinking is gonna set us up well to catch yet another wave of massive change. Moving on to our results, let me now provide an update on our business and financial performance for the three months ended March 31, 2024.
Our results for the quarter were within revenue guidance, with revenue totaling GBP 174.4 million, representing an 11.8% year-on-year decrease in constant currency from GBP 203.5 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of GBP 15.5 million, representing an 8.9% adjusted profit before tax margin, and our adjusted diluted earnings per share of 22 pence was above our guidance. I'd like to cover in more depth our recent acquisition of GalaxE.Solutions. GalaxE.Solutions brings a strong senior executive team in the U.S. with an excellent track record of winning and growing Fortune 100 relationships. We are already seeing opportunities emerge, including some early wins together.
As a reminder, over 70% of GalaxE.Solutions's revenue comes from clients in the U.S. healthcare sector, which we believe is a very attractive vertical. GalaxE.Solutions's leadership has proved successful at penetrating large U.S.-based payer services and pharmaceutical companies. Based on conversations with these clients, we believe we will be able to significantly scale the offerings. Here are some examples of projects GalaxE.Solutions is currently working on for various clients. In healthcare, we are working with a leading health insurance plan provider, leveraging GalaxE.Solutions's self-service portal platform to facilitate the complex management of pharmacy benefit plans across multiple third-party pharmacy benefit managers. Additionally, the platform will be used to support the implementation of the new requirements for CMS, the government agency that regulates Medicare and Medicaid, allowing Medicare members to opt in to a monthly payment plan for out-of-pocket expenses.
GalaxE.Solutions's platform uniquely de-risks the implementation, while significantly improving accuracy, regulatory traceability, and member experience. GalaxE.Solutions is also helping a Fortune 50 health plan achieve its goal of building a high-performing health services portfolio for delivery of innovative and flexible solutions to their clients. We are working with the client's leadership team to define goals to retire end-of-life technologies while implementing DevOps-enabled, cloud-centric, and product-oriented systems. This is a multi-year initiative focused on providing scalable solutions, driving lower costs, and improved quality with zero downtime. GalaxE.Solutions is working with a leading global bank to accelerate and advance their API migration initiative for their U.S. operations. Utilizing our proprietary accelerators, the teams will map business functions, extract business rules, identify data and workflows, map functional dependencies, and create testing scenarios and cases for complete future testing coverage....
This approach is expected to help the bank reduce transformation costs while improving speed to market and quality. Finally, for a large fintech client, Galaxy is mitigating and eliminating exposure to excessive extended security updates for end-of-life operating systems and database assets. By building a sustainable asset lifecycle management process, maximizing automation and integrated tooling, GalaxE's efforts are resulting in a significant cost savings for the client. Moving on to an update on technology, we recently announced the creation of our agentic AI industry accelerator, internally called Morpheus. We have already been successfully using it as part of both our pre-sale cycle, as well as a foundation for quickly helping our clients get value from their AI investments. To date, large language models, or LLMs, and AI have existed in a black box, with little insight into how the systems arrive at the answers they provide.
Endava is changing this by operationalizing LLMs around data to overcome current barriers caused by hallucinations, ensuring that all activity is transparent, knowable, and critically auditable. Rolling out this accelerator to regulated industries can deliver value in many ways, including helping insurers underwrite policies more efficiently, help analysts with legal or financial research, as well as due diligence efforts, and drive the development and testing of new healthcare products. Multi-agent teams represent a significant advancement in AI technology, allowing for a more dynamic, flexible, and comprehensive problem-solving capabilities. We see it solving complex industry challenges, optimizing processes, and delivering unprecedented value for our clients and their customers. AI is an exciting technology which we believe will positively impact our clients and businesses. We are still engaged in demonstrating the art of the possible with AI. We are beginning to see production projects being signed off and investments being made.
This last quarter, we signed new contracts in automotive, healthcare, and sports for AI-specific projects. In healthcare, we recently scoped an AI platform that leverages our Morpheus agentic AI application accelerator to significantly increase the efficiency of medical trials. Projects like these highlight that with the right use case, Endava is well-placed to benefit from an exponential increase in opportunities, given the relatively low investment costs and potential high savings for our clients. Our people are top-notch, and we recently won the grand prize in the competition Hack Together, the Microsoft Fabric Global AI Hack. This event was a global online hackathon, where participants had the opportunity to build innovative AI solutions using Microsoft's data platform, Fabric. Innovators team won with a cloud-native data solution, integrating OpenAI for document analysis, particularly for detecting personally identifiable information in files and images.
International Women's Day in March was a wonderful moment to recognize women at Endava, who each play a significant role in making a difference to our culture, with our clients and solutions, and in the world of technology. We ran a global campaign under the concept umbrella, Connect, Inspire, Rise, and over 1,000 Endavans attended sessions on leadership, career growth, mental, physical, and financial well-being. We received excellent internal feedback on a new training program under our Endava Wellbeing umbrella called Mental Wellbeing for Leaders. It's a program created to help line managers recognize warning signs of mental health issues in their teams, and it provides them with the tools to address the issue. We ended the quarter with 11,025 employees, a 6.1% decrease from 11,742 in the same period last year.
In the current environment, our recruitment is focused on areas of demand. Technology is our how, and people are our why, and as such, we continue to prioritize professional development by training and upskilling our people in key emerging technologies and techniques such as machine learning, generative AI, Next gen cloud, cybersecurity, product strategy, and sustainable computing, in order for them to remain at the leading edge of digital transformation. I'd like to take this opportunity to thank all Endavans for their commitment and determination as we persevere through current headwinds. We will continue to manage the business for the long term, maintaining our culture and organizational health and creating exciting solutions for our clients and their customers. 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 fiscal year.
Mark Thurston (CFO)
Thanks, John. Endava's revenue totaled GBP 174.4 million for the three months ended March thirty-first, 2024, compared to GBP 203.5 million in the same period in the prior year, a 14.3% decrease over the same period in the prior year. In constant currency, our revenue declined 11.8% from the same period in the prior year, within the range we provided to you last quarter, and reflected a 5.2% positive inorganic contribution during the quarter. Sequentially, revenue was down by 4% in constant currency on the previous quarter. As a reminder, there was no contribution from Galaxy during the course just ended.
Loss before tax for the three months ended March 31, 2024, was GBP 0.5 million, compared to a profit before tax of GBP 30.4 million in the same period in the prior year. Our adjusted profit before tax for the three months ended March 31, 2024, was GBP 15.5 million, compared to GBP 43.4 million for the same period in the prior year. Our adjusted profit before tax margin was 8.9% for the three months ended March 31, 2024, compared to 21.3% for the same period in the prior year.
Our adjusted diluted earnings per share was GBP 0.22 for the three months ended March 31st, 2024, calculated on 58.8 million diluted shares, as compared to GBP 0.59 for the same period in the prior year, calculated on 58.2 million diluted shares. Revenue from our ten largest clients accounted for 34% of revenue for the three months ended March 31st, 2024, compared to 33% for the same period last fiscal year. The average spend per client from our ten largest clients decreased from GBP 6.8 million to GBP 5.9 million for the three months ended March 31st, 2024, as compared to the three months ended March 31st, 2023, representing a 13.9% year-over-year decrease.
In the three months ended March 31, 2024, North America accounted for 30% of revenue, Europe for 28%, UK for 35%, and the rest of the world accounted for 7%. Revenue from North America declined 19.4% for the three months ended March 31, 2024, over the same period last fiscal year. Comparing the same periods, revenue from Europe grew 0.9%, the UK declined 22.3%, and the rest of the world grew 3.8%. Revenue from payments declined 27% for the three months ended March 31, 2024, over the same period last fiscal year and accounted for 24% of revenue.
Revenue from banking and capital markets declined 24.2% for the three months ended March 31, 2024, over the same period last fiscal year, and accounted for 14% of revenue. Revenue from insurance grew 1.7% for the three months ended March 31, 2024, over the same period last fiscal year and accounted for 9% of revenue. Revenue from TMT declined 4% for the three months ended March 31, 2024, over the same period last fiscal year and accounted for 24% of revenue. Revenue from mobility declined 22.4% for the three months ended March 31, 2024, over the same period last fiscal year, and accounted for 10% of revenue.
Revenue from other grew 3.2% for the three months ended March 31, 2024, over the same period last fiscal year and accounted for 19% of revenue. Our adjusted free cash flow was GBP 2.2 million for the three months ended March 31, 2024, compared to GBP 21.2 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period totaled GBP 190 million at March 31, 2024, compared to GBP 164.7 million at June 30, 2023. In April, we used GBP 129 million of our cash funds towards the acquisition of GalaxE.Solutions.
Capital expenditure for the three months ended March 31st, 2024, as a percentage of revenue, was 0.8%, compared to 2% in the same period last fiscal year. Now, turning to our outlook for the quarter four and the full year fiscal 2024. When we announced our guide in February, we did not include the contribution from GalaxE.Solutions, which at the time remained subject to regulatory approval. On the 10th of April, following the expiration of the required waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, we closed the transaction. So the Q4 guide includes the contribution from GalaxE.Solutions. The guide, including GalaxE.Solutions, represents sequential growth of 12%-13% at the bottom and top of the range. Excluding GalaxE.Solutions, the guide otherwise generally remains flat compared to Q3.
Our guidance for Q4 fiscal year 2024 is as follows: Endava expects revenue to be in the range of GBP 195 million-GBP 197 million, representing constant currency revenue growth of between 3.5% and 4.5% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of 22-23 pence per share.
...Our guidance for full year fiscal year 2024 is as follows: Endava expects revenue to be in the range of GBP 741 million-GBP 743 million, representing constant currency revenue decrease between 4.5% and 4.0% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of 113-114 pence per share. This above guidance for Q4 fiscal year 2024 and the full fiscal year 2024 assumes the exchange rates on April 30, 2024, when the exchange rate was 1 British pound to 1.25 U.S. dollars and 1.17 euro. This concludes our prepared comments. Operator, we are now ready to open the line to Q&A.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jonathan Lee with Guggenheim Securities. Please go ahead.
Jonathan Lee (Analyst)
Great, thanks for taking our questions. Can you help us understand how the integration of GalaxE.Solutions is progressing? And can you remind us of the revenue and EPS implications over the next few quarters?
John Cotterell (CEO)
Sure. So, I'll pick up on where the, how the integration is going, and then Mark, perhaps he should talk about the revenue and so on. So it's actually going very, very well. We are already winning business together. One contract that we've signed for a European telco, it was enabled by the fact that we have footprint in India now, because of the telco, they are completely operating out of India in the space where we've done that piece of business, which is a call center AI deal, where we're now doing the discovery for them. So, plus we have others that are in the contracting phase.
We're also seeing opportunities in expanding across Galaxy customers, essentially, a couple of customers who are moving us up their preferred supplier lists, so that we can take larger pieces of work, and have more prioritization from them. The diversification of geo and industry footprint is helpful, and you'll start to see that coming through in the quarters ahead. And you know, finally, as I touched on in the opening remarks, our enterprise transformation proposition has been significantly strengthened, and we're getting a lot of interest. Have been, you know, more than 10 customers that we're talking to about those services, following that strengthening. So we're very, very positive about the Galaxy deal and the organic opportunities that it's gonna give us going forward. Mark?
Mark Thurston (CFO)
So hey, Jonathan. So as I said in the prepared comments, the quarter-on-quarter growth is up to 12% and 13% at the high end of the guide. GalaxE.Solutions represents about sort of 12% of that uplift, so it's about sort of GBP 21 million run rate on the revenue perspective. As we sort of signaled at the time of the last call, integration costs are expected to be reasonably heavy this quarter. So there is negligible to zero EPS contribution in the quarter. I think as we go through into our FY 2025, we should start to, as we go through the integration process, their gross margins and their adjusted PBT should move up towards the Endava level. But it is too early to sort of call out a metric on that at this stage.
But certainly, their gross margins will be in line with where we are at Endava.
Jonathan Lee (Analyst)
Appreciate the details there. As a follow-up, yeah, what in your customer conversations gives you confidence in achieving your fiscal 2024 outlook, especially as we think about potential delays in ramping up projects that may already be committed versus, you know, some of the prepared remarks around pent-up demand and potentially increasing discretionary spend?
John Cotterell (CEO)
Yeah, sure. I mean, the you know, fiscal year 2024, we're in our last quarter, so there's just over a month to go. And therefore, within our guide, we have a very high proportion that is contracted and committed, as we call it. Mark can touch on the numbers in a moment. But you know, that visibility, and the work that we're currently doing is what gives us the confidence around the current quarter guide that we have, which leads to the full fiscal year.
Mark Thurston (CFO)
Yeah. The contractor and committed percentage is 99% within that guide. So it's a very high level of coverage when you compare it with what were our historic norms.
Jonathan Lee (Analyst)
That's helpful. Appreciate that, guys.
Operator (participant)
The next question comes from Bryan Bergin with TD Cowen. Please go ahead.
Bryan Bergin (Analyst)
... Hey, good morning, good afternoon. Thank you. Maybe I'll start with demand. So can you kind of give a sense that since you last reported, how that client behavior has progressed, particularly deal closure and deal ramps, as you've gone past March into April and May? Can you talk, you know, about the conversations you're having with clients? And understand you noted a flattish Q4 growth ex Galaxy. Can you just share any thoughts on how sequentials may progress, as you work through the balance of calendar 2024?
John Cotterell (CEO)
Yeah, so, client behavior is actually picking up a little bit. You know, perhaps worth unpacking the dynamics. I've discussed this on previous calls of our business, which is that, you know, we have projects and programs running with clients, and there's a natural closure as some of those complete. And so each quarter, there's a sort of downward pressure, which we overcome with the new business that's coming through. And so the discretionary spend, as I was calling it, or the new spend by clients, needs to be larger than the amount that's dropping off each quarter for us to drive growth. Clearly, we've had a series of quarters where that has been lower. In fact, it's been very quiet indeed, leading to the drops quarter on quarter.
With the flattening off, that is showing that some of that discretionary spend is coming through and impacting the quarter. Not as much as we'd like, but I think it is early signs that some of that is coming through, and of a strengthening underlying environment. The actual, you know, customer conversations, we continue to build a backlog of business where we have done discovery work and where clients are still making the decisions about whether to go ahead with the programs. And I touched on some of that in the opening remarks, and that continues, and it is now a larger backlog than it was at the end of last quarter. And that gives us confidence that at some point, it needs to break through.
That confidence being based on the fact that if clients were never going to spend the money they on building out the production systems, they wouldn't continue to spend money on the discovery work that we're doing with them. Mark, any color on the numbers?
Mark Thurston (CFO)
Well, I think it's all down to visibility, Brian. You know, so as you can tell with the guide at the moment, we're at a high level of contractual committed coverage at 99%. So certainly near term, looking into you know, the first quarter, we have stronger visibility. I think it comes back again to this pipeline conversion issue, where you know, we're adding to the pipeline, it is growing. It is the velocity at which it proceeds through to signed and initiated work that continues to be the issue.
So, in terms of, you know, sequential growth, when we anticipate the uptick, it is difficult to say at the moment, and obviously, we'll be giving clearer guidance when we get to September, when we, we give our full year results and the outlook for our fiscal year to June 2025.
Bryan Bergin (Analyst)
Okay, understood. And I guess as we think about gross margin inputs, we understand Central Europe has become more expensive as a result of the war in Ukraine. Can you just maybe talk about how you're navigating that, just given your leading scale, particularly in Romania? Is that market becoming more crowded from a talent acquisition standpoint?
John Cotterell (CEO)
I'm not sure where you're picking up that Central Europe has become more expensive. That's certainly not true for us. It may be there are other organizations who previously operated further east than us, who've had to move west into more expensive territories, and that's pushed up their Central European costs. But for us, we haven't needed to do that. In fact, you know, given the current environment and the lower demands that are going on, we're not seeing inflationary impact in Central Europe at all at the moment.
Bryan Bergin (Analyst)
Okay, appreciate that. Thank you.
Operator (participant)
The next question comes from Ryan Potter with Citi. Please go ahead.
Ryan Potter (Analyst)
Hey, thanks for taking my question. Just kind of looking across your verticals, and the payments vertical looks to be where you're still seeing some of the most demand pressure. So I was wondering if you could dive a little deeper into the trends you're seeing there, and what it would take to start to see a recovery there? And also in terms of some of your larger clients in the vertical, if you could comment on Worldpay, now that its majority stake is complete, if you're seeing any improvement there, and then also if Mastercard's remained largely stable? Thanks.
Mark Thurston (CFO)
I'll let John talk about sort of, payments and, you know, talk about our two largest clients, Mastercard and Worldpay, and then I'll pick up the balance of the portfolio.
John Cotterell (CEO)
Yeah. So, on Mastercard, it remains the story of the work that we're doing on the RTP, the real-time payments business, continues to just slowly decline, and is offset by the growth in work with the rest of Mastercard. It's actually very healthy growth with the Mastercard work outside of the RTP space, just from a smaller initial start point. So the one isn't quite balancing the other, meaning that we're seeing a slow decline across the overall Mastercard portfolio. But I think, you know, the relationship remains very healthy, and underneath the surface, we're breaking into more and more parts of Mastercard. So for the longer term future, it's actually very healthy.
In Worldpay, we are seeing the first signs of the work coming from that spinoff. You know, Worldpay are receiving some of the funding around the restructuring that they've been planning. You know, we are working with them on planning how we can help them execute on that. You know, are hopeful that we'll see a reasonable amount of that work coming our way.
Mark Thurston (CFO)
Yeah, and I think, if you look at the rest of the portfolio, it is flat progress, really, across banking, capital markets, insurance and TMT. The one area where we saw a sequential decline was in mobility, and that was most noticeable in North America. And it reflects the comments we made last quarter's earnings, where it's a mixture of a large client coming off peak activity in the logistics space. We made some comments about airlines, where again, there was some conservatism around spend and rolling out programs, due to the sort of macro outlook, which has come to fruition, for want of a better word. And then in automotive, again, we're seeing delayed decision making, given choice of sort of technologies.
Those are the real sort of key drivers in that mobility. In terms of the rest of the portfolio, it is relatively sort of flat, apart from those two areas.
Ryan Potter (Analyst)
Got it. I guess, maybe shifting to some margins. The fiscal 2024 EPS outlook midpoint was lowered here. So could you provide some details on the factors that are driving this? Like, how much is coming from potentially lower margin expectations? Can you comment on your margin expectations for, for 4Q and, and fiscal 2024, versus maybe higher interest expense or integration costs from, from Galaxy? And then on the margin side, what drivers do you have to improve margins from here, whether it be improved utilization or anything else to call out as you head into fiscal 2025?
Mark Thurston (CFO)
Well, Q3 was a big EPS beat. We did much better on our G&A savings, so we secured through the restructuring quicker savings than anticipated at the time of the guide. And also the tax rate was significantly lower than anticipated at 18%, due to the release of a tax provision, which is one-off in nature. Now, in terms of what we see going out into Q4, and this includes GalaxE.Solutions, is we will see some improvement in the gross margin, probably up to between sort of 33%-34%, as we continue to, you know, reduce bench. There isn't anything really in terms of pricing uplift to reflect in that figure, but that reduction in bench will lead to improved utilization.
So there's we're continuing with our sort of restructuring through to the year. I mean, that's that program back in February, so we will continue with that, so that will give us some upside. And then I think our SG&A will start to sort of normalize as well. So the guide implies at the moment for Q4, that there's not a significant uplift in adjusted PBT margin, given that we've got a heavy sort of integration budget with Galaxy at the moment. Thereafter, I think we start to improve as we go through our next fiscal year in terms of the gross margin improvements and the leverage from SG&A that we get through that full integration with Galaxy.
Ryan Potter (Analyst)
Got it. Thanks again.
Operator (participant)
The next question comes from Maggie Nolan with William Blair. Please go ahead.
Margaret Nolan (Analyst)
Thank you. Do you have a multi-year target for percentage of headcount in terms of geographic distribution that you're working towards?
Mark Thurston (CFO)
So our expectation over time is that we will diversify across the globe. Currently, we are concentrated in Central Europe relative to our other global delivery locations, and particularly concentrated in Romania, where about a third of our staff are. We expect those all to continue to grow, but as the business expands, we also expect to see LATAM move up as a proportion of our business. And then over time, the delivery capabilities out of Asia Pac, mainly in Vietnam and India now, will start to move up. Very much sticking to the delivery model and the delivery approach that we currently have. We're not looking to shift the market that we're operating in because of that geographic mix changing.
Margaret Nolan (Analyst)
Thank you. As we approach the, you know, end of your fiscal year in June, can you remind us kind of what the typical method is in terms of how you'll build the guidance for your next fiscal year? Are you taking any additional considerations under your view, given that the visibility has been quite limited in recent quarters, when you think about how you'll build guidance for next year?
John Cotterell (CEO)
... I believe to date, and from more recent history, had a track record of beat and raise. So we are gonna be cautious basically in our guidance, as we go sort of forward. And part of that is because we've, you know, we've done a sizable acquisition with Galaxy, so there are integration challenges. So we were willing to sort of guide appropriately. So I think as we go through the integration process between now and September, as we sort of form that view for the fiscal, we'll guide appropriately so that we hopefully don't deliver any surprises.
Margaret Nolan (Analyst)
Thank you.
Operator (participant)
The next comes from Puneet Jain with J.P. Morgan. Please go ahead.
Puneet Jain (Analyst)
Hey, thanks for taking my question. So John, you gave us helpful perspective on how GenAI could be hurting near-term demand, and yet it represents significant medium-term growth opportunities for the sector. Could you review for us why Endava or maybe digital engineering companies as a group, have right to win in this new AI age? Like, what type of work you expect, you will do, and why, like the Endava or, digital engineering companies are the, right names, to be doing that for clients?
John Cotterell (CEO)
Yeah, great question, Puneet. I love it. So the way we see it is that, if you look at what digital transformation has been over the last 20 years, it has largely, for a lot of the enterprise customers, been around creating a layer over the top of their enterprise core. A layer that has enabled improved, you know, customer interaction, and, you know, driven revenue and so on, and hugely valuable to them. And, you know, we've been one of the organizations that's really benefited from helping drive change across that top layer.
As we get into AI, it will need to drill into the systems, the data, and the processes that exist in the core, in order to provide the quality of change, the business benefit that you can get out of AI. You've got to get at the data, that's in the core. You know, organizations who already have a very flexible core, newer organizations typically, are gonna find it much easier to adopt AI and roll out the benefits than the larger enterprises who have a more, let's say, legacy core. So the opportunity is for the organizations who have both the digital transformation capability, that we've demonstrated over so many years, and the core modernization capability.
Now, what I was highlighting in the my preliminary remarks was that Endava is actually incredibly well positioned for this. We have, over the last 10-15 years, been building a whole core modernization suite, which we have tried with many customers, 150, as I highlighted, across 1,300 systems. And that actually enables, in a data-driven way, to understand what the existing core systems actually do, and what changes need to be made to make them more flexible, and opened up, so that their data is available to the AI that's coming.
So you put those two things together, you've got digital transformation taking a kick from the AI wave that's coming through, and all the new ways of doing customer interaction, driving automation, and so on, that it's gonna open up, and the core modernization capability that's needed. And we see ourselves as being in a uniquely almost differentiated position against our competitors out there.
Puneet Jain (Analyst)
Got it. No, that's very helpful. And then your headcount was down, give or take about 5% this quarter on a sequential basis. How does your utilization look like right now versus your targets? I think, Mark, you mentioned there is some scope to improve utilization in Q4. So can you talk about utilization rates right now versus your targets?
John Cotterell (CEO)
Yeah, I mean, so utilization at the moment is, it's been pretty sort of stable, so it's about 66-67 for the quarter just gone. Our bench is pretty, pretty low, currently about 8.5% so to speak. So, it will remain at that sort of level. The bench may go a little bit lower, but most of our margin improvement is gonna come from greater utilization, basically. And historically, when we've been delivering good margin, we've been up at the high 60s, and typically, a percentage movement in utilization, all things being equal, leads to a percentage point improvement on gross margin.
Again, one caveat around that, we are integrating GalaxE.Solutions, and so we need a stronger hold around the metrics, operating metrics of that business. But I think what I've said is largely gonna hold true for them as well.
Puneet Jain (Analyst)
... Okay, thank you.
John Cotterell (CEO)
Thank you.
Operator (participant)
The next question comes from Bryan Keane with Deutsche Bank. Please go ahead.
Bryan Keane (Analyst)
Yeah. Hi, Mark, just wanted to ask on gross margin. I think it fell below the 30% threshold in the quarter, which is a little below we were expecting. Was there any call outs just for the quarter itself, that I know you're talking about an improvement sequentially, but just trying to figure out the quarter itself, why it fell?
John Cotterell (CEO)
It did fall, but it was where we guided. So, I did see how you got your number. We think it's on an adjusted basis, 31.5%, so it's above the 30%. And in line with what we were guiding, the kicker on the EPS was basically through lower SG&A and the reduced tax rate. So maybe we just need to compare notes on that gross margin.
Bryan Keane (Analyst)
Okay.
John Cotterell (CEO)
Calculation difference.
Bryan Keane (Analyst)
Yeah, yeah, we'll look at it. There might be some adjustments there. And then I think you gave us the Galaxy contribution. What's the other inorganic contribution we should expect in the fourth quarter from other acquisitions, just so we have the total inorganic contribution for fourth?
John Cotterell (CEO)
It's a very minimal element from TLM, which we had about a year ago, but it's pretty negligible. It's mainly all of Galaxy.
Bryan Keane (Analyst)
Got it. Okay. I'll pass along. Thank you.
Operator (participant)
The next question comes from James Faucette, with Morgan Stanley. Please go ahead.
James Faucette (Analyst)
Hey, thanks, guys, for taking the question. Just a couple of quick follow-ups. First, in terms of Worldpay, you said that you're starting to see some of that business and engagement come back, as GTCR takes over management of that company. How are you thinking about, like, what the return and opportunity looks like there, over what timeframe? You know, just trying to get a sense of any early indications on that, because it seems like there's a lot of potential there.
John Cotterell (CEO)
Yeah. I mean, James, obviously it's a sensitive area in terms of clients' investment decisions. We have very good stakeholders across the COO, the CTO, so we're engaged regularly in conversation with them. And, you know, with them shaping up their investment plans, their change plans, we feel very much involved and expect to be part of that going forward. Is about as far as I think we should go at the moment.
James Faucette (Analyst)
Understood. Understood. And then wanted to ask quickly about kind of GalaxE.Solutions and how you're thinking about that, and integrating that into the rest of your operations. And, you know, what are the things that you're paying attention to in terms of competition for talent in that market right now, the pricing dynamics between, you know, at least traditionally, where GalaxE.Solutions had been and Endava more broadly? Just trying to think through the working relationship and how that'll expand and improve Endava's capabilities down the road.
John Cotterell (CEO)
Yeah, sure. I mean, the first thing to say is that if you look at the average revenue per workday in Galaxy, it's not a lot different to Endava, because of that mix of onshore and offshore. And so, you know, we would expect to maintain that sort of value add pricing in what we do. The second thing is that the strengths that we have are very complementary. So, you know, the digital transformation work that we do is something that is mainly an Endava strength. If you look at the core modernization stuff, that the data numbers that I put out there, about two-thirds of that was Endava work, and about a third of it was from the Galaxy experience set. So they've strengthened that.
I think if you look at that core modernization side, India is a good place to do that. There's a lot of experience that they have in India and can bring to apply that. And if you put that alongside the patented technologies that we have, the toolsets and the accelerators that we use to deliver that service, it gives us a strong differentiation against the Indian pure plays for work that we do out of India. And then when you add the digital transformation capability to drive true enterprise transformation as AI comes through, put those two things together and you end up with a strong differentiation, still pulling on our nearshore capabilities as well as adding India in.
So, you know, that's, that's very much how we're seeing it. We see it as being, you know, being able to protect price and the earnings enhancing over time. So I think that's probably economically what you were searching for there.
James Faucette (Analyst)
Yep. No, that's great. Appreciate that.
John Cotterell (CEO)
Makes sense.
Operator (participant)
The next question comes from Moshe Katri with Wedbush. Please go ahead.
Moshe Katri (Analyst)
Hey, thanks for squeezing me in. So two questions. First, on bookings, can we get some color on some of the new bookings in terms of verticals, regions, and then in general, are we seeing any sort of changes in terms of how bookings have been converting? Obviously, there's been an issue with conversion slowdown and the fact that conversion has been pretty inconsistent, so any color there will be helpful. Thanks.
Mark Thurston (CFO)
I mean, my comments are really on the larger deals that I sort of focus on. But I mean, the pipeline has been growing, as John said, so you know, quite significantly in terms of the number of deals and the average sort of size of them from the last time we talked on the earnings call. What hasn't changed is the pace at which they go through from proposal to contract or being told you haven't been successful, that remains sort of slow. And then, you know, partially the sort of reason, mainly the reason that we're at in the quarter where we're guiding towards what was our previous sort of bottom.
So it's an issue basically of progression through the pipeline in terms of velocity, not one of win rate.
Moshe Katri (Analyst)
Okay. And then just on Galaxy, can you just remind us if Galaxy is growing this year, or any sort of, kind of, color on their growth rates?
Mark Thurston (CFO)
It's, it is too early really to say that. We've sort of took control, as said in the comments, 10th of April. We obviously have a budget to put together, for ourselves for June to June 2025. So we are going through the process at the moment of looking at their, their forecasts, and establishing what those growth rates look like. But certainly they were growing, and they have a calendar year, by the way. They were certainly growing, as year on year between calendar 2022 and calendar 2023.
John Cotterell (CEO)
I think the big opportunity with the GalaxE lies in the deals that we can collaborate on and win together. That's where we're gonna get the acceleration. You know, either their clients allowing us to expand footprint because of the larger scale and capabilities that Endava brings, or Endava clients benefiting from the footprint capabilities, particularly the enterprise transformations thing that I've been talking about, that GalaxE really solidifies for us. So that's where we're looking to see the growth, rather than just you know, them organically operating by themselves.
Moshe Katri (Analyst)
Understood. Thank you.
Operator (participant)
The next question comes from Jamie Friedman with Susquehanna. Please go ahead.
Jamie Friedman (Analyst)
Good morning, good afternoon. I wanted to follow up on Puneet's earlier question, John. In terms of your right to win in AI, is it possible to share your perspective, maybe with the lens of slide 13? It's the one where you talk about your capabilities. So even if you don't have it in front of you, but it's where you're— If you look at AI in the context of these service lines, say, digital production or engineering or data delivery, where are you seeing revenue realization at this point, or expecting to see it?
John Cotterell (CEO)
Yeah, so I mean, that's pulling out the underlying capabilities, rather than what we go to market with. So we go to market with digital transformation propositions that are all about helping a client transform their business, whether that be driving revenue or efficiencies on the cost side. And, you know, that's been the classic digital transformation space that we've performed in and done so well over so many years. The right to win, I think, comes from being able to combine that with, you know, patented, unique approach to core modernization that really de-risks that modernization program.
There are so many large enterprises out there that, that have been wary of getting into the enterprise core modernization space, and actually, we can give them a much more solid route to doing so. Now, as you do that, it really opens up what you can do on the digital transformation side. So, because, because of the access to data that you get, because of the process cleanup that you can drive through the organization, and, you know, being able to put those two capabilities together in a very differentiated way, that's where we see our right to win coming from.
Jamie Friedman (Analyst)
Okay, and then, Mark, I just had a question about the free cash flow, and I think you had called this out last quarter, so it wasn't a surprise. But the 1.2% Adjusted free cash flow as a percentage of revenue down from 10%, is... I see that obviously a lot of it's the, you know, the revenue pressure and the profitability pressure, but what, what in here should we be looking at?
Mark Thurston (CFO)
... Well, we typically have some cyclicality in the cash flow, so it is usually a low quarter, cash flow, not as low as this, as a percentage of revenue. We have taken the cash component of the restructuring of about $7.5 million through the cash flow, so that's $4 million. So I think that adds about, I think about a couple of percentage points to it. It is-- I don't think this is representative of sort of the cash flow generative position of Endava going forward. I think it is a, it's a combination of us going through the restructuring. There definitely has been a sort of slowdown because it's related to, you know, the profitability of the revenue, which is low.
As our profitability sort of improves going forward, that will drive a stronger sort of free cash flow position.
Jamie Friedman (Analyst)
Okay, that makes sense. Thank you.
Operator (participant)
The next question comes from Tom Blakey with KeyBanc. Please go ahead.
Tom Blakey (Analyst)
Hey, everyone, thank you for taking my question. I just my question was, it's good to hear about the new bookings, you know, seeming to offset some of these pressures and downsells and whatnot. When you look out, John, to the next few quarters here, maybe into fiscal 2025, not exactly a question on guide, but how far through are we in terms of these potential downward pressures? What does the portfolio look like in fiscal 2024 that seem to have kind of like upticked in terms of downward pressure, when you kind of take a look at it from a portfolio of like your current business as we look out the next few quarters? That'd be kind of, I think, helpful for everybody.
John Cotterell (CEO)
Yeah, I don't want you to take away that this downward pressure is an unusual thing. This is something that has been happening through all of the boom times of growth as well. It's just the natural projects coming to an end cycle.
Tom Blakey (Analyst)
Okay.
John Cotterell (CEO)
... What we've been experiencing over the last 18 months or so is the new spend that's been coming through has not been offsetting that. And that's where this quarter we're seeing it offsetting it and enabling stabilization. We're also seeing that big backlog of work where we've done discoveries for clients, paid discoveries, where they're not yet making the decisions to go ahead with it. So, you know, it's too early to call that upward trend that's coming from new discretionary spend coming through, that's enabled stabilization in Q4, is going to accelerate to the point where we anticipate an upturn. But that is the core question, is when does that happen? When does this backlog of opportunities break through and actually start to lead to the uplift?
You know, right now, we're not ready to call that. We'll see in September.
Tom Blakey (Analyst)
So that and that's helpful in terms of the relatively normal cadence of the downward pressure. That's helpful. And then maybe just switching back over to the Galaxy topic. I was under the understanding, just given prior, you know, research and whatnot from Galaxy, that EBIT margins were in the high teens from an organic perspective. Just walk us through maybe the puts and takes there, as we look to kind of like model out the next year or so, and if there's any seasonality in their revenue organically, that would be helpful as well. Thank you.
Mark Thurston (CFO)
Well, I think it depends on what numbers you've been looking at. So I don't like to disclose any public sort of numbers. We have been putting them onto IFRS. That's part of the integration challenge, when you're looking at the accounting policies. There is integration activity which can be quite marked for us, certainly in the first, you know, six months. So that's really until, probably longer, until about sort of December. I think as John said, their bill rate is in line with ours, revenue per head. They do have a higher proportion of, you know, onshore, compared to us. But we think that we can achieve, over the course of what will be fiscal 25, taking them up to levels of gross margin that we achieve.
Then we will also be looking at the SG&A, because there will be, you know, some synergies there basically. So I'm not going to spell it out in short. I think you're gonna have to sort of wait until we guide in more detail for fiscal 25, which we will do in September.
Tom Blakey (Analyst)
Okay, and Mark, just any seasonality that GalaxE.Solutions's been typically experiencing off that 21-22 million GBP?
Mark Thurston (CFO)
It's too early to tell, to be honest. Certainly in terms of their budgets that we were looking at through the due diligence process, it looked like strong growth. Again, we have to sort of dedup it for our revenue recognition, which we try to do at the due diligence sort of stage, but we're sort of working through that. I don't think there is any cyclicality or seasonality that we could pick up in terms of the timing of the spend that they have with their clients. But we have to do further work really, before I can, you know, comment. Yeah.
Tom Blakey (Analyst)
Excellent. Thank you for taking my questions.
Mark Thurston (CFO)
Thanks, Tom.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to John Cotterell, CEO, for any closing remarks.
John Cotterell (CEO)
Yeah, so thank you all for joining us today, and as I mentioned in my prepared remarks, we talked about the pivot in digital transformation that's underway, driven by AI, specifically, the need to drive change in the enterprise core. We've touched on that a little bit during this call. We believe Endava is well positioned for this, with both the digital transformation capability to ideate and innovate, alongside patented technology to help make enterprise core systems and data accessible to AI. The combination of these capabilities positions us excellently for the next wave of digital transformation driven by AI. We will continue to invest in these capabilities in anticipation of the market turn, and I look forward to updating you at our next earnings call, which will be our full year numbers. Thank you.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.