Q3 2024 Earnings Summary
- Endava's acquisition of GalaxE is progressing well, with early signs of collaboration leading to new business wins and opportunities to expand their client base, particularly in enterprise transformation.
- The company's pipeline is growing significantly in terms of the number of deals and average size, indicating strong underlying demand that could drive future growth once deal velocity improves.
- Client behavior is picking up, with increased discretionary spending and a larger backlog of business compared to the previous quarter, providing confidence in potential growth as these opportunities convert into contracts.
- Slow conversion of deals is impacting growth: The company noted that while the pipeline has been growing, the pace at which deals progress from proposal to contract remains slow. This delay is affecting revenue growth and is a main reason they're guiding towards lower expectations.
- Heavy integration costs of GalaxE leading to negligible EPS contribution: The recent acquisition of GalaxE is incurring significant integration costs, resulting in negligible to zero EPS contribution in the quarter. This could weigh on profit margins in the near term.
- Significant decrease in adjusted free cash flow as a percentage of revenue: Adjusted free cash flow dropped to 1.2% of revenue from 10%, primarily due to restructuring costs and lower profitability. This decline may limit the company's financial flexibility.
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Demand Trends and Sequential Growth Outlook
Q: How has client behavior progressed, and thoughts on sequential growth?
A: Client behavior is picking up slightly, with discretionary spend starting to come through, leading to a flattening off in Q4. However, it's too early to call when this will translate into growth, and we'll provide clearer guidance in September. We have stronger near-term visibility with contracted and committed coverage at 99% within the guide. The pipeline is growing, but the progression to signed work remains slow. -
GalaxE Integration and Financial Impact
Q: How is the GalaxE Solutions integration progressing, and revenue and EPS implications?
A: Integration is going very well; we're winning business together, including a contract with a European telco enabled by our footprint in India. We're positive about the GalaxE deal and its organic opportunities. GalaxE contributes about 12% of quarter-on-quarter growth, approximately £21 million revenue run rate. Integration costs are heavy this quarter, leading to negligible to zero EPS contribution. We expect their gross margins and adjusted PBT to move towards Endava levels in FY'25, but it's too early for specific metrics. -
Confidence in Fiscal '24 Outlook
Q: What gives you confidence in achieving fiscal '24 outlook amid potential delays?
A: With over a month left in fiscal '24, we have a very high proportion of work that is contracted and committed, giving us confidence in our current quarter guidance and the full fiscal year. Contracted and committed percentage is 99% within the guide, providing a very high level of coverage compared to historic norms. -
AI Opportunity and Company's Positioning
Q: Why does Endava have a right to win in the new AI age?
A: We see AI driving the need to access core systems and data for business benefits. Endava is well-positioned with both digital transformation capabilities and core modernization expertise. We've applied our core modernization suite with over 150 customers across 1,300 systems, enabling us to modernize enterprise cores effectively. This positions us uniquely against competitors for AI-driven transformations. -
Margins and Gross Margin Outlook
Q: Why did gross margin fall, and what's the outlook?
A: Gross margin was 31.5%, in line with guidance. The EPS beat was due to lower SG&A and a reduced tax rate. We expect gross margin to improve to 33%-34% in Q4 as we reduce bench and improve utilization. Most margin improvement will come from higher utilization. -
Mastercard and Worldpay Updates
Q: Can you discuss trends in payments and updates on Worldpay and Mastercard?
A: For Mastercard, work on real-time payments is slowly declining, offset by healthy growth elsewhere, breaking into more parts of Mastercard. The relationship remains very healthy. With Worldpay, we're seeing initial work from the spin-off and are hopeful to secure a reasonable amount as they proceed with restructuring. -
Utilization Rates and Margin Improvement
Q: How does your utilization look now versus targets, and is there scope to improve?
A: Current utilization is around 66%-67%, with bench at about 8.5%. We expect margin improvement from increased utilization, aiming for high 60%s as we've had historically. Each 1% increase in utilization leads to a 1 percentage point improvement in gross margin. -
Free Cash Flow and Restructuring Costs
Q: What impacted free cash flow this quarter, and outlook ahead?
A: Q3 typically has lower cash flow. We incurred cash restructuring costs of about £7.5 million, affecting free cash flow. As profitability improves, we expect stronger free cash flow moving forward. -
Headcount Reduction and Impact on Margins
Q: How does the headcount reduction affect utilization and margins?
A: Headcount was down about 5% sequentially. Utilization remained stable at 66%-67%. We aim to improve margins through higher utilization as we reduce bench, moving towards historical levels. -
GalaxE's Growth and Integration Plans
Q: Is GalaxE growing this year, and what's the integration plan?
A: It's too early to say about GalaxE's growth this year as we're integrating and aligning budgets. They were growing year-on-year between calendar '22 and '23. The big opportunity lies in collaborating on deals and leveraging combined capabilities to drive growth.