Endava plc (DAVA) Q2 2022 Earnings Report, Transcript and Summary

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Endava Second Quarter Fiscal Year 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Laurence Madsen Head of Investor Relations, you may begin your conference.

Thank you operator. Good afternoon everyone and welcome to Endava's second quarter fiscal year 2022 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 remarks today include forward-looking statements including our guidance for Q3 fiscal year 2022 and for the full fiscal year 2022 and statements regarding our perceived opportunities and anticipated future growth and geographic expansion, our expectations regarding digital transformation of businesses, and industries and other industry trends, the necessity of digital transformation for many companies, and Endava's ability to benefit therefrom, potential technological advances, our expectation for future partnerships, and ability to expand our existing relationships, anticipated client demand for Endava services, our ability to attract and retain employees, and be an employer of choice in multiple geographies, our integration of FIVE and Levvel, and our ability to execute on our sustainability objectives, 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 September 28, 2021, 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 our 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.

Thank you, Laurence. I'd like to thank you all for joining us today and I hope you're all staying safe and well. We're pleased to be here to provide an update on our business and financial performance for the three months ended December 31st, 2021. Endava continues to experience very strong demand for our digital services in all of our regions and verticals. However, the environment continues to be one where demand outweigh supply and therefore, we are having to be very selective in the work that we take on. The situation in Russia and Ukraine is one that we continue to monitor. For Endava, we believe that our direct exposure is low as we have no people based in Russia, Ukraine, or Belarus. Endava reported revenue of £157.7 million for Q2 of our fiscal year 2022, representing a 53.4% year-on-year increase in constant currency from £105.2 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of £33 million, representing a 60.4% year-on-year increase from £20.6 million in the same period in the prior year. Our strong revenue growth continues to be driven by the expansion of work for our existing clients and the acquisition of new ones during the quarter. As I've mentioned previously, we continue to see an increasing flow of new client opportunities which start small with ideation or proof-of-concept engagements and then scale as we move into production system development. The scaling of these projects as engagements expand is now driving the growth of larger clients and the increased spend by these clients. We ended the quarter with 689 active clients up from 521 at the end of the same period in the prior year, a 32.2% year-on-year increase. Importantly, we grew the number of larger clients with a total of 107 clients who are paying us in excess of £1 million a year compared to 75 in the same period last year, representing a 42.7% year-on-year increase. The average spend of our top 10 clients continues to grow strongly and was up 40.4% year-on-year in the three months ended December 31, 2021. Our business in the US continues to expand strongly helped by the successful integration of our most recent acquisitions FIVE and Levvel. Revenue from North America grew 79.8% for the three months ended December 31, 2021 over the same quarter last fiscal year. Revenue from the rest of the world is also growing strongly up 109.1% year-on-year driven mainly by the Payments and Financial Services vertical with existing clients taking us to new countries and clients moving to new jobs and taking us with them. Revenue in our Payments and Financial Services vertical grew by 55.8% year-on-year driven by strong growth in all the subsegments of that vertical. Banking and capital markets grew very strongly due in large part to investments in consolidated data platforms, cloud migration and the crypto and distributed ledger technology space, whilst business-driven initiatives such as advanced trading analytics and digitization are thriving. Demand in payments is driven by the continued shift to frictionless payments facilitated primarily by e-commerce, merchant onboarding and open banking in combination with real-time payment rails. Across our insurance vertical, we've seen significant growth in delivery of no-code/low-code solutions for underwriting and pricing and in the application of automation to areas such as straight-through processing of claims. Our other vertical also grew very strongly up 58.2% year-on-year with mobility being the key driver. Mobility the movement of people and goods is experiencing a long-term shift towards autonomous electric vehicles and we're seeing accelerated demand for last-mile logistics connected vehicle innovation and sharing and warehouse intralogistics. I'd now like to give some highlights on what we've been doing on the technology front. For many years much of our business has been serving enterprises or fintech clients developing software for their own use. More recently, we started working with software product vendors to develop their products particularly in the financial services and technology industry areas. We have a range of successful ongoing engagements for clients who develop technical software products such as collaboration platforms or software development tools as well as some clients who develop well-known products for the capital markets industry. The products we work on are often offers both as packaged software to be installed and operated by the customer as well as SaaS solutions run by the product vendor on behalf of their customer. This area has grown strongly for us and we found strong demand for our architecture product design development testing and creative services skills with these clients. Looking at the demand landscape through an industry-based lens, I would like to provide an update on our work in the private equity sector. Work for PE portfolio clients has been a significant proportion of Endava's business over the years and we estimate that over 25% of our revenue comes from PE portfolio businesses. According to Refinitiv in 2021 private equity firms began putting to work their record piles of unspent cash at a record rate to account for 20% of M&A activity. These financial sponsors accounted for $1.2 trillion worth of deals in 2021, a 111% year-on-year increase and a new record. We remain confident in our ability to continue to grow this portion of our business. Our acquisition of Intuitus in November 2019 helped expand our PE footprint in the mid-market space. We continue to grow our work with the larger funds as their demand for transformational large-scale IT investments continues to increase. We've seen the opportunity for technology change become a more important driver of the value creation thesis for buyers. And as a result, we continue to find ourselves in advantageous commercial situations where we are advising PE firms on the potential impacts of post-acquisition technology transformation activities cross-functional teams of engineers, product strategists and subject matter experts are specialists in this field and we are particularly active in sectors where we have deep engineering expertise such as payments, insurance and TMT. Here are some specific examples of what we're doing in the PE space. In the past 12 months we've been asked by multiple funds to help them in their ambitions to acquire payments businesses. Given our deep understanding of the industries we helped validate the growth potential of the targeted companies. And our team helps to set achievable product and technology road maps. For one such fund we have now kicked off a large multiyear product transformation program. We worked with a global payments business backed by a PE fund on their product strategy work stream focused on sizing the tech effort needed to deliver product propositions leading to an engineering road map. During the work we discovered issues of technical debt and proposed a future architecture. This advisory work has led to a multiyear engagement with multiple engineering teams. Endava is working with a global PE portfolio company that is one of the largest digital real estate organizations. The various brands of this company functioned independently on a primarily national basis and are now being rolled into a single group powered by a single technology platform. Endava is now advising on the architecture solution design and overall programming, as well as working alongside the existing technology teams to build up a new platform while enabling the existing business to continue running. One of our clients is a PE-owned technology software company based on the US West Coast who have engaged several LATAM's scrum teams and continue to open up new business units to Endava engagements as we demonstrate the whole added value. We're also very active with PE investors in retail particularly focused on target companies with e-commerce ambitions. We've been seeing a growing demand for investments to accelerate the migration to a cloud-native tech stack where packaged business capabilities sit at the heart of a customer-centric omnichannel commerce operations and our team is helping clients move to this paradigm. Our ability to combine our understanding of the deal drivers with our architecture and product expertise makes us a unique partner for PE houses. Our goal is to scale this model globally and particularly to expand our relationship with US PE firms. As we see an increase in commercial demand across all regions and industries, we've also seen an increase in our growth from a people perspective. I'm excited to highlight in December we reached a milestone of 10,000 Endavans. This is more than just a number. It's about having a great team doing amazing work for our clients. We ended the quarter with 10,391 employees a 39.2% increase from 7,464 in the same period last year. We added 775 net new employees in the last quarter. While competition for talent remains intense, our focus on recruiting the best talent in the countries where we are located is unchanged and we continue to recruit and retain the people we need. We are also continuing to expand our geographical reach including Poland and Canada. We are proud to be an Employer of Choice in Romania, Serbia and North Macedonia, where we have won Best Employer Awards and where we have more than half our people. We also continue to grow our LatAm presence with over 1,600 Endavans in the region at the end of December, up 79% year-on-year, showing that we continue to be a very desirable employer in that region also. I would now like to provide a bit more granularity on our recruiting program to explain how we continue to be an employer of choice. We have a strong internal referral program. And for the 12 months ended in December, around 30% of our new hires joined Endava through this referral program. This is a strong element of the Endava culture and helps with knowledge sharing and team spirit as we grow. Our internship program also helps us attract talent. And for the 12 months ended in December 21% of our new hires came from graduate recruiting from partner universities. University graduates begin their professional careers with us and grow into seasoned IT professionals with either specific industry vertical or disciplined expertise. We also have a rehiring program which allows for easy integration as these returning Endavans who're already very familiar with our culture. The balance of the hiring is mainly targeted towards recruitment of senior people. Further, we believe diversity and inclusion are key to our culture. Last year, we established the Endava Diversity Inclusion and Belonging Forum to bring together a broad and varied group of passionate Endavans from across the business to drive and deliver sustainable organizational inclusion. We believe our strong culture is key to our low attrition level of 12.5% as of December 2021. We also continue to introduce new incentives to better align rewards to our people with Endava's growth. As part of our We Care approach to sustainability, we recently announced our focus on achieving net zero emissions from our organization and value chain, accelerating our journey to a net positive impact. These will take time, and we will approach our environmental disclosures with the utmost integrity. With this in mind, we recently signed a commitment letter to Science Based Targets, which sees Endava joining the Race to Zero. Additionally, we celebrated our 10,000th Endavans milestone by planting 10,000 trees and we have a commitment to plant at least 30,000 trees by the end of our 2022 fiscal year. As a next-generation technologies provider, we are mindful of the environmental impact of the software and technology infrastructures we design and deliver. We believe that we have the ability to drive sustainability through digital acceleration and we are proud to help our clients build environmentally conscious solutions. As demonstrated by our financial results, demand for our services remains strong. We're excited about the opportunities in front of us and remain confident in our ability to execute on our objectives. I'll now pass the call on to Mark, who will walk you through our financial results for the quarter and provide guidance for the coming quarter and the fiscal year.

Thanks, John. Endava's revenue totaled £157.7 million for the three months ended December 31, 2021 compared to £105.2 million in the same period in the prior year, a 49.8% increase over the same period in the prior year. In constant currency, our revenue growth rate was 53.4%. Profit before tax for Q2 fiscal year 2022 was £19.1 million compared to £10.6 million in the same period in the prior year. Our adjusted profit before tax for the three months ended December 31, 2021 was £33 million compared to £20.6 million for the same period in the prior year. Our adjusted profit before tax margin was 20.9% for the three months ended December 31, 2021 compared to 19.6% for the same period in the prior year. Adjusted profit before tax, or adjusted PBT is defined as the company's profit before tax adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets and realized and unrealized foreign currency exchange gains and losses all of which are non-cash items. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was £0.46 for the three months ended December 31, 2021 calculated on 58.0 million diluted shares as compared to £0.29 in the same period in the prior year calculated on 57.1 million diluted shares. Revenues from our 10 largest clients accounted for 34% of revenue for the three months ended December 31, 2021, compared to 37% for the same period last fiscal year. Additionally, the average spend declined from our 10 largest clients increased from £3.9 million to £5.4 million for the three months ended December 31, 2021, representing a 40.4% year-over-year increase. In the three months ended December 31, 2021, North America accounted for 35% of revenue compared to 29% in the same period last fiscal year. Europe accounted for 21% of revenue compared to 27% in the same period last fiscal year and the UK accounted for 41% of revenue compared to 42% in the same period last fiscal year. While the rest of the world accounted for 3% of revenue compared to 2% in the same period last fiscal year. Revenue for North America grew 79.8% for the three months ended December 31, 2021 over the same quarter of fiscal year 2021. Comparing the same periods, revenue from Europe grew 17.1%. UK grew 46.9% and the rest of the world grew 109.1%. We grew in all three of our industry verticals during the quarter. Revenue from Payments and Financial Services grew 55.8% for the three months ended December 31, 2021. Revenue from Payments and Financial Services accounted for 51% of revenue compared to 49% in the same period last fiscal year. Revenue from TMT grew 32.5% for the three months ended December 31, 2021 over the same quarter of 2020 and accounted for 25% of revenue, compared to 28% in the same period in the prior year. Revenue from other grew 58.2% for three months ended December 31, 2021 over the same quarter of 2020. And now accounts for 24% of revenue compared to 23% in the same period in the prior year. We now turn to our adjusted free cash flow, which is our net cash provided by operating activities, plus grants received less net purchases of non-current tangible and intangible assets. Our adjusted free cash flow was £31.2 million for the three months ended December 31, 2021 compared to £18.7 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period remained strong at £114.2 million at December 31, 2021 compared to £69.9 million at June 30, 2021. CapEx for the three months ended December 31, 2021 as a percentage of revenue was 2.4% compared to 1.6% in the same period last fiscal year. Our guidance for Q3 fiscal year 2022 is as follows. Endava expects revenues will be in the range of £161 million to £163 million, representing constant currency revenue growth of between 44% and 45%. Endava expects adjusted diluted EPS to be in the range of £0.42 to £0.44 per share. Our guidance for full year fiscal year 2022 is as follows. Endava expects revenues will be in the range of £636 million to £640 million, representing constant currency growth of between 44% and 45%. Endava expects adjusted diluted EPS to be in a range of £1.80 to £1.84 per share. This above guidance for Q3 fiscal year 2022 and the full fiscal year 2022 assumes the exchange rates at the end of January when the exchange rate was £1 to US$1.34 and €1.20. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

[Operator Instructions] And your first question comes from the line of Ashwin Shirvaikar from Citi. Your line is open.

Thank you. Good morning, John, Mark and Laurence. Solid quarter. Congratulations. I guess my first question relates John to how you started your prepared remarks, you said you're being selective in terms of what projects you seek and approve. Could you provide some more granularity around that in terms of selective in what way? Are you focused on eventual TAM? Are you looking at profitability? Could you provide more granularity on that.

Yes. Sure. Thanks, Ashwin. So our key is to focus on our clients where we're looking to develop a long-term scaled relationship. And indeed in industries where those prolonged tech transformations that we've been talking about are underway. So we're less interested in working on a single project for a new client, if we don't think that the relationship can expand. I mean that's always a judgment call but that's the call that we're making. Essentially, with our business model we want to get in and make an impact on the clients' business through the product that we help them build And then as that product is successful in the market we see clients coming back for more. So that -- we're looking for the relationships that's going to enable us to progress that model. We also -- we always have a mind to our desire as a business that I've touched on before, around diversifying our geographic and vertical mix of clients. So Endava goes down that diversification mode. So we essentially put every opportunity into a scoring system because there's a lot of them coming through in order to prioritize, which business we're going to do and to prioritize where we allocate our people.

Got it. And I appreciate the detail on recruiting. That was very helpful. I guess a couple of sub questions from that. One is the sharp rise in LatAm? Would that be representative perhaps of more North America opportunity, or is it just par for the course? And then you did mention obviously there's no direct impact from -- you don't have people in Russia, Belarus or Ukraine. But given sort of the geography of where Romania is, are you expecting any sort of indirect sort of social pressure and things like that that affect you?

Okay. So yes firstly on LatAm yes that is partly tied to the growth that we're seeing in North America. We are pushing more of the growth that we achieve with clients in North America into our LatAm delivery centers. And obviously, it's been a very strong market for us to recruiting. So between those two things, we've seen that sharp acceleration in LatAm. On your question around the sort of central sort of Eastern European pressures. Romania, we take a lot of comfort from the fact that Romania is a member of the NATO. And we have about half of our staff in Romania just under. So I do believe that the chances of the pressures that are currently going on in Russia, Ukraine and Belarus, unlikely to spill over into actual NATO territory, given that would engender a sharp response from NATO. And therefore, we gained some comfort from that. The – I think in some ways it's more likely that we would see work and possibly people actually heading west into our territories in Romania and Poland actually opening opportunities for us if the situation continues to worsen to the east of us. So it's – I hope things don't progress in that way but it is possible that that would have a small benefit for us.

Understood. Thank you.

Thanks, Ashwin

Your next question comes from the line of Bryan Bergin from Cowen. Your line is open.

Hi. Good morning, good afternoon. Thank you. I wanted to stay on the topic of supply here. So it sounds like attrition remains stable and low which is good. Have you noted any accelerated competition for talent though as some providers may be looking to diversify beyond that current geopolitical footprint they have in Eastern Europe? And how are you thinking about regions you intend to lean into most from a headcount expansion standpoint over the next couple of years?

I mean the recruitment in our markets is always a huge competition. And I wouldn't say that it's been any sharper in the last quarter than we've previously experienced. The numbers of people that we lose to larger competitors is really quite small. We're talking under 5% of the numbers that we actually recruit in a quarter to give some context to it. So it's not a huge factor driving attrition for us. And that is largely down to the strength that we have as an employer of choice in the markets that we operate in. So – so yes, it's well under control. If you look at some of the markets that we are – we've got our eyes on, I've mentioned that we're moving into Poland and Canada. And we've also established a corporate entity in Malaysia and so we'll start to scale in those markets as well over the next few quarters. Obviously, they'll start reasonably small and we'll get the culture well established, so that we progress as an employer of choice in those locations as well before you see a huge impact in terms of acceleration there. But yes, we are moving out of – beyond our existing geographies as we've continued to do over the last few years.

Okay. Makes sense. And then just the acceleration in the £1 million plus revenue clients. I think this – there may have been a record uptick on a quarter-on-quarter basis for you here. Can you just talk about the mix of those new large clients. Is it broadly represented across industries and regions or any of that standout for you more so here. And then can you just talk about any changes in that in sales investment or the go-to-market approach that have really spurred that nice uptick over this quarter and the last several?

Yes. So I mean one of the things that I touched on in previous quarters is that with Endava, we engage with clients in a proof-of-concept or prototype and type basis doing some ideation work around how technology could be applied to their business and where benefits would come. And then as that proof-of-concept is brought to life, it scales into production systems. And we've been broadening our smaller client base over the past two years. And those 1 million-plus clients in the main is those smaller customers bottling up into production system engagements. And then as we scale our footprint with clients into perhaps other product areas that they have across the business. That is the main driver for the growth in larger clients. The private equity side also does that. We engage with them on a smaller basis with – as they're considering investing in a prospective portfolio company, and then as they make that investment and some of the technical transformation work to the platforms in those businesses that then bubbles up into larger production work in the £1 million-plus space. So those are the main drivers that push that growth in the £1 million-plus clients. And we continue to see a strong pipeline of those sorts of engagements in the £1 million minus under £1 million space that, we will be working on growing into that larger client guys.

Thank you.

In terms of the sales teams, it largely the growth in different regions and different sectors largely follows, where we put salespeople on the ground. So as you know, a couple of years ago, we put a lot of effort into North America and that is cascading into North American growth. So the US was up 80% year-on-year last quarter. And we're just putting people on the ground in the rest of the world, which more than doubled year-on-year. And actually, we had from a rest of the world point of view it was the first quarter where we had a top 10 client from the rest of the world. So it's starting to pull through into the larger clients there as well.

Thanks.

Your next question comes from the line of Mayank Tandon from Needham & Company. Your line is open.

Thank you, John. I was just curious in terms of – as we think about the growth going forward, how should we break it down between just recruiting so sort of linear head count growth versus is there any room for utilization to improve. I know, you've been running pretty hot just given how strong demand is? And also, if you could just comment on pricing power in this very dynamic demand market.

Hi, Mayank, it's Mark here. So a lot of the headline growth that we've had this quarter of 53%. So the average head count was up 37%. So that drives part of it. We have about 4% added to that from increased utilization. So it's probably around mid – about between 70% and 71%, which is in our sweet spot. And then, we've had a further sort of 7% which is a slight tweak in the onshore offshore mix. And then the balance is actually the mandate rates increasing, which is four percentage points of growth against the 53% now. Going forward, the head count growth is still going to remain a driver of that growth. We're not going to get much leverage from a utilization perspective. And I also semi believe that, onshore offshore mix has sort of stabilized. So the growth rates coming forward implied in the guide are going to be head count related, but also through to passing on that cost pressure that we and others are experiencing through rate rises.

That's helpful, Mark. And then as a quick follow-up, I just wanted to get a sense of – as you look at your top 10 clients, and you've had again very strong growth within the top 10 based on some of the metrics you shared. Where are you in terms of maturity with these clients? Is there still plenty of room to grow, or do you believe that you've now maybe come to a point where growth will start to maybe plateau and slow down and the growth will be really fueled by the non-top 10 going forward?

So, we believe, there's lots of room for growth in many of the top 10. They're big organizations in the main where our footprint is – has got a lot of room for expansion. There's probably a couple in there where we go in to the place where it's going to start to plateau. But the remainder offer a lot of room for growth. So we do expect that, the top 10 as a proportion of our overall business will slowly come down, simply because one of our stated aims is to diversify the business. That means we're obviously pulling into -- pushing for other clients to grow faster as part of that diversification, into new geographies and territories and so on. So -- but lots of room for growth there.

That's helpful. Congrats on the quarter.

Thank you.

Thank you.

Your next question comes from the line of James Faucette from Morgan Stanley. Your line is open.

Thanks very much. Wanted to follow up on the question around hiring. In the past you've kind of talked about having a normalized ceiling of growing head count by around 30% per year. Are we in a situation now where you can confidently lift that at least as a potential, or should we just look at the current rate of hiring as more of a surge, in that, sustaining that above that 30% is probably going to be difficult and not likely?

Yes. Thanks, James. It's a good question. And one that we watch closely. We've always guided that 30% is probably a sensible max. There were a couple of factors coming out of the pandemic that contributed to us being able to push it a bit faster, one of which was that we continue to promote people through the pandemic. And so, with recruitment being slower during that period, the organization became more senior and that gave us an opportunity coming out of the pandemic to expand faster than our previous maximum that we would have guided at. Secondly, our attrition is low. We're at 12.5% this quarter, which is below the 15% that we target. And lower attrition means that we can grow a little bit faster, because the knowledge base within the business of how we operate remains stronger. And so, those factors together have enabled us to push the 38% year-on-year growth that you saw in Q2. We do expect that that will start to come down, we may keep that 30% max running a little bit higher, but I don't think it will continue at the 38% level going forward.

Useful color. I appreciate that. And then, the other question I wanted to ask was around acquisitions. There's always, it seems like maybe an opportunity or at least some benefit from doing tuck-in acquisitions of talent in specific skill sets. What are you seeing and thinking about in the current environment? And especially with the valuations volatility that we've seen over the last few months, how should we think about that part of capital allocation?

So we are always looking for good opportunities and acquisitions. We have a team that are focused on doing that and we're seeing a lot of opportunities. We are, however, very choosy around businesses that have the right DNA that are going to integrate well with Endava namely ones with an ideation to production type mindset, with an agile approach to the way in which they operate and ones who are utilizing next-gen technology. Obviously, there's nothing that I can report that we're working on right now. But if there is anything material, we would report that. Strategically where acquisitions work best for us is helping, number one, with the geographic diversification and pushing into some of the new territories that we want to build up in. Secondly, in the sector acceleration of some of the industry verticals that we're very focused on, because of bringing specific experience and capability in that. And then, finally, sometimes there are businesses that bring some skills or technology capabilities that just help us boost an area within the business. Of course sometimes you find a business that brings all three components in the deal. So that's what we're always looking for, the strategy remains the same. And there in capital allocation terms, there are some good returns to be had for us in the sorts of businesses that we can buy.

Thank you.

Thanks, James.

Your next question comes from the line of Maggie Nolan from William Blair. Your line is open.

Thank you. Congratulations. Could you talk a little bit about the growth drivers in private equity particularly the -- how the Intuitus acquisition has progressed over time versus the Bain relationship? And then, when you do work for PE does that show up in the Financial Services vertical regardless of what industry the portfolio company you're working on might be in?

So private equity, as I touched on in the opening remarks is -- and it's the portfolio companies of private equity owners is around the 25% maybe slightly more than that percent of our revenue comes from those sorts of businesses which is why we highlight it. The Intuitus acquisition really helped us with the earlier-stage conversations with PE firms i.e. the -- a lot of the work that we're doing with them is actually before they put a bid in and complete an acquisition. And with the focus of it is around, how the technology platform can be transformed as part of their investment thesis. And that's attractive to us as well, because when they buy a business with that investment thesis we can help them with the downstream work in transforming it. We report those portfolio companies in the industry segment that the portfolio company sits in. So it's not -- it doesn't pop into payments of financial services, just because it's got a PE owner. Indeed, most of the peers even the upfront work when they buy a business, the consultancy type work we're doing upfront they will book against the portfolio company. So even that will get reported in the wider industry verticals where it gets reported into the PE firm and will go against payments of financial services where they don't win the bid. And they carry the cost themselves. Did I fully cover your question?

Yes that's great. Thanks. My other question is on the revenue per employee which has been trending up nicely. Could you just talk about some of the drivers behind that? And then how sustainable this trend is in the near-to-medium term?

Yeah. Hi Maggie, so the revenue part is basically a function of the mandate rates and utilization. So it's sort of been indicating that we're probably in our sweet spot. In terms of utilization we're in that sort of low-70s. It depends on quarter-to-quarter whether we're accelerating in terms of building bench ahead of demand which has an impact. And then, it's the mandate rate. So the utilization, I think will broadly be around where it is by those, sort of spurts to get ahead of demand for the quarter ahead. And then, it's a function of pricing. And the pricing in terms of quarterly progression, we believe will improve. We're confident in our ability to recover the cost pressures through the battle for talent. So I think there'll be some stability and probably some upward movement on our revenue per head.

Thanks Mark. Good job.

Thanks, Maggie.

Your next question comes from the line of Bryan Keane from Deutsche Bank. Your line is open.

Hi guys. I wanted to ask about the -- obviously the tension in Russia and Ukraine. Does that disruption to any of your peers lead to new work potentially for Endava? How do you think about that John?

I mean I couldn't really comment on peers, but we are certainly seeing some of our clients who have footprint with other players in those territories start to have conversations with us about whether they could buildup what they're doing with us a little bit more just because of the risk sensitivities that they have to what's going on. So I wouldn't expect it to be a huge flow of work. And indeed as you'll have picked up, we were already supply constrained in the work that we're taking on. So -- but if it's the right client and the right opportunity, we'll certainly engage with some of those opportunities that are coming through. I think the other thing is we are starting to see some movement of staff who are currently particularly in the Ukraine who are thinking maybe it's time to move to another country. And that's actually -- a relatively small level at the moment is starting to be visibly stronger.

Got it, got it. And then one question on the guidance for Mark. If you look at the implied 4Q revenue guide, it comes down a little bit from where you guys have been running this fiscal year in 3Q. So just trying to think about when we get to 4Q I know the comp gets a lot difficult after a significant growth rates that started in the fourth quarter. How much of the fourth quarter run rate is conservatism anniversarying of acquisitions just more normalization of the growth? Just trying to think about the factors for 4Q by the time we get there?

Yeah. So I mean the guide at the top is around 28% for organic constant currency growth. That may be -- look that it's slowing when you compare it with the quarters Q1, Q2, Q3. But it is dipping out the M&A impact as you said. And also our Q4 FY 2021, our organic constant currency was 35% of a very strong recovery from COVID. So we have a combination of a tough comp there and also the unwinding of the M&A contribution, which we executed in Q3 last fiscal. But the momentum is very strong. We anticipate keeping utilization where it is. And we're also making some allowance for mandate rate expansion.

Got it. And how much was the M&A contribution for the quarter again, Mark?

This quarter?

Yeah.

It's about 10%.

Great.

So underlying organic is around 44%.

Got it. Thanks team. Congratulations on all the success.

Thanks.

Thanks Bryan.

Your next question comes from the line of Jamie Friedman from Susquehanna. Your line is open.

Hi, good morning. Let me echo the congratulations. I'll just ask my two upfront, John since we have you. How are you thinking about IT budgets for 2022 calendar? I realize you guys make your own weather but in general, how are the budget trends? That's the first one. And then the second one is in your prepared remarks John you talked about the insurance vertical. You had an example, but I was wondering if you could elaborate there as to how you're seeing that one evolve? Thank you.

Yeah. You rightly Jamie called out that the IT budget spend that clients pushing in our direction partly comes from their IT world. A lot of it comes from business investment mindset around how technology can have a real impact on the relevant parts of the business. So we're not as directly exposed to ebbs and flows in IT budgets as some of the more traditional players are. So to me it doesn't feel like there's any issue. There's plenty of money that clients are pushing in the direction of what we do. But I don't have the same sense of the wider IT budget spending trends that a lot of the more traditional wider-based services business would have. On the insurance vertical, we've -- a lot of what's happening in the insurance space is around data, around the move to clouds. Data being the ability to create more competitive insurance products to provide foundations for better use of automation, things like straight-through processing of claims which we've successfully done with a few clients has in no human touches the entire process of the claim once the client has entered. There's also a bit of activity around no-code and low-code solutions for underwriting and pricing that clients pushing out into the market and quite a bit of direct-to-market website type capability, where more say broker-type clients actually pushing direct into the consumer market. So those are a number of areas across insurance, where we're seeing growth in activity.

Thank you for that.

Thanks, Jamie.

Your next question comes from the line of Moshe Katri from Wedbush Securities. Your line is open.

Thanks for squeezing me in. And let me add my congratulations to strong results. Two big picture kind of questions. One, can you give us some color on what you're seeing in terms of wage inflation, maybe in terms of ranges? And then, given the supply constraint issues that we're seeing out there, are you having to bump up the number of comp increases that you're doing on an annual basis? Maybe you can kind of refresh -- give us kind of a color in terms of how often have you been doing those comp increases on an annual basis? Thanks.

I mean on the wage inflation, we've seen slightly elevated, our main pay rise has gone through in January. We don't see any sort of uptick in terms of attrition at this stage. We will see how we go with that. But typically, the average cost per head we've managed to contain with our normal sort of distribution curve. So, we're seeing sort of a sequential uplift in costs of about 3% or so when you look at it more from one quarter to the other. But actually when it translates into a gross margin impact, we've lost probably about a percentage when you go from Q2 to Q3. And that's something that we've usually experienced as we've gone through the year, it is our major sort of pay around it, it does have that impact and then we start to recover it through the balance of the year, through discussions with clients, around rate increases, around the appropriate renewal stage. I think you had a backup, didn't you? Actually the last question you had...

I'll pick it up. So on our annual pay review is the main point at which we do comp increases. The only other significant element is, we do have quarterly reviews on promotions across the business. And obviously, when we promote someone, we review that comp at the same time. But apart from that, it's mainly the annual cycle. So, you see quite a large pay component coming through in our Q3. And then it takes the rest of the year as Mark touched on for the price rises to come through that then push the margins back up again.

Understood. Thank you.

Thanks.

Your next question comes from the line of Steve Enders from KeyBanc. Your line is open.

Hi, great. Thanks for taking the question. I just want to ask a bit about some of the underlying demand drivers you called out in the comments I think one of the areas was working with the SaaS vendors and some of the packaged software vendors and helping enable that. So, I guess one just how are you kind of seeing the underlying opportunity from here to work with them? And how should we kind of think about that as a percent of the mix going forward?

Yes, I mean that's something that sits within our TMT space. And we've been very excited to see more work coming through with the SaaS technology providers typically on the West Coast in the US. And the work we're doing for them is around the engineering of the products that they push out there. And there are a number of them and they're a big opportunity for us. So, we're excited to see that picking up.

Okay, great. And then you mentioned as well that you're planning to move into Malaysia and establishing a new corporate entity there. I think we've talked in the past about how -- some of the plans to enter the Asian market, but does this kind of change how you're thinking about a build versus buy point of view as you think about targeting Asia more broadly?

So, we will look at M&A opportunities. And if we can find the right sort of business, we'll look at M&A as a route to expanding. The Malaysia one we are building organically we just have opportunities with clients in the Asia-Pacific region. And we wanted to -- a big part of our model is that similar time zone agile delivery capability that we push through. And for clients in Australia, as we're scaling beyond early engagements, we really needed capability on the ground in Asia-Pacific. So we're not waiting for an M&A opportunity to come through. We're going through it organically in Malaysia.

Okay, perfect. Appreciate you taking the questions.

Thank you.

This concludes our question-and-answer session. I will turn the call back over to John Cotterell for some closing remarks.

Great. Well, thank you all for joining us today. As you all have noted from -- the demand for our services remains strong and that is across all of our verticals and geographies. And so we remain very positive about our business position. I look forward to speaking to you in a few months at our next earnings call. Thank you.

This concludes today's conference call. Thank you for your participation.