Endava PLC

NYSE:DAVA

Earnings Call Analysis

Endava Reports Steady Growth and Strong Outlook Amid Digital Transformation

Endava's revenue grew 3.5% year-over-year to GBP 195.1 million for Q1 FY2025, driven by a 32.5% increase in North America. Despite a decline in overall margins, adjusted profits showed resilience. Management expects revenue for Q2 FY2025 between GBP 195-197 million, with annual guidance set at GBP 800-810 million, reflecting 10-11.5% growth. The adjusted EPS forecast for the year is GBP 1.12 to 1.17. The integration of GalaxE is expected to enhance capabilities, positioning the company to capitalize on AI-driven opportunities, while maintaining focus on core modernization and strategic partnerships.

Growth Amid Change: Endava's Positive First Quarter

In the first quarter of fiscal year 2025, Endava reported revenue of GBP 195.1 million, an increase of 3.5% compared to the same quarter last year. Adjusted profit before tax (PBT) stood at GBP 19.2 million, although slightly down from GBP 29.8 million a year ago, indicating a temporary dip in profitability due to operational challenges during the integration of their new acquisition, GalaxE. The company's focus on AI and core modernization is proving timely, aligning well with market shifts towards these areas.

Client Dependency and Revenue Trends

The top 10 clients contributed to 36% of total revenue, with average spending rising from GBP 6.5 million to GBP 7.1 million year-over-year. This reflects Endava's reliance on major clients while also demonstrating growth. Revenue breakdown revealed North America leading with a 32.5% growth, driven in part by the GalaxE acquisition, while other regions like the UK and 'Rest of the World' faced declines of 8.0% and 42.8%, respectively.

Vertical Performance Insights

The earnings call highlighted mixed performance across business verticals. Healthcare, reported separately for the first time, grew impressively by 201.6% thanks to GalaxE. Conversely, payments saw a significant decline of 25.5%, affecting 20% of total revenue. Notably, banking and capital markets experienced an increase of 23.4%, indicating resilience in certain sectors despite overall challenges.

Prospects and Guidance for Future Growth

Looking ahead, Endava forecasts revenue for Q2 FY2025 to be in the range of GBP 195 million to GBP 197 million, reflecting year-over-year growth of 8.5% to 9.5%. For the full fiscal year, they anticipate revenue between GBP 800 million and GBP 810 million, which is a 10.0% to 11.5% increase compared to fiscal year 2024. Adjusted diluted EPS is projected at GBP 0.24 to GBP 0.25 per share for Q2, and GBP 1.12 to GBP 1.17 for the full year.

Driving Transformation Through AI and Core Modernization

Endava leaders emphasized their commitment to AI-driven transformation, noting that 60% of CEOs view AI deployment as a top priority for business modernization. The company's acquisition of GalaxE not only enhances their capabilities but positions them to undertake larger and more complex transformation projects directly tied to their clients' core systems.

Strategic Partnerships and Market Positioning

The company continues to diversify its customer footprint and strengthen its market position through strategic partnerships. Recent collaborations with Aer Lingus, Mambu, and GoCardless highlight Endava's strategy to expand its offerings across various sectors, particularly in financial services and digital payments.

Challenges and Outlook

Despite the growth, challenges remain, particularly regarding delayed decision-making processes from clients as they navigate tighter budgets and a cautious economic environment. Endava is mitigating this by focusing on recruitment in high-demand areas such as data, AI, and cloud, though they anticipate slow growth in headcount until later in the fiscal year.

Conclusion and Strategic Focus Moving Forward

Endava's first quarter results highlight adaptability in a shifting technological landscape. By leveraging AI, modernizing core systems, and enhancing client relationships, the company is strategically positioned for future growth despite current economic challenges. Investors should monitor the effectiveness of implementation post-GalaxE integration and the company's ability to capitalize on trends in AI to sustain momentum.

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and welcome to the Endava First Quarter Fiscal Year 2025 Results conference call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Laurence Madsen, Head of Investor Relations at ESG. Please go ahead.

[Laurence Madsen, executive]

Thank you. Good morning, everyone, and welcome to Endava's First Quarter Of Fiscal Year 2025 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 Q2 fiscal year 2025 and for the full fiscal year 2025. The effect of headwinds facing our industry and business, our ability to capitalize on market opportunities and trends in our industry, including with respect to developments with artificial intelligence, our addressable market, our expectations regarding the impact of our recent acquisition of GalaxE 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 strategy, plans, operation and growth opportunities.

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 the Securities and Exchange Commission on September 19, 2024.

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. Reconciliations 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, executive]

Thank you, Lawrence, and good morning, everyone. Thank you for joining us for our First Quarter Fiscal Year 2025 earnings call. We're pleased with our first quarter results, which beat our guide and showed top line growth quarter-on-quarter as well as year-on-year.

As we discussed on our last earnings call, we believe our market is exhibiting the characteristics of a significant digital shift. This is visible in the slowdown of more traditional digital business alongside the acceleration of new, mainly AI and core modernization-driven growth. Whilst this growth has emerged from a smaller base, we believe that the acceleration is beginning to outpace the areas of decline.

I will add that this shift seems to differ from others the markets have experienced over the years. The AI imperative to transform the core comes with a plethora of exciting opportunities, revolutionizing the digital experience as we know it. We believe that our experience and expertise in digital transformation, AI and core modernization make us the ideal partner for customers in this new disruptive wave.

Additionally, we believe the size of the market we address is expanded by this shift, where quite excitingly, we are no longer focused on solutions built predominantly around the core, but in fact, need to engage directly with the core itself from ideation through to production, what we are calling the digital shift.

We believe our business is well set up for these new growth areas whilst reducing concentrations. Our focus on AI is continuing to establish leading-edge propositions to solve real business challenges and our acquisition of GalaxE has enhanced our core modernization capability, adding patented IP, which provides clients with a more secure and cost-effective path for their digital future. These capabilities give us access to larger, more complex transformation programs, with a powerful proprietary set of accelerators, providing us with a compelling sales offering.

Alongside this, we've diversified our customer footprint across industries and geographies and globalized our delivery capability. We believe these changes strategically position us to meet the growing demand for the digital shift. And this morning, I will outline our progress across each of these priorities and look forward to showcasing some of our latest technology offerings at our Investor Day tomorrow and hope you can join our webcast.

First, our business winning activities. We continue to focus on building larger strategic partnerships with customers as a key lever for future growth. We have increased the size of the largest opportunities we are seeing over the last few years, regularly bidding on and winning deals valued at GBP 100 million and higher.

As a result of the shifts in the market, we are also having more conversations with our customers about addressing their largest enterprise challenges. I'm pleased to share that in recent months, we secured strategic deals with clients in various verticals and regions, highlighting our continued business diversification. A few examples of these include a multiyear agreement with Aer Lingus to support them with their digital transformation ambitions from specialist strategic advisory work to business-wide migration and implementation programs. Then there is our work with a leading mining company and also several large and longer-term commitments with big insurers in order to de-risk their modernization programs.

I'm also happy to announce our progressing partnerships across the market to open up new channels and leverage relationships. Today, we announced a partnership with USoft, the provider of a low-code platform with which to develop business-critical applications. As Usoft continues to focus on product innovation, Endava will provide implementation support and drive stronger customer relationships to help scale their platform's impact.

We also recently formed a strategic partnership with Mambu to drive innovation in the financial services sector through cloud banking technology. In a nutshell, the partnership aims to help financial institutions modernize their core systems, accelerate time to market and enhance customer experiences. This collaboration will empower banks and fintechs to adopt flexible, scalable and API-driven solutions, enabling them to stay competitive in an evolving digital landscape while meeting regulatory requirements efficiently.

And finally, we recently signed a strategic partnership with GoCardless aimed at enhancing digital payment solutions for businesses globally. Simply put, through this partnership, businesses can expect to streamline payment processes, reduce costs and improve cash flow management. The partnership will focus on delivering innovative, scalable solutions that meet the growing demand for seamless real-time payment experiences.

Moving on to technology and AI, in particular, based on the results of our recent sponsored IDC InfoBrief titled the Next Wave of Digital Transformation in the era of the AI-powered digital shift, 60% of CEOs consider deploying AI, machine learning and generative AI to be their top modernization and transformation initiative, making it the leading priority for this group.

But to truly harness AI's transformative potential, organizations must ensure that this technology is embedded deep within their core systems, which is why modernizing our clients' core infrastructure is a key pillar of our long-term strategy.

So let's turn to core modernization. We do not view it as just a behind-the-scenes upgrade. It's the critical foundation enabling the adoption of cutting-edge technologies to drive future growth from AI and automation to advanced analytics.

Without modern, flexible and scalable systems, businesses simply can't take full advantage of these innovations. The core modernization is a holistic approach to transforming platforms that have historically resisted change or be overlooked in transformation efforts. The same IDC research found that 49% of firms attribute overspending on digital infrastructure to the cost of maintaining legacy systems, which just underscores the urgent need to modernize the greater operational efficiency.

When we work with clients to modernize their core systems, we aim to develop those relationships into long-term partnerships where we can continue to help and thrive in a rapidly changing landscape. In short, core modernization empowers us to deliver innovation at scale, setting the stage for future growth and transformation.

Through our Dava.X capabilities, we design and accelerate our clients' change agendas, seamlessly integrating these innovations with our foundational capabilities to drive lasting impact. It's about equipping organizations with the ability to implement and optimize next-gen technologies without being held back by our data systems.

So what does this innovation look like in action? The cornerstone of our modernization approach is an in-depth analysis of legacy technology assets. This analysis is supported by our own IP in the form of AI-enabled accelerators, which are designed to reduce disruption and vastly increase the speed and accuracy of delivery. They offer a tailored unique approach that analyzes each customer's situation, thereby facilitating our ability to develop, deploy and integrate impactful solutions.

The 7 modernization accelerators range from Chronos and Ray, which focus on software assessment, to Morpheus, our agentic AI accelerator. The suite also includes tools for dependency mapping, predictive analysis capabilities and optimizing data center environments, which clients have told us are unique features and which enables more efficient, lower-risk accelerated transformation programs. And by leveraging next-generation technologies, we believe we can deliver even greater value to our clients, pushing the boundaries of what's possible with the goal of delivering sustainable growth.

These accelerators and the others that we offer in specific verticals totaling more than 20 overall, really come into their own when underpinned by our core competencies in data, AI and digital product strategy and management. A big focus for us right now is supporting clients as they transition their AI use cases from proof of concept to operating in production. We have front row seats when seeing the value that our AI systems provide to our clients.

An example, for a pre-eminent London market insurer, we deployed an AI system that monitors their huge volume of incoming submissions and politely declines the ones that don't suit our clients' business model. The system makes the decision based on whether it is the wrong type of product or if it may sway the whole portfolio.

Another interesting use case is one where we developed an AI system for a personal lines insurer offering car and home insurance products in the U.K. We worked on their claims transformation program to increase the number of online self-reported customer claims after an accident. From the first notification of loss, AI was used to ensure that the claimant would never need to repeat information even if the case was escalated.

Claims handling is a major cost area for insurers. So this program had an important value proposition. Before our system went live, around 14% of their customers' claims were self-reported online. A year after our go-live, this has doubled to about 28% and keeps increasing.

Then there is the U.S. asset tracking company, facing a demanding environment where precise real-time tracking of physical assets was essential. Challenges emerged around accurately pinpointing and recording asset locations. So leveraging a customized AI model integrated with an IoT solution, we automated the geo-marking process. This eliminated the need for manual data entry, enhanced accuracy and provided the client with a seamless tracking experience.

And finally, a manufacturer of intelligent glasses requires greater levels of accuracy when users issue voice commands. To help resolve the problem, a large language model or LLM-based solution was deployed to enhance the user experience. When a user speaks to the device the model maps natural language to the commands supported by the device. If the user words do not match predefined commands, the AI model generates an appropriate response. The device is capable of processing both user speech and images, providing a comprehensive and intuitive interaction experience.

As you can see, it's an exciting time for us. These deployed AI use cases represent just a small subset of the solutions we've been creating and deploying for clients.



Switching gears now and moving on to GalaxE. Integration is progressing with a focus on both commercial alignment and the goal of achieving operational excellence. We are concentrating on our cross-selling efforts and recently leveraged our nearshore teams to support a major U.S. pharmaceutical retailer with their international assets, demonstrating our global reach and industry insights.

Additionally, we broadened the scope of services offered to a long-standing GalaxE Healthcare client, now working to elevate their data strategy and reinforcing our commitment to delivering transformative outcomes in healthcare.

I mentioned earlier that we have globalized our delivery capability. To expand on that, we are excited to have been able to open up new areas of client spend with our delivery footprint in India. Our presence in this region gives us the ability to offer global coverage across time zones and access to a diverse and skilled team, essential elements in large-scale engagements. As India is often a strategic location in our clients' technology delivery plan, we're already seeing a new level of engagement with potential customers, including strategic bids that would previously have been out of our reach.

Our first net new success in the region was our selection as the preferred technology partner for a global capital markets organization. This perfectly illustrates the benefit from our new India footprint. Our India delivery qualified us to engage with the customer, but the services will require delivery not just from India, but also Central Europe and LatAm as well as both AI and core modernization capabilities. Building on this momentum, we're progressing with further opportunities across payments and retail and are actively collaborating with existing customers to design optimal best shoring solutions.

Now moving on to our people. We ended the quarter with 11,821 Endavans on board, which represents a 0.5% increase from the same period last year. Looking forward and based on the current environment, we are prioritizing recruitment in high-demand areas such as around the domains of data, AI and cloud.

With our people in mind, I would like to focus on an area that is very important at Endava, which is mental health. We are committed to creating an environment where everyone feels empowered to take care of their well-being and our Endavans can find support and guidance through the employee assistance program and our dedicated well-being champions.

To mark the World Mental Health Day this October, we offered a master class and workshops offering practical tools and strategies to navigate life's ups and downs with confidence. We also joined the global celebration of Customer Experience Day, recognizing the positive impact it creates for our organization, our people and our clients. In October, our engineering days took center stage, featuring 3 days of live talks streamed from Bucharest, Mont-Vidéo and Melbourne. These global sessions were led by our top engineers exploring key topics that resonate across our business and the wider industry today. Local and regional events followed, fostering collaboration among our teams as we continue to transform how we envision and engage with technology.

In closing, I'd like to take this opportunity to thank all Endavans for their commitment and determination as we are navigating the challenges of the digital shift, but also discovering the new opportunities it brings. We will continue to manage the business for the long term, maintaining our culture and organizational health and creating exciting technological solutions that empower our clients to thrive in this next wave of AI-driven digital transformation.



Now I'll hand over to Mark, who will walk you through our quarterly financial results and offer guidance for the upcoming quarter and remainder of the fiscal year.

[Mark Thurston, executive]

Thanks, John.

Endava's revenue totaled GBP 195.1 million for the 3 months ended September 30, 2024, compared to GBP 188.4 million in the same period in the prior year, representing a 3.5% increase. In constant currency, our revenues increased 5.2% from the same period in the prior year. Sequentially, revenue was up 2% in constant currency on the previous quarter. Profit before tax for the 3 months ended September 30, 2024, was GBP 4.2 million compared to GBP 17.3 million in the same period in the prior year. Our adjusted PBT for the 3 months ended September 30, 2024, is GBP 19.2 million compared to GBP 29.8 million for the same period in the prior year. Our adjusted PBT margin was 9.9% for the 3 months ended September 30, 2024, compared to 15.8% for the same period in the prior year. Profit before tax and adjusted PBT were impacted by a decline in operating margins.

As I said last quarter, we expect these margins to improve from current level in future periods following the integration of GalaxE and the business optimization initiatives we undertook during fiscal 2024.

Our adjusted diluted earnings per share was GBP 0.25 for the 3 months ended September 30, 2024, calculated on 59.4 million diluted shares as compared to 39p for the same period in the prior year, calculated on 58.4 million diluted shares. Revenue from our 10 largest clients accounted for 36% of revenue for the 3 months ended September 30, 2024, compared to 35% for the same period last fiscal year. The average spend per client from our 10 largest clients increased from GBP 6.5 million to 7.1 million for the 3 months ended September 30, 2024, as compared to 3 months ended September 30, 2023, representing an 8% year-over-year increase.

In the 3 months ended September 30, 2024, North America accounted for 39% of revenue, Europe for 25%, the U.K. for 31%, while the rest of world accounted for 5%. Revenue from North America grew 32.5% for the 3 months ended September 30, 2024, over the same period last fiscal year.

Comparing the same periods, revenue from Europe grew 2.7%, U.K. declined 8.0% and the Rest of World declined 42.8%. North America was boosted by the contribution of the GalaxE business while the decrease in the U.K. is mainly due to a decrease in payments and the rest of world is due mainly to a slowdown in banking and capital markets and insurance verticals.

Revenue from payments declined 25.5% for the 3 months ended September 30, 2024, over the same period last fiscal year and accounted for 20% of total revenue.

Comparing the same periods, revenue from Banking and Capital Markets grew 23.4% and accounted for 17% of total revenue. Revenue from Insurance grew 14.5%, accounted for 9% total revenue. Revenue from TMT declined by 4.5% and accounted for 21% of total revenue. Revenue from Mobility declined 14.3% and accounted for 9% of total revenue. Revenue from Healthcare, which starting this quarter will be reported as a separate vertical rather than being included in our other vertical, grew 201.6% with the acquisition of GalaxE and accounted for 12% of revenue. Revenue from Other grew 3.0% and accounted for 12% of total revenue.

Regarding Payments, the decrease was mainly driven by lower spend by a few clients in that vertical compared to the prior year. However, on a sequential basis, revenue from payments increased by 2.1%.

Our adjusted free cash flow was GBP 3.5 million for the 3 months ended September 30, 2024, compared to GBP 16 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period totaled GBP 52.8 million September 30, 2024, compared to GBP 62.4 million at June 30, 2024.

Our Borrowings totaled GBP 132.6 million at September 30, 2024, compared to GBP 144.8 million at June 30, 2024. Capital expenditure for the 3 months ended September 30, 2024, as a percentage of revenue was 0.6% compared to 0.4% in the same period last fiscal year.

Now moving on to our outlook. Our guidance for Q2 fiscal year 2025 is as follows: Endava expects revenue to be in the range of GBP 195 million to GBP 197 million, representing constant currency revenue growth of between 8.5% and 9.5% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of GBP 0.24 to GBP 0.25 per share.

Our guidance for full year fiscal year 2025 is as follows: Endava expects revenue to be in the range of GBP 800 million to GBP 810 million, representing constant currency revenue increase between 10.0% and 11.5% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of GBP 1.12 to GBP 1.17 per share.

This above guidance for Q2 fiscal year 2025 and the full fiscal year 2025 assumes the exchange rates on October 31, 2024, when the exchange rate was GBP 1 to USD 1.30 and EUR 1.19.

This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

[Operator]

[Operator instructions] The first question today comes from Jamie Friedman with Susquehanna.

[James Friedman, analyst]

I wanted to ask, John, I was intrigued by your prepared remarks, especially the opening commentary about the acceleration of the new technologies now outpacing the decline of the DevOps. But you went on to say that this is different from prior technology architectures in your view. I was just hoping you could elaborate that, like if you can help unpack how bad is the bad stuff, how fast is the good stuff and why this is different this time?

[John Cotterell, executive]

Yes. Thanks, Jamie. Good question. I mean, this is around the digital shift that I was highlighting in my opening remarks, where if you look back the previous 20 years of our business, we were largely building digital capabilities around the outside of clients' core systems and the shifts that were going on remained around the outside. The need of AI to get into the data, the workflows, the processes that sit at the heart of the enterprise means that you can't, in this new era, just build around the outside. But you actually need to get into the core and do a lot of the transformation work on the core.

So that's the difference that I was picking out. The impact on us is that as clients get into engaging with those questions, they are larger programs because it's not a case of creating some product capability largely around the outside of the core, but actually a deeper program of work that goes into the core and transforms it. And that's not an easy program. So there are larger programs, clients taking longer to do the preparatory work on it and to do the sign-ups on it. So that's the shift picture, if you like, that we're setting and which we are negotiating our way through at the moment.

[Operator]

The next question comes from Jonathan Lee with Guggenheim.

[Yu Lee, analyst]

And tremendous to see the relative stability in the outlook here. Can you provide an update around your underlying assumptions in your outlook across the macroeconomic landscape and client budgets? And where you'd expect potential for maybe growth acceleration versus deceleration based on what you see in your pipeline today?

[John Cotterell, executive]

So the broad picture that we have in our outlook is based on the macro and the current situation are largely remaining unchanged. And the processes that clients are going through in terms of thinking about where to prioritize their spend and the time it's taking them to do that following similar extended cycles as they go through that. There are still higher standards that CFOs are setting in terms of the financial returns of the investments that they're making than used to be the case during COVID and post-COVID period, and expectations of solid business cases that are going on.

At the same time, these are new technologies, AI, the approaches to core modernization that we're bringing and so on. So creating the business cases that have the solidity are challenged from a technical point of view, and we're putting a lot of work into helping our clients get to the bottom of that and get their cases to stand up.

So the second part of your question, that essentially is what's driving the ups and downs. There's a shift from the more traditional digital transformation work built around the outside of the core towards larger programs that are taking longer to sign off that go into the core and need our core modernization approach. And so as we look forward, we are balancing the ups and downs in that shift in client spend and the time that it takes them to make those decisions.

[Yu Lee, analyst]

And just as a follow-up, your outlook contemplates sequential revenue growth acceleration in the back half of your fiscal year. What in your customer conversations gives you that confidence and visibility into your ability to achieve that? And how do we balance that with the sequentially lower headcount we saw in the quarter?

[John Cotterell, executive]

So let me cover some of the customer conversations and then Mark can give some of the numbers that go alongside that. So the customer conversations, as I touched on in the last 2 conversations, have all been around clients making those large transformative decisions. Some of those are underway, and that gives us some confidence that those programs will ramp up over the next 8 months or so through to the end of our fiscal. And others are still in pipeline. So subject to the uncertainties that business that is still to be closed has. But nonetheless, we can see a few of those shaping up quite nicely. And they are large programs and can make a solid impact on us.

Mark, do you want to cover?

[Mark Thurston, executive]

Yes. I haven't much to add to what John said. I mean the pipeline continues to grow since the last call in September. It's balanced across the geos and the verticals. We're seeing larger potential deal opportunities I think some of this is also coming from our enhanced capability through the GalaxE acquisition. So the core modernization topic John touched on. And we're getting incremental interest basically because of our presence in India. So that is opening opportunities for us. And you put all of that together, it underpins that sort of confidence that we have in those sequential growth in the second half.

[Operator]

The next question comes from Maggie Nolan with William Blair.

[Margaret Nolan, analyst]

You've sort of alluded to this in a couple of different ways, but maybe I'll just ask explicitly if you could comment on these larger, longer-term projects, ones that are focused on core modernization, slightly different than what you've done in the past. Do they have different conversion timelines, ramp timelines, margin profiles? Any other aspects that you would flag that are different from what Endava typically saw previously?

[John Cotterell, executive]

Yes. I think the big difference is the longer conversion times. We're not expecting the margin profiles to look different. It is very much -- our approach to this is an accelerator-enabled approach that enables us to get very good analytics on these complex legacy calls that clients have. And we all need to recognize they've left these alone as long as they can because of the complexity of understanding them because many of the people who are involved in building them are no longer around in the businesses and so on.

So good analytics on understanding these calls gives a more assured transformation program. And then you get a faster and more cost-effective transition than the sort of historic traditional approaches that people have used.

We're using AI very much as part of that to deepen those routes to understanding what the core does and to speeding up the process of changing it once you've got your arms around it. So because it's different to the historic ways in which other organizations have tackled core modernization, we don't expect it to be margin reducing, but actually to operate to a similar dynamic that we had with digital transformation over the past 20 years and the added value of the approach and the economic benefits to the clients being an ability to protect our margins as we go through them.

[Margaret Nolan, analyst]

That's helpful. And then, Mark, Is there any more insight you could give into the trajectory of the adjusted PBT margin over the course of the fiscal year? Is that a second half phenomenon later in the year? And then as well as the kind of the magnitude of the improvements as we think about things like the cost efficiency program, integration, revenue trajectory?

[Mark Thurston, executive]

So I mean, the EPS guide for Q2 can tell that the adjusted PBT outlook is broadly in line with Q1. I think we see the improvements come through in the second half, partially through sort of Q3, but mainly Q4 when we complete our integration from a systems perspective and process perspective with GalaxE which is scheduled for the end of February. So there's still heavy investment going on in the integration activities in Q2 and Q3. And then that abates somewhat when we get into Q4, where adjusted PBT margins move up to the sort of 13%, 14% or so. So we should be exiting this fiscal year on a much improved run rate outlook.

[Operator]

The next question comes from Bryan Bergin with TD Cowen.

[Zachary Ajzenman, analyst]

This is Zach Ajzenman on for Bryan Bergin. First question we had was on top client performance. It was encouraging to see the top 10 cohort better sequentially again here. But just given some of the variability seen over the past year with some of the top accounts. Can you just speak to what's embedded in the fiscal '25 outlook and maybe provide more insight into the latest sentiment with some of these key accounts relative to what was seen earlier this calendar year?

[Mark Thurston, executive]

Yes. I think on the previous call, we've said that our largest client was a GalaxE client. We expect stability there. Our next couple of clients are in the payment sort of space, and we're seeing stability there as well. And indeed, we may see a little bit of growth in one of them in the second half. The rest of the client group looks pretty stable. We do have a slowdown in a media client where there's been an M&A transaction, which we're expecting to ramp down quite quickly. So that will impact Q2 and the balance of the year. But the rest of the clients look stable. And in fact, it looks like it will grow quite nicely.

[Zachary Ajzenman, analyst]

That's good to hear. And our follow-up on Gen AI. Any notable change in the number of projects that are now progressing into full-scale production mode? And for programs that are moving forward, can you compare and contrast contract structures, pricing, productivity commitments, anything along those lines relative to more of the traditional work that you've done in the past?

[John Cotterell, executive]

Yes. So there is a step-up in projects that are going into production. I would caution that it's not huge in the context of the number of projects that Endava does, but it is a steady increase from a small base. And it's good to see those many proof of concepts, some of them starting to convert into production assignments and starting to see the benefits being delivered to clients. I mean this is something we've been doing for a while. You'll have picked up in the opening remarks that a couple of those have been in place for over a year. And so it's not ramping from nothing completely new, but the Gen AI space picking up speed is moving up.

From a contracting point of view, we expect that over time, and we're talking 2 or 3 years here, that the shape of the contractual discussions will begin to move towards more outcome-based high pricing. However, today, it is all on a T&M basis. There is still too much learning to be done, both by us and by our clients, in terms of what can be done with Gen AI to actually be turning that into outcome-based pricing. But we do believe that there will be opportunity, particularly as we get specific use cases nailed and we can roll them to multiple clients across an industry that actually moving to an outcome-based mechanism will become part of our practice around Gen AI.

[Operator]

The next question comes from Bryan Keane with Deutsche Bank.

[Bryan Keane, analyst]

Can you guys quantify the percentage of revenue now coming from Gen AI? And then, Mark, any update on pricing on the contracts, what you're seeing in the market?

[Mark Thurston, executive]

I mean pricing overall just remains stable, still competitive with budget pressures, but we're not seeing price erosion or meaningful price erosion based on average measures of the rate per workday. I think the AI piece, we're not tending to look at it that way because, again, I think we think about providing solutions for clients using various technologies, and obviously, AI is a sort of strong component of [indiscernible] embedded in most of the solutions that we are offering to clients.

But we don't look at it as like this is a percentage of the opportunities that are on the slate that include AI. I think AI is in all of them to a varying sort of degree. So it's not a figure that I can give you, Bryan.

[Bryan Keane, analyst]

Got it. And Mark, just hoping to get the acquisition contribution for the quarter and what you're expecting for fiscal year '25?

[Mark Thurston, executive]

So as a percentage of reported revenue for Q2, we expect the contribution to be 13% as it was in Q1. And the proportion of the M&A for the full year remains unchanged from the previous sort of guide.

[Operator]

[Operator Instructions] The next question comes from James Faucette with Morgan Stanley.

[James Faucette, analyst]

I wanted to just follow up on a question in terms of the project size and conversion time. What does that entail? Or what should we take from that in terms of the amount of competition there are for these projects? Is that also different? And as you're looking at these longer time to conversion, how should we think about the change in visibility as we go out beyond kind of your current forecast horizon?

[John Cotterell, executive]

So the project sizes, as I touched on in the opening remarks and earlier, are larger. Of course, one of the challenges to work through with clients is to set them a roadmap where they -- whilst they can see the overall size, they can actually break the deliverables down into more bite-size chunks with business benefits aligned with that so that we turn it into an incremental improvement approach. It still hits the longer conversion time that I've been touching on because of the need for that overall framework and the client confidence about the roadmap that they have. But then once we start moving into pulling off bitesize chunks, then the program gets traction and starts to move forward.

The competition question is mixed. I think sometimes, yes, we do see higher levels of competition. But other times, it follows the traditional business-winning approach that we've had over the last 25 years, where we've been working with a client around the art of the possible doing proof of concepts, whether at the AI end or at the core modernization end to show them what can be achieved alongside the roadmap planning and then actually start to see that pull off without going through an RFP or a large-scale process. So it falls into both categories. We do see a little bit more of the competition in the RFP process on some of the large programs, but not exclusively.

[James Faucette, analyst]

Got it. And then just on -- touching on the visibility point, I mean, it seems like is this improving your visibility, I guess, beyond this fiscal year into next? And when should we -- and this is following a little bit on Jonathan's question, like how should we be thinking about the pace of hiring or net headcount additions over the course of the rest of this fiscal year?

[Mark Thurston, executive]

The sort of elongated decision-making makes judgments on pipeline conversion more challenging than it has been. So we're adopting a cautious approach to that. I think as we're approaching the turn of the calendar year, budgets are being set. And again, we're exerting sort of caution around our assumptions around pipeline conversion there.

And how that sort of manifests itself in terms of headcount growth is that we don't anticipate any sort of significant ramp-up in headcount until we get well into beyond Q3 really. We are recruiting though, I have to say, we are focused on certain skills, which are high demand, so data, AI and cloud. But they are just topping up skills for work that we can see here and now.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to John Cottrell for closing remarks.

[John Cotterell, executive]

Thank you, and thank you all for joining us today. As I mentioned in my prepared remarks, we believe the market continues to exhibit the characteristics of a significant digital shift. That's visible in the slowdown of more traditional digital business alongside the acceleration of new, meaning AI and core modernization-driven growth. And we believe that our experience and expertise in digital transformation, AI and core modernization make us the ideal partner for customers in this new disruptive wave.

Additionally, as a result of the digital shift and our work into the core, we believe we can now offer services to a wider range of potential clients. I look forward to our Investor Day tomorrow. I hope some of you can join us and to our next earnings call in February. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.