Endava PLC

NYSE:DAVA

Earnings Call Transcript 2024-Q3

[Operator]

Good day and welcome to Endava's Third Quarter of Fiscal Year 2024 Conference Call. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Ms. Laurence Madsen, Head of Investor Relations and ESG. Please go ahead.

[Laurence Madsen, executive]

Thank you. Good afternoon, everyone, and welcome to Endava's third quarter of fiscal year 2024 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava's Chief Executive Officer; and Mark Thurston, Endava's Chief Financial Officer. Before we begin, a quick reminder to our listeners. Our presentation and our accompanying remarks today include forward-looking statements including, but not limited to, statements regarding our guidance for Q4 fiscal year 2024 and for the full fiscal year 2024; the impacts of headwinds facing our industry and business; our ability to capitalize on market opportunities and trends in our industry, including with respect to development of artificial intelligence; our expectations regarding the impact of our recent acquisition of GalaxE on our business; enhancements to our technology and offering; demand from clients for our technology services; our ability to create long-term value for our clients, our people, and our shareholders; and our business strategies, plans, and operations.These statements are subject to risk and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date and we undertake no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. For more information, please refer to the Risk Factors section of our Annual Report filed with Securities and Exchange Commission on September 19, 2023.Also during the call, we'll present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. 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, Laurence. I'd like to thank you all for joining us today and I hope that you're all well. As we get started, I want to share some perspective on the current environment, which I think we all understand has been very challenging. My sense is that we have come off a period of aggressive tech spending post COVID. Clients now find themselves trying to sort through their spending priorities as they continue to face meaningful macroeconomic uncertainty. However, we believe that there is also significant pent-up demand for technology services to undertake and complete digital transformation and to get ready for generative AI. Every industry needs to reinvent itself to some extent to take advantage of generative AI, but it first requires meaningful investments in technology and data stacks to be ready. This transformation goes beyond the digital systems, which mostly sit above the core and enhance customer interactions.AI requires access to the right data and systems to be truly effective and therefore transformation work must go much deeper into the core of the enterprise. Due to the complexity, uncertainty and risk involved in re-engineering and opening up these core systems; the planning work is therefore taking much longer before scale production-ready projects can be commenced. All of this has created a pause and a deceleration, but I also think pent-up demand that may be more meaningful than what we have experienced in prior periods. While we aren't happy with our share price or multiple, I believe these are temporary as long as we maintain our competitive positioning. Our approach to this environment has been to continue to invest in our people and our ability to serve our clients and be ready for when the market turns.That's why we moved to diversify our footprint and delivery with GalaxE and continue to build accelerators that will give us a nimble and very relevant set of solutions for this emerging market. Our history has been centered around leading edge technology capabilities, agile development in very fast growing areas characterized by meaningful demand and helping our clients ideate and innovate. The key to long-term success in services is the high quality talent pool that adds real value to clients and with a scale that is relevant to clients as they move from proof of concept to production, but staying nimble and agile. We see our size as a competitive advantage as our entire industry gets ready to pivot yet again. Our systems analysis capabilities, patented technology and deep understanding of the industries in which we operate enable a truly comprehensive enterprise modernization solution that supports our clients' overall business transformation and which we refer to as enterprise transformation.We have been working with our clients to build a truly unique approach to enterprise transformation, which addresses this need for AI to reach to data and processes at the core of the enterprise. We use patented technology that facilitates a low risk and controlled end-to-end transformation of core systems through data-driven decision making. With these capabilities, we help transform clients' underlying technology so it becomes more efficient and agile. Our bespoke data-led approach not only helps re-engineer core technology, but also any legacy business processes that technology supports ensuring that we continue to deliver holistic market leading enterprise and business modernizations. With this tried and tested approach, we decrease overall impact and risk for the customer and to date have delivered visible results to over 150 clients across more than 1,300 systems and with over 650 million lines of codes.Clients trust us at a time when they feel very uncertain. In the coming quarters, we will discuss more and we are seeing signs that our strategic thinking is going to set us up well to catch yet another wave of massive change. Moving on to our results. Let me now provide an update on our business and financial performance for the 3 months ended March 31, 2024. Our results for the quarter were within revenue guidance with revenue totaling GBP 174.4 million representing an 11.8% year-on-year decrease in constant currency from GBP 203.5 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of GBP 15.5 million representing an 8.9% adjusted profit before tax margin. And our adjusted diluted earnings per share of 22p was above our guidance.I'd like to cover in more depth our recent acquisition of GalaxE. GalaxE brings a strong senior executive team in the U.S. with an excellent track record of winning and growing Fortune 100 relationships. We are already seeing opportunities emerge, including some early wins together. As a reminder, over 70% of GalaxE's revenue comes from clients in the U.S. health care sector, which we believe is a very attractive vertical. GalaxE's leadership has proved successful at penetrating large U.S. based payer services and pharmaceutical companies. Based on conversations with these clients, we believe we will be able to significantly scale the offerings. Here are some examples of projects GalaxE is currently working on for various clients.In health care, we are working with a leading health insurance plan provider leveraging GalaxE' self-service portal platform to facilitate the complex management of pharmacy benefit plans across multiple third-party pharmacy benefit managers. Additionally, the platform will be used to support the implementation of the new requirements for CMS, the government agency that regulates Medicare and Medicaid, allowing Medicare members to opt into a monthly payment plan for out-of-pocket expenses. GalaxE's platform uniquely derisks the implementation while significantly improving accuracy, regulatory traceability and member experience. GalaxE is also helping a Fortune 50 health plan achieve its goal of building a high performing health services portfolio for delivery of innovative and flexible solutions to their clients.We are working with the client's leadership team to define goals to retire end-of-life technologies while implementing DevOps enabled, cloud-centric and product oriented systems. This is a multiyear initiative focused on providing scalable solutions, driving lower costs and improved quality with 0 downtime. GalaxE is working with a leading global bank to accelerate and advance their API migration initiative for their U.S. operations. Utilizing our proprietary accelerators, the teams will map business functions, extract business rules, identify data and workflows, map functional dependencies and create testing scenarios in cases for complete future testing coverage. This approach is expected to help the bank reduce transformation costs while improving speed to market and quality. And finally, for a large fintech client, GalaxE is mitigating and eliminating exposure to excessive extended security updates for end-of-life operating systems and database assets.By building a sustainable asset life cycle management process, maximizing automation and integrated tooling; GalaxE's efforts are resulting in a significant cost savings for the client. Moving on to an update on technology. We recently announced the creation of our Agentic AI industry accelerator internally called Morpheus. We have already been successfully using it as part of both our presales cycle as well as the foundation for quickly helping our clients get value from their AI investments. To date, Large Language Models or LLMs and AI have existed in a black box with little insight into how the systems arrive at the answers they provide. Endava is changing this by operationalizing LLMs around data to overcome current barriers caused by hallucinations ensuring that all activity is transparent, knowable and critically auditable.Rolling out this accelerator to regulated industries can deliver value in many ways including helping insurers underwrite policies more efficiently, help analysts with legal or financial research as well as due diligence efforts and drive the development and testing of new health care products. Multiagent teams represent a significant advancement in AI technology allowing for more dynamic, flexible and comprehensive problem solving capabilities. We see it solving complex industry challenges, optimizing processes and delivering unprecedented value for our clients and their customers. AI is an exciting technology, which we believe will positively impact our clients and businesses. We are still engaged in demonstrating the art of the possible with AI. We are beginning to see production projects being signed off and investments being made. This last quarter we signed new contracts in automotive, health care and sports for AI specific projects.In health care, we recently scoped an AI platform that leverages our Morpheus Agentic AI application accelerator to significantly increase the efficiency of medical trials. Projects like these highlight that with the right use case, Endava is well placed to benefit from an exponential increase in opportunities given the relatively low investment costs and potential high savings for our clients. Our people are top notch and we recently won the grand prize in the competition Hack Together, Microsoft Fabric Global AI Hack. This event was a global online hackathon where participants had the opportunity to build innovative AI solutions using Microsoft's data platform Fabric. The innovative team won with a cloud native data solution integrating OpenAI for document analysis, particularly for detecting personally identifiable information in files and images.International Women's Day in March was a wonderful moment to recognize women at Endava, who each play a significant role in making a difference to our culture, with our clients and solutions and in the world of technology. We ran a global campaign under the concept umbrella Connect, Inspire, Rise; and over 1,000 Endavans attended sessions on leadership, career growth, mental, physical and financial well-being. We received excellent internal feedback on a new training program under our Endava Wellbeing umbrella called Mental Wellbeing for Leaders. It's a program created to help line managers recognize warning signs of mental health issues in their teams and it provides them with the tools to address the issue. We ended the quarter with 11,025 employees, a 6.1% decrease from 11,742 in the same period last year.In the current environment, our recruitment is focused on areas of demand. Technology is our how and people are our why. And as such, we continue to prioritize professional development by training and upskilling our people in key emerging technologies and techniques such as machine learning, generative AI, NexGen Cloud, cybersecurity, product strategy and sustainable computing in order for them to remain at the leading edge of digital transformation. I'd like to take this opportunity to thank all Endavans for their commitment and determination as we persevere through current headwinds. We will continue to manage the business for the long term maintaining our culture and organizational health and creating exciting solutions for our clients and their customers.I'll now pass the call on to Mark, who will walk you through our financial results for the quarter and provide guidance for the coming quarter and fiscal year.

[Mark Thurston, executive]

Thanks, John. Endava's revenue totaled GBP 174.4 million for the 3 months ended March 31, 2024 compared to GBP 203.5 million in the same period in the prior year, a 14.3% decrease over the same period in the prior year. In constant currency, our revenue declined 11.8% from the same period in the prior year within the range we provided to you last quarter and reflected a 5.2% positive inorganic contribution during the quarter. Sequentially, revenue was down by 4% in constant currency on the previous quarter. As a reminder, there was no contribution from GalaxE during the quarter just ended. Loss before tax for 3 months ended March 31, 2024 was GBP 0.5 million compared to a profit before tax of GBP 30.4 million in the same period in the prior year. Our adjusted profit before tax for the 3 months ended March 31, 2024 was GBP 15.5 million compared to GBP 43.4 million for the same period in the prior year.Our adjusted profit before tax margin was 8.9% for the 3 months ended March 31, 2024 compared to 21.3% for the same period in the prior year. Our adjusted diluted earnings per share was 22p for the 3 months ended March 31, 2024 calculated on 58.8 million diluted shares as compared to 59p for the same period in the prior year calculated on 58.2 million diluted shares. Revenue from our 10 largest clients accounted for 34% of revenue for the 3 months ended March 31, 2024 compared to 33% for the same period last fiscal year. The average spend per client from our 10 largest clients decreased from GBP 6.8 million to GBP 5.9 million for the 3 months ended March 31, 2024 as compared to the 3 months ended March 31, 2023 representing a 13.9% year-over-year decrease. In the 3 months ended March 31, 2024 North America accounted for 30% of revenue, Europe for 28%, U.K. for 35% and the Rest of the World accounted for 7%.Revenue from North America declined 19.4% for the 3 months ended March 31, 2024 over the same period last fiscal year. Comparing the same periods, revenue from Europe grew 29%, the U.K. declined 22.3%, and the Rest of World grew 3.8%. Revenue from payments declined 27% for the 3 months ended March 31, 2024 over the same period last fiscal year and accounted for 24% of revenue. Revenue from banking and capital markets declined 24.2% for the 3 months ended March 31, 2024 over the same period last fiscal year and accounted for 14% of revenue. Revenue from insurance grew 1.7% for the 3 months ended March 31, 2024 over the same period last fiscal year and accounted for 9% of revenue. Revenue from TMT declined 4% for the 3 months ended March 31, 2024 over the same period last fiscal year and accounted for 24% of revenue.Revenue from mobility declined 22.4% for the 3 months ended March 31, 2024 over the same period last fiscal year and accounted for 10% of revenue. Revenue from Other grew 3.2% for the 3 months ended March 31, 2024 over the same period last fiscal year and accounted for 19% of revenue. Our adjusted free cash flow was GBP 2.2 million for the 3 months ended March 31, 2024 compared to GBP 21.2 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period totaled GBP 190 million at March 31, 2024 compared to GBP 164.7 million at June 30, 2023. In April, we used GBP 129 million of our cash funds towards the acquisition of GalaxE. Capital expenditure for the 3 months ended March 31, 2024 as a percentage of revenue was 0.8% compared to 2% in the same period last fiscal year.Now turning to our outlook for the quarter 4 and the full year fiscal '24. When we announced our guide in February, we did not include the contribution from GalaxE, which at the time remained subject to regulatory approval. On the 10th of April following the expiration of the required waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, we closed the transaction. So the Q4 guide includes the contribution from GalaxE. The guide including GalaxE represents sequential growth of 12% to 13% at the bottom and top of the range. Excluding GalaxE, the guide otherwise generally remains flat compared to Q3. Our guidance for Q4 fiscal year 2024 is as follows. Endava expects revenue to be in the range of GBP 195 million to GBP 197 million representing constant currency revenue growth of between 3.5% and 4.5% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of 22p to 23p per share.Our guidance for full year fiscal year 2024 is as follows. Endava expects revenue to be in the range of GBP 741 million to GBP 743 million representing constant currency revenue decrease between 4.5% and 4.0% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of GBP 1.13 to GBP 1.14 per share. This above guidance for Q4 fiscal year 2024 and the full fiscal year 2024 assumes the exchange rates on April 30, 2024 when the exchange rate was GBP 1 to USD 1.25 and EUR 1.17.This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

[Operator]

[Operator Instructions] The first question comes from Jonathan Lee with Guggenheim Securities.

[Yu Lee, analyst]

Can you help us understand how the integration of GalaxE Solutions is progressing? And can you remind us of the revenue and EPS implications over the next few quarters?

[John Cotterell, executive]

So I'll pick up on how the integration is going and then Mark can talk about the revenue and so on. So it's actually going very, very well. We are already winning business together. One contract that we've signed for a European telco. It was enabled by the fact that we have footprint in India now because the telco, they are completely operating out of India in the space where we've done that piece of business, which is a call center AI deal where we're now doing discovery for them. Plus we have others that are in the contracting phase. We're also seeing opportunities in expanding across GalaxE customers, essentially a couple of customers who are moving us up their preferred supplier list so that we can take larger pieces of work and have more prioritization from them. The diversification of geo and industry footprint is helpful and you'll start to see that coming through in the quarters ahead. And finally, as I touched on in the opening remarks, our enterprise transformation proposition has been significantly strengthened and we're getting a lot of interest as in more than 10 customers that we're talking to about those services following that strengthening. So we're very, very positive about the GalaxE deal and the organic opportunities that it's going to give us going forward. Mark?

[Mark Thurston, executive]

So as I said in my prepared comments, the quarter-on-quarter growth represented 12% and 13% at the high end of the guide. GalaxE represents about sort of 12% of that uplift so it's about sort of GBP 21 million run rate on the revenue perspective. As we sort of signaled at the time of the last call, integration costs are expected to be reasonably heavy this quarter so that is negligible to 0 EPS contribution in the quarter. I think as we go through into FY '25, we should start to go through the integration process, their gross margins and the adjusted PBT should move up towards the Endava level, but it is too early to call out a metric amount at this stage. But certainly their gross margins will be in line with where we are in Endava.

[Yu Lee, analyst]

As a follow-up, what in your customer conversations gives you confidence in achieving your fiscal '24 outlook especially as we think about potential delays in ramping up projects that may already be committed versus some of the prepared remarks around pent-up demand and potentially increasing discretionary spend?

[John Cotterell, executive]

Yes, sure. I mean the fiscal year '24, we're in our last quarter so there's just over a month ago. Therefore, within our guide, we have a very high proportion that is contracted and committed as we call it. Mark can touch on the numbers in a moment. But that visibility and the work that we're currently doing is what gives us the confidence around the current quarter guide that we have, which leads to the full fiscal year.

[Mark Thurston, executive]

Yes. I think the contracted and committed percentage is 99% within that guide. So it's a very high level of coverage when you compare it with what were our historic norms.

[Operator]

The next question comes from Bryan Bergin with TD Cowen.

[Bryan Bergin, analyst]

Maybe I'll start with demand. Can you kind of give us a sense that since you last reported how that client behavior has progressed, particularly deal closure and deal ramps as you've gone past March into April and May? Can you talk about the conversations you're having with clients? And I understand you noted a flattish 4Q growth ex GalaxE. Can you just share any thoughts on how sequentials may progress as you work through the balance of calendar '24?

[John Cotterell, executive]

So client behavior is actually picking up a little bit. Perhaps worth unpacking the dynamics. I've discussed this on previous calls of our business, which is that we have projects and programs running with clients and there's a natural closure as some of those complete. And so each quarter there's a sort of downward pressure, which we overcome with the new business that's coming through. And so the discretionary spend, as I was calling it, or the new spend by clients needs to be larger than the amount that's dropping off each quarter for us to drive growth. Clearly we've had a series of quarters where that has been lower. In fact it's been very quiet indeed leading to the drops quarter-on-quarter. With the flattening off, that is showing that some of that discretionary spend is coming through and impacting the quarter not as much as we'd like.But I think it is early signs that some of that is coming through and is strengthening underlying environment. The actual customer conversations, we continue to build a backlog of business where we have done discovery work and where clients are still making the decisions about whether to go ahead with the programs and I touched on some of that in the opening remarks. And that continues and it is now a larger backlog than it was at the end of last quarter and that gives us confidence that at some point, it needs to break through. That confidence being based on the fact that if clients were never going to spend the money on building out the production systems, they wouldn't continue to spend money on the discovery work that we're doing with them. Mark, any color on the numbers?

[Mark Thurston, executive]

Well, I think it's all down to visibility, Bryan. So as you can tell with the guide at the moment, there's high level of contractual committed coverage at 99%. So certainly near term just looking into the first quarter, we have stronger visibility. I think it comes back again to this pipeline conversion issue where we're adding to the pipeline and it's growing. It is the velocity at which it proceeds through to sign an initiated work continues to be the issue. So in terms of sequential growth when we anticipate the uptick, it is difficult to say at the moment and obviously we'll be giving clearer guidance when we get to September when we give our full year results and the outlook for our fiscal year to June '25.

[Bryan Bergin, analyst]

Okay. Understood. And I guess as we think about gross margin inputs, we understand Central Europe has become more expensive as a result of the war in Ukraine. Can you just maybe talk about how you're navigating that just given your leading scale, particularly in Romania? Is that market becoming more crowded from a talent acquisition standpoint?

[John Cotterell, executive]

So I'm not sure where you're picking up that Central Europe has become more expensive. That's certainly not true for us. It may be there are other organizations who previously operated further east than us who've had to move west into more expensive territories and that's pushed up the Central European costs. But for us, we haven't needed to do that. In fact given the current environment and the lower demands that are going on, we're not seeing inflationary impact in Central Europe at all at the moment.

[Operator]

The next question comes from Ryan Potter with Citi.

[Ryan Potter, analyst]

Just kind of looking across your verticals and the payments vertical looks to be where you're still seeing some of the most demand pressure. So I was wondering if you could dive a little deeper into the trends you're seeing there and what it takes to start to see a recovery there? And also in terms of some of your larger clients in the vertical, if you could comment on Worldpay now that its majority stake is complete if you're seeing any improvement there and then also if Mastercard remain largely stable?

[Mark Thurston, executive]

I'll let John talk about sort of payments and comments about our 2 largest clients, MasterCard and Worldpay, and then I'll pick up the balance of the portfolio.

[John Cotterell, executive]

So on Mastercard, it remains the story of the work that we're doing on the RTP. The real-time payments business continues to just slowly decline and is offset by the growth in work with the rest of Mastercard. It's actually very healthy growth with the Mastercard work outside of the RTP space just from a smaller initial start point. So the one isn't quite balancing the other meaning that we're seeing a slow decline across the overall Mastercard portfolio. But I think the relationship remains very healthy and underneath the surface we're breaking into more and more parts of Mastercard. So for the longer-term future, it's actually very healthy. In Worldpay, we are seeing the first signs of the work coming from that spinoff and Worldpay are receiving some of the funding around the restructuring that they've been planning and we are working with them on planning how we can help them execute on that. And I'm hopeful that we'll see a reasonable amount of that work coming our way.

[Mark Thurston, executive]

And I think if you look at the rest of the portfolio, it is flat progressively cross banking, capital markets, insurance and TMT. The 1 area where we saw a sequential decline was in mobility and that was most notable in North America and it faced the comments we made last quarter's earnings where it's a mixture of a large client coming off peak activity in the logistics space. We made some comments about airlines where again there is some conservatism around spend and rolling out programs due to the sort of macro outlook, which has come to fruition for want of a better word. And then in automotive, again we're seeing delayed decision making given choices of technologies. Those are the real sort of key drivers in that mobility. But in terms of the rest of the portfolio, it is relatively sort of flat apart from those 2 areas.

[Ryan Potter, analyst]

Got it. I guess maybe shifting to margins. The fiscal '24 EPS outlook midpoint was lowered here. So could you provide some details on the factors that are driving this? Like how much is coming from potentially lower margin expectations? Can you comment on your margin expectation for 4Q and fiscal '24 versus maybe higher interest expense or integration costs from GalaxE? And then on the margin side, what drivers do you have to improve margins from here? Will it be improved utilization or anything else to call out as you head into fiscal '25?

[Mark Thurston, executive]

Well, Q3 was a big EPS beat. We did much better on our G&A savings so we secured through the restructuring quicker savings than anticipated at the time of the guide. And also the tax rate was significantly lower than anticipated at 18% due to the release of a tax provision which is oneoff in nature. Now in terms of what we see going out into Q4 and this includes GalaxE, we will see some improvement in the gross margin probably up to between sort of 33%, 34% as we continue to reduce bench. There isn't anything really in terms of pricing uplift to reflect in that figure, but that reduction in bench will lead to improved utilization. So we will continue with our sort of restructuring through the year. We announced that program back in February so we will continue with that. So that will give us some upside. And then I think our SG&A will start to sort of normalize as well. So the guide implies at the moment for Q4, there's not a significant uplift in adjusted PBT margin given that we've got a heavy sort of integration budget with GalaxE at the moment, Thereafter, I think we start to improve as we go through our next fiscal year in terms of the gross margin improvements and the leverage from SG&A that we get through integration of GalaxE.

[Operator]

The next question comes from Maggie Nolan with William Blair.

[Margaret Nolan, analyst]

Do you have a multiyear target for percentage of headcount in terms of geographic distribution that you're working towards?

[John Cotterell, executive]

So our expectation over time is that we will diversify across the globe. So currently we are concentrated in Central Europe relative to our other global delivery locations and particularly concentrated in Romania where about 1/3 of our staff are. We expect those all to continue to grow. But as the business expands, we also expect to see LatAm move up as a proportion of our business and then over time the delivery capabilities out of Asia Pac, mainly in Vietnam and India now, will start to move up. Very much sticking to the delivery model and the delivery approach that we currently have. We're not looking to shift the market that we're operating in because of that geographic mix changing.

[Margaret Nolan, analyst]

And as we approach the end of fiscal year in June, can you remind us kind of what the typical method is in terms of how you'll build the guidance for your next fiscal year? Are you taking any additional considerations under your view given that the visibility has been quite limited in recent quarters when you think about how you'll build guidance for next year?

[Mark Thurston, executive]

I believe to date and more recent history had a track record of beats and raise. So we are going to be cautious basically in our guidance as we go sort of forward and part of that is because we've done a sizable acquisition with GalaxE so there are integration challenges. So we will aim to sort of guide appropriately. So I think as we go through the integration process between now and September as we sort of form that view for the fiscal, we'll guide appropriately so that we hopefully don't deliver any surprises.

[Operator]

The next question comes from Puneet Jain with JPMorgan.

[Puneet Jain, analyst]

So John, you gave us a helpful perspective on how Gen AI could be hurting near-term demand and yet it represents significant medium-term growth opportunities for the sector. Could you review for us why DAVA or maybe digital engineering companies as a group have right to win in this new AI age? What type of work you expect you will do and why the DAVA or the digital engineering companies are the right names to be doing that for clients?

[John Cotterell, executive]

Great question, Puneet, I love it. So the way we see it is that if you look at what digital transformation has been over the last 20 years, it has largely for a lot of the enterprise customers been around creating a layer over the top of their enterprise core, a layer that has enabled improved customer interaction, driven revenue and so on and hugely valuable to them. And we've been 1 of the organizations that's really benefited from helping drive change across that top layer. As we get into AI, we'll need to drill into the systems, the data and the processes that exist in the core in order to provide the quality of change the business benefit that you can get out of AI. You've got to get the data that's in the core. Organizations who already have a very flexible core, newer organizations typically, are going to find it much easier to adopt AI and roll out the benefits than the larger enterprises who have a more, let's say, legacy core.And so the opportunity is for the organizations who have both the digital transformation capability that we've demonstrated over so many years and the core modernization capability. Now what I was highlighting in my preliminary remarks was that Endava is actually incredibly well positioned for this. We have over the last 10 to 15 years been building a whole core modernization suite, which we have tried with many customers, 150 as I highlighted across 1,300 systems. And that actually enables in a data-driven way to understand what the existing core system actually do and what changes need to be made to make them more flexible and opened up so that data is available for the AI that's coming. So you put those 2 things together, you've got digital transformation taking a kick from the AI wave that's coming through and all the new ways of doing customer interaction, driving automation and so on that it's going to open up and the core modernization capability that's needed. And we see ourselves as being in a uniquely almost differentiated position against our competitors out there.

[Puneet Jain, analyst]

That's very helpful. And then your headcount was down give or take about 5% this quarter on a sequential basis. How does your utilization look like right now versus your target? I think, Mark, you mentioned there is some scope to improve utilization in Q4. So can you talk about utilization rates right now versus your targets?

[Mark Thurston, executive]

Yes. So utilization at the moment has been pretty sort of stable so it's about a 66%, 67% for the quarter just gone. Our bench is pretty low, currently about 8.5% so to speak. So it will remain at that sort of level, bench may go a little bit lower. But most of our margin improvement is going to come from greater utilization basically. And historically when we've been delivering good margin, we've been up at the high 60%s. And typically 1 percentage movement in utilization all things being equal is 1 percentage point improvement on gross margin. Again 1 caveat around that. We are integrating GalaxE and so we need a stronger hold around the operating metrics of that business. But I think what I said is largely going to hold true for them as well.

[Operator]

The next question comes from Bryan Keane with Deutsche Bank.

[Bryan Keane, analyst]

Mark, just wanted to ask on gross margin. I think it fell below the 30% threshold in the quarter, which is a little below what we were expecting. Was there any callouts just for the quarter itself? I know you're talking about an improvement sequentially, but just trying to figure out the quarter itself why it fell.

[Mark Thurston, executive]

It did fall, but it was where we guided. So it's interesting how you got your number. We think it's on an adjusted basis 31.5% so it's up to 30% and that was in line with what we were guiding. The kicker on the EPS was basically through lower SG&A and the reduced tax rate. So maybe we just need to compare notes on that gross margin calculation difference.

[Bryan Keane, analyst]

Yes, we'll look at it. There might be some adjustments there. And then I think you gave us the GalaxE contribution. What's the other inorganic contribution we should expect in the fourth quarter from other acquisitions just so we have the total inorganic contribution for fourth?

[Mark Thurston, executive]

It's very minimal from TLM, which we had about a year ago, but it's pretty negligible. It's mainly all of GalaxE.

[Operator]

The next question comes from James Faucette with Morgan Stanley.

[James Faucette, analyst]

Just a couple of quick follow-ups. First, in terms of Worldpay, you said that you're starting to see some of that business and engagement come back as GTCR takes over management of that company. How are you thinking about like what the return and opportunity looks like there over what time frame? Just trying to get a sense of any early indications on that because it seems like there's a lot of potential there.

[John Cotterell, executive]

Yes. I mean, James, obviously it's a sensitive area in terms of clients' investment decisions. We have very good stakeholders across the COO, the CTO. So we engage regularly in conversation with them and with them shaping up their investment plans, their change plans. We feel very much involved and expect to be part of that going forward. It's about as far as I think we should go at the moment.

[James Faucette, analyst]

Understood. And then I wanted to ask quickly about kind of GalaxE and how you're thinking about that and integrating that into the rest of your operations? And what are the things that you're paying attention to in terms of competition for talent in that market right now, the pricing dynamics between at least traditionally where GalaxE had been and Endava more broadly? Just trying to think through the working relationship and how that will expand and improve Endava's capabilities down the road?

[John Cotterell, executive]

Sure. I mean the first thing to say is that if you look at the average revenue per workday in GalaxE, it's not a lot different to Endava because of that mix of onshore and offshore and so we would expect to maintain that sort of value-add pricing in what we do. The second thing is the strengths that we have are very complementary so the digital transformation work that we do is something that is mainly an Endava strength. If you look at the core modernization stuff that the data numbers that I put out there, about 2/3 of that was Endava work and about 1/3 of it was from the GalaxE experience set. So they've strengthened that. And I think if you look at that core modernization side, India is a good place to do that.There's a lot of experience that they have in India and can bring to apply that. And if you put that alongside the patented technologies that we have, the tool sets and the accelerators that we use to deliver that service, it gives us a strong differentiation against the Indian pure plays for work that we do out of India and then when you add the digital transformation capability to drive true enterprise transformation as AI comes through. Put those 2 things together and you end up with a strong differentiation, still pulling on our nearshore capabilities as well as India. And so that's very much how we're seeing it. We see it as being able to protect price and being earning and enhancing over time. So I think that's probably economically what you were searching for there.

[Operator]

The next question comes from Moshe Katri with Wedbush.

[Moshe Katri, analyst]

So 2 questions. First on bookings. Can we get some color on some of the new bookings in terms of verticals, regions? And then in general, are we seeing any sort of changes in terms of how bookings have been converting? Obviously there's been an issue with conversion slowdown and the fact that conversion has been pretty inconsistent. So any color there would be helpful.

[Mark Thurston, executive]

I mean my comments are really on the large deals that I sort of focus on. But I mean the pipeline has been growing, as John said, so quite significantly in terms of the number of deals and the average sort of size of them from the last time we talked on the earnings call. What hasn't changed is the pace at which they go through from proposal to contracts or being told you haven't been successful. That remains sort of slow and that is partially the sort of mainly the reason that we're in a quarter where we're guiding towards what was our previous bottom. So it's an issue basically of progression through the pipeline in terms of velocity not one of win rate.

[Moshe Katri, analyst]

Okay. And then just on GalaxE. Can you just remind us if GalaxE is growing this year or any sort of kind of color on their growth rates?

[Mark Thurston, executive]

It is too early to say. I mean we sort of took control, as said in the comments, 10th of April. We obviously have a budget to put together for ourselves to June '25. And so we are going through the process at the moment of looking at their forecasts and establishing what those growth run rates look like. But certainly they were growing and they have at calendar year-end by the way. They were certainly growing year-on-year between calendar '22 and calendar '23.

[John Cotterell, executive]

I think the big opportunity with the GalaxE lies in the deals that we can collaborate on and win together. That's where we're going to get the acceleration. Either their clients allowing us to expand footprint because of the larger scale and capabilities that Endava brings or Endava clients benefiting from the footprint capabilities, particularly the enterprise transformation thing that I've been talking about that GalaxE really sort of does for us. So that's where we're looking to see the growth rather than just them organically operating by themselves.

[Operator]

The next question comes from Jamie Friedman with Susquehanna.

[James Friedman, analyst]

I wanted to follow up on Puneet's earlier question, John, in terms of your right to win in AI. Is it possible to share your perspective maybe with the lens of Slide 13? It's the one where you talk about your capabilities. So even if you don't have it in front of you, but if you look at AI in the context of these service lines, say, digital production or engineering or data delivery; where are you seeing revenue realization at this point or expecting to see it?

[John Cotterell, executive]

So I mean that's pulling out the underlying capabilities rather than what we go to market with. So we go to market with digital transformation propositions that are all about helping a client transform their business, whether that be driving revenue or efficiencies on the cost side, and that's been the classic digital transformation space that we performed in and have done so well over so many years. The right to win I think comes from being able to combine that with patented unique approach to core modernization that really derisks that modernization program. And there are so many large enterprises out there that have been wary of getting into the enterprise core modernization space and actually we can give them a much more solid route to doing so. Now as you do that, it really opens up what you can do on the digital transformation side because of the access to data that you get, because of the process cleanup that you can drive through the organization. And we have been able to put those 2 capabilities together in a very differentiated way. That's where we see our right to win.

[James Friedman, analyst]

Okay. And then, Mark, I just had a question about the free cash flow and I think you had called this out last quarter so it wasn't a surprise. But the 1.2% adjusted free cash flow as a percentage of revenue down from [ 10% ], I see that obviously a lot of it's the revenue pressure and the profitability pressure. But what else in here should we be looking at?

[Mark Thurston, executive]

We typically have some [ currency ] in the cash flow. So it is usually a low quarter cash flow not as low as this as a percentage of revenue. We have taken the cash component of the restructuring of about GBP 7.5 million through cash flow sort of GBP 4 million. So I think that has I think about a couple of percentage points to it. I don't think this is representative of the sort of the cash flow generative position of Endava forward. I think it is a combination of us going through the restructuring. There definitely has been a sort of slowdown related to the profitability of the revenue, which is low and as our profitability sort of improves going forward, that will drive a strong sort of free cash flow position.

[Operator]

The next question comes from Tom Blakey with KeyBanc.

[Thomas Blakey, analyst]

My question was it's good to hear about the new bookings seeming to offset some of the pressures of downsells and whatnot. When you look out, John, to the next few quarters here maybe into fiscal '25, not exactly a question on guide, but how far through are we in terms of these potential downward pressures? What does the portfolio look like in fiscal '24 that seemed to have kind of like upticked in terms of downward pressure when you kind of take a look at it from a portfolio of like your current business as we look out the next few quarters? That'd be kind of I think helpful for everybody.

[John Cotterell, executive]

I don't want you to take away that this downward pressure is an unusual thing. This is something that has been happening through all of the boom times of growth as well. It's just the natural projects coming to an end cycle. What we've been experiencing over the last 18 months or so is the new spend that's been coming through has not been offsetting that and that's where this quarter we're seeing it offsetting it and enabling stabilization. We're also seeing that big backlog of work where we've done discoveries for clients -- paid discoveries where they're not yet making the decisions to go ahead with it. So it's too early to call that upward trend that's coming from new discretionary spend coming through that's enabled stabilization in Q4 is going to accelerate to the point where we anticipate an upturn. But that is the core question is when does that happen? When does this backlog of opportunities break through and actually start to lead to the uplift? And right now we're not ready to call that. We'll see in September.

[Thomas Blakey, analyst]

That's helpful in terms of the relatively normal cadence of the downward pressure. And then maybe just switching back over to the GalaxE topic. I was under the understanding just given prior research and whatnot from GalaxE that EBIT margins were in the high teens from an organic perspective. Just walk us through maybe the puts and takes there as we look to kind of like model out the next year or so and if there's any seasonality in their revenue organically? That would be helpful as well.

[Mark Thurston, executive]

I think it depends on what numbers you've been looking at. I doubt they disclose any public sort of numbers. We have been putting them on to IFRS. That's part of the integration challenge and we're looking at the accounting policies. There is integration activity, which will be quite marked for us certainly in the first 6 months so that's really probably longer until about sort of December. I think as John said, their bill rate is in line with our revenue per head. They do have a higher proportion of onshore compared to us. But we think that we can achieve over the course of what will be fiscal '25, taking them up to levels of gross margin that we achieved. And then we will also be looking at the SG&A because there will be some synergies there basically. So I'm not going to say [indiscernible]. I think you're going to have to sort of wait until we guide in more detail for fiscal '25, which we will do in September.

[Thomas Blakey, analyst]

Okay. And Mark, just any seasonality that GalaxE has been typically experiencing off that GBP 21 million, GBP 22 million?

[Mark Thurston, executive]

It's too early to tell to be honest. Certainly in terms of their budgets that we're looking at through the due diligence process, it looked like strong growth. Again we have to sort of do our revenue recognition, which we try to do at the due diligence sort of stage, but we're sort of working through that. I don't think there is any cyclicality or seasonality that we could pick up in terms of the timing of the spend that they have with their clients. But we have to do some further work really before I can comment.

[Operator]

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

[John Cotterell, executive]

So thank you all for joining us today. And as I mentioned in my prepared remarks, we talked about pivot in digital transformation that's underway driven by AI, specifically the need to drive change in the enterprise core. We've touched on that a little bit during this call. We believe Endava is well positioned for this with both the digital transformation capability to ideate and innovate alongside patented technology to help make my enterprise core systems and data accessible to AI. The combination of these capabilities positions us excellently for the next wave of digital transformation driven by AI. We will continue to invest in these capabilities in anticipation of the market. And I look forward to updating you on our next earnings call, which will be our full year numbers. Thank you.

[Operator]

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