Earnings Call Transcript - DAVA Q2 2022

Operator, Operator

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

Laurence Madsen, Head of Investor Relations

Thank you, operator. Good afternoon everyone and welcome to Endava's second quarter fiscal year 2022 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava's Chief Executive Officer; and Mark Thurston, Endava's Chief Financial Officer. Before we begin, a quick reminder to our listeners. Our remarks today include forward-looking statements including our guidance for Q3 fiscal year 2022 and for the full fiscal year 2022 and statements regarding our perceived opportunities and anticipated future growth and geographic expansion, our expectations regarding the digital transformation of businesses, industries, and other industry trends, the necessity of digital transformation for many companies, and Endava's ability to benefit from it, potential technological advances, our expectation for future partnerships, and ability to expand our existing relationships, anticipated client demand for Endava services, our ability to attract and retain employees, and be an employer of choice in multiple geographies, our integration of FIVE and Levvel, and our ability to execute on our sustainability objectives, as well as other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements and reported results should not be considered an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. Please refer to the Risk Factors section of our annual report on Form 20-F filed with the Securities and Exchange Commission on September 28, 2021, which contains a discussion of important factors that could cause actual results to differ materially from those contained in any forward-looking statements. Also during the call, we'll present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which you can find on our Investor Relations website. A link to the replay of this call will also be available there. With that I'll turn the call over to John.

John Cotterell, CEO

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

Mark Thurston, CFO

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

Operator, Operator

We are now ready to open the line for Q&A.

Ashwin Shirvaikar, Analyst

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

John Cotterell, CEO

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

Ashwin Shirvaikar, Analyst

I appreciate the detailed information on recruiting. That was very helpful. I have a couple of follow-up questions. First, regarding the significant increase in LATAM, does this indicate more opportunities in North America, or is it typical for the region? Also, while you mentioned that there’s no direct impact since you’re not operating in Russia, Belarus, or Ukraine, given Romania's location, do you anticipate any indirect social pressures that might affect you?

John Cotterell, CEO

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

Ashwin Shirvaikar, Analyst

Understood. Thank you.

Bryan Bergin, Analyst

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

John Cotterell, CEO

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

Bryan Bergin, Analyst

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

John Cotterell, CEO

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

Bryan Bergin, Analyst

Thank you.

John Cotterell, CEO

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

Mayank Tandon, Analyst

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

Mark Thurston, CFO

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

Mayank Tandon, Analyst

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

John Cotterell, CEO

We believe there is significant potential for growth among many of our top 10 clients. They are generally large organizations where we have ample opportunities for expansion. While a few of them may reach a saturation point, the rest still have considerable room for growth. Consequently, we anticipate that the contribution of the top 10 to our overall business will gradually decline, as one of our goals is to diversify. This entails focusing on attracting other clients to grow faster as part of that diversification, including entering new markets and regions. Thus, there remains extensive opportunity for growth in this area.

Mayank Tandon, Analyst

That's helpful. Congrats on the quarter.

John Cotterell, CEO

Thank you.

Mark Thurston, CFO

Thank you.

James Faucette, Analyst

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

John Cotterell, CEO

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

James Faucette, Analyst

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

John Cotterell, CEO

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

James Faucette, Analyst

Thank you.

Maggie Nolan, Analyst

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

John Cotterell, CEO

Private equity has been a significant part of Endava's business, contributing over 25% of our revenue. This is why we emphasize it. The acquisition of Intuitus has been beneficial in initiating early discussions with private equity firms, often occurring before they place bids and finalize acquisitions. Our focus during these discussions is on how the technology platform can be enhanced as part of their investment strategy. This is appealing to us because when they acquire a business based on that strategy, we can assist with the subsequent transformation work. We categorize these portfolio companies within the specific industry segment they belong to. Therefore, they are not classified under payments or financial services solely due to having a private equity owner. In fact, most of our peers will attribute the initial consultancy work they do for a business to that portfolio company. Even if they do not win a bid, those costs will still be reported in the broader industry categories tied to the private equity firm they are associated with. Did I address your question completely?

Maggie Nolan, Analyst

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

Mark Thurston, CFO

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

Maggie Nolan, Analyst

Thanks Mark. Good job.

Bryan Keane, Analyst

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

John Cotterell, CEO

I can't really comment on our competitors, but we are definitely noticing that some of our clients who also work with other companies in those regions are beginning to discuss with us the possibility of increasing their collaboration with us due to the risk sensitivities they are facing. I don't anticipate a significant influx of work, especially since we are already limited in the projects we can take on. However, if we encounter the right client and opportunity, we will certainly consider those possibilities. Additionally, we are starting to see some staff movement from individuals currently in Ukraine who are contemplating relocating to another country. This is currently a small trend, but it has started to show noticeable growth.

Bryan Keane, Analyst

Got it, got it. And then one question on the guidance for Mark. If you look at the implied Q4 revenue guide, it comes down a little bit from where you guys have been running this fiscal year in Q3. So just trying to think about when we get to 4Q I know the comp gets a lot difficult after significant growth rates that started in the fourth quarter. How much of the fourth quarter run rate is conservatism anniversarying acquisitions, just more normalization of the growth? Just trying to think about the factors for 4Q by the time we get there?

Mark Thurston, CFO

The guidance at the top indicates about 28% growth in organic constant currency. While this may seem like a slowdown compared to Q1, Q2, and Q3, it also accounts for the impact of previous acquisitions. In Q4 FY 2021, our organic constant currency growth was at 35% following a strong recovery from COVID. We're facing both a challenging comparison and a reduction in the contribution from acquisitions that were completed in Q3 of the previous fiscal year. However, our momentum remains robust, and we expect to maintain utilization levels while also anticipating some expansion in mandate rates.

Bryan Keane, Analyst

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

Mark Thurston, CFO

It's about 10%.

Bryan Keane, Analyst

Great.

Mark Thurston, CFO

So underlying organic is around 44%.

James Friedman, Analyst

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

John Cotterell, CEO

Yes, you rightly called out that the IT budget spend that clients are pushing in our direction partly comes from their IT world. A lot of it comes from a business investment mindset around how technology can have a real impact on the relevant parts of the business. So we're not as directly exposed to ebbs and flows in IT budgets as some of the more traditional players are. To me, it doesn't feel like there's any issue. There's plenty of money that clients are pushing in the direction of what we do. I don't have the same sense of the wider IT budget spending trends that a lot of the more traditional wider-based services business would have. On the insurance vertical, we've seen significant growth in delivery due to the accumulation of data and its usage, as well as the migration to cloud. Data provides the foundation for creating more competitive products and better use of automation. This includes straight-through processing of claims, which we've successfully done with a few clients, ensuring no human involvement in the entire process once the client has entered the claim. There's also significant activity surrounding no-code and low-code solutions for underwriting and pricing, with clients pushing out these capabilities into the market, along with direct-to-consumer website functionalities that broker-type clients are implementing.

James Friedman, Analyst

Thank you for that.

Moshe Katri , Analyst

Thank you for including me. I want to congratulate you on your strong results. I have two broad questions. First, can you provide some insight into what you're observing regarding wage inflation, perhaps in terms of specific ranges? Second, considering the supply constraints we’re facing, are you increasing the number of compensation raises you provide annually? It would be helpful if you could update us on how frequently you've been implementing these compensation increases each year. Thank you.

Mark Thurston, CFO

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

John Cotterell, CEO

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

Moshe Katri, Analyst

Understood. Thank you.

Steve Enders, Analyst

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

John Cotterell, CEO

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

Steve Enders, Analyst

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

John Cotterell, CEO

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

Steve Enders, Analyst

Okay, perfect. Appreciate you taking the questions.

John Cotterell, CEO

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

Operator, Operator

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