Earnings Call Transcript - DAVA Q2 2024

Operator, Operator

Good morning and welcome to the Endava Second Quarter Fiscal Year 2024 Results Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Laurence Madsen, Head of Investor Relations. Please go ahead.

Laurence Madsen, Head of Investor Relations

Thank you. Good afternoon, everyone. And welcome to Endava's second 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 accompanying remarks today include forward-looking statements, including, but not limited to, statements regarding our guidance for Q3 fiscal year 2024 and for the full fiscal year 2024; the overall headwinds facing our industry and business, including macroeconomic conditions and the global geopolitical climate and the impact of such headwinds on our ability to grow revenues, and in particular, growth and expansion in our industry verticals; the impact of our investment and cost-saving initiatives on our financial performance; our acquisition of GalaxE Solutions, including expected synergies from the transaction, and the overall impact on our business; enhancements to our technology and offerings; demand from clients for our technology services; our ability to create long-term value for our clients, people, and shareholders; and our business strategies, plans, and operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and we undertake no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. For more information, please refer to the Risk Factors section of our annual report filed with the Securities and Exchange Commission on September 19, 2023. Also, during the call, we will 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. The 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, CEO

I'd like to thank you all for joining us today. And I hope you're all well. We're pleased to be here to provide an update on our business and financial performance for the three months ended December 31, 2023. As we noted in our press release, the environment continues to be challenging. Our results and guidance reflect headwinds in IT spending, particularly on discretionary projects, and in the payments and banking and capital markets verticals. That said, we believe we have a very well-positioned and strong business. We are confident that despite current softness in demand, the longer-term opportunity for us is very attractive. We want to make sure Endava continues to be well positioned to create long-term value for our clients, our people, and our shareholders. We continue to pursue our strategy to ensure that, while we are rightsized for the current demand environment, we are also making necessary investments in our business to position ourselves for when discretionary CapEx picks up again. We're seeing three key trends in the market. One, while budgets are up this year and there's a lot of work to be done, in the short term, spending is being deferred as clients continue to be cautious. As one client put it, we have the budget for a substantial ramp-up with Endava, but we're going to go slow for now and see how the year unfolds. Secondly, we are seeing deeper demand for vertical and technology expertise. And thirdly, the growing importance and relevance of a broader diversified delivery footprint. Given these trends, we're continuing to make organic and inorganic investments in a disciplined way to diversify our revenue, our delivery, and invest in technology and domain capabilities. We want to attract great talent and take advantage of the difficult times many others are facing to invest in and add to our leadership. We are also evaluating acquisition opportunities that help us accelerate our growth strategy. Some of these investments may result in lower near-term margins, given the current market environment. As we know, it takes courage to invest in uncertain times. But we continue to ensure we are being disciplined in pursuing our strategic objectives. Moving on to our results, we reported revenue totaling £183.6 million for Q2 of our fiscal year 2024, representing an 8.1% year-on-year decrease in constant currency from £205.2 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of £22.7 million, representing a 12.4% adjusted profit before tax margin. Some of the large projects we mentioned last quarter have not scaled up to expectations yet, while others have remained in the pipeline for longer than expected as a result of client hesitancy. We now have numerous projects where discovery work has been done, but clients are hesitating on when to commit the sizable spend needed to build production-ready systems. Alongside this short-term change to our growth expectations, we've started our business optimization program in order to facilitate a return to the medium term to our 20% constant currency organic revenue growth and 20% adjusted profit before tax margin. We remain focused on investing in growth while simultaneously reducing corporate complexity and eliminating inefficiencies. We believe this will improve our competitiveness and enable us to further invest in growth. Let me tell you about some of these strategic initiatives where we are investing. We will continue with our global industry focus, which is a key additive differentiator. Additionally, we are increasing our use of automation and accelerators to deliver outcomes for our clients more quickly. Increasingly, we are being requested to participate in larger scale enterprise systems integration work. As a result, this will be a focus of activity in the coming quarters. We are bringing together our close-to-client delivery and nearshore delivery teams under one manager per region in order to further build consistency in our delivery capability. We're starting to see the benefits of our combined sales and client delivery operations, resulting in a more cost-effective organization, greater collaboration across industries and regions, and the development of senior multidisciplinary leaders that will ensure Endava is able to continue to scale. We're using the slowdown period as an opportunity to invest in senior go-to-market leadership, attracting dealmakers who are difficult to shift in boom times. We undertook a rebranding exercise at the end of January, which has been very well received. In the last 12 months, we hired a dozen deal makers from leading competitors across our industry verticals. On the technology front, we want to help our clients embrace and explore new technologies more rapidly. Therefore, in addition to our core delivery competencies, we are creating new teams called pods that will be singularly focused on helping our clients accelerate and invent the future around new and emerging technologies. Pods represent an opportunity for differentiation by demonstrating our thought leadership across industry verticals against a key set of technologies and capabilities. The pods pull together existing Endava experts with exceptional thought and delivery leadership within a fast-evolving technology domain. They will work with our industry teams to establish thought-leading propositions around high momentum technologies and work alongside our delivery locations to ensure that appropriate skills are built and available at scale as acceleration is realized. We're building pods for AI, cloud, intelligent automation, cybersecurity, quantum, sustainability, and embedded and physical computing. The right time to invest in these go-to-market technology and sales arenas. These efforts will lay an even stronger foundation on which to scale as markets return. In addition to the release of our results today, I am thrilled to announce our acquisition of GalaxE Solutions to strengthen our healthcare vertical, as well as establish delivery capabilities in India. This is our largest acquisition to date, and it aligns with our strategic vision of expanding our global delivery footprint and further diversifying our revenue base. GalaxE was started in 1993 by the CEO, Tim Bryan, and is a leading provider of digital transformation and product development services to blue-chip US companies with a significant client base in the healthcare vertical and delivery capabilities in India. I met with Tim and his leadership team and visited their delivery centers in India, and I'm excited about the synergies we can create between the two companies. This acquisition significantly expands our presence in the fast-growing and exciting healthcare sector in the US. Additionally, with GalaxE, our global delivery footprint now expands to India, the deepest IT talent pool in the world where GalaxE has nearly 1,200 employees. GalaxE will strengthen our North American management team and bring decades of offshore delivery know-how to Endava. In addition, GalaxE has developed a strong accelerator-enabled capability, facilitating the understanding of existing enterprise systems and enabling change. This capability, alongside Endava's existing strength in delivering next-generation technology, will allow us to open new opportunities and go deeper into enterprise transformation work, delivering more insightful and predictable outcomes. Mark will provide more details on the transaction shortly. I’m excited to share that we announced yesterday that we're expanding our strategic partnership with Equiniti, a leading international provider of tech-enabled shareholder retirement and remediation services. We have established a five-year partnership of £75 million to support the delivery of a transformative product and tech roadmap. This deal strengthens our existing three-year relationship and delivers significant growth for Endava in our capital markets vertical. With the extension of this partnership, Equiniti has become one of Endava's top 10 clients globally. This revenue is net new, and is an example of the sizable project opportunities that are being slower to convert than expected last quarter.

Mark Thurston, CFO

Thanks, John. Endava's revenue totaled £183.6 million for the three months ended December 31, 2023, compared to £205.2 million in the same period in the prior year, a 10.6% decrease over the same period in the prior year. In constant currency, our revenue declined 8.1% from the same period in the prior year, within the range we provided to you last quarter and reflected a 5.3% positive inorganic contribution during the quarter. Sequentially, revenue was down by 3.6% in constant currency on the previous quarter. Profit before tax for Q2 fiscal year 2024 was £10.6 million compared to £20.3 million in the same period in the prior year. Our adjusted profit before tax for the three months ended December 31, 2023 was £22.7 million compared to £43 million for the same period in the prior year. Our adjusted profits before tax margin was 12.4% for the three months ended December 31, 2023 compared to 20.9% for the same period in the prior year. Our adjusted diluted earnings per share was £0.30 for the three months ended December 31, 2023, calculated on 58.6 million diluted shares, as compared to £0.59 for the same period in the prior year, calculated on 58.0 million diluted shares. Revenue from our 10 largest clients accounted for 34% of revenue for the three months ended December 31, 2023 compared to 31% for the same period last fiscal year. The average spend per client from our 10 largest clients increased from £6.5 million to £6.3 million for three months ended December 31, 2023 as compared to the three months ended December 31, 2022, representing a 3.1% year-over-year decrease. In the three months ended December 31, 2023, North America accounted for 31% of revenue compared to 33% in the same period last fiscal year. Europe accounted for 26% of revenue compared to 23% in the same period last fiscal year. The UK accounted for 34% of revenue compared to 39% in the same period last fiscal year, while the rest of the world accounted for 9% compared to 5% in the same period last fiscal year. Revenue from North America declined 14.5% for three months ended December 31, 2023 over the same period last fiscal year. Comparing the same periods, revenue from Europe grew 1.3%, the UK declined 22.3% and the rest of the world grew 44.8%. Revenue from payments declined 20.8% for the three months ended December 31, 2023 over the same period last fiscal year and accounted for 26% of revenue compared to 29% in the same period last fiscal year. Revenue from banking and capital markets declined 25.2% for three months ended December 31, 2023 over the same period last fiscal year and accounted for 14% of revenue compared to 17% in the same period last fiscal year. Revenue from insurance grew 10.4% for the three months ended December 31, 2023 over the same period last fiscal year and accounted for 8% of revenue compared to 7% in the same period last fiscal year. Revenue from TMT declined 5.2% for three months ended December 31, 2023 over the same period last fiscal year and accounted for 23% of revenue compared to 22% in the same period last fiscal year. Revenue from mobility declined 4.1% for the three months ended December 31, 2023 over the same period last fiscal year and accounted for 11% of revenue compared to 10% in the same period last fiscal year. Revenue from other grew 3.3% for the three months ended December 31, 2023 over the same period last fiscal year and now accounts for 18% of revenue compared to 15% in the same period last fiscal year. Our adjusted free cash flow was £33.6 million for the three months ended December 31, 2023 compared to £37.0 million during the same period last fiscal year. Now cash and cash equivalents at the end of the period remained strong at £198.6 million at December 31, 2023 compared to £164.7 million at June 30, 2023. Capital expenditure for the three months ended December 31, 2023 as a percentage of revenue was 0.8% compared to 2.0% in the same period last fiscal year. As John mentioned, we announced the acquisition of GalaxE today. Consideration for this acquisition totals up to $405 million, primarily in cash with some stock, with $30 million conditional upon future performance. The transaction is expected to close in early April 2024, subject to the completion of customary closing conditions and approvals, and therefore is not contemplated in our current guidance. Now turning to our outlook for Q3 and full year fiscal 2024. On our last earnings call, we highlighted the number of large deals being progressed and a general strengthening of pipeline. Whilst the large deals pipeline has continued to grow in number and value, they have been slow to progress. In addition, deals that we have encountered are proving slow to ramp up into the production phase, given the uncertain macroenvironment, creating hesitancy among clients. This has mainly been the case across all industry verticals. This weakness is most pronounced in payments and in banking and capital markets. Payments companies are taking a very cautious view on the macroenvironment. This has resulted in slower release of IT budgets, and we are seeing projects being delayed. In banking and capital markets, we're seeing regulatory work take precedence over large transformation work. Thus, in setting the revenue guide, we've set a narrow range for Q3, given where we are in the quarter, but set a wider range around Q4, which reflects the uncertainty we're seeing in pipeline conversion. The top and bottom of the range for Q4 would be 7% and 0.5% sequential growth on the midpoint for Q3 respectively. Consequently, whilst this uncertainty persists, our business optimization program that John mentioned earlier will focus on actively managing headcount appropriately in this environment, with a particular focus on our seniority pyramid. As a result, we expect to take an exceptional charge in H2 associated with headcount reduction. Guidance has been set with these actions underway and reflects the savings we anticipate achieving. With that context, let me now turn to the guidance. Our guidance for Q3 fiscal year 2024 is as follows. Endava expects revenue to be in the range of £174 million to £176 million, representing constant currency revenue decrease of between 12% and 11% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of £0.17 to £0.19 per share. Our guidance for full year fiscal year 2024 is as follows. Endava expects revenue to be in a range of £722 million to £735 million, representing constant currency revenue decrease between 7% and 5% on a year-over-year basis. Endava expects adjusted diluted EPS to be in a range of £1.09 to £1.22 per share. This above guidance for Q3 fiscal year 2024 and the full fiscal year 2024 assumes exchange rates on January 31, 2024 when exchange rate was 1 British pound to 1.27 US dollars and 1.17 euro. This concludes our prepared comments. Operator, we're now ready to open the line for Q&A.

Operator, Operator

Our first question comes from Ashwin Shirvaikar of Cit.

Ashwin Shirvaikar, Analyst

I was hoping to get some clarity with regards to the implied sequential growth range for 4Q, relatively wide range. So, 0% to 7.5% or so. How much GalaxE contribution is included? And then, when you look at organic sequential growth, what sorts of course corrections have you made with the assumptions you're making in relation to the conversion of pipeline to bookings, bookings to revenue, and so on?

Mark Thurston, CFO

The guide doesn't include any contribution from GalaxE. We said in the prepared comments that we hope it will complete early April. So it does exclude in that respect. In setting the guide, we've obviously had issues with the speed at which the pipeline is converted. And that's why we've put a large range on the guide for Q4. Basically, the assumptions around pipeline conversion for Q4, we have been more conservative at the top end of the guide than we have previously. So when we are looking at the proportion of contracted/committed, we're typically looking at about 70% of the guided figure. We're actually going higher this time, around approximately 80%. And our conversion rates – and when I talk about conversion rates, win rate, we tend to win 50% of the opportunities we pursue. The conversion rate is about actually the time it takes from that win to make a contract with the other party and commence work. So, we haven't changed the assumption on our win rate because it's consistent with what we've done. But the actual conversion rate is going to be somewhat slower. And as John said in his comments, and I did myself, it's because budgets are either being constrained through this first quarter of the calendar year, and clients are not willing yet to release them, even though they're saying that there's work there for us to do. So, we're taking a cautious view at the top of the range. But, actually, that is not as conservative. We're basically putting the bottom of range where we see little sequential growth going from Q3 to Q4. So the bottom of the range would be something like £176 million, which is the top of the range for Q3.

Ashwin Shirvaikar, Analyst

There was a prepared remark that alluded to clients asking for diversified delivery. Hopefully, you can walk through that. Is that more a – is it now a necessity to have, let's say, India, South Asia, plus LatAm, plus some presence in Central Europe? Sort of, is that kind of a standard ask from a risk management perspective? Or two out of three will do? Or what specific sorts of things are clients looking for from a diversification perspective?

John Cotterell, CEO

Yes, it is some of the things that you touched on. Essentially, as we're getting into larger projects and larger proportions of the spend that clients have, they want to see that mix of us not just being able to do the more expensive Central Europe/LatAm delivery, but also being able to augment that with some more cost-effective delivery capabilities out of places like India and Southeast Asia, and being able to scale that a little bit more, so that it becomes part of the mix. It's not a move into a different sort of service. It's just a move to get an ability to balance our pricing a little bit more and remain competitive by introducing that. Also, the access to the talent pool is another reason why we've been targeting India. We've been hinting at that for a while. With the GalaxE deal, we actually take a step into India delivering.

Ashwin Shirvaikar, Analyst

So, cost is driving this rather than geopolitical risk, I guess that was the gist of my question?

John Cotterell, CEO

Yes, it's much more about competitive pricing than geopolitical risk for us.

Puneet Jain, Analyst

Follow up to what Ashwin asked. Can you talk about the pricing trends you are seeing? And are you seeing, on a sequential basis, clients continuing to push for like-to-like price declines as well?

John Cotterell, CEO

The pricing that we're finding is actually stable. The diversified delivery comment I was making was the ability to widen our footprint in clients by having a wider footprint in more cost attractive, from a client point of view, delivery locations, i.e., it opens up parcels of work that we previously wouldn't have available to us, just delivering out of Central Europe and Latin America. But within the zones that we're operating in, we're actually finding pricing is pretty stable, and arguably even getting smaller increases.

Puneet Jain, Analyst

Can you share more details around the plan, business optimization program, how many heads you expect to cut, potential cost savings? And more importantly, how are you going to ensure that that does not create any disruption in delivery?

Mark Thurston, CFO

So the initial phase, which is going to lead to the determination of costs, as I outlined in the prepared comments, is basically looking at areas of overlap in SG&A and addressing the bench that we have built up as a result of deals and pipelines slipping to the right. So we're losing about 450 people. There'll be a termination cost of about £7.5 million. And it should generate an annual savings of about £23 million. But this is a tough – first part really of the program that we wanted to put in place. But we'll be looking basically at the market part of the organization where we're aligning sales and delivery more closely and where we get some overlap in that area, and we will seek to streamline. Again, John talked about the pods on the call as well, which are to push more technology from a horizontal perspective into these new verticals. And again, as we sort of focus more closely on that, we anticipate that it will drive higher utilization with our staff, our external-focused staff. So it's initially two phases. The first phase is to address pension, look at SG&A. The second phase is basically to streamline and simplify by reducing duplication across the organization.

Jesse Wilson, Analyst

This is Jesse on for Maggie. So, first, I had a question about margins. Are you still expecting the fiscal second quarter to be the trough in margins, given the revision to guidance here?

Mark Thurston, CFO

When you say fiscal second quarter, the one we just reported on? The quarter to December? I would say we've got a little bit further to go in terms of Q3. I think that is going to be our low point. We will see a little bit of weakness in the gross margin despite the bench reduction exercise that's going on in the quarter, but it is happening in the latter part of the quarter. And we also have some investments that we're making to SG&A. In terms of adjusted PBT, we'll be in Q3, so the quarter to March, when we'll be probably sub-10%. But then, as the program starts to have a more impact on profitability and we see the sequential sort of growth in revenue that we anticipate, gross margin will improve, the bench will reduce, and then we will be delivering an adjusted PBT which would be low double-digits. It's also worth saying that, during this quarter, we're investing pretty heavily. We're bringing in the deal makers; we're investing in the pods. We don't carve out our transaction costs on M&A. And so, that impacts Q3 pretty strongly. So, that's all part of the margin pressure in Q3.

Jesse Wilson, Analyst

For my follow-up, in the past, you've talked about pursuing acquisitions that are 5% of the business. And obviously, this one is a bit larger. Could you talk about how the growth and margin profile compares? And maybe what type of multiple you paid? And how you make sure that this one goes well as the others have done in the past?

John Cotterell, CEO

We talked about 5% to 10%. And we said we'd go over 10% for something that was really strategic. And this is a little over 10%. But it is really strategic for us. If you look at it, it moves the US to being our largest region in terms of client revenues; that is absolutely crucial. And it's been a target of ours for a long time. And it's great to see a step up there; the US is the largest market in the world, and needs to be our largest. Secondly, is perhaps the India talent pool, which we touched on earlier in the call. And that's pretty strategic. They bring decades of experience; they've been operating there for over 20 years. And that sort of offshore delivery model is pretty crucial. I went out to India with my team; we spent a lot of time with the GalaxE guys out there, really got to grips with how they do it, and I'm confident that it's a very, very strong delivery operation. Thirdly, it’s a big step forward in healthcare, taking healthcare to being one of our largest verticals. So, we'll be pulling that out, I'm pretty sure, next year as a separate vertical as a result of having done this deal. It's also one of the more stable sectors through this period. So, a great area to invest in. They're a growing business, very healthy, and they have a bunch of accelerators that fit very, very well with ours. And we spent quite a bit of time as a team working through how they would work. The client calls that I did, which were yesterday, were astounding. They're the best set of client calls that I've ever had, going through an acquisition in terms of clients' belief in GalaxE and their ability to deliver. So, a lot of plans around how we do the integration properly. We’ve done a lot of work on making sure this is the right deal for us in execution terms as well as the strategic side that I just went through. Mark, anything on the financials?

Mark Thurston, CFO

Not really. The 1,600-odd people that were on board, a high proportion of them are in North America, 30% of headcount. They deliver broadly the similar revenue per head that we do, and profitability is similar to Endava, although we will need to invest in their support functions which as a private business, they have run very lean. When it does complete, it is likely to add 4% to our guide for full-year growth that we just outlined.

Bryan Bergin, Analyst

On the outlook here, are there also cancellations that have occurred as clients kind of went through the year-end period? Or is this entirely delayed release? Because I heard you mention client IT budgets actually – I guess potentially up this year. So, trying to understand the aspect of lost revenue versus delayed growth potential. And really, are some of these bigger programs that you expected to help you with that prior fiscal 4Q growth ramp still on the table in calendar 2024, meaning potentially they could cross over for you in the first half of your fiscal 2025?

John Cotterell, CEO

I'll let Mark do some of the detail on that. But you're right, we are seeing client budgets, IT budgets up. We're just not seeing them spending it yet. And that's where some of our confidence about an upturn later in the year comes from because there is a backlog of work, there is budget to go against it. We just need to get through this hesitancy.

Mark Thurston, CFO

Yeah, that's exactly right. In the opening question, when it was talking about the delays and the conversion of pipeline, that has been our issue. We haven't seen erosion on the base. Actually, for us, pricing remains stable despite comments we've heard from other players in the space. And in terms of our sort of larger deals, which, for us, we monitor deals that are over about $5 million or $10 million TCV, the volume has gone up in a number of deals. When we look at it from when we were talking in the guide in mid-November, we've lost a couple but we've gained sort of $5 million, so we were up in absolute numbers. And the actual value that we now have in the hopper compared with back in November is up by 75%. And there are much larger deals coming into play. I think John referenced the Equiniti deal, which was something that we anticipated would land before Christmas. And we've only been able to announce today, which gives an illustration of the issue that we've been facing as we've dealt with the uncertainty of pipeline conversion.

Bryan Bergin, Analyst

On the margin front, if you can talk about near-term utilization considerations as you move through the second half of the year, and are you able to quantify the level of investment you're making here in the near term, just to give us a better sense of how much is investment driven versus top-line driven?

Mark Thurston, CFO

Utilization for the current quarter, so which is the quarter to December, which was reasonably low, that sort of 67%, we think it will be in Q3 maybe a little bit below that, say 66% or so. So, the bench will be quite high until the actions that we just announced are going to take effect, and will then revert to something that is more normal as we go into Q4. So we'll be heading up towards the 68%, 69%. In terms of investments, we continue to actually invest in our sales and marketing activity. So it is around about, at the moment, about 6% of revenue. Obviously, with the deal that we have just landed with GalaxE, we've invested quite a lot of money in terms of deal-related fees. So, it's pretty crunchy in Q3. And then, we have ongoing M&A integration. We had two before this deal in Asia-Pac and North America that we will complete by the year-end, but that will continue as we take on board GalaxE, which will roll on into FY 2025. And then we’re looking also at a simplification of our processes and systems. That will be a continual P&L investment for us as well. So we just want to get lean for the future and make sure that we have some thought processes to scale.

Antonio Jaramillo, Analyst

I just want to go back and discuss the GalaxE acquisition. You indicated that the revenue per billable headcount and the margins are at par with Endava's. But then you also indicated that you needed to make some investments in the business. Should we assume that the acquisition is at least somewhat dilutive for the first year, given some of the investments that you need to make into what you're doing in India?

Mark Thurston, CFO

In terms of a deeper dive on EPS for the full year, I don't think it will make a contribution in terms of improving it, although it will do from a revenue perspective. We have to make some investments in that sort of finance function and some of the support functions to take them from the private world up to public company speed. And then, again, it is plugging the Indian offshore capability into the Endava nearshore business model. That will take some investment on our part. So I think for the near term, which is probably six months or so, it won't be earnings dilutive. I think it'll be earnings neutral, but thereafter, we anticipate that it will be earnings positive.

John Cotterell, CEO

There are signs as we're getting through February that clients are starting to ease off a little bit. You saw it in the Equiniti deal that we announced yesterday. That got signed; it wasn’t getting signed earlier in the quarter. The clients are looking at their budgets, looking at the things that they want to do. And we're seeing some of that come through. I actually think others across the industry are also seeing that. We're seeing the same trend.

Bryan Keane, Analyst

Mark, I guess on GalaxE, what's the normalized revenue growth rate of the company and how's it growing more recently? Is it being impacted by the economy?

Mark Thurston, CFO

Well, they have a December year-end at the moment, so they haven't concluded December 2023. But the growth rates there are around 10%. The expectation sort of growing into calendar 2024 is probably around 10% to 15%. So they are growing quite nicely, actually. As I said, their financial profile is similar to us, with the one caveat that they don't carry the SG&A that you would expect from an organization like Endava. So, the systems investment, I mentioned the finance function that needs to be put in place, but that won't be prohibitive for us because we will just move them onto our platform. The one caveat is it is in a different continent, so we do need to establish some presence there. So, the profitability is good. And I think the growth prospects are good. And I think they're probably going to be better under Endava ownership than they were previously.

Bryan Keane, Analyst

On a normalized basis, do you think they can grow somewhere near the 20% constant currency revenue growth outlook that you guys think is possible?

John Cotterell, CEO

Oh, yes, absolutely. In fact, we think that as we get to go, there's an opportunity to cross-fertilize the capabilities of the businesses, the accelerators that I was talking about, to actually see opportunities to accelerate both core Endava and the GalaxE business. GalaxE, because we widen their capability, we give them scale; they do have large clients who hesitate to spend more with them because of that scale. Endava, because of the access to these accelerators, that will help us drive a little bit deeper into enterprise transformation with our larger clients. So, there's some very good revenue opportunities as we combine the businesses on top of the normalization process.

Operator, Operator

The next question comes from Spencer Anson of Susquehanna. Please go ahead.

Spencer Anson, Analyst

How have you seen the demand environment evolve since macro conditions became more difficult and what should we watch for to get an indication that things might be standing up going forward?

Mark Thurston, CFO

I suppose, at the moment, our sort of macros, as we've outlined, have seen hesitancy and progression with work. I guess it has something to do with our exposure, particularly for Europe and the UK giving people pause. So we're not actually seeing much of a change from that perspective. But, actually, the work is building up. I gave sort of indication of the pipeline of bigger deals building up, the size of them. The number is just the willingness of clients to commit at this stage.

Operator, Operator

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

John Cotterell, CEO

Thank you all for joining us today. As you can see, we're investing in Endava in order to facilitate a return in the medium term to our historical profitability and growth levels. We’re gearing Endava to continue as the leader as tech waves regather strength. We look forward to speaking to you in our next earnings call. Thank you.

Operator, Operator

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