Q2 2021 Endava PLC Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to and Jarvis, earning release for the second quarter fiscal year, a T Thompson on 'twenty one.
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I would now like to hand, the conference over to your first speaker for today Laurence.
Madsen Investor Relations manager. Please go ahead.
Thank you good afternoon, everyone and welcome to and that by the second quarter of fiscal year 'twenty 'twenty. One conference call. As a reminder, this conference call is being recorded joining me today are John Cottrell, and the best Chief Executive Officer, and Mark Thurston and that has 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 2021 and for the full fiscal year 'twenty 'twenty, one are expected near and medium term revenue growth.
The impact of the COVID-19, pandemic and associated global economic uncertainty, our expectations regarding digital transformation of existing businesses and and the strength the necessity of digital transformation for many companies and and that is the ability to benefit there from anticipated.
For the client demand for and that that services are expected the ability to leverage our intellectual property to provide more cost effective deliberate bolster our clients with greater speed and our expectation regarding expansion opportunities as well as other forward looking statements.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements.
Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements and reported results should not be considered as an indication of future performance. Please note that these forward looking statements made during this conference call speak.
Only as of today's date and the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law.
Please refer to the risk factors section of our annual report on form 20-F filed with the Securities and Exchange Commission on September 15, and 20 training, 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 well present, both ifr F and non ifr and financial measures a reconciliation of non Ifr S to Ifr ice measures is included in today's earnings press release, which you can find on the Investor Relations website.
A link to the replay of this call will also be available there.
That I will turn the call over to John.
Thank you Jos a.
I'd like to thank you all for joining us today, and I hope, you're all staying safe and healthy.
And I am pleased to be here to provide and update on our business and financial performance for the three months ended December 31st 2020.
And while the Corona virus vaccination campaign has started and many countries around the globe life is far from normal with many countries, including the U K still and locked down or facing similar restrictions.
Whilst we continue to adjust to the impacts of the pandemic the.
And for all services continues to increase.
We've seen the acceleration of digital transformation clearly differentiating the leaders from the lack of ups.
When the second a surge of COVID-19 cases, it's all main markets and the northern hemisphere at the end of last year I mentioned to you that all customers with a much clear on their priorities and they had been immediately following the declaration of the pandemic and the way, we're seeing more business as usual type stability and decision.
And making.
Did not see sudden decisions to stop for reduced project activity and demand for our services continues to grow.
And the all of a had a solid Q2 for all of fiscal year 'twenty 'twenty, one with revenue of 100 and follow a point 2 million pounds a growth of 22, 5% year on year from 85 point and 9 million pounds and the same period and the prior year.
A strong revenue growth was once again driven by the expansion of work for our existing clients and the acquisition of new ones during the quarter during.
During the quarter, we continued to broaden our client base and ended the quarter with 521, the active clients up from 367 at the end of the same period and the prior year, a 42% year on year increase.
Average revenue for all top 10 clients grew by 21% year on year and revenue from clients, who paid us a both 5 million pounds over the past 12 months increased 34, 3% year on year.
Additionally, we ended the quarter with 75 clients, who paid us over 1 million pounds per year compared to 65, and the same period last year, representing a 15% share on grace.
We have adjusted a sales and marketing approaches and response to the reduced travel and in person attendance of industry events.
In September we highlighted that we were seeing and increasing flow of the new client opportunities, which start small with a share or proof of concept of engagements and then scale as we move into production and system development. We're.
And we're continuing to observe this trend with a greater number of new clients and the second quarter.
And with the expanded 1 million pound plus the 5 million pound plus cohorts for the top 10 revenue growth as engagements expand.
On the technology side, and all of a possesses significant intellectual property embodied in a know how and reusable assets one type of and all the IP is our accelerators. The ease of reusable project delivery assets that will allow us to provide clients with deliverables of greater volume more quick.
And at the less risk and starting from scratch we.
We develop our accelerators and response to repeat a demand on a projects. So they a practical tools to accelerate our clients' success by packaging a hard won experience.
The accelerators reduce the time required for delivery and know how within the accelerator allows us to leverage higher margin deliverables at a lower cost for our clients.
Some of the accelerators, we have developed trace a delay a reusable components payment systems testing frameworks and programming frameworks for data engineering projects for.
For example over the past nine months, we built 15 payment accelerators that many payment of implementation projects require but the time create differentiation or competitive advantage for our clients such as token Ization self service on boarding fraud engines and called processing.
We have implemented accelerators and for client programs, including a clear course and G day of so far and we are seeing and accelerating adoption we.
We provide these components and source code form to accelerate delivery of a large a program, enabling us to provide a clients with great of value.
Short and timeframe.
With time to market being a key differentiator. These accelerators can provide our clients with and edge.
I'd also like to highlight today some of the work, we're doing and the fast growing health Tech sector.
We believe digital transformation and presents opportunities to transform the quality of services provided and health by making the more efficient more secure and more data driven whether and direct patient care settings or in the context of researching and better ways to provide care and this is where we have focused our energies.
And the other has been partnering with Webmd health services for near the 10 years assisting them and the digital journey, we felt webmd develop corporate wellness solutions to help companies improve the health of their employees.
We have also utilized our experience and distributed agile delivery to support the development of players and new digital platform lift play a build meaningful relationships with patients on drug therapy, using awfully scripted life patient centric conversations.
Supported by digital outreach.
There's a purpose built lift technology platform bring science into the art of human engagement with pretty cool data science to craft a mindful of patient journey.
A leading health tech provider partnered with <unk> to develop a number of apps, allowing clinicians and patients to make the most of the time together.
We built the triage at the configured online questionnaires, allowing clinicians to create a work flow through which patients can interact with a body map. It's a highlight different areas of the human body, where musculoskeletal pain is occurring before the patient is physically examined by the clinician we built another tool.
Allowing clinicians and patients to connect remotely while on.
Audio or video chat on computers and mobile devices. Additionally, we helped create a program called patient outcomes to allow clinicians to use home exercise or a note resolution programs in tandem with a patient's profile and match them up to increase the likelihood of a patient enrollment and the <unk>.
Parents to the program.
And all of a has recently been chosen by a leading provider of advanced health care solutions for the management of blood plasma and tissue and cells to support them with the design and implementation of the application infrastructure and AWS for one of their clients and Germany.
We are leveraging our in depth technical expertise and cloud infrastructure and the AWS partnership to minimize implementation costs, while migrating the on premises software into the cloud.
Solution will allow foster future cloud implementation for their clients as we automate and the provisioning of infrastructure by building and infrastructure as Covid pipeline.
Underlying all health Tech is evidence based practice drawn from scientific research and we've been working with one of the pioneers in that area.
Life Science publications limited.
The life is a not for profit organization and inspired by research funders and led by scientists.
The mission is to help scientists accelerate discovery by operating platform for research communication that encourages and recognizes the most responsible behaviors and science.
And this means building technology to help scientists share of their findings quickly and effectively so we helped build and article hosting platform used modern web front and the techniques. The result was the launch of a new journal website transforming the way scientists share the research and cleaning.
Two groups focusing on COVID-19 research.
It's been a privilege to build a solution that helps health care providers have a positive social impact and transforming patient care.
Many of these examples of being the innovative entrance to the health Tech space. It was setting the pace and the transformation of health services and the patient outcomes.
Similar to our experiences with the Fintech space. We believe this innovation will cascade up to the larger providers and health as the dramatic benefits of digital transformation, a demonstrated providing a long runway of expansion opportunities for nextgen providers such as ourselves.
A client growth continues to translate into strong employee growth we.
We ended the quarter with 7000 and 464 employees and.
A 19, 1% increase from 6267 and the same period last year.
We have increased a head count organically every quarter since the start of the pandemic and our attrition rate remains low.
We recently added two employees and Sydney, Australia to support clients in the region.
And in Q3 for a fiscal year 2021, we also added one employees and a pool.
The lockdowns and similar restrictions ease and we expect to add to a head count and Asia Pac.
The majority of our workforce continues to work from home and productivity remains high.
We still defining a post pandemic hybrid model for the new work environment and I.
And continue to recruit people on the basis that they must be able to regularly attend and indaba office.
With this in mind last quarter I mentioned, the launch of the handoff of Wellbeing program, which is designed to ensure the endo ovens can access the wellbeing support that's right for them be it through workshops digital content or master classes.
We are delighted of how this is being welcomed by all people with overall engagement levels continuing to increase.
Since launch and close to 70% of indulgence have participated and at least one of these events.
As shown by these results client demand for our services continues to be strong as digital transformation continues to increase and <unk>.
The importance.
Mark and I and the entire team are extremely pleased with our performance for the quarter just ended despite the challenging pandemic situation.
And we are excited about the opportunities emerging and remain confident and our ability to live a value for all of our stakeholders.
Let me end by thanking our people who in these turbulent times continued to deliver excellence quality and value to our clients and diverse homework and contacts and thereby enable the performance just outlined we appreciate the dedication and loyalty.
I'll now pass the call onto Mark who will walk you through a financial results for the quarter and provide guidance for the coming quarter and the fiscal year.
Thanks, Tom and the.
The office revenue totaled a $105 2 million pounds for the three months ended December 31st 2020, compared to $85 9 million pounds and the same period last year a.
The 22, 5% increase over the same period in the prior year and.
Constant currency a revenue growth rate was 21, 4%.
Profit before tax for Q2 fiscal year 'twenty 'twenty, one was $10 6 million pounds compared to loss before tax of $17 3 million pounds and the same period and the prior year.
The loss during the same period and the prior year was the result of the declaration of a nonrecurring discretionary employee bonus, which we refer to as the discretionary EBT bonus of $27 7 million pounds and December 2019.
On adjusted profit before tax for the three months ended December 31st 2020, with 26 million pounds compared to $20 5 million pounds for the same period last year.
The adjusted profit before tax margin was $19 six per cent for the dream.
And at December 31st 2020, compared to $23 eight per cent for the same period last year.
Adjusted profit before tax adjusted PBT is defined as the company's profit before tax adjusted to exclude the impact of share based compensation expense.
And the EBT bonus amortization of acquired intangible assets realized and unrealized foreign currency exchange gains and losses net gain on disposal of a subsidiary.
Share based compensation expense amortization of acquired intangible assets and the unrealized foreign currency gains on noncash expenses.
Adjusted PBT margin is it just the PTT as a percentage of total revenue.
Just a diluted EPS was <unk> 29 pence for the three months ended December 31st 2020 calculated on $57 1 million diluted shares as compared to 30 pence per se.
The period last year calculated on 56.0 million diluted shares.
Revenue from our 10 largest clients accounted for 37% of revenue for the three months ended December 31st 2020 unchanged from the same period last year. Additionally.
Additionally, the average spend declined on a top 10 largest clients increased from $3 2 million pounds to $3 9 million pounds for the three months ended December 31st 2020.
And the three months ended December 31, 2020, North America accounted for 29 percentage of revenue unchanged for the same period last year Europe accounted for 27% of revenue compared to 23% and the same period last year and the U K accounted for 42% of revenue.
<unk>, 45% and the same period last year, while the rest of the world accounted for two percentage of revenue compared to 3% and the same period last year.
Revenue from North America grew 23, 7% for the three months ended December 31st 2020 of them.
The same quarter of 2019, comparing the same periods revenue from Europe grew.
47% and the U K grew 14, 2%.
The group and all three of our industry verticals during the quarter.
Revenue from payments and financial services grew 12, 3% for three months ended December 31 2020.
Revenue from payments and financial services accounted for 49% of revenue compared to 53 per cent and the same period last year.
Revenue from TMT grew 42, 7% for the three months ended December 31st 2020 over the same quarter of 2019 and accounted for 28% of revenue compared to 24 per cent and the same period last year.
Revenue from other grew $25 one per cent for three months ended December 31, 2020 of the same quarter of 2019, and now accounts for 23% of revenue and.
Thanks for the same period last year.
This growth was mainly driven by clients and the mobility and health Tech sectors.
And we now plan to our adjusted free cash flow, which is a net cash provided by operating activities.
Once received less net purchases of non current tangible and intangible assets.
Our adjusted free cash flow was $18 7 million pounds for the three months ended December 31st 2020, compared to eight zero a million pounds. During the same period last year.
The prior comparative period include the first tranche a of a one of discretionary EBT bonus cash payment of $10 7 million pounds.
Our cash and cash equivalents at the end of the period nine strong and take the $4 2 million pounds at December 31, 2020, compared to a $101 3 million pounds achieved two of 2020.
We spent $50 5 million pounds net of cash of Quad and the six months on our acquisition of contract digital services and the work.
Just.
Capex for the three months ended December 31, 2020, as a percentage of revenue was one 6% compared to three 7% and the same period last year.
Guidance for Q3 fiscal year 'twenty, one is as follows.
And the other expected revenues will be and a range of 110 million pounds, 211, 5 billion pounds, representing constant currency revenue growth of between 20.0% and 21, 5%.
And the other expects adjusted diluted EPS to be and a range of 27 to 28 pence per share.
Our guidance for the full year fiscal year 'twenty, one is as follows and.
The other expects revenues would be in the range of 423 million pounds to 426 million pounds, representing constant currency growth of between 22.0 cents and 22, 5%.
And the other expects adjusted diluted EPS to be and a range of a 110 to a 113 pence per share.
The constant currency growth figures quoted for the full fiscal year 'twenty one guidance still includes the pro forma adjustments for the world a capsid and it remains and the fully a comparator.
The above guidance for Q3 fiscal 2021, and the full fiscal year 'twenty and 'twenty one assumes the exchange rates at the end of January for.
On the exchange rate was one British pound to 1.3 step and U S dollars and $1 one free cash.
Concludes our prepared comments operator, we are now.
Ready to open the lines for Q&A.
As a reminder to ask a question you will need to press star one on your telephone.
On your question please press the pound or hash key.
Your first question. This morning and comes from Bryan Bergin from Cowen. Please go ahead.
Hi, good morning, good afternoon.
Hoping to dig in and around the client expansion metrics and also North America traction. So theres a notable sequential uptick here in the greater than 1 million pound clients can you provide some color there as far as the verticals you're seeing the most of a momentum and the types of those programs and I am curious about North America, specifically can you provide detail around that client activity such as new.
A new logo wins and existing relationship expansion.
And so on North American class a sorry.
And we're pleased with.
And every night.
Quarter on quarter year on year class, a 23, 7%.
Yeah, most of that is organic and it's been a cross the pace, we've had strength and.
Payments, and particularly and the financial services, so great progress of any sort of pleased with it.
And in terms of a number of clients if I play sorry for the minion plans very pleased with the the uptake that we thought we had there as well.
<unk> sort of a 75 and quite.
On a quarter last quarter of 66 has been a great and we've seen a big influx.
And the ultimate for that.
And the minions two says.
The good evidence of a again traction in terms of growing.
And the existing sort of a client base.
Hi, Brian.
I think one of the things that is visible and the numbers is.
And the trend the I was touching on over the last couple of quarters.
Which is the <unk>.
And the all of a works is we start off with <unk> and R&D.
Asian Phase.
All of a proof of concept toilet, helping a client to get the.
Adds around how.
Power technologies could impact of that business models, and the one of them, which they operate.
And then.
As they see that brought to life the.
The engagement kind of expand.
Into the production phases, where were we.
We're actually building systems, a kind of go.
All right.
And that's visible and so you can see the the broadening footprint.
All of a new clients coming in and I was touching on.
And you can see some of that starting to come through into the larger client base.
With with some of those moving up into the the 1 million pound.
Client cohort that Mark was touching on.
And then of course, we continue to see the expansion into the higher cohorts.
Cohorts with the spend levels of the top 10 and.
The 5 million plus clients also climbing.
So thats the dynamic of what's going on.
Okay.
Good to see.
And then just on the margin strength can you talk about the key factors contributing to a there and your confidence and sustaining these elevated levels and I'm curious how your pusher on the accelerators that you described impact profitability of are you able to gain more leverage through these.
Yes.
The gross margin adjusted gross margin was.
And sequentially in line with Q1 and last week Q1, we benefited from the R&D tax credit. So that was a slight headwind of about 50 basis points coming into Q2, it was offset by a.
Helpful. FX is.
The pound strengths and against the dollar and the euro, but basically the margin sequentially, we saw utilization per.
Up slightly and the banks for juiced. The people were taking the last holiday and were seeing an improvement and the pricing outlook for as well so gross margins.
The strong.
I think going forward. It will follow the typical a patent because we have a major sort of pay round, which goes through.
And the first of the sort of July so there'll be some pegging back from that level roughly of that sort of a two percentage points of thing.
And I think we will see utilization start to improve during the course of the year and touch the Q3 and then we do have less working days, which does have a a margin and Pat when you compare with Q1 and Q2, but generically I think the margins gross margins are on a good place.
And you see also we had a sequential reduction in and out of SG&A I think that's kind of give me a theme as we go out of the top line. The key Pas SG&A spend on the control we will expand all of the adjusted PBT margin.
And just putting a question about.
And the accelerators.
We used the help demonstrate value and win business with clients.
Because we're able to.
Sure of that and how we're going to get the product to market faster.
Three of use of the accelerator and we roll it into.
The cost of the services provided to the client is not done on a ongoing license spaces going on.
On the Levered.
The ability basis similar to the Fleetwood we were building it from scratch.
So it does help us too.
And get projects going foster with clients demonstrate more value and therefore.
When the business there is a small margin improvement overall on the the projects that we win and that way.
Obviously, because we're not having to build that COVID-19 from scratch.
And we get some of that to the client.
And we think some of the and improved margin.
Okay understood. Thank you.
Thanks, Brian.
Yeah.
Your next question comes from Ash and Shoemaker from Citi. Please go ahead.
Thank you.
Good morning folks a good quarter here.
Just wanted to just a follow up a little bit to start on on the activity to a question.
I just want to understand.
The IP if the IP belongs to you and there's a potential to expand the concept from tool sets the full scaled solutions.
And perhaps even stock chart doing more.
And on the lines of sort of a software model.
Down the road and if debt is if the accelerator of concept is limited to any particular work of course.
Alright.
So a lot of all focused around the accelerators of Spain to put them into places where.
There is there's a.
That's a standardization.
It's a sort of thing that every project in that space requires.
And there's a little differentiation between clients.
The it comes from those accelerators and so then you can focus of the energy with the client around.
Building that differentiation.
Rather than just the underlying services that come through the accelerators.
The notes.
Full package.
Okay.
And not full package.
<unk> products that we would take to market and we have no intention of building the Mount as such.
One of the huge benefits that we're able to offer a.
Clients as the knowledge that we're not going to take.
The IP that we developed with them.
All of the know how that comes from it.
And turn that into differentiated products that we sell to the competitors and the market.
So it is very very consciously focused on and the non competitive arenas.
Go ahead of it.
We're not causing any concerns with all claims.
All of it migrating a course of that competitors.
And we've done it in a few areas payments is the one that I called out this time and will be touching on some of the areas and the quarters of ahead.
Where we've pushed accelerators of out.
And doing different things some of the some of the nine related some of them.
Data.
Transformation framework.
Some of the testing related others around and looking at clients existing code bases and the challenges and transforming that.
We introduced a.
Digital transformation into the services.
Got it got it.
The second question was on head count the see the a.
A very healthy.
Head count growth.
But could you kind of you know.
Break that down a bit.
And talk about.
Head count growth by geography does.
Sort of that he didn't know the sponsored the country response to Covid impact your decision to hire a not tied in a particular place.
And does a good to see the.
APAC head count additions that you've talked about is that with the intention of a sort of being a bit.
A bit more Asia focused in the future.
Or is that just a one off with a couple of clients.
Yes, so the.
And the head count right.
Not the.
Restricted cash.
In any of our locations by.
The pandemic backdrop.
And I was still able to recreate.
Albeit it's a lot of it is done and a and a virtual context.
And some of other jurisdictions.
It's been fun to do interviewing over the past the nine months as well face to face.
So and so that hasnt been a restriction around the <unk>.
And then Mike in terms of where we've grown.
And.
And we tend to.
Push work to places, where we get access to the talent.
And we need.
Where and.
And we do it and a fairly even way.
If we focus too much on one of two cities and.
Then the demand that we would place on those cities would draw of cost inflation.
Because because we're a big player and the markets, where we operate so the more even and distributed that we all the more of it helps us to control.
Cost inflation with the recruits and.
And expand and a balanced fashion and for.
As of the business grows one of the things that we're always planning ahead for the.
His provisioning new locations.
And see.
All of geographies.
So that we didn't have a going to be out of a lighting any individual cities that we're growing into.
A quick question.
So that is absolutely a round.
Building client relationships.
And the more advanced vacations across the Asia Pacs and coal.
Australia, Japan et cetera and vehicles.
And.
Therefore, being able to support some of all clients of a global.
On a on a global basis and Thats.
Constant I'll ask the Lee.
<unk> the leaf.
We have pushed back on until we were ready to expand into the Asia Pac.
So we will build out that close to clients.
Capability and <unk>.
Course, we also expect and in line with al and the actual delivery model.
Put the delivery centers in the Asia Pacific time zone as well.
And the third enables agile delivery to the operates without good times on Agua a lap.
So we're just starting on that it's been existing clients.
Pulled us into that that growth and the rest of the world figure that you've seen over the last couple of years.
And now we're ready to start putting the people on the ground.
Looking for new clients as well as expanding existing ones and non children for.
Got it. Thank you. This is a good performance and a independent assessment.
Your next question comes from my own <unk> Tandon from Needham. Please go ahead.
Thank you a congrats on the quarter John I wanted to just maybe talk a little bit of about the contribution from new clients versus growth from the existing account base, just how that's been trending and I'm really curious to sort of share your thoughts on what is the penetration today of indaba of the existing installed base of the other way too.
Maybe put that into perspective, how much more room to grow within your core clients.
Okay.
So actually even through the pandemic all of them.
<unk>.
Models that we've experienced for the last and.
Well for Ibs, visibly and the numbers, but before that as well.
Which is the between 19 on and 90% of a grace.
Of a revenue each year columns for them are existing clients.
And then the 10% of that sits on top of the new clients that we acquire.
During the year.
And that the model is still largely true over the last nine nine to 12 months.
And.
And what that means is essentially existing clients, a growing and driving a big chunk of the organic growth.
And then the new clients.
And I'm, taking it up to.
To that over 20% Mark that we.
And we target each year.
So.
And.
If you look across the final part of your question around growth opportunities and the existing clients.
There's a very large oil and gas.
Showing growth opportunities and that client base.
And many of them a very large.
Fortunately, a fortune 100 type organizations.
And while I'm looking for.
The partners to work within the digital transformation space.
And who are expanding the budgets and their spend in this space.
And where we are getting the opportunity to expand with them.
And as they do more.
Having said that it remains very important to us the full saving working with some of the smaller clients the disruptors.
And we're entering a industries.
That's often where we are.
The total.
Play with the technologies and find new business models do things with those players.
The causes disruption and the market.
And gives us the capability and.
Until then take for the larger players as they also.
Seek to respond to the transformation and that's being driven by that.
Yeah.
Got it that's how long of the talks.
The rule.
Okay sorry.
Sorry, I just wanted to follow up with one more question around.
It is good to see the hiring strength, but I'm a.
Interested in terms of how should we think about the contribution from pricing and utilization to revenue growth going forward, how much more room do you have on both those fronts to drive revenue.
So let me pick up the pricing and then Mark talk a little bit about the utilization.
So on the pricing side.
Did you see a flattening actually a slight golf and all per.
Sing.
For the last year.
April to June period, as the pandemic was at its height. Since then and pricing has been picking back up again.
Steadily actually following a historic norms for them that slight drop back then.
And the last quarter of utilization picked up one of the pick up from them.
So on <unk>.
Utilization did pick up and in Q2, as we start to reduce a bunch of which built for.
The pandemic and.
And the utilization will continue to rise and what would be impactful and the current quarter and Q3, because there are less working day. So.
And of that needs to be taken into account and utilization will start to rise it will still be heading towards the typical sort of 70% 71% of talked about.
As a sort of high watermark and where.
Still on the sort of high <unk> at the moment side of us.
And the ability to.
The increase of flex the gross margin for the utilization.
And in terms of sort of of the you can see and terms of all.
Revenue had looking at that again sequentially.
Sequentially so.
It is a balance of 63 and a half hours on this quarter compared to 61.3.
Three of the quarter before and that sort of the function of the two drivers of we've ever seen a law.
Moving to which is utilization and on price.
Thank you so much congrats on the quarter.
Thank you.
Your next question comes from Charlie Brennan from Credit Suisse. Please go ahead.
Yes.
Great. Thanks for taking my questions I've got two if I kind of one one medium term and one shorter term.
Just in terms of the medium term outlook for margins it feels like you've touched on a few points here the debt.
The suggest upward pressure on margins, whether it's increasing pricing will the use of accelerators of our SG&A leverage at all.
Films like future margin should be going higher are you and the position to talk about why you think medium term margin should settle for a dog a.
And then on the assumption there is some upward pressure on margins for Atlas.
It clearly would you rather see that come through and the margin line or would you rather reinvest that for fast the topline gross.
And then just on a more short term question, if I try and back out acquisitions. It looks like your third quarter guidance is assuming underlying revenue growth.
So a 3% tie of and then you delivered in Q2 are there any metrics you can give a surround the order book of booking the.
The comfort that we're going to see that underlying acceleration. Thank you.
Alright, Thanks, Charlie let me just a.
And then mark a pick up of some of the detail.
So yes the.
You picked up on the mindset of we have wishes that actually.
As we drive some improved margins, whether that'd be a gross margin of level or indeed for the reasons that you highlighted.
Or indeed leverage against G&A we.
We do intend to.
Put some of that.
And if not all of it into the sales and marketing arena.
On to sustain and.
Perhaps even accelerate on.
Top line growth rate, obviously, as we get larger.
Our expectation is that we'll need to push more into the sales and marketing line to sustain a.
The growth rate.
And then also just pick up on the bookings question and then I'll let.
And Mark pick up some of the detail on the times.
So without getting into any detail.
Our bookings in Q2 were in good shape a.
We're running ahead of both the Q1 and the previous year.
And in line with the.
The acceleration in.
And client demand.
And I've been touching on and these really.
Hughes Mark do you want to pick up on the two so yeah I think.
And I was just when I look on somehow a small with a flat line all class margin quarter to quarter. It doesn't it doesn't flow that way mainly because of the.
And the maintenance of pay round, which is going through the sort of quarter. So we do get a step down as we get into the second half, but if you look at it a year on year.
It is robust and it's a it's a function basically of.
Utilization and other.
As a side I think as we went into Covid utilization went down on the bench built and we have started to <unk> and a bench and utilization is coming up. So we are we're getting back to more normal levels of utilization, we've got a little bit further to go and to get to that sort of high <unk>.
<unk>, 17, and 71% and et cetera, and all.
So we're seeing a pricing OLED cope with cautious about it and seeing pricing starts to improve.
The gross margins have.
The ability to expand but again, we have the focus on the the cost side, which is basically the <unk>.
People that we employ to deliver the services so as long as we keep that in balance and we've been through a few of you that model to contain cost and I think we have a robust gross margin outlook and then just to repeat what I've always said as well as we grow the top line, we will get a leveraging of our SG&A.
A.
We make out of the acceleration of that because of the.
Change that kind of a it has put us through in terms of for the property footprint.
So the the change in terms of the spend on property might come down a tad, but then again, we may decide that we want to reinvest that and.
Satellite and South Korea investments and net sales and marketing.
So I think of the adjusted PBT level.
And deliberate a good.
A lot of the margin for this quarter at 19, 6% it will come down somewhat and the second half, but I think we are a business that can generate towards that 20%.
Adjusted PBT March and have that capability.
And just one very small follow up you touched on potential property decisions are there any obvious big lease expiries coming up that are going to crystallize decisions for me.
No what we've got actually a minute as it relates to a capex our capex is being put in a low.
And certainly last quarter is relatively low this quarter, but it's starting to pick up again and that part of that is because.
The property element, we are basically everybody's at home. So we haven't expanded the property footprint, we are committed though and a couple of locations.
And to some buildings, which we are going to fulfill and fit outs, but we're thinking about how we fit those buildings out to accommodate a new model that John was referring to.
I think we will get some savings on the property line, but it will probably take a little while and I've lived for a while maybe.
Year to two and a half years for it to work its way through each of something that is node splits and SG&A as a percentage of revenue.
Perfect. Thanks, so much of a lot on on the culture.
Thanks, Joe.
Your next question comes from Maggie Nolan from William Blair. Please go ahead.
And this is Ted on for Maggie Thanks for taking a question.
And we were discussing how you're seeing a higher volume smaller initial projects I was curious how does how does the overall mix of projects stages compared to normalized levels, maybe pre COVID-19 is kind of a benchmark.
Yeah.
And so.
It is a little higher than it has been pre COVID-19.
That to some extent is visible.
In the eyes of new customer numbers that we.
And we published.
And on.
And the.
Ladies and gentlemen, just for the operator.
I apologize for potential of a flight to lay and today's conference. Please standby and will resume as soon as possible. Thank you for your patience.
And so I suppose.
And then separately are you able to hear me.
Yes, I'm here.
Hi, just letting you know that a we lost the main speaker line and they actually disconnected.
Okay.
Okay.
So if you just hang on I am just looking for to reconnect them here.
Okay, and I am still on the question for you.
You absolutely are.
Give me just one moment here please.
Yeah.
Alright, and we have a.
The smoking.
Right. So there's a mark and John back sorry about that we dropped out.
For some reason and.
So I'm not sure of what you heard for me, so I'm going to start from the beginning so.
Yes, the opportunities that we have with the new clients coming through is expanding.
You can see that in the numbers of.
The new clients that were adding to a roster.
And for many of those that is the initial quite small.
Ideation and proof of concept work that we do and the early days of working with them.
The the numbers of those is higher than usual.
And that is what is depressed.
The average client spend and across the wider portfolio outside of the top 10.
But the opportunity for us is that many of those will.
Get traction.
And grow into larger deliverables as we move the systems into.
On a production type service.
So that's the big opportunity for us over the next.
No and 12 months is to see many of those clients convert and.
Two and larger opportunities and begin to scale, obviously alongside our existing large customers continuing to scale.
Okay.
Okay. Thanks.
Paul I wanted to as a thought.
And I wanted to dig in on the hiring trend.
So with the better visibility and the second half of the year and we expect to see any change and the hiring volumes and the second half of the year.
And yes, so we are gearing up to.
Slightly fast the levels of hiring.
And that is some of that was visible in the last quarter.
And we're pushing a little bit harder on the accelerator.
For this quarter.
And expect that to continue into Q4, obviously, we've been expanding our footprint as well.
On the the contract digital services business gave us a lot of the locations across the Adriatic.
And we're tapping into those as well.
In terms of all of our ability to do that expansion.
Yeah.
Great and if I could just spoke of and a quick housekeeping question what was the organic growth rate embedded in the third quarter and for your guidance. Thank you.
For the third quarter.
And sort of middle.
The double digits, so around a sort of 14 and 16% as the case right.
And then we accelerate from the Q4, you can do the math.
Alright, great. Thank you.
Your next question comes.
Your next question comes from James sponsored for Morgan Stanley. Please go ahead.
Great. Thank you very much and I just wanted to follow up on a couple of questions have already been addressed but you know when you look at a your incremental opportunities and growing opportunities and the APAC region combined with.
No the hiring expansion that you just talked about looking to do how should we think about organic versus inorganic.
Needs and perhaps opportunities to supplement both a regional opportunities as well as a.
Head count and additions et cetera.
Great. Thanks James.
And obviously the underlying business models that we have is to drive them.
And that goes as we come out of the slight dip that we had with the pandemic. It's.
It's a draw of 20% plus organic growth and then supplement that with tuck ins through M&A.
And also using a the M&A too.
How we balance our portfolio.
And for from a geographic as well as sector point of view.
So as we get traction and Asia Pacific, We will look to some M&A as an opportunity to establish a more significant presence there and that.
Well, the a year or two down the line and say I don't see anything is rushing through the.
But also we'll be looking at M&A.
In terms of pushing ahead and in the U S as well.
All of which as you know we've been doing really well from an organic growth point of view as mark highlighted.
But actually pushing that a little bit of a half step through M&A is.
A little say something the were considering.
Yeah, and that makes sense and and just to build on that quickly is the are you seeing I mean, what kinds of opportunities are you seeing and and are you looking at things or would you be considering things that largely complement your existing vertical exposures or.
Hum.
And our acquisitions are going to be a key weighted to expand.
Kind of the the industries that you're targeting and can address.
Yeah, so the the priorities for us as well.
And look at and target saw a number one theres a good cultural fit and the way in which they do things is very very aligned with the way the into all of the does things.
DNA if you like.
Meaning that they have the ideation to production of approach a utilize agile right three of the way that the upright and they've got their teeth into next.
And next Gen technology, and the way they do it and.
And so we see a lot of companies I think and the run up to Christmas that the three of four months running up to Christmas we were seeing about five companies a week pushed cost us a.
But very few of them have the right DNI.
So we remain pretty choosy and what we're looking for is organization. So that will help our geographic.
Geographic rebalancing, so as I just touched on a lot.
Looking into the U S is one of the areas and downstream looking at Asia Pac.
And that focus because we've given Europe, a really good push over the last.
A 15.
So 18 months.
The sector side of it is also important as obviously, we have a big weighting and the payments and financial services side.
And so often looking for businesses that are on.
In other sectors what were looking for there is we have a we have a thesis around zone.
Waves of technology change the.
Sectors with the all being driven on it.
For a long period of time.
Bye Bye technology in terms of the way the business model is up right and so on payments being historically, one that we've been and that still has a well to run a.
But also in mobility a insurer.
The insurance the way in which technology, starting to drive change and that and so on and on many other sort of gone through over the years. So we're looking for businesses, the adding those sectors, rather and just any any sector.
And occasionally we spoke of a business that has a technology capability that we want a AD, but I have to say normally a.
And we've been able to develop our own technology capability.
And rather than having to needed to buy that day and so that's the focus around M&A, where it comes on.
That's great color. Thank you very much.
Our next question comes from Bryan Keane from Deutsche Bank. Please go ahead.
Hi, guys I wanted to ask John just on.
Thinking about you know any pent up demand and.
Vaccines rollout and we get into the second half of this calendar year do you do you see any pent up demand with clients.
And the pipeline as as we get a little bit further.
You know I had and and get Covid behind us.
So the.
The short answer to that is yes.
There is there is a day.
Demand, where some clients are.
Still holding back.
And because of sensitivity over the outcome of the pandemic.
Particularly this is true and travel related activities.
Which isn't just the travel industry.
That's the travel insurance.
There's the cross border payment type of activities and the payment and so on so the the restrictions on travel and hospitality actually spill over into the into other sectors and all the.
This way and.
And the travel industry.
And in those areas you see some restraint on budgets being released.
Well spin and other areas, which is what's driving our growth.
Clients.
Accelerate a quite a halt so do you expect the as we get three of the pandemic and sort of thing and things start to open up some of those out of a bunch of areas will open up as well.
Regarding the of an incremental opportunity for us.
Got it that's all I had thanks so much.
Thanks, Brian.
Your next question comes from Jamie Friedman from Susquehanna. Please go ahead.
Hi.
Thanks for taking my question John I was just curious and I'll just ask one question drawback of the queue, but.
B and the time of year that it is calendar year any view at this point on I T budgets for 2021, especially in a couple of your key verticals and those come together, yet and how things work.
Yeah. Thanks, Jamie I mean, we are.
There are a lot of the.
Other players and the OTT services will talking about a client it budgets at this time of a year and how impacts and to be honest, we see less of that.
We don't tend to see.
Clients restraining themselves in terms of spend a funnel into digital transformation.
And based on the annual review cycle and not having as a kick it off of each fund actually yeah, I mean, there's a small amount of it.
But largely as you've seen and.
And the last quarter.
And.
And the acceleration that comes.
Throughout the year.
And in many cases, that's that's not decisions and issues, our clients and decided on it beginning of the financial year and they were budgeting and I'd say.
Clients do make money available.
For the sorts of services and initiatives that were involved and and.
And that continues to tighten through the year of course, there is a little bit of it.
And so on and that is that is visible and coming through.
<unk>.
The slots of making the decisions through January and February.
But it's a much much smaller dynamic for us and and we hear from other players and the Iot service as well.
So I think that's it for questions upfront.
And dropped again, yes, there are no further questions asking for.
So and.
Thank you all for joining us today and as you'll have noted even though value of the pandemic is still reaching of a terrible impact we are confident that our clients a incorporated a those challenges into their investment plans and was therefore seeing good demand and all of the main verticals and so we remain positive about our business position looking forward and I hope.
For to seeing you over the next earnings call.
Thank you.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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Gross.
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Yes.
And.