Endava PLC (DAVA) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Endava plc earnings release conference call. (Operator Instructions)

I would now like to turn the conference over to your speaker today, Laurence Madsen, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's Fourth Quarter of Fiscal Year 2020 and Full Fiscal Year 2020 Earnings 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 Q1 fiscal year 2021, our expected near and medium-term revenue growth, the potential impact of the COVID-19 pandemic and associated global economic uncertainty, our expectations for future investments in our business, our expectations regarding digital transformation of existing businesses and industries, the necessity of digital transformation for many and Endava's ability to benefit there from and anticipated client demand for Endava services 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 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, 2020, which contains and identifies 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.

So thank you, Laurence, and I'd like to thank everyone for joining us today, and I hope you're all staying safe and healthy. And Mark and I are pleased to be here to provide an update on our business and financial performance for the 3 months ended June 30, 2020, and for the full fiscal year 2020.

Now the world has changed drastically over the last 6 months, an evolution that may previously have taken years or even decades to occur has been accelerated into a matter of months. The benefit of our business model that has the ability to operate predominantly in a digital environment has been clearly demonstrated. And COVID-19 has given us a glimpse of the large amount of digital transformation work still to be done in our world.

In addition, as I mentioned last time, the productivity improvements when we switched to working from home has led to widespread acceptance of this more flexible working model. And we expect this to serve us well in the future with a more attractive employee proposition possible, assisting in the attraction and recruitment of people.

The Endava distributed agile delivery model was designed to be hugely flexible, and this has served us well as the structural shocks have impacted, enabling a fast reaction and protecting our business performance and our people as the changes hit.

Moving to the financials and firstly looking at quarter 4 fiscal year 2020. Endava had a solid quarter, with revenue of GBP 90.5 million, a growth of 18.1% year-on-year from GBP 76.6 million in the same period in the prior year. If we pro forma adjust for the revenue from the Worldpay Captive divested in August 2019, our revenue growth on a constant currency basis was 20.4% year-on-year.

Our strong revenue growth was driven by the expansion of work for our existing customers and the acquisition of new ones during the quarter. During the quarter, we continued to broaden our client base and ended the quarter with 416 active clients, up from 275 at the end of the same period in the prior year, a 51.3% year-on-year increase.

We saw a trough in client projects in April, May, and business has recovered nicely since. Many customers reevaluated their priorities with an unprecedented level of stopping and starting projects underlying our quarter 4 performance. In the quarter, revenue growth coming from our largest clients increased sequentially, as large corporations continue to invest in digital transformation during the pandemic.

Revenue from clients who paid us above GBP 5 million increased 7.6% over the prior quarter, while revenue from our smaller clients decreased slightly during the same period. This was part of a very visible trend where our larger clients with strong balance sheets doubled down on digital investments through this period, while smaller customers trimmed back while they assessed the impact of the pandemic.

We wouldn't normally disclose our book-to-bill ratio. But in the interest of providing additional color during these uncertain times, I will disclose that for Q4, book-to-bill was well over 2 and our highest quarterly ratio in 4 years. Our ability to engage with customers and close business was not impeded by the pandemic despite reduced travel and attendance at industry events. Much of this order book will take a few months to come through into revenue as project ramp-ups take time and as early stages involve smaller teams undertaking ideation, solution design and so on.

Moving on to our results for the full fiscal year 2020. Our revenue totaled GBP 351 million, up 21.9% year-over-year and 24.2% adjusting for the sale of the Worldpay Captive. While the pandemic halted our record of more than 30% reported revenue growth every year since 2015 and makes near-term prospects difficult to predict, we remain confident in our ability to continue to grow our top line at over 20% on an annualized basis in the near to medium term.

In the last fiscal year, we grew in all of our regions and verticals. We continue to invest in our North American business, where we posted a solid revenue increase of 26.3% year-on-year and 28.9% year-on-year in Q4.

For the year, Europe grew 8.5% and the U.K. 20.1%. All of our verticals also grew nicely, with Payments and Financial Services up 21.7% year-on-year, TMT up 14.4% and Other up 32.8%.

Our strong revenue growth came with an improving adjusted profit before tax margin. We know that these continue to be uncertain times with the impact of this pandemic still being felt. But at the same time, for Endava, these pressures have opened up opportunities and acceptance of new business and operating models, for which we are highly equipped. We expect many traditional industries and the established businesses that exist therein will dramatically change and expand their business models over the course of the next 2 years. And these changes won't be subtle, understanding the critical necessity of digital interactions, organizations that have relied solely on in-person, high-touch customer interactions or face-to-face business processes will need to develop new digital revenue streams to insulate their business from market and operational risk.

Overall, we expect businesses are going to have to look hard at the strength and weaknesses of their customer relationships and the products and platforms that support those bonds. By identifying which interactions are already digital, which can handle complete digitization and which need to be retired, they can evolve beyond the analog business models that won't have the flexibility to roll with the punches of an uncertain and we believe undoubtedly digital future.

I'd now like to provide an update on what has been happening on the private equity side of our business. The initial reaction we saw from private equity firms during the COVID-19 crisis was generally to focus their efforts on protecting their current portfolios. We reacted by offering a new portfolio advisory service, which was warmly received and resulted in strengthening our position and credibility within the market.

Following the initial slowdown of deal flow, certain markets, notably the German-speaking and Nordic regions, began to open up, and we noticed a significant increase in complex transactions, for example, carve-outs and distressed assets and so on requiring in-depth and real-world technology expertise.

We saw investors begin to shift their focus from more traditional business, such as manufacturing and retail to software and technology-driven targets. We also noticed that some PE firms had a greater appetite for risk, and we're taking advantage of the volatile market. These factors contributed to our team successfully securing 14 new clients in the last 3 months, with the majority of this work being undertaken remotely. A recent example includes an outside in due diligence for a [Swiss general SPE investor] focusing on the mid-market. The client was extremely pleased with the quality of our work, which also allowed them to perform their due diligence virtually and communicate with the management of the targets seamlessly.

With respect to our relationship with Bain & Company, we see evolving customer expectations, alongside cost reduction and operational improvement imperatives, pushing technology to the top of retail banks and insurer strategic agendas. With our clients' competitiveness in mind, Bain and Endava have partnered to develop an end-to-end digital solution, joining true strategic and engineering heritage to enable retail banks and insurers to best serve their customers in the digital world. This cloud-ready solution is built upon a compostable architecture of micro services designed to provide maximum flexibility and long-term sustainability and powered by over 80 proprietary accelerators that help increase velocity, improve quality and reduce execution risk.

Moving on to M&A. We are delivering on our strategy of pursuing tuck-in acquisitions. Last month, we announced the acquisition of Comtrade Digital Services, CDS, a provider of strategic software engineering services and solutions with delivery centers in Slovenia, Serbia and Bosnia. I first met the team of CDS over 1.5 years ago, and we had an immediate connection as their whole mindset, the way they develop and look out for their people and the way they go to market resonated with me and our mindset at Endava. This acquisition fits with our strategy of further expanding our European business and complements our acquisition of Exozet in December 2019 by broadening our delivery centers in order to service clients in the German-speaking region with CDS' 460 technical staff.

Additionally, CDS' existing client bases strengths our existing verticals in Payments and Financial Services and TMT and bring clients in other verticals, including logistics, energy, travel and health care. Culturally, we believe CDS is a great fit for Endava, and we are excited about this acquisition.

We also completed a third tuck-in acquisition this past financial year, Intuitus, which expanded our footprint in private equity.

Our client growth continues to translate into strong employee growth. We ended the quarter with 6,624 employees, a 15.1% increase from the 5,754 in the same period last year. Our revenue per operational head continues to improve ending the year at GBP 62,300, up from GBP 58,700 last year, a 6.1% year-over-year increase, driven mainly by an increase in pricing. Our attrition rate has decreased every quarter this past financial year. As we mentioned last quarter, we did not stop hiring when the pandemic hit. While this decision marginally impacted our utilization rate during the quarter, we believe that we are in a good position at the start of our new fiscal year to handle our strong pipeline. We added 137 operational staff in the quarter, up 2.3% over the prior quarter and up 14.9% year-on-year.

As shown by these results, client demand for our services is stronger than ever as digital transformation has become digital necessity for many. Mark and I and the entire team are extremely pleased with our excellent performance for the fiscal year just ended, despite the challenging environment. And we are excited about the opportunities ahead of us and remain confident in our ability to deliver value for all of our stakeholders.

I'll now pass the call on to Mark, who will walk you through our financial results for the quarter and for the year and to provide guidance for the coming quarter.

Thanks, John. Here are some highlights for the most recent quarter. Endava's revenue totaled GBP 90.5 million for the 3 months ended June 30, 2020, compared to GBP 76.6 million in the same period last year, an 18.1% increase over the same period in the prior year.

In constant currency, our revenue growth rate was 16.5%. As John mentioned, if we pro forma adjust for the revenue from the Worldpay Captive last year, our revenue growth on a constant currency basis was 20.4% year-on-year.

Profit before tax for Q4 fiscal year 2020 was GBP 6.7 million compared to profit before tax of GBP 10.4 million in the same period in the prior year. Endava incurred a true-up charge in Q4 fiscal year 2020 of GBP 3.1 million relating to the previously disclosed funding on May 5, 2020, of the second and final tranche of the nonrecurring discretionary employee bonus by Endava Limited Guernsey Benefit Trust, or EBT, the benefits of which are Endava's employees.

Our adjusted profit before tax for the 3 months ended June 30, 2020, was GBP 15.2 million compared to GBP 13.5 million for the same period last year, a 12.6% year-over-year increase. Our adjusted profit before tax margin was 16.8% for the 3 months ended June 30, 2020, compared to 17.6% for the same period last 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, discretionary EBT bonus, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, initial public offering expenses incurred, Sarbanes-Oxley compliance readiness expenses incurred, net gain on disposal of subsidiary, fair value movement on contingent consideration, secondary offering expenses incurred and stamp duty on transfer of shares. Share-based compensation expense, amortization of acquired intangible assets, unrealized foreign currency gains and losses with fair value movement of contingent consideration are noncash expenses.

Adjusted PBT margin is adjusted PBT as a percentage of total revenue.

Our adjusted diluted EPS was 23p for the 3 months ended June 30, 2020, calculated on 56.4 million diluted shares as compared to 20p for the same period last year, calculated on 55.2 million diluted shares, up 15% year-over-year.

Revenue from our 10 largest clients accounted for 40% of revenue for the 3 months ended June 30, 2020, unchanged from the same period last year. Additionally, the average spend per client from our 10 largest clients increased from GBP 3.1 million to GBP 3.6 million for the 3 months ended June 30, 2020.

In the 3 months ended June 30, 2020, North America accounted for 31% of revenue compared to 28% in the same period last year, Europe accounted for 24% of revenue compared to 27% in the same period last year, and the U.K. accounted for 42% of revenue compared to 45% in the same period last year, while the rest of world accounted for 3% of revenue. Note, we did not report rest of world in prior years.

Revenue from North America grew 28.9% for the 3 months ended June 30, 2020, over the same quarter of 2019. Comparing the same periods, revenue from Europe grew 7.8%, and the U.K. grew 9.1%. But excluding the impact of the Worldpay Captive from the prior year period, comparative growth would have been 8.4% higher or 17.5%.

We grew in all 3 of our industry verticals during the quarter. Revenue from Payments and Financial Services grew 17% for the 3 months ended June 30, 2020. Excluding the impact of the Worldpay Captive for the prior year period, comparative growth would have been 7.8% higher or 24.8%. Revenue from Payments and Financial Services accounted for 52% of revenue, unchanged from the same period last year.

Revenue from TMT grew 18.8% for the 3 months ended June 30, 2020, over the same quarter of 2019 and accounted for 28% of revenue, unchanged from the same period last year. Revenue from Other grew 19.8% for the 3 months ended June 30, 2020, over the same quarter of 2019 and now accounts for 20% of revenue, unchanged in the same period last year. This growth was mainly driven by clients in the logistics and retail sectors.

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 noncurrent tangible and intangible assets. Our adjusted free cash flow was GBP 0.4 million for the 3 months ended June 30, 2020, compared to GBP 8.9 million during the same period last year. Adjusted free cash flow was impacted by the payment of the final tranche of the nonrecurring discretionary employee bonus mentioned earlier of GBP 14.9 million.

Our cash and cash equivalents at the end of the period remained strong at GBP 101.3 million compared to GBP 70.2 million at the end of June 30, 2019. CapEx for the 3 months ended June 30, 2020, as a percentage of revenue, was 1.9% compared to 2.9% in the same period last year.

I'd now like to move on to some highlights for our fiscal year 2020. Endava's revenue totaled GBP 351 million for the fiscal year 2020 compared to GBP 287.9 million in the previous fiscal year, a 21.9% increase over the same period in the prior year. In constant currency, our revenue growth rate was 21%, and adjusting for the sale of the Worldpay Captive, 24.2%.

Profit before tax for the fiscal year 2020 was GBP 25.3 million compared to profit before tax of GBP 30.1 million in the same period in the prior year. Our adjusted profit before tax for the fiscal year 2020 totaled GBP 68.6 million compared to GBP 52 million for the same period last year, a 32% year-over-year increase. Our adjusted profit before tax margin was 19.5% for fiscal year 2020 compared to 18% for the same period last year. The year-over-year improvement in our adjusted profit before tax margin is mainly due to a continued positive pricing environment, FX tailwinds and control of SG&A despite having taken a sizable bad debt charge in Q3.

Our adjusted diluted EPS was GBP 1 for the fiscal year ended June 30, 2020, calculated on 56.1 million diluted shares as compared to 76p for the previous fiscal year calculated on 55 million diluted shares, up 31.6% year-over-year.

Revenue from our 10 largest clients accounted for 38% of revenue for the fiscal year ended June 30, 2020, unchanged on the previous fiscal year. Additionally, the average spend per client from our 10 largest clients increased from GBP 10.9 million to GBP 13.4 million, a 23.1% year-over-year increase.

We grew in all geographies on a year-over-year basis, with North America up 26.3% year-over-year, Europe up 8.5%, and the U.K. up 20.1%. However, excluding the impact of the Worldpay Captive from the prior year period, comparative growth in the U.K. would have been 7.3% higher or 27.4%. On a year-over-year basis, revenue from Payments and Financial Services increased 21.7%. However, excluding the impact of Worldpay Captive from the prior year period, comparative growth in this segment would have been 6.3% higher or 28%.

TMT increased 14.4%, and Other increased 32.8%. The year-over-year growth in Other came mainly from logistics, retail and services.

Our adjusted free cash flow was GBP 31.4 million for the fiscal year ended June 30, 2020, compared to GBP 29.8 million during the same period last year. Our adjusted free cash flow was impacted by the payment of the nonrecurring discretionary employee bonus of GBP 25.9 million.

CapEx for the fiscal year ended June 30, 2020, as a percentage of revenue, was 2.8% compared to 2.5% during the same period last year. At this time, it is difficult to predict the duration and full scope of the direct and indirect potential impacts of the ongoing COVID-19 pandemic. With these uncertainties in mind, Endava is providing guidance for Q1 fiscal '21, but not full year fiscal year '21 at this time.

Our guidance for Q1 fiscal year '21 is as follows. Endava expects revenues will be in the range of GBP 93 million to GBP 94 million, representing constant currency revenue growth of between 18.5% and 20%. Endava expects adjusted diluted EPS to be in the range of 21p to 22p per share. Our guidance regarding constant currency revenue growth is pro forma for the sale of Endava Technology SRL, also referred to as the Worldpay Captive to Worldpay. The transaction closed on August 31, 2019.

This quarter, we are providing guidance for Q1 fiscal '21 using the exchange rates at the end of August, when the exchange rate was GBP 1 to USD 1.33 and EUR 1.12.

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

(Operator Instructions) And your first question comes from the line of Bryan Bergin with Cowen.

Wanted to start with the outlook here. So demand commentary sounds really solid. But as it relates withholding that full year outlook, just curious, is this merely caution amid the ongoing uncertainty? Or anything visible that may suggest some increased near-term challenges? I heard the commentary about trough activity in the April-May period. So just any reason to believe that the growth trajectory doesn't improve from here?

Bryan, thanks for the question. No, it is just caution the question of whether second waves are going to build up in the Northern Hemisphere as we get into the winter period and whether that might cause clients to reevaluate again some of their spending. I mean we do believe that actually having been through a first wave, most clients have got a lot clearer view of what they want to do through this period. And it's less likely to be affected, we believe, by a second wave, but at the same time, these are very uncertain times. And so given we've got a full 12 months for our financial year as opposed to just 2 quarters, we held off giving guidance.

Okay. Makes sense. And then just a follow-up here, really just around margin potential. So with the significant ramp in transformation activity that you're anticipating, do you have to do anything differently in your investment to capture that work? And then I'm curious on the work-from-home implications. Can you just go into a bit more detail on how you're thinking about the financial implications for your model?

Yes. So on the work from home, we moved up seamlessly, as you may recall, from Q3 to work from home and actually, productivity improved. We're being cautious about the return to the office environment, given the uncertainty in the COVID set up. But we think it presents opportunity for us to look at the whole way that people work. And I think we would have a balance between having the flexibility of work from home and also going through some of the scrum initiations at the start of a project, we should have better done face-to-face in an office environment. So we're looking at the whole property scenario should have implications for the property as a percentage of SG&A going forward.

In terms of the outlook, that's fully reflected basically in John's opening comments. We're not really targeting further sort of investments on anything to change the business model. We're really just focusing on the work-from-home dimension at the moment.

I mean the one thing that I would call out is that when we're kicking off new projects with clients, the early stages of that are not high in terms of billing because we're doing ideation work, we've got smaller teams working on that doing analysis and so on before larger teams ramp up for execution and delivery of product to market. So a lot of the new stuff that we've talked about that's coming through, it does take a little while to build up.

We have done a little bit of investment over the summer in what we call accelerators, where we find that there are frequent requests for certain capabilities and functionalities across our client base. And so given that the bench rose slightly, as you saw in our figures during that period, we invested that in creating some accelerators. And actually, that is helping us to push some of these deals along a little bit faster.

And your next question comes from the line of James Faucette with Morgan Stanley.

Great. Wanted to ask, if you could give a little more color on kind of the pacing of work and engagement? You mentioned that there were some starting and stopping. I wonder if you can summarize kind of what is starting or maybe what's stopping? Is that just types of projects or types of customers?

And then as far as the high level of book-to-bill, where are you seeing spend prioritized in terms of types of projects?

Okay. So as we went through our Q4 there was a bit of a pullback in April and May, which we talked about a little at the last earnings call. So -- and the characteristics were very different across different industries. So it's quite difficult to draw high-level views. But let me give you some examples at an industry level. So if you look at the Payment space, for instance, there was a bit of pullback on the -- just the card-present-type acquiring investments that our clients were making. And that was basically because their volumes were dropping of people going into shops and so on. In contrast to that, the e-commerce world started stepping up in activity, and we saw clients pushing a lot more investment into the e-commerce world, things like self-service onboarding. The onboarding process for a new merchant is traditionally quite manual, can take weeks for a new merchant to be able to start accepting card payments. We help our clients implement systems that enable a self-onboarding experience for a merchant in a matter of minutes. Now obviously, that was absolutely crucial as we started to go through the early stages of the COVID impact.

Another area which was picking up was a lot more investment around open banking. Whilst that's been around a while, open banking facilitated a lot of types of payments, which became attractive to customers in a COVID pandemic type world, moving away from needing to use debit or credit cards and so on in a retail environment.

In some other areas, we worked with quite a few automotive companies who needed to move from people coming into their car showrooms to providing a more virtual environment, where they could view vehicles, compare vehicles in a much more virtual world as opposed to the sort of traditional comparison type capabilities that websites had. And we also use that for virtual shows because some of the motor shows were turned into virtual shows. Also things like dealers being able to pull down video content from the car company that they're working with in a dedicated dealer portal and make that a much more manageable environment for them.

Another one is the logistics. We saw quite a few of our logistics clients who were more digitally equipped, if you like. They saw a significant step-up in customers asking to use their services, which meant their systems needed to be integrated into the systems of these new clients. And so there was quite a bit of implementation work and tuning work that was required to enable that happen.

In health tech, we saw some significant investments in tele health, enabling people to do consultations online. We had an interesting project there where we recognize that there was a major gap in most tele health solutions in the physical therapy space. So using digital measurement, analysis and data capture tools, we were able to use essentially leading-edge immersive media technologies and integrate that into the tele health solution. And it's now the #1 feature that's requested by the users of that application. Prior to the release of that, the tele health solution of our client was receiving ratings of 2.5 to 3 out of 5, but now in the 2 months after going live, it's jumped to 4 out of 5. So those are some examples of the sorts of switches where clients have moved away from the investment path they were on and accelerated investments in the more digital space.

Got it. And that's really -- sorry.

And then -- yes, there was a book-to-bill dimension to your question as well. So the book-to-bill, some of that is long-term commitments that clients were making, but a multiple year in nature, which, of course, is very, very good for us in these more uncertain times, and we're glad to have booked those. Some of those were new projects that we're kicking off. And as I cautioned in my opening statement, not all of that will hit visibly in this quarter, one that we're in now because we're at that early stage of envisioning and shaping those projects with clients, and that tends to be smaller teams who do that.

I appreciate that, John. And then I guess my follow-up question, just what are you seeing in terms of vendor consolidation at your clients? And do you think you're being able to win share right now? And if so from whom? Or what is -- I guess, just looking for a little color, what's happening with vendor consolidation in your client base?

Yes. So -- I mean, we -- of the view that vendor consolidation is always happening across our client base, it's not that visible to us. We don't tend to be in the place where they're evaluating the sort of things that we do for vendor consolidation. If I could characterize it, it tends to be the legacy type services, where they're looking to squeeze their costs down, and they're doing that through vendor consolidation. Whereas the types of services that we're providing, they're looking for organizations like Endava who can make a real difference. And the conversations that we're having with them are much more strategic and much more around how technology can impact their business models and use cases. So vendor consolidation, I think we benefit from it, shall we say, because it squeezes up cost a bit and savings that can come in our direction. But we very rarely find ourselves going through a vendor consolidation process. It does happen, but probably in low single digits as a proportion of our clients each year.

And your next question comes from the line of Mayank Tandon with Needham.

Congrats, John and Mark, on a strong quarter. I had a couple of questions. First, on the growth trajectory, getting back to that 20% to 30% type growth, I think, John, you mentioned, could you break that down between organic versus inorganic? And on that note, what was the inorganic contribution in the 1Q guide as well?

So -- yes. So I suppose what you're pulling out is what's the underlying growth that's going on. We saw 3 major differences between our Q1 and Q4 numbers. Obviously, there's the inorganic growth in our guidance that's boosting our revenue growth, but we also have significant FX headwinds in the number. And these 2 almost offset each other. And then the other factor that we have is we've got headwinds of about 2% from what I'll call a holiday effect, where considerably more holiday has been taken in Q1 compared to Q4. So what happened is lockdowns during our Q4 meant people didn't take much holiday. As those lockdowns have weakened in Europe, the teams have taken more holiday. So that's had an effect of about 2% headwind. So if you take the underlying growth, adjusting for all those items, you can see that we're actually stronger than the 4% growth guided.

The other interesting factor is that the holiday headwind is all in Europe and North America. If you look at LATAM, with its lockdowns and winter months still ongoing, we expect to have a similar holiday level in LATAM that we had in Q4. So in that region, the headwind was not experienced, but it will occur in the future. But obviously, it's only 15% of our revenue. So it's not a material impact for Endava. So I hope that gives the color you're looking for.

Sure. That's helpful. And then I would just like to also ask, as you look to get back to that trend line growth of -- again, I think you said 20% to 30% longer term -- well, maybe sooner rather than later, how does that break down between the impact of utilization versus ramping up hiring versus any type of pricing increments that you might expect to see as well maybe get back to that sort of pre-COVID pricing leverage that you had in the past?

So I think pricing-wise, we've seen that hold up relatively well, to be honest, going through Q3, Q4, and we're seeing at the moment as well. So in terms of upswing in revenue, it's not really going to come from an improving sort of price position. It's volume of demand coming through. There's a little bit of constraint that you could see in terms of the growth for Q1 because of the availability of people through the holiday period, but that is a little bit short term in nature. And actually, as we actually push on the recruitment engine, which we held a little bit back given the uncertainty, then that isn't also going to be a restraining factor on the return to the 20% growth. So it's basically how quick are those projects going to crank up.

I mean as we said, sort of about the question about why we're not giving full year guidance. Whilst things are more stable amongst our clients, and we're optimistic about it cautiously, a second wave would not give us -- could blow us, of course. So in terms of trying to judge when that 20% growth comes back, we don't really want to be drawn on it at this stage.

And your next question comes from the line of Moshe Katri with Wedbush.

And congrats on a very strong quarter. A couple of follow-ons, going back to the commentary on hiring and recruiting. Given the book-to-bill dynamics, is there a specific target in mind that you have in terms of headcount additions for fiscal year '21? That's number one. And then I have a follow-up.

Yes. So sure, the -- on the recruitment side, we're aiming to pull teams as it aligns with our revenue growth. We tend to -- because we see a bit of pricing improvement year-to-year, and as Mark was just touching on, that continues to flow through. So we tend to recruit 4% to 5% less people both than you see on the top line growth. So if we grow the top line in the low 20s, we'd grow the people headcount in 19s. And we're seeing good opportunities to recruit good people at the moment. I think one of the benefits of being an organization that didn't lay people off during this period is that it has reinforced our reputation in the markets that we operate in as a good employer, as a safe place to be employed. And even although that the uncertainty persists, people are prepared to switch jobs to join Endava, although they might be less keen to join other organizations. So we don't see that as being a restriction on our growth as we move through this financial year.

Okay. I appreciate that. And then going back to the book-to-bill and some of the commentary regarding the nature of the work, I appreciate the color around CNP versus card present kind of work, e-comm. And then going back to your commentary on the platform that you've developed with Bain, is that an open banking platform targeting some of the financial institutions?

It's basically based on putting together some accelerators that exist across the banking and insurance world. So it's a mixture of some of the accelerators that we've built ourselves, but also product that's available in the market that has the architectural characteristics that we are confident will give clients flexibility for a digital world. Not all platforms are highly suited to an agile, flexible, digital proposition in the market. So we basically pulled out those which fit well, which have the APIs, which have a microservices type design that enable flexibility for clients. And we're walking a fair number of organizations through how that would work for them as they're considering how they want to improve their offerings or how they want to move into a more digital proposition in the market. And of course, with Bain, that's on a more global basis than Endava's traditional footprint.

And your next question comes from the line of Charlie Brennan with Crédit Suisse.

Charlie, you might be on mute.

Hello. Can you hear me now?

We can.

We can. Yes.

Hello? Perfect. I've got 2 questions, if I can. The first is just to come back to your observation on holiday dynamics. You beat your guidance in the fourth quarter by around 4 percentage points. Is it reasonable to attribute half of that to the unexpected holiday dynamic of people not taking holidays in Q4? Or was that reflected in your 4Q expectations?

And then secondly, just on acquisitions. I missed what the inorganic contribution was for the fourth quarter. Can you just give us the revenue contribution? And then just related to acquisitions, we're clearly in uncertain times. I'm just wondering what gave you the confidence to press ahead with the Comtrade deal, given it's one of the largest acquisitions you would have done, the backdrop seems to be magnifying M&A risk at the moment?

Yes. Okay. So let me just pick up at a high level the holiday dynamics. We actually saw that one coming. So we had anticipated we'd get a bit of an uplift from people not taking holiday during Q4. And so that was built into our guidance. What happened was, if you look under the covers of Q4, there was a sharp ramp down at the beginning of Q4 as clients suspended projects and reduced team sizes and so on as they would do in their reprioritization. And then a stronger pickup in the last 6 weeks or so of the quarter as they commence new things or expanded existing teams once they got clarity around where they wanted to focus their energies. So obviously, that pickup at the end of Q4 wasn't visible to us at the time we were giving the guidance. And indeed, there was even potential that things could carry on dipping for a while. So that's why the beat came through as strongly as it did.

Yes. And on the margin, Charlie, I mean, it's purely really due to that utilization movement. So we're about at the time of issuing the guide we thought we have quite a significant bench that start to get absorbed. So utilization was better than we anticipated by about 2 percentage points, which is roughly where we've -- where we've ended up sort of sequentially. If you look at our gross margin from Q3 to Q4, this is on the adjusted basis, from 43.4% to 41.2%. So the gross margin was stronger than anticipated. Everything else was broadly in line, so demand is stronger, utilization better.

Yes. And just coming to your question on the acquisition of CDS. I mean these were a team that I've been talking to for 18 months. I first met them in January 2019. And they weren't -- they weren't on the market, so I had to persuade them that it was a good thing to become part of Endava. And we had started due diligence with prior to the pandemic hitting. I did pause it for a couple of months, probably just out of recognition of the uncertainty at the time. But as we got into June, and we could see our business picking up and I was confident because I knew this team well and had been working with them over a number of meetings, I was keen to go ahead and execute on something, which I think over the medium to long term will make a big positive impact on Endava. So that's why we went through with that.

Perfect. And Mark, are you able to help us with the revenue contribution from M&A in Q4?

Yes. I mean for the full year -- the full year '20, we did constant currency pro forma 24%. And so the organic element to that was 20%. So Q4, you're probably looking at a contribution from M&A of around 5% to 6%, which gives you an indication of the growth that we've put in organically, which was where basically we've got the lift on the revenue against the guide.

And your next question comes from the line of Jamie Friedman with Susquehanna.

In your prepared remarks, John, you had mentioned that the business, in general, had a lot of starts and stops, that was the language you used, in the quarter. I was just wondering from operating perspective, what kind of challenges that creates in terms of utilization and bench commitment? That's the first question.

And then -- and then, Mark, in terms of the margins going forward, are there any seasonality call-outs or the seasons all off because some of the unique macro factors?

Okay. So Jamie, from an operating perspective, yes, when you get projects stopping and starting or you're needing to redeploy, it's obviously not a completely seamless activity where people step off one product and move on to another. So that that lag effect where people come off and then move on to another is the main reason, if you like, why you saw a step-down in revenues from Q3 to Q4.

And then sort of looking forward, I think we've always had some slight seasonality around our margins because our major pay round goes through 1st of January. So we tend to step down slightly on our gross margin in Q3, Q4. So that dynamic will remain the same. But in terms of the near term, there's -- I think there'll be a slight coming off in the gross margin, where we've been in Q4 due to this impact that John was pointing out around people delaying taking a holiday. So the margins, I think, will continue during Q1, Q2 at that level. And then we'll just see the usual seasonality where the annual pay round goes through and then we start to recover that through our rate negotiations with clients thereafter.

And then if I could just sneak one more in. Thank you for the incremental disclosure on the bookings book-to-bill. How much of the business typically is like sell and bill, meaning it's booked and billed intra-quarter? I think you said, John, in your prepared remarks that I don't want to put words in your mouth, but you did give a perspective as to -- it would take, I don't know, weeks or months before the bookings started billing? I mean, what's the -- what kind of duration do you get at that greater than 2 book-to-bill?

So the book-to-bill, I mean, we don't publish it because it's much bumpier. The reason for pulling it out was there's been a lot of questions about has COVID and the pandemic environment impeded our ability to sell and close business to fill the pipeline and see things come through. So the real reason for highlighting that was to make it absolutely clear that during this period we have been able to open up opportunities with clients and close deals. Under the number, there is a mixture of longer-term deals and short term in nature. The short term in nature does get built very quickly. The long term, if it's a 3-year deal, it can be fairly flat over 3 years, and it can flatten that booking over 3 years. There was -- it wasn't an unusual mixture. If you like, it was a fairly normal mixture. There was a number of new sizable opportunities that we picked up, where we -- the entire process from the first call with a client through to starting a project occurred in a virtual environment, and there's not been any face-to-face meetings with the client. So I think in the -- in terms of the guide that we've put in, you can see some of that work coming through. But our belief is that the major benefit of those bookings are the projects that we've kicked off won't be seen in Q1 that we see in downstream.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

So thank you all for joining us. And these are interesting and uncertain times. But I hope we've been able to give you some real insights into how Endava is responding and how we're performing. And I look forward to catching up with you all in around November when we do our Q1 results.

This concludes today's conference call. You may now disconnect.