Good day and thank you for standing by and welcome to the Endava plc Earnings Release Third Quarter Fiscal Year 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.

[Operator Instructions]. I would now like to hand the conference over to your speaker for today, Ms. Laurence Madsen. Please go ahead. .

Thank you, operator. Good afternoon, everyone, and welcome to Endava's third quarter of fiscal year 2021 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 Q4 fiscal year 2021 and for the full fiscal year 2021, our expected near and medium-term revenue growth, the potential impacts of the COVID-19 pandemic and associated global economic uncertainty, including with respect to expectations regarding future work arrangements for our people; our expectations regarding digital transformation of existing businesses and industry; the necessity of digital transformation for many companies and Endava's ability to benefit therefrom; anticipated client demand for Endava's services; our expected ability to leverage our intellectual property to provide more cost effective deliverables to our clients with greater speed; our expectations regarding expansion opportunities; and our ability to execute on our sustainability objectives; as well as other forward-looking statements.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements and reported results should not be considered 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, 2020, which contains a discussion of important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Also, during the call, we'll present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which you can find on our Investor Relations website. A link to the replay of this call will also be available there. With that, I'll turn the call over to John. .

Thanks, Laurence. And I'd like to thank you all for joining us today. I do hope that you're all staying safe and healthy in these unusual times. We're pleased to be here to provide an update on our business and financial performance for the three months ended March 31, 2021.

Now, while the COVID-19 vaccination campaign is underway around the globe, life is not yet back to normal even as lockdown restrictions have been gradually lifted in many countries. We continue to prioritize the safety and wellbeing of our people as this pandemic affects the countries and the communities in which they live and work.

But even in this context, we've seen a strong demand for our services. We've seen that digital transformation is at the heart of significant changes in how the world does business. And we continue to grow in all regions and all verticals.

Endava had a solid Q3 for our fiscal year 2021, with revenue of GBP 112.3 million, representing growth of 23.8% year-on-year in constant currency from GBP 92.2 million in the same period in the prior year.

We ended the quarter with an adjusted profit for the period of GBP 19.3 million, representing a 51% year-on-year increase from GBP 12.8 million in the same period in the prior year. Our strong revenue growth was once again driven by both the expansion of work for our existing clients and the acquisition of new ones during the quarter.

We continued to broaden our client base and ended the quarter with 567 active clients, up from 395 at the end of the same period in the prior year, a 43.5% year-on-year increase.

Average revenue from our top 10 clients grew by 21% year-on-year as we continue to deepen our relationships with these large accounts and revenue from clients who paid us above GBP 5 million increased 41% year-on-year.

Additionally, we continue to increase the number of clients who are paying us in excess of GBP 1 million per year, with 81 clients in this category, up from 67 in the same period last year, representing a 21% year-on-year increase.

We continue to see an accelerating trend of new clients starting work with us on a small ideation or proof of concept engagement and then scaling as they realize the business benefits. This effect is driving the growth in these large client cohorts. On the technology side, we see a lot of demand across the full range of our services.

But a couple of technical trends stand out this quarter. First, there is the continued need for digital platforms.

Digital platforms are cloud native software applications that can be accessed and extended by well-defined API's allowing them to be quickly and reliably extended to perform a range of business functions in a particular domain, both by the owning organization and external partners.

These platforms are in demand in both emerging industries like fintech and in established domains like mobility, and we believe that we're well positioned to meet this demand across industries.

The second trend is demand for application rationalization and modernization, particularly in large financial services firms, in payments and in other transaction-based areas of these organizations. We provide both the strategic view of what and how to modernize as well as the engineering skills to perform the modernization.

Now, last quarter, I explained some of the work we've been doing over the last few years to create accelerators that make us more efficient in client delivery projects. One of these that I'd like to highlight this quarter is our software analytics tool called Chronos.

It is the technical accelerator that underpins our software analytics service and provides an extremely sophisticated analysis of existing software systems using a range of inputs, including metadata from source code control systems, such as Git, change trackers from issue management systems like JIRA, and other simpler metrics generation tools.

It uses a library of patterns and anti-patterns to spot characteristics and problems in the software, often producing insights that surprise people who worked on that software for years, such as patterns of developer behavior, hidden dependencies, and knowledge gaps in the current team.

We have analyzed dozens of complex systems over the last few years. And Chronos has been a key enabler for us to do this quickly and reliably.

The understanding of our clients' existing systems that we're able to generate with Chronos helps us to deliver application rationalization and modernization programs faster and more cost effectively than we were able to do without this tool. Now, we recently launched our We Care program to bring to life our sustainability Mission.

Making a positive impact on the world around us has always been at the heart of our business and it means a lot to me personally. Endava's core purpose and values aim to capture this mission. We identified five key areas that we care deeply about. First, our people as we enable them to be the best that they can be.

Second, social impact and our contributions to the communities in which we operate. Third, operating responsibly and demonstrating our ethical approach to business. Fourth, innovation and data integrity as we continue to provide secure and smart solutions. And finally, the environmental impact as we play our part in protecting our planet.

Now, we've captured and documented what we do across all these areas to make it much easier for clients and other stakeholders to understand our passion in this area and what we're doing about it. As part of our commitment to our people, we continue to champion and empower women in technology.

At the end of March, women accounted for 35% of our workforce. We recently held our Endava Women's Week with a program of exciting and impactful events, including masterclasses with inspirational industry leaders, a live Q&A panel that brought together leaders from across our global business and access to two major international Women's Day events.

Across our locations, Endavans participated in events, encouraging women to imagine their future in IT. While internally, we also launched mentoring initiatives to further support our women to rise in their careers. Many of our client engagements are also very aligned with our We Care mission.

I'm going to run through some specific examples on how we help our clients to make a positive impact. OX Global, the creator of the OX truck, has the mission to deliver affordable low carbon transport in emerging markets, with the goal of creating economic growth, positive social impact, and reduced emissions.

To achieve the required lower price, the physical operating cost of an OX truck are shared across multiple users on a mobility as a service basis. We partnered with OX to build a simple app that will allow the customer to request an OX service, such as transport or distribution of goods to and from a location.

We believe the user-centric technology strategy and operating model we helped design is best suited to serve OX's unique target market. We also helped Macmillan Cancer Support, one of the UK's leading cancer charities with their digital transformation.

The new cloud-based platform will build on microservices, allowing Macmillan to provide a more engaging digital presence that is intuitive and helps and support users.

Using this platform, people living with cancer and their families can get the help they need when they need it and Macmillan staff can work together more effectively and create new exciting and engaging digital experiences and content to keep supporting the audiences that they're committed to serving.

ElectraLink, the company responsible for operating the data hub underpinning the UK energy market, needed to deliver a new digital product pending the UK energy market needed to deliver a new digital product to support the UK's target of achieving a net zero carbon footprint by 2050.

The goal is to enable electricity distribution organizations and their customers to best plan for power provision using green and renewable sources. Endava teamed up with ElectraLink, acting as the delivery partner to build a minimum viable product, providing a graphical presentation of generation and electricity network data.

The client called the final product a game changer in how the electricity industry will view and use data. STEM is a global leader in artificial intelligence driven energy storage systems. Its storage solutions accelerate renewable energy growth, help alleviate power grid intermittency issues and support corporate ESG goals.

Our data scientists and data engineers worked with STEM software team to build solutions that reduce energy costs by automatically switching between using battery power during more expensive periods and grid power during cheaper periods.

Another area we've been working with Home Cycle Technologies [ph], an innovative startup, reinventing how plastic and aluminum items are recycled. The company pays customers to recycle based on the unique codes on the containers and specialized trash bins.

We helped build the recycling system app for their pilot currently running in the State of New York, as well as their website. We've also been working with Lineage Logistics, the world's largest and most innovative temperature controlled industrial REIT and logistics solutions provider.

They are transforming the supply chain by preserving protecting and optimizing the distribution of food. We're assisting them with the development of their industry leading warehouse operations technology, including the implementation of automation technology and applied data science.

Lineage has been named as a visionary partner of Feeding America, the United States' largest domestic hunger relief organization. I'm very proud of our success in helping these clients with their goals of making the world a better place. Now we're also continuing our strategy of tuck-in acquisitions and recently completed two transactions.

We acquired FIVE, based in Croatia and Brooklyn, New York, on March 4. FIVE increases our capacity in the ideation, design and delivery of intelligent digital experiences and enhances our capabilities in digital product strategy and performance optimization services.

FIVE has a team of 157 operational employees, mainly based in delivery centers in Croatia and Brooklyn. And on April 1, we acquired Levvel based in Charlotte, North Carolina.

Levvel has a strong focus in the payments and financial services, logistics and mobility, and TMT segments, and we believe will enable us to continue to expand in the United States, while serving clients in these core market sectors. Levvel delivers from the US and Mexico with 172 operational employees.

We believe these two transactions will enable us to further accelerate the expansion of our US business, which has shown strong organic growth over the last few years. They also offer Mexico and Croatia as new countries in which we can expand our delivery capability.

I'm pleased with the strategic and cultural fit of both FIVE and Levvel within Endava and we're already seeing a significant number of joint opportunities. Our client growth continues to translate into strong employee growth. We ended the quarter with 8,127 employees, a 25.6% increase from 6,468 in the same period last year.

We continue to actively recruit in all regions. We remain the employer of choice in our core locations and continue to attract top talent. At the same time, our attrition rate remains extremely low. The majority of our workforce continues to work from home and productivity remains high.

We expect a gradual return to the office starting in the second half of this calendar year with a hybrid model of in-person and remote working. As shown by our results and by the guidance Mark will provide, our services are at the core of our clients digital transformation journey.

We're excited about the opportunities emerging and remain confident in our ability to deliver value for all of our stakeholders. Let me end by thanking our people who continue to deliver excellence, quality and value to our clients in diverse home working contexts and who enable the performance that I've just discussed.

We appreciate your dedication and loyalty. I will now pass the call on to Mark who will walk you through our financial results for the quarter and provide guidance for the coming quarter and the fiscal year. Mark Thurston Thanks, John.

Endava's revenue totaled GBP 112.3 million for three months ended March 31, 2021 compared to GBP 92.2 million in the same period last year, a 21.8% increase over the same period in the prior year. In constant currency, our revenue growth rate was 23.8%.

Profit before tax for quarter three fiscal year 2021 was GBP 16.5 million compared to GBP 18.3 million in the same period in the prior year. Our adjusted profit before tax for three months ended March 31, 2021 were GBP 23.9 million compared to GBP 16 million pounds for the same period last year.

Our adjusted profit before tax margin was 21.3% for the three months ended March 31, 2021 compared to 17.4% 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 or losses, net gain on disposal of subsidiary, share-based compensation expense, amortization of acquired intangible assets and unrealized foreign currency gains or non-cash expenses.

Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted earnings per share or EPS was GBP 0.34 for three months ended March 31, 2021 calculated on 57.2 million diluted shares as compared to GBP 0.23 for the same period last year calculated on 56.3 million diluted shares.

Revenue from our 10 largest clients accounted for 36% of revenue for the three months ended March 31, 2021, unchanged from the same period last year. Additionally, the average spend per client from our 10 largest clients increased from GBP 3.3 million pounds to GBP 4.0 million pounds for the three months ended March 31, 2021.

In the three months ended March 31, 2021, North America accounted for 29% of revenue compared to 27% in the same period last year.

Europe accounted for 25%, unchanged from the same period last year, and the UK accounted for 43% of revenue compared to 45% in the same period last year, while the rest of world accounted for 3%, unchanged from the same period last year. North America grew 28.9% for the three months ended March 31, 2021 over the same quarter of 2020.

Comparing the same periods, revenue from Europe grew 21.3% and the UK grew 18.0%. We grew in all three of our industry verticals during the quarter. Revenue from payments and financial services grew 19.2% for three months ended March 31, 2021.

Revenue from payments and financial services accounted for 53% of revenue compared to 54% in the same period last year. Revenue from TMT grew 32.3% for three months ended March 31, 2021 over the same quarter of 2020 and accounted for 27% of revenue compared to 25% in the same period last year.

Revenue from other grew 15.7% for three months ended March 31, 2021 over the same quarter of 2020 and now accounts for 20% of revenue compared to 21% in the same period last year.

We now turn to our adjusted free cash flow, which is our net cash provided by operating activities plus grants received less net purchases of non-current tangible and intangible assets. Our adjusted free cash flow was GBP 10.2 million for three months ended March 31, 2021 compared to GBP 9.6 million during the same period last year.

Our cash and cash equivalents at the end of the period remained strong at GBP 78.8 million at March 31, 2021 compared to GBP 101.3 million at June 30, 2020. We spent GBP 14.7 million net of cash acquired on the acquisition of FIVE during the quarter.

CapEx for three months ended March 31, 2021 as a percentage of revenue is 1.2% compared to 2.4% in the same period last year. Our guidance for Q4 fiscal year 2021 is as follows. Endava expects revenues will be in the range of GBP 130 million to GBP 132 million, representing constant currency revenue growth of between 51% and 53%.

Endava expects adjusted diluted EPS to be in the range of GBP 0.34 to GBP 0.36 per share. Our guidance for full-year 2021 is as follows. Endava expects revenues will be in a range of GBP 443 million to GBP 445 million, representing constant currency growth of between 29% and 30%.

Endava expects adjusted diluted EPS to be in the range of GBP 1.22 to GBP 1.24 per share. The constant currency growth figure quoted for the full fiscal year 2021 guidance still includes the pro forma adjustment for the Worldpay Captive as it remains in the full-year comparative.

This above guidance for Q4 fiscal 2021 and for the full fiscal year 2021 assumes the exchange rates at the end of April when the exchange rate was GBP 1 British to $1.39 and €1.15. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A..

[Operator Instructions]. You have a question from the line of Bryan Bergin with Cowen. .

I wanted to ask on the 4Q outlook and this material uptick in growth? First, can you just quantify the level of organic versus inorganic mix? And then, it would seem like the demand is rapidly normalized here, but can you talk about what you're seeing in the pace of client decision-making, sales cycles, really any changes in client buying behavior you're noting now versus pre-pandemic?.

There has been a material uptick in the guide. We have a full quarter for FIVE compared to a month in Q3 and then we have a full quarter contribution from Levvel. So, the inorganic component of the growth guidance that we're giving is circa around sort of 12%.

But, actually, there's been a very big acceleration in the underlying business and that is around sort of 11% of the increase that we had on the previous guide, which is implied in our full-year guidance of around 30%. So, the two components is a 23% sort of uplift, slightly more from acquisitions at 12%, but the organic uplift is around 11%. .

On the wider picture around client buying behavior and what's driving demand, we see demand remaining very strong.

And that's the buying process with us is that clients engage with us, whether it's a new client or indeed those existing ones who are looking to build out new products in initial ideation phases where we're looking at what the new product would potentially do for their business, where we're producing proof of concepts and so on.

And as those get selected, they scale up into larger production demand. So, what we're seeing at the moment is we've got many of these early stage engagements, more than we would have had pre-pandemic. And the expectation is that, over the next 12 to 18 months, we should see those flow up into production scale engagements that drive demand.

So, we see quite a large pipeline coming through that is being driven by that early stage work that we're doing with the clients. And you actually see some of that in the numbers of smaller clients that are expanded fast over the last year.

One of the drivers of that has been new clients engaging us in ideation phases that don't have huge cost tags attached to them, but as they get traction as a way to move their business forward, they flow into wider engagements..

You had a notable SG&A reduction that's down 11% in pounds quarter-over-quarter. Can you talk about the efficiencies that are driving that? I don't think you've been at this level since pre-IPO.

So, how do you think about the sustainability at this rate as you do consider reopening later in 2021 and a likely uptick in S&M activity?.

There's a number of sort of positive facts behind that. We're in the range – and slightly above actually on the revenue, but the EPS was a big beat, primarily that was sort of gross margin. But the SG&A was a big contributor to that, is around on an adjusted basis, just under 16% of revenue as we were anticipating 18%.

And there's a number of items there which range from bad debt release as we're coming out of the pandemic and then lower spending which is mainly to the timing around items such as sales and marketing. But, going forward, certainly for Q4, we'd see a more normalized level of SG&A around 18% – adjusted SG&A 18% of revenue.

And that's sort of implicit in the EPS guide we're giving..

You have a question from the line of Ashwin Shirvaikar with Citi. .

My congratulations as well. This is quite a quite an exceptional uptick in expectations. Let me start with asking about supply of talent. You also have a very strong uptick in headcount.

So, in the geographies that you are getting your talent from, are you beginning to see sort of supply concerns emerge? And if so, is it more range related, just the number of people related? Or if not, what are you doing something different that you're not facing this, similar to other people are facing in this way?.

The recruitment of quality staff, as you know, is always a challenge. It requires a successful market presence and career proposition that's going to attract and retain the best.

Currently, demand is running ahead of our ability to grow in terms of the ramping up of people, although, of course, we have taken that into account in the guidance that we've given.

We've always guided the market around about 30% organic growth on average – you can see some quarters pop over it – is our sensible ceiling without growing beyond the ability to onboard, train and equip our teams to perform in the Endava way. Currently, our attrition is actually very low. We're still at 8%, which is well below the 15% that we target.

So, that is enabling us to grow organically at greater than 30% max that we'd normally guide without destabilizing our expansion. However, as I just noted, it's still below the market demand that we're experiencing. So, we are actually having to turn some business away. So, that probably goes to the heart of your question, I imagine..

I would think that, based on your comments on pipeline as well as what you said in your prepared remarks on demand that this is not a temporary snapback, that this should inform your outlook when you finally give your fiscal 2022 outlook. So, this is a longer-term sequence of events and multi-year, hopefully.

Would that be accurate?.

Yeah. Absolutely, it feels like that at the moment with the visibility of those ideation phases that we're doing with clients. We'd expect a significant number of those to flow through into production systems, which is a significant step up on the engagement level with clients and the amount of spend on the induction phase.

So, yes, feels more like a new normal than any sort of normalization back to the growth rates of historic guidance. .

You have a question from the line of James Faucette with Morgan Stanley..

I just had a couple of follow-up questions – or at least one follow-up question to Ashwin's question as it relates to recruiting. In the past, at least you've talked about being able to recruit roughly one-third from referrals, a third coming from university partnerships, and basically a third coming from the market.

Any change in that kind of mix? And I guess, tied to that, if there are changes or even if they're not, what are you needing to do from a compensation standpoint in your recruiting right now?.

Only small changes. We're probably seeing about 40% of our recruitment coming through referrals, which has pulled back. The uni and market elements are small amounts. And there are some sign of staff cost pressures at the moment. But our major pay round annually is in December, and we actually address a lot of that pressure in the December pay round.

And with the level of demand in the market, we do expect that we will see some cost pressures coming through. And we've taken that into account as we look forward. I expect that attrition will pick up from current levels and that will also inform our position on salaries as a market.

But we remain confident that we can recruit and retain excellent people at that level of growth that we're comfortable with..

On the other side of the equation, I guess, can you talk about the pricing environment and your expected ability to pass through costs? And I'm curious, based on your comments around the ideation, engagement, et cetera, are you able to manage – like, how does that impact your pricing with your customers? And are you able to build in some of these cost pressures, particularly if you're engaging kind of at earlier stages now?.

The pricing environment, you can really see in our revenue per head, it's remained relatively consistent quarter-on-quarter despite FX headwind. So, it's pretty solid. And we see that going out. I think given the sort of cost pressures that just sort of indicated, we will need to have conversations with our clients over the coming months about rates.

But, against the sort of the whole backdrop of the demand picture out there, we're pretty confident that we can secure that pricing at sensible levels to get the talent that we require to deliver the solutions to clients. .

Just add to that pricing conversation, which is oriented around the value that we're bringing through a transformative product that we've helped the client to envision is very different to a commodity style pricing conversation..

You have a question from the line of Maggie Nolan with William Blair..

This is Ted on for Maggie. In the past, you've mentioned that margins can be strong on initial relationships with clients.

Is that a piece of what's driving the current margin strength? Or has that dynamic changed at all?.

We do get an element of that. Yes. When we're doing a small engagement, we tend to start a little bit closer to the rate card. And then, as we scale with the client and they're spending more with us, obviously, we offer some discounts against the volume and assurance of business going forward, which benefits us as a business as well, obviously.

So, it's a sensible dynamic. It won't be a huge dimension in terms of moving the margin.

I'm guessing less than 1%, Mark?.

Yeah..

But it is a small element. .

John, I think you mentioned that, in the second half of the year, there's a gradual return to the office with a hybrid model.

Can you maybe elaborate on what that hybrid model looks like? How does that impact kind of the T&E levels spend? And maybe how you use the real estate footprint?.

Obviously, this is an area of huge discussion across the industry. We're seeing some companies take different directions on it. In Endava, we're very, very consciously trying to balance the two factors. On the one hand, we've seen major benefits from working from home with good productivity. Employees like having that flexibility.

And they want to see it as part of their working patterns in future, all of which we will respond to.

On the other hand, we also strongly believe that teamwork across multidisciplinary teams in an agile setting actually benefits hugely from in-person team activity, enabling better ideation, improved team spirit, and actually a social context for our people to thrive as a team. So, people are also keen to see that.

So, as a result, we are planning for a hybrid model where people will have a lot of flexibility within their teams to have head down days at home or quiet spaces in the office. And there'll be other days where key agile ceremonies are undertaken as a team in person in the office.

So, sprint planning, retrospectives, technical or business solution ideation, and so on within your team. So, we'll see a mixture of it. And I think that will give people the benefit of flexibility to work from home a lot of the time when they want to, but also delivering the team benefits that we need for our business model.

Mark, I don't know if you want to say anything on the impacts on P&L. .

I think, over time, with the property footprint, we should get better utilization with people coming in less than the five days a week, and that will push up our occupancy. Whilst we're sort of in some longer-term lease arrangements, the requirement for space over the coming years will reduce.

So, I'd expect our sort of property costs or potential revenue to tip down a percentage or two over coming years. .

You have a question from the line of Mayank Tandon with Needham..

This is actually Kyle Peterson on for Mayank. Just wanted to start with M&A. You guys have definitely been pretty active on that front lately.

What's the pipeline like right now? And what are some key areas of priority for you and what you guys are looking for on future deals?.

As you've noted, we've closed two transactions, one in March and one right at the beginning of this current quarter. And we're seeing a lot of opportunities. There are multiple deal opportunities running across our desk literally every day. So, there's a lot of activity out there.

But actually few of them have got the right DNA, that ideation to production capability, the agile approach that utilizes next gen technology that we're looking for and we remain very choosy in where we engage now. There's nothing I can report on at the moment. As soon as there is anything material, obviously, of course, we will report it.

In terms of the focus, it very much remains, firstly, around the geographic balancing. So, adding geographic locations. And, of course, the last two strengthened in the US. The previous to strengthened us in Continental Europe.

And so, we'll be looking probably into Asia-Pac and maybe if there's right opportunities for further strength in the US and Continental Europe. Second area is around sector acceleration, particularly building out some of the key opportunities we see in our other segments. And then, there occasionally are some technology boosters that are valuable.

And often deals bring some element of all three of these, and that makes those businesses particularly attractive from an M&A point of view..

I guess just a quick follow-up. The trends in the payments and BFSI vertical looks really strong this quarter.

Is that new clients and projects ramping? Is there more spend in some of the existing base? And how should we think about how Levvel will impact your kind of reach and scale within the payments vertical moving forward?.

It was strong. Despite the headwinds, we had 14% consecutive growth quarter-on-quarter. And most of that has been across all of our geographies. So, we're getting real traction in our offering, riding that wave particularly well. .

From a Levvel point of view, that business is split across mobility and logistics as being the largest area. And then, the payments and financial services, particularly mid-tier banks, is also a very, very strong capability. So, those will add to our existing sector focus and give us some depth and acceleration in the US in those sectors..

You have a question from the line of Bryan Keane with Deutsche Bank..

Just a couple of clarifications. A lot of my questions have already been asked and answered. Mark, when we look at the organic growth increase in the 4Q guide, I think you were talking about maybe 11% uplift.

What's causing that versus previous expectations three months ago?.

Basically, the acceleration across – very strong pickup in payments and financial services, as the last questioner sort of pointed out. And we are seeing an acceleration geographically as we go into Q4, particularly into sort of Europe and the UK.

So, we're, we're firing on all cylinders in terms of geo expansion, and particularly the payments and financial services sector..

Thinking about the EPS raise, the raise was material there even despite the acquisitions.

Are the acquisitions accretive or they actually dilute to start in the fourth quarter?.

I think they contribute. In terms of the beat this quarter, it was really from a strong gross margin. So, it was stronger than we anticipated, which was higher utilization, people taking less holiday, the SG&A timing effect that I sort of pointed out, which should sort of normalize at the 18%.

And basically, we see the margin that we secured in Q1 being maintained at that level. On an adjusted basis, that's 41.5%. We get contribution and a minor uplift from the acquisitions that we add in for the full-year effect – full quarter in in Q4 for Levvel and for FIVE..

[Operator Instructions]. You have a question from the line of Jamie Friedman with Susquehanna..

Mark, in your answer to a previous question, I thought that you had disclosed the specific growth in payments unless I heard you wrong.

Can you reiterate what you had said previously?.

I was pointing out that, sequentially, quarter-on-quarter, going from Q2 to Q3, we've had strong growth, around 14%. And most of that has been across all our geos. That's payments and financial services. So, includes insure, tech, asset and wealth management and banking..

The headcount did grow a little bit faster than the revenue, Mark. And then, your attrition is really low at the same time. 8% is remarkable.

So, is that headcount growth in anticipation of the standing up new business as soon as the fourth quarter, is that what that's about?.

Depends if you are looking at year-on-year or quarter-on-quarter. So, at the total level, we grew quarter-on-quarter about 7%. We had a contribution from M&A. So, let's call it sort of 6% in terms of our revenue growth.

And the headcount tends – the better headcount metric to take is the average because it has a relationship with revenue rather than period-end. And that grew quarter-on-quarter about 6% or so. And even if you take out the contribution from FIVE, which was in there for one month, we're getting to around a 6%.

So, we're growing really the revenue in line with the headcount. Now, we saw an improvement in the margin in the quarter because utilization went up marginally. So, we're eating into a bench that we had previously built up in the Q1, Q2.

I think we're in a position now where we are still recruiting very strongly to meet that demand that we've outlined in the guide and probably our utilization will remain at around that sort of level. And that's why I think the gross margin will be in line with what we've delivered this quarter..

The comment I was making was year-over-year, but I understand sequential makes more sense as a way to look at it. John, your prepared remarks talked a lot about North America. And I realize that's, obviously, a very important geography for you, though, historically smaller than, say, the UK. Your acquisitions are both this quarter in North America.

Would it be fair to map the growth in the verticals by the growth in the geographies? In other words, like TMT grew 32%, North America grew almost as fast.

Is there more TMT in North America than elsewhere?.

Not particularly. The mix doesn't exactly map on to the geography. So, it's not completely homogenous. But a lot of the growth in North America, for instance, is happening in the payments and financial services arena.

So, there's more of a rebalancing and standardizing, if you like, of the proportions as you look across geographies and sectors that is going on. So, whereas, historically, North America probably has been a little bit more in TMT and other, it is normalizing as our organic growth comes through..

There are no additional questions. I would like to turn the call back over to management for closing remarks..

Great. Well, thank you all for joining us today. I'm sure, as you will have noted, that demand for our services actually remains very strong. And we're seeing that across all our verticals and geographies.

So, we remain very positive about our business position and look forward to seeing you at our next earnings call, which will be in September, given it's our full year. Thank you. .

Thank you..

Ladies and gentlemen, this does conclude today's conference. You may now all disconnect..