Endava plc (DAVA) Q4 2020 Earnings Call Transcript

Endava plc  (NYSE: DAVA) Q4 2020 earnings call dated Sep. 15, 2020

Corporate Participants:

Laurence Madsen — Investor Relations Manager

John Cotterell — Chief Executive Officer

Mark Thurston — Chief Financial Officer

Analysts:

Bryan Bergin — Cowen and Company, LLC — Analyst

James Faucette — Morgan Stanley — Analyst

Mayank Tandon — Needham & Company — Analyst

Moshe Katri — Wedbush Securities — Analyst

Charlie Brennan — Credit Suisse — Analyst

Jamie Friedman — Susquehanna International Group, LLP — Analyst

Presentation:

Operator

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.

Laurence Madsen — Investor Relations Manager

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 therefrom and anticipated client demand for Endava’s 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.

John Cotterell — Chief Executive Officer

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. Mark and I are pleased to be here to provide an update on our business and financial performance for the three months ended June 30, 2020 and for the full fiscal year 2020.

The world has changed drastically over the last six 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 a 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 these structural shops have impacted, enabling our fast reaction and protecting our business performance and our people as the changes hit.

Moving to the financials and firstly looking at quarter four fiscal year 2020, Endava had a solid quarter, with revenue of GBP90.5 million, a growth of 18.1% year-on-year from GBP76.6 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 four performance. In the quarter, revenue growth coming from our largest clients increased sequentially as large corporations continued to invest in digital transformation during the pandemic.

Revenue from clients who paid us above GBP5 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 four 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 GBP351 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 UK 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 two years and these changes won’t be subtle.

Understanding the critical necessity of digital interactions, organizations that have relied solely on the 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 strengths 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 assets 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 markets.

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, carved-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 are taking advantage of the volatile market. These factors contributed to our team successfully securing 14 new clients in the last three months, with the majority of this work being undertaken remotely. A recent example includes an outside in due diligence for a Swiss generalist PE investor focusing on the mid-market. The client was extremely pleased with the quality of our work, which also allowed them to form 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 and in Slovenia, Serbia, and Bosnia. I first met the team at CDS over one and a half years ago and we had an immediate connection of 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 healthcare. 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 GBP62,300, up from GBP58,700 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 provide guidance for the coming quarter.

Mark Thurston — Chief Financial Officer

Thanks, John. Here are some highlights for the most recent quarter. Endava’s revenue totaled GBP90.5 million for the three months ended June 30, 2020 compared to GBP76.6 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 GBP6.7 million compared to profit before tax of GBP10.4 million in the same period in the prior year.

Endava incurred a true-up charge in Q4 fiscal year 2020 of GBP3.1 million relating to the previously disclosed funding on May 5, 2020 of the second and final tranche of the non-recurring discretionary employee bonus by Endava Limited Guernsey Benefit Trust or EBT, the beneficiaries of which are Endava’s employees.

Our adjusted profit before tax for the three months ended June 30, 2020 was GBP15.2 million compared to GBP13.5 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 three 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 and fair value movement of contingent consideration are non-cash expenses. Adjusted PBT margin is adjusted PBT as a percentage of total revenue.

Our adjusted diluted EPS was 23 pence for the three months ended June 30, 2020 calculated on 56.4 million diluted shares as compared to 20 pence 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 three 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 GBP3.1 million to GBP3.6 million for the three months ended June 30, 2020.

In the three 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 UK 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 three months ended June 30, 2020 of the same quarter of 2019. Comparing the same periods, revenue from Europe grew 7.8% and the UK 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 three of our industry verticals during the quarter. Revenue from Payments and Financial Services grew 17% for the three 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 three 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 three months ended June 30, 2020 over the same quarter of 2019 and now accounts for 20% of revenue, unchanged from 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 non-current tangible and intangible assets. Our adjusted free cash flow was GBP0.4 million for the three months ended June 30, 2020 compared to GBP8.9 million during the same period last year. Adjusted free cash flow was impacted by the payments of the final tranche of the non-recurring discretionary employee bonus mentioned earlier of GBP14.9 million.

Our cash and cash equivalents at the end of the period remained strong at GBP101.3 million compared to GBP70.2 million at the end of June 30, 2019. CapEx for the three 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 GBP351 million for the fiscal year 2020 compared to GBP287.9 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 GBP25.3 million compared to profit before tax of GBP30.1 million in the same period in the prior year. Our adjusted profit before tax for the fiscal year 2020 totaled GBP68.6 million compared to GBP52 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 GBP1 for the fiscal year ended June 30, 2020 calculated on 56.1 million diluted shares as compared to 76 pence 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 GBP10.9 million to GBP13.4 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 UK up 20.1%. However, excluding the impact of the Worldpay Captive from the prior year period, comparative growth in the UK 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 GBP31.4 million for the fiscal year ended June 30, 2020 compared to GBP29.8 million during the same period last year. Our adjusted free cash flow was impacted by the payment of the non-recurring discretionary employee bonus of GBP25.9 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 GBP93 million to GBP94 million, representing constant currency revenue growth of between 18.5% and 20%. Endava expects adjusted diluted EPS to be in the range of 21 pence to 22 pence 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 GBP1 to USD1.33 and EUR1.12.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question come from the line of Bryan Bergin with Cowen. Please go ahead.

Bryan Bergin — Cowen and Company, LLC — Analyst

Hi. Thank you. I wanted to start with the outlook here. So the main commentary sounds really solid, but as it relates to 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 trough — the growth trajectory doesn’t improve from here?

John Cotterell — Chief Executive Officer

Hi, 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 two quarters, we held off giving guidance.

Bryan Bergin — Cowen and Company, LLC — Analyst

Okay, makes sense. And just to follow-up here really just around margin potential. So with the significant ramp in transformational activity that you’re anticipating, do you have to do anything differently in your investments 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?

Mark Thurston — Chief Financial Officer

Yeah. So on the work from home, we moved seamlessly as you may recall from Q3 to work from home and actually productivity improved. We have been 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 to work from home and also going through some of the scrum initiations at the start the project which are better done face to face in an office environment. So we’re looking at the whole property scenario, which would 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 are 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.

John Cotterell — Chief Executive Officer

I mean, the one thing that I would call out is that when we are 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, 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 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.

Bryan Bergin — Cowen and Company, LLC — Analyst

Okay. And that’s helpful. Thank you.

Operator

And your next question come from the line of James Faucette with Morgan Stanley. Please go ahead.

James Faucette — Morgan Stanley — Analyst

Great. Thank you very much for taking my question. Wanted to ask if you could give a little more color on kind of the pacing of work and engagement. You mentioned there were some starting and stopping. Wonder if you can summarize kind of what is starting or maybe what is 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?

John Cotterell — Chief Executive Officer

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. 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 pull back on the card present type acquiring investments that our clients were making and that was basically because their volumes were — that 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 on on-boarding, the on-boarding process for a new merchant is traditionally quiet manual, can take weeks for a new merchant to be able to start accepting card payments. We help our clients implement systems that enable self on-boarding 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 can view vehicles, compare vehicles in a much more virtual world as opposed to the sort of traditional comparison type capabilities that websites had. Then we also used 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 are working with in a dedicated dealer portal and make that a much more manageable environment for them.

And another one is 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 telehealth, enabling people to do consultations online. We had an interesting project that where we recognized that there was a major gap in most telehealth solutions in the physical therapy space. So using digital measurement analyses and data capture tools, we were able to use essentially bleeding edge immersive media technologies and integrate that into the telehealth solution. And it’s now the number one feature that is requested by the users of that application. Prior to the release of that, the telehealth solution of our client was receiving ratings of 2.5 to 3 out of 5. But now in the two 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.

James Faucette — Morgan Stanley — Analyst

Got it. That’s helpful. Sorry.

John Cotterell — Chief Executive Officer

Yeah, 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, that are 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 were 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, we do that.

James Faucette — Morgan Stanley — Analyst

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 home or what is — I guess just looking for a little color what’s happening with vendor consolidation in your client base.

John Cotterell — Chief Executive Officer

Yeah. So, I mean, we are of the view that then the 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 are 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 are looking to squeeze that cost down and they are doing that through vendor consolidation, whereas the types of services that we’re providing, they are looking for organizations like Endava who can make a real difference and the conversations that we’re having with a 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 that — and savings that can come in our direction. But we are very — really 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.

James Faucette — Morgan Stanley — Analyst

That’s great. I appreciate the commentary this morning.

John Cotterell — Chief Executive Officer

Thank you.

Operator

And your next question comes from line of Mayank Tandon with Needham. Please go ahead.

Mayank Tandon — Needham & Company — Analyst

Thank you. Congrats John and Mark on a strong quarter. Well, 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?

John Cotterell — Chief Executive Officer

Yeah. So I suppose what you’re pulling out is what’s the underlying growth that’s going on. We saw three major differences between our Q1 and Q4 numbers. Obviously there is the inorganic growth that’s boosting our revenue growth. But we also have significant FX headwinds in the number. And these two 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 the holiday effect where considerably more holiday has been taken in Q1 compared to Q4. So what happened is, lock downs during our Q4 meant people didn’t take much holiday. As those lock downs have weakened in Europe, the teams have taken more holiday. So that’s had a effect of about 2% headwind.

So if you take the underlying growth, adjusting for 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 future. But obviously, it’s only 15% of our revenue. So it’s not a material impact for Endava. I hope that gives the color you are looking for.

Mayank Tandon — Needham & Company — Analyst

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?

Mark Thurston — Chief Financial Officer

So, I think pricing-wise, we’ve seen that hold up relatively well to be honest going through Q3, Q4 and we’re seeing that 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 is a little bit of constraint that you could see in terms of the growth for Q1 because of availability of people through the holiday period. But that is a little bit short term in nature. And actually as we 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 are 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 them to be drawn on it at this stage.

Mayank Tandon — Needham & Company — Analyst

Got it. Great. Thank you for answering my questions. Appreciate it.

John Cotterell — Chief Executive Officer

Thank you.

Operator

And your next question come from the line of Moshe Katri with Wedbush. Please go ahead.

Moshe Katri — Wedbush Securities — Analyst

Hey, thanks, 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. Thanks.

John Cotterell — Chief Executive Officer

Yeah. Sure. On the recruitment side, we’re aiming to pull teams in 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 growth than you see on the top line growth. So if we grow the top line in the low 20s, we grow the people headcount in the high teens. And we are 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 has reinforced our reputation in the markets that we operate in as a good employer with 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.

Moshe Katri — Wedbush Securities — Analyst

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

John Cotterell — Chief Executive Officer

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 micro services type design that enable flexibility for clients. And we’re working a fair number of organizations through how that would work for them as they are 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.

Moshe Katri — Wedbush Securities — Analyst

Understood. Thanks.

John Cotterell — Chief Executive Officer

Thank you.

Operator

And your next question come from the line of Charlie Brennan with Credit Suisse. Please go ahead.

John Cotterell — Chief Executive Officer

Hi, Charlie. You might be on mute.

Charlie Brennan — Credit Suisse — Analyst

Hello, can you hear me now? Hello? Perfect.

John Cotterell — Chief Executive Officer

Hi there, Charlie.

Charlie Brennan — Credit Suisse — Analyst

I’ve got two 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?

John Cotterell — Chief Executive Officer

Yeah, 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 re-prioritization and then a stronger pickup in the last six weeks or so of the quarter as they — as — commenced 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.

Mark Thurston — Chief Financial Officer

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

John Cotterell — Chief Executive Officer

Yeah. 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 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 had a 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 it.

Charlie Brennan — Credit Suisse — Analyst

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

Mark Thurston — Chief Financial Officer

Yeah. I mean, for the full year ’20, we did constant currency pro forma 24% and so the organic element of 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 got the lift on the revenue against the guide.

Charlie Brennan — Credit Suisse — Analyst

Perfect. That was very helpful. Thank you.

Operator

And your next question come from the line of Jamie Friedman with Susquehanna. Please go ahead.

Jamie Friedman — Susquehanna International Group, LLP — Analyst

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 an operating perspective, what kind of challenges that creates in terms of utilization and bench commitment. That’s the first question. And then, Mark, in terms of the margins going forward, are there any seasonality call-outs or the seasons all off because of some of the unique macro factors?

John Cotterell — Chief Executive Officer

Okay. So, Jamie, from an operating perspective, yes, when you get projects stopping, starting or you’re needing to redeploy, it’s obviously not a completely seamless activity where people step off one project and move on to another. So that lag effect is 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.

Mark Thurston — Chief Financial Officer

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, I think there will be a slight coming off in the gross margin from where we’ve been in Q4 due to this impact that John was pointing out around people delaying taking 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.

Jamie Friedman — Susquehanna International Group, LLP — Analyst

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?

John Cotterell — Chief Executive Officer

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 has been a lot of questions about, has COVID and the pandemic environment impeded our ability to sell and place business to fill the pipeline and see things coming 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 billed very quickly. The long term, if it’s a three year deal, it can be fairly flat over three years and it can take — can flatten that booking over three years. There was — it wasn’t a 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 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 or the projects that we’ve kicked off won’t be seen in Q1, that will be seen downstream.

Jamie Friedman — Susquehanna International Group, LLP — Analyst

Got it. Thank you.

Operator

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

John Cotterell — Chief Executive Officer

So thank you all for joining us. 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 are performing. And I look forward to catching up with you all in around November when we do our Q1 results.

Operator

[Operator Closing Remarks]