Endava plc (DAVA) Q1 2020 Earnings Call Transcript

Endava plc (DAVA -0.90%)
Q1 2020 Earnings Call
Nov 19, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Endava first quarter fiscal-year 2020 results. [Operator instructions] Thank you. I would now like to hand the conference over to your speaker for today, Laurence Madsen, investor relations. Please go ahead.

Laurence Madsen -- Investor Relations

Thank you. Good afternoon, everyone, and welcome to Endava's first quarter of fiscal-rear 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 Q2 fiscal-year 2020 and the full fiscal-year 2020 and 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 our SEC filings as well as our financial results, press release for a more detailed description of the risk factors that may affect our results. 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

Thank you, Laurence, and thank you all very much for joining us today. Mark and I are pleased to be here to provide an update on our business and financial performance for the three months ended September 30, 2019. Endava had another record quarter for quarter 1 fiscal-year '20 with revenue of GBP 82.4 million, a strong growth of 24% year on year from GBP 66.4 million in the same period in the prior year. Our strong revenue growth is driven by the expansion of our existing customers and the acquisition of new ones during the quarter.

We continue to broaden our client base and ended the quarter with 278 active clients, up from 262 at the end of the same period in the prior year. The total number of clients who generated revenue over GBP 1 million on a rolling 12-month basis was 62, an increase of 19% over the same period of the prior year. And we continue to grow the number of clients generating over GBP 2 million on a rolling 12-month basis. This group increased by 50% from the same period last year to 45.

In the last quarter, we grew in all of our regions and verticals. We had strong revenue growth, along with continued improvement in our operating margins. As of this quarter, we will report our revenue from the Rest of the World. In quarter 1 fiscal-year '20, the Rest of the World accounted for 2% of revenue.

It is small, but fast growing. The Rest of the World includes companies located in Hong Kong, Japan and the Middle East. On the technology front, we see several trends continuing to develop in parallel streams, often within the same organizations. Our clients are demonstrating an increasing desire to bring their IT and business organizations closer together in a deliberate move to drive toward more rapid value delivery.

The need to create a unified business view and operational structure around transformation is growing strongly. Given our unique combination of next-gen technology ideation, focused on solving business problems, alongside our ability to take these concepts to production at an enterprise scale, we are successfully helping our clients make their organizational pivot by merging these groups while delivering new products and platforms to market. Additionally, the C-suite is now realizing that transformation initiatives will be seriously hindered without a strong cloud foundation. As a result, the deepening of cloud initiatives has become a priority.

We've been active in helping clients capitalize on the promised benefits to streamline business services, rationalize IT estate and lower costs. Finally, we see the need for businesses of all sizes of maturity level to better understand the strengths and weaknesses of their software platforms. Most organizations have an application estate that has grown organically and largely tactically over the years without much cohesion. We are increasingly asked for architectural evaluation exercises at all levels of scale from detailed code analysis of individual applications to entire application estate reviews.

We use a range of industry-recognized and proprietary techniques for these evaluations, along with our own proprietary code analysis technology. I would now like to spend a moment on our private equity focus and strategy. Work for PE portfolio clients has been a significant proportion of Endava's business over the years, as we successfully deliver a transformational change to their portfolio companies through the adoption of next-generation technology. Strategically, we believe that extending our footprint and relationships with PE clients will position Endava well, not just for the due diligence and digital strategy work but also for the downstream transformation programs once the clients have completed their acquisitions.

We also see more PE firms evaluating the potential for technology change to drive significant value increase as part of their investment thesis in a number of sectors. As a result of this strategy and belief, we have invested further in the PE segment in a couple of areas over the past month. Firstly, two weeks ago, we announced the acquisition of Intuitus Limited, headquartered in Edinburgh, Scotland. Intuitus is a leading independent provider of technology and digital due diligence and other technology advisory services to PE clients, significantly expanding the number of PE firms with whom we have a relationship.

Culturally, we believe Intuitus will fit well with the Endava family and open up significant opportunity for downstream transformation programs following deal completion. This acquisition adds 24 employees and a network of senior freelance IT professionals. The transaction closed on November 1, 2019, and we expect it to be accretive in year one. Secondly, last week, we announced the launch of an integrated IT due diligence product with Bain & Company, targeted at PE clients.

As I highlighted in previous calls, we have been actively working with Bain in the PE space, and this announcement is a natural evolution in our relationship. In the last year, our integrated offering has grown into a defined product set, which has been well received by PE clients, who recognize the value of a combined team which integrates the deep technology insights, developed by Endava into the broader investment thesis of commercial due diligence. In the light of these announcements, I would like to just highlight some of the private equity projects we have been working on with Bain. We worked closely with a leading PE fund on several projects in Italy.

We did the pre-acquisition work on a large education company in which the PE fund took a stake. Our work included, analyzing the user experience of the digital platform, along with a deep dive into the architecture and IT systems. Another assignment involved looking at a credit company in order to help it scale the existing platform, understand the defensibility and potential to develop value-add products based on the existing architecture and operations. We've also been actively advising another global PE firm for some of their portfolio companies in the retail and transportation sectors located in France and the Nordic region.

We performed in-depth digital maturity assessments, including technology assessments, and made recommendations around architectural, application landscape and IT operations. Our assessments led to immediate strategic decisions for those companies. Our client growth continues to translate into strong employee growth. We ended the quarter with 5,904 employees, a 13.9% increase from 5,182 in the same period last year.

As a reminder, during this quarter, we transferred 146 employees with the sale of Endava Technology SRL, also referred to as the Captive to Worldpay. The transaction closed on August 31, 2019. The competition for talent remains challenging, but our strategy of being an employer of choice in the cities where we operate is a strength in recruiting and retaining talent. The Endava online community remains very active, with over 33 postings on technology thought leadership in the quarter ended September 30, 2019.

On a macro level, we continue to review the potential impact of Brexit on Endava. We're not aware of any clients who are adjusting their spending plans with us as a result of the uncertainties caused by Brexit. We started the 2020 fiscal year with solid results and client demand for our service offerings remains strong. We remain optimistic about our ability to deliver sustainable growth into the future.

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

Mark Thurston -- Chief Financial Officer

Thanks, John. Endava's revenue totaled GBP 82.4 million for the three months ended September 30, 2019, compared to GBP 66.4 million in the same period last year, a 24% increase over the same period in the prior year. In constant currency, our revenue growth rate was 21.5%. As John mentioned, the sale of the Captive to Worldpay closed on August 31, 2019, and this means the current quarter reported had one less month's contribution from the Captive than the comparative period.

Our adjusted profit before tax for the three months ended September 30, 2019, was GBP 16.9 million compared to GBP 11.7 million for the same period last year, a 45% year-over-year increase. Our adjusted profit before tax margin was 20.5% for the three months ended September 30, 2019, compared to 17.6% 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 and one-off IFRS 16 contribution for sublet rental income related to sale of the Captive to Worldpay. Excluding the contribution from the sale of the Captive, our adjusted profit before tax margin would have been 19.9%.

Adjusted profit before tax is defined as the company's profit before tax for the period, adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, initial public offering expenses incurred, Sarbanes-Oxley compliance readiness expenses, fair value movement of contingent consideration and gain on disposal of subsidiary, all of which are noncash other than realized foreign currency exchange gains and losses, initial public offering expenses, Sarbanes-Oxley compliance readiness expenses and gain on disposal of subsidiary. Adjusted PBT margin is calculated as a percentage of our total revenue. Our adjusted diluted EPS was 24p for the three months ended September 30, 2019, calculated on 55.4 million diluted shares as compared to 17p for the same period last year, calculated on 53.8 million diluted shares, up 41.2% year over year. Revenue from our 10 largest clients accounted for 41% of revenue for the three months ended September 30, 2019, compared to 39% in the same period in the prior year.

And the average spend per client from our 10 largest clients increased from GBP 2.6 billion to GBP 3.3 million for the three months ended September 30, 2019. We continue to grow outside of our top 10 clients. The number of clients who generated revenue of at least GBP 1 million on a rolling 12-month basis was 62 at September 30, 2019, compared to 52 at September 30, 2018. These large clients operate in all three of our largest geographical locations: North America, Europe and U.K.

In the three months ended September 30, 2019, North America accounted for 27% of revenue compared to 27% in the same period last year; Europe accounted for 26% of revenue compared to 29% in the same period last year; and the U.K., 45% of revenue compared to 44% in the same period last year. Revenue from North America grew 25.5% for the three months ended September 30, 2019, over the same quarter of 2018. Comparing the same periods, revenue from Europe grew 10.6% and the U.K. 27%.

As John mentioned, starting this quarter, we will be breaking out the revenue for the Rest of World. This revenue was previously attributed to the U.K. We grew in all three of our industry verticals during the quarter. Revenue from Payments and Financial services grew 22.4% for the three months ended September 30, 2019, over the same quarter of 2018 and accounted for 53% of revenue, unchanged from the same period last year.

Revenue from TMT grew 17% for the three months ended September 30, 2019, over the same quarter of 2018 and accounted for 25% of revenue compared to 27% in the same period last year. Revenue from Other grew 38% for the three months ended September 30, 2019, over the same quarter of 2018, and now accounts for 22% of revenue compared to 20% in the previous fiscal year. This growth was mainly driven by clients in the consumer products goods, retail and services sector. Our adjusted free cash flow was GBP 13.5 million for the three months ended September 30, 2019, compared to GBP 0.3 million during the same period last year.

Our adjusted free cash flow is our net cash provided by or used in operating activities, plus grants received less net purchases of noncurrent tangible and intangible assets. Capex for the three months ended September 30, 2019, as a percentage of revenue was 3% compared to 2.9% in the same period last year. Our guidance for Q2 fiscal-year 2020 is as follows: We expect revenues will be in the range of GBP 82.5 million to GBP 83.2 million, representing constant currency growth of between 20% and 21%. We expect adjusted diluted EPS to be in the range of 21p to 22p per share.

Our full-year guidance for fiscal-year 2020 is as follows: We expect revenues will be in the range of GBP 340 million to GBP 343 million, representing constant currency growth of between 22% and 23%. We expect adjusted diluted EPS to be in the range of 86p to 89p per share. Our guidance for the full year fiscal-year 2020 is below the range we provided last quarter due solely to a movement in foreign exchange rates as a result of the strengthening of the British pound. We provided guidance for the full fiscal-year 2020 last quarter using the exchange rates at the end of August when the exchange rate was GBP 1 to USD 1.21 and EUR 1.10.

This quarter, we are providing guidance for Q2 fiscal 2020 and for the full fiscal-year 2020, using the exchange rates at the end of October, when the exchange rate was GBP 1 to USD 1.29 and EUR 1.16, an increase of 7% and 5%, respectively. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

Questions & Answers:

Operator

Certainly. [Operator instructions] Bryan Bergin with Cowen. Your line is open.

Bryan Bergin -- Cowen and Company -- Analyst

Thank you. I wanted to start with Intuitus. Can you comment on the scale of that business? Just trying to connect the change in guidance on a constant currency basis attributable to that versus your organic? And also comment on just the planned go-to-market strategy with that entity?

John Cotterell -- Chief Executive Officer

Brian, thanks for that. Yes. So Intuitus for us is all around our focus on private equity, building their relationships with these guys who end up owning a number of portfolio companies and then driving the downstream transformation opportunities that will come out of it. So the major benefit that we see to Endava as a business will be through the leverage that comes from those relationships with the PE owners.

It's actually in revenue terms, it's less than 2% of the Endava revenue. So the impact on us is very, very low in terms of actually driving direct revenue. It is much more about that leverage through the customer relationships that we can get.

Bryan Bergin -- Cowen and Company -- Analyst

OK. Makes sense. And then on the TMT vertical. Can you just comment on what you're seeing in that industry vertical? I think it's -- it ticked down this quarter.

What are your opportunities to just drive that back to higher growth levels?

John Cotterell -- Chief Executive Officer

Yes. So I mean, obviously, across our verticals, we're seeing continued strength in Payment and Financial Services and obviously, as well, from the numbers, Other continues to step up very strongly. TMT remains strong for us. It's just not as strong as we're getting in the Other areas.

Actually, with TMT, a lot of the strength is in the U.S. rather than in Europe, which is good news for us. And as we continue to get the results of the investment that we've made in the sales teams across the U.S., we think that will pull-through on the TMT side as well.

Bryan Bergin -- Cowen and Company -- Analyst

Thank you.

Operator

Maggie Nolan with William Blair. Your line is open.

Maggie Nolan -- William Blair and Company -- Analyst

Thank you. I wanted to talk about the delivery locations, just given that you're breaking out Rest of World now. Are there future delivery locations that you feel need to be broken out? And then also in that same vein, just given that Velocity Partners is well integrated into the business at this point, can you comment on how you've done in terms of growing Latin America as a delivery center?

John Cotterell -- Chief Executive Officer

Sure. So I mean, obviously, we're breaking out Rest of the World from a revenue perspective. And as with our previous expansions into new areas of geography, we tend to lead on client relationships and revenue before investing behind that in terms of delivery locations. Rest of the World, we pulled out because it's hit that sort of 2% mark, and it's moving quite strongly.

Largely, it's been Payments and Financial Services. And it's mainly been existing client relationships where someone has moved from an existing client in Europe or North America, into the Rest of the World, and then has taken us with them into their new role. Now if you look at it from a delivery locations point of view, obviously, our strategy is to have nearshore similar time zone delivery capability to the majority of our clients. So as that Rest of the World, which is Southeast Asia and Middle East at the moment, as that builds and grows, we will be looking to establish delivery capability in the Asia Pac region, but not imminently, would be my call on that.

We want to see the client revenues grow a little bit more before we do that. What was the second part of your question?

Maggie Nolan -- William Blair and Company -- Analyst

The success building out Latin America as a delivery location since that's a bit newer geography for you?

John Cotterell -- Chief Executive Officer

Right, yes. So yes, so the Velocity deal has -- actually, Mark's got some numbers.

Mark Thurston -- Chief Financial Officer

Yes. So I think we're continuing to sort of grow Lat Am. So our headcount is up in the region. So we closed Q4 about 780.

We've moved that number up sort of 6% sequentially quarter-on-quarter. So we're making great inroads into that territory and supporting our growth in North America, as we sort of pointed out the revenues grew 25% year on year. So good progress, I'd say.

John Cotterell -- Chief Executive Officer

Yes. And just a little bit of color on that. The two main areas -- the two main countries we've grown in are Colombia and in Argentina, both of which have a very good delivery culture and mindset, are very, very well aligned with the way in which Endava operates now. And I see that growth that Mark was just calling out as coming out of that good integration that we've had.

Maggie Nolan -- William Blair and Company -- Analyst

Thank you. And then on the margins, can you break down some of the puts and takes of the margin strength at both the gross and adjusted PBT level?

Mark Thurston -- Chief Financial Officer

Sure. So on the gross margin, we had strong results. On an adjusted basis, we're at 42.7%. So -- 42.8%, sorry, which was up from where we were at Q4.

We benefited basically from continued pricing and rates. Utilization did come off somewhat as we sort of flagged in the previous sort of course. So through the course of 2019, we've been operating at elevated levels of utilization, which is above 70% for that -- for us, and that has come down to a more normalized levels currently. So that mitigated some of the strength that we saw in the positive pricing environment.

But similarly, while we also got the advantage of the gross margin, which is about one percentage point, SG&A was also lower than anticipated. And there's a number of small items behind that. We do believe that we have further public company costs to come in. We suspect that we were going to have to put some further work into our Sarbanes-Oxley because of the size of the free float at the moment.

So that roughly took us up a good sort of 2.5 percentage points over Q4. And then we received a one-off gain as a result, basically, of implementing IFRS 16, which grosses up the balance sheet for mainly property leases. That gain came about because of the Captive. So we recognized an asset on to the balance sheet.

And because the sublet income was -- had a slight margin on it, it actually produced a gain when we derecognized it and recognized the sublease income as a financial asset in the balance sheet, and that's approximately 0.6% of further rise. So the adjusted PBT margin for the quarter is exceptionally strong at 20.5%. I sort of pointed out that 0.6% of that is due to IFRS 16 and this Captive gain. So that takes down to about 19.9%.

And while we're seeing a positive pricing environment, I expect utilization to come down a little bit during Q2 to a more normalized level. And so I think you could read in that Q1 was pretty exceptional for us, and that we should get down to a more normalized level of adjusted PBT margin.

Maggie Nolan -- William Blair and Company -- Analyst

Thank you.

Operator

Bryan Keane with Deutsche Bank. Your line is open.

Bryan Keane -- Deutsche Bank -- Analyst

I wanted to ask on Payments and Financial Services. It continues to be a robust area for you guys. Is there any callouts in specific areas that you guys are seeing extra demand? Actually curious a little bit about blockchain. Are you seeing a pickup in demand there, in particular?

John Cotterell -- Chief Executive Officer

Yes. So more generally, in the financial services, arena, payments continues to be a very, very strong area for us. Is enabling us to expand geographically. So some of the Rest of the World work has been in the payment space, as well as doubling down with existing clients and seeing large expansion there.

And that continues to be in the traditional areas around acquiring much in portals, clearing and so on. Other areas where we've seen activity have been insurance. Insurance is building up strongly for us. Asset and wealth management continues to see a lot of activity, partly driven by regulatory changes in that market segment, but also some of the sort of next-gen banking challenges, open banking and so on is also driving expansion in that space.

Specifically on blockchain, actually, we're seeing some things get into production environments, but most of what we're seeing on blockchain is more of the proof-of-concept and prototyping level. We're seeing quite a lot of activity in that -- as in three or four clients working around blockchain challenges in the exchanges space, increasing the security of interaction around exchanges. Outside of the Payments and Financial Services area, the largest area of activity we see is in the logistics space, was once again around shipping goods and being able to track and undertake all of the customs and so on activities around logistics.

Bryan Keane -- Deutsche Bank -- Analyst

OK. That's helpful. And then I wanted to ask about the Bain & Company partnership. Is there a way to think about how much revenue that contributes -- that partnership contributes for you guys? And then going forward now with this additional announcement, is there a growth rate or a way to think about how big this business could be with Bain combined?

John Cotterell -- Chief Executive Officer

So -- I mean, the relationship with Bain continues to strengthen, both in the PE space that I covered in the opening remarks, but also in the wider areas around digital transformation and some of the work that we do with them around a product that they can then take to their clients. We're continuing to win new logos together and the number of clients that we're working alongside each other are expanding. It's quite difficult to separate out and measure because we find ourselves in situations where we're the incumbent in a client, and we introduce Bain to do what they do well, where they're an incumbent, they introduce us. We also find ourselves in situations where we operate in subcontract to Bain.

So actually being able to separate out and measure as a proportion of Endava's business, where and how all of that has occurred is quite difficult for us. What I can say is where we are in subcontract to Bain, they are one of the clients that are in the greater than GBP 1 million turnover category now.

Bryan Keane -- Deutsche Bank -- Analyst

OK. Great. Thanks for the help.

Operator

Ashwin Shirvaikar with Citi. Your line is open.

Ashwin Shirvaikar -- Citi -- Analyst

Thank you. Good morning, folks. My first question is, John, you mentioned doing these architecture reviews and so on and so forth. You've mentioned a little bit about the downstream opportunity.

You -- can you maybe provide more details with regards to -- are you already beginning to see that downstream opportunity emerge? And would you, in general, expect sort of some kind of an acceleration in the size of relationships, size of contracts to emerge from this?

John Cotterell -- Chief Executive Officer

So at a headline level, yes, we are seeing the downstream opportunities. And yes, we are converting some of them. I think, Ashwin, from -- from what you know about us, there's always been a reasonably significant proportion of Endava's revenue that's come through these PE client relationships. And doing the transformation -- the platform transformation work that is needed as part of those clients' investment thesis.

So the work we're doing with Bain and the Intuitus acquisition is both in the PE space about widening those PE relationships and the conversations that we can have with the owners of these businesses, so that we can help them create their thesis around technology transformation and the value creation of the platform that they get out of us, but then execute on it once they've acquired the businesses. So we have a significant number of portfolio companies, and we might dig into that number for you next time where we're working with the portfolio companies on transformation. With the Intuitus guys, as I mentioned a moment ago, we're already seeing downstream transformation leads coming through the relationships that they have at that level.

Ashwin Shirvaikar -- Citi -- Analyst

Got it. And broader than that, are you currently leaving revenue growth opportunities sort of untapped because of supply constraints? We do hear that from others in the space. In other words, can you grow faster if you wanted to?

John Cotterell -- Chief Executive Officer

I mean, I think we never tap into 100% of the opportunity in front of us because -- it's more about being able to get the teams together in a timely fashion for clients than around the general recruitment and retention. Our ability to recruit remains strong. Our retention is high. You can see that in our attrition figures, which are continuing to trend down.

And in the locations where we're operating, we broadly are able to draw in the talent that we need to meet our top line. But as I said, it's never 100% that you get through that.

Ashwin Shirvaikar -- Citi -- Analyst

Great. So I guess, partly where I was going with that was the headcount growth in the quarter, I think, might be the lowest you've ever reported. Am I to then assume that, that is a temporary circumstance, and we should see headcount growth reaccelerate?

Mark Thurston -- Chief Financial Officer

So I think on the headcount point, you need to take account of the disposal of Worldpay. So John called out 13.9%. It's near a 17% when you call out -- doing on a like-for-like basis. And then you compare that with the growth that we had year on year, which is a constant currency at 21.5%, then it's broadly similar.

So you've got two percentage points differential. So the -- I don't think we're sort of constrained. I think the -- our utilization as we saw have been trailing, was elevated last year. It is starting to trend down to more normalized levels.

So the headcount growth is what we will require basically to deliver sustainable margin going forward.

Ashwin Shirvaikar -- Citi -- Analyst

Understood. Thank .you

Operator

Charlie Brennan with Credit Suisse. Your line is open.

Charlie Brennan -- Credit Suisse -- Analyst

Great. Thanks very much for taking the questions. Just two actually. Firstly, coming back on the margin point.

You continue to call out favorable pricing. Is there a way for us to think about how much of your existing book of business you've been able to reprice? And how much more of a future benefits is that going to be? And then secondly, back on this Intuitus deal, it looks like they're a mid-market specialists, and I typically think about you servicing larger clients. Have I misrepresented Intuitus? And how do you feel about the mid-market space?

John Cotterell -- Chief Executive Officer

Want to do first one, Mark?

Mark Thurston -- Chief Financial Officer

Yes. So pricing, it does continue to be favorable for us. We certainly say in terms of the metrics that can be calculated in terms of revenue ahead. So there was a healthy sequential increase quarter-on-quarter, albeit a little bit flatter by the FX rates.

But we definitely see it on a like-for-like basis in our day rates or revenue per man day rates. So it is a benign environment. And we've continued to see this momentum through 2019. And so far, the outlook into 2020 that we could see, it also remains benign.

We -- in terms of the repricing, I guess, you're referring to renewal conversations with clients. So I think we said in the past that we tend to get premium pricing when we secure new work for clients because of the scarcity of the work, the talent and the expertise that we bring. But we still manage to secure meaningful rate increases when we come to renew with our clients that we've been in situ with for quite some time. So we are benefiting from that positive pricing environment, is basically, I think, a consequence of where we operate in the market.

At the moment, we are not seeing any sort of weakness at the moment.

John Cotterell -- Chief Executive Officer

Right. And on your Intuitus question, yes, they've been focused around mid-market. They are moving up into a little bit more of the top tier. It does actually complement very, very well what we do with Bain, which is very, very much focused on the top-tier global PE firms and actually through their delivery model because they have access to 100 C-suite level freelancers in the business.

So it provides us with a huge amount of extra flexibility to respond to demand in the space. And the challenge in the space is the demand comes along very, very quickly. So a client will call up and go, I need a team on Monday to have a look at this prospective acquisition. And the senior level of freelancers will enable us to respond, not just to the existing client base that Intuitus have, but also much more effectively, working alongside Bain, where, frankly, we'd been turning work away.

Charlie Brennan -- Credit Suisse -- Analyst

Right. Thank you.

Operator

Mayank Tandon with Needham & Company. Your line is open.

Mayank Tandon -- Needham and Company -- Analyst

Thank you. Could you comment on accretion, where it is today and how does this compare to, say, six, 12 months ago? You mentioned that it has been down ticking. So would love to get some perspective on that. And in the same way, and if you could talk about your expectations for wage inflation, and how you see that rolling through the year?

John Cotterell -- Chief Executive Officer

Yes. So attrition has been coming down. I mean, we target staying below 15%, which we've remained below the entire period on the public market. But it did edge up toward it at one point, about 1.5 years ago and has been trending down steadily since then, to probably a couple of percentage points off that peak.

Mark Thurston -- Chief Financial Officer

I didn't catch the second question, actually, Mayank.

Mayank Tandon -- Needham and Company -- Analyst

Right. Mark, I was asking about the wage inflation, how you see that rolling through the year, the impact that you expect. Maybe if you could talk about it in terms of some of your core markets, how does that flow through the model?

Mark Thurston -- Chief Financial Officer

So we always have a -- the competition for talent always as high as John sort of said. But actually, our ability to recruit at a sensible price point is undiminished. And I -- we basically attribute to -- this to our -- the successful business that we built, the brand that attracts TAM, which means that we don't have to pay market-leading size to attract that talent. And you can see that with the attrition rates where they are, that we're doing a good job on that.

In terms of the cost going forward, in terms of average cost per head, it is basically at the levels that we have seen sort of historically where we manage the cost base, certainly, delivery cost base through, let's call it, a pyramid structure where basically people come into the organization and develop skills and expertise that they are able -- we are able then to pass on to our clients as they increase their seniority through sort of Endava. So we tend to get a margin diminution when we do our primary pay round, which is 1st of January. But then as we go through renewal conversations with clients, we tend to recover that cost through the balance of the year. So we're not seeing any margin pressure really from the cost of securing talent.

Mayank Tandon -- Needham and Company -- Analyst

That's helpful. And then if I could ask one more in terms of just competition, as you scale, then I would imagine are competing on larger opportunities in the market. How has the competitive landscape changed for you, if at all?

John Cotterell -- Chief Executive Officer

So the competitive landscape continues to be fairly similar. It's always a competitive market. The larger players that we run up against are Accenture and EPAM. They're probably the most common two that we see.

But demand is strong, and there's good opportunities with the client base. And so we continue to win well right across the portfolio and sectors driving the top line growth that you see.

Mayank Tandon -- Needham and Company -- Analyst

Excellent. Thank you.

Operator

Joseph Foresi with Cantor Fitzgerald. Your line is open.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. Most of the questions have been answered as you guys can imagine. But the first one, I'd like to start with is just around inorganic growth. Obviously, you did sort of a smaller tuck-in acquisition.

But you've created some more flexibility on the balance sheet I know to the extent that -- well, to the extent that you can talk about it, maybe you can spread some light on -- or shed some light on potential acquisition targets. Would you be looking to do something smaller or larger, tuck-in in nature, transformative and any particular vertical that you might be looking at?

John Cotterell -- Chief Executive Officer

So yes, we continue to look for the right sorts of inorganic acquisition opportunities. They will very much fit in line with the strategy that we've previously articulated to market around tuck-in opportunities that we can integrate closely into the business. We're looking for opportunities that are going to add either sector or technology capability to the business but may also add some delivery capability, if we're looking at new geographies. For instance, when we get to wanting delivery capability in Asia Pac, we may well look at an acquisition to assist us in doing that.

We are actively looking, as I called out in the last quarter. And as opportunities come through, we'll close them and announce them to market.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. And then kind of building on Mayank's question, just on the political climate in the regions that you're servicing from the Ukraine and Latin America, there's been obviously a lot of turmoil in the global political arena. Maybe you could talk about any impact that you're seeing there, anything that you're monitoring from a delivery perspective, I'd love to get your feedback on that.

John Cotterell -- Chief Executive Officer

OK. So I mean, the first thing to say is we are not in the Ukraine or Russia for that matter.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

I'm sorry, I meant Romania. I apologize.

John Cotterell -- Chief Executive Officer

Yes. So largely, we've gone for places that they offer opportunity to establish a leading position and attract great staff because they're not the silicon valleys in established parts of the world. Now we've adopted an approach choosing locations that are emerging, but not too politically sensitive. So Romania, for instance, as you call out, is within the European Union and has been maturing strongly as a nation since they joined the European Union back in 2007.

So we plot a path around not finding ourselves strongly with strong delivery locations in highly politically sensitive territories. And that's how we manage that political risk.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. And then just the last one for me around margins. Do you foresee a time where you may review the margin profile over the long term? How should we think about sort of -- I know it's been asked a couple of different ways, but -- do you review that on an annual basis? Will you review it again in 2020 because, obviously, the margins could potentially, at least, they appear like they should or could potentially expand at some point?

Mark Thurston -- Chief Financial Officer

Yes, I think that's a good point. I think at the moment, it's a little bit too early to call. We just said we just delivered 20.5%, and there was a one-off sort of contributed to that. And we certainly came into the IPO with a target margin of 17%, and we've done better than that almost every quarter since.

I would prefer to make that call as we get toward March next year when we see our Q3, as I said. Our utilization has come down from the elevated levels that we had during the course of '19, so that we're on normal range of operation. And we're still generating strong gross margin because of the -- probably because of the pricing sort of environment. I think we need to also establish what our go ahead level of SG&A is.

And then as we leverage, we should get some traction in reducing that as a percentage of revenue. So I think it's probably about six months away, to be frank, Joe, before we sort of call out any change.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Thank you again.

Operator

[Operator instructions] Arvind Ramnani with KeyBanc. Your line is open.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Hi. Thanks for taking my question. I'll ask another question on the private equity Bain partnership. And my question on that is, how are you organized from a sales perspective? Is it something that your senior management kind of work selectively and plan out course of action or do you have dedicated kind of sales teams on that -- on the opportunity related to Bain?

John Cotterell -- Chief Executive Officer

So we have a steering group that we operate with Bain, which includes myself and senior Bain leadership team folks. And the amount and the level of activity is fairly broad. So we draw in the relevant business winning teams from Endava and Bain on an opportunity-by-opportunity basis in order to close business together, win alongside each other and so on. And that works very well.

We've been doing that for around two years now and going down the learning curve of how we win together. And it's reached that point where it's scaled across both organizations, so let me describe it that way, where lots of people on each side are involved in executing against it.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Terrific. And then just a quick follow-up on the same topic. Do you have any kind of rules on the engagement around essentially kind of conflict where you're going and helping potential competitor of one of the clients or has that -- you really haven't run into such situations?

John Cotterell -- Chief Executive Officer

So we -- it's a very open relationship where we're not restricting each other particularly. So if Bain introduce us somewhere or we introduce them, we don't restrict downstream behavior to being alongside or through each other. But we have a clear preference to actually work together and make these things happen together because we believe that when you put the technology and the organizational and commercial capabilities across our two organizations that we have together in a structured fashion, you get a much more powerful result than the client can get just by put into organizations with those capabilities alongside each other who've never worked together before. It's the nature of technology, how do you actually get that dimension of change that -- that ideation of what's going to make a difference into the sort of strategy and organizational change discussions.

And if you don't have that operating closely enough together, it's tough to work.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Great. And if I can squeeze one last one?

John Cotterell -- Chief Executive Officer

Sorry, go on.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Great. And if I can squeeze one last one in, is around the topic of automation. I mean, I know you kind of talk about it a lot within the industry itself, but if you can kind of just give us a view of --

John Cotterell -- Chief Executive Officer

Sorry, did we lose you or was that?

Operator

The questioner has dropped.

John Cotterell -- Chief Executive Officer

OK.

Operator

There are no further questions at this time. I would now like to turn the call back over to the presenters for final remarks.

John Cotterell -- Chief Executive Officer

Thank you all for joining the call, and I hope that you've picked up through it on our continued optimism about our ability to deliver sustainable growth going forward. And we look forward to speaking to you all again next quarter. Thank you.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Laurence Madsen -- Investor Relations

John Cotterell -- Chief Executive Officer

Mark Thurston -- Chief Financial Officer

Bryan Bergin -- Cowen and Company -- Analyst

Maggie Nolan -- William Blair and Company -- Analyst

Bryan Keane -- Deutsche Bank -- Analyst

Ashwin Shirvaikar -- Citi -- Analyst

Charlie Brennan -- Credit Suisse -- Analyst

Mayank Tandon -- Needham and Company -- Analyst

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

More DAVA analysis

All earnings call transcripts