Endava PLC (DAVA) 2019 Q1 法說會逐字稿

Good morning.

My name is Jessa, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Endava Earnings Release First Quarter Fiscal Year 2019 Conference Call.

(Operator Instructions) Thank you.

Ms. Laurence Madsen, Manager of Investor Relations, you may begin your conference.

Thank you.

Good afternoon, everyone, and welcome to Endava's First Quarter 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 '19 and for the full fiscal year 2019 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.

Thank you very much, everyone, for joining us on our Q1 Fiscal Year '19 Earnings Call.

We're pleased with our results for the quarter with revenue of GBP 66.4 million, up 39.7% year-on-year from GBP 47.5 million in the same quarter in the previous fiscal year.

Our revenue growth rate at constant currency was 39.8%.

We ended the quarter with 262 active clients compared to 258 at the end of June 2018 and 192 in the same quarter in the previous fiscal year.

We define active clients as those who paid us for services over the preceding 12-month period.

Additionally, during the quarter, we recognized revenue for 15 new logos in all 3 regions and across all verticals.

The number of our largest clients, who spend greater than GBP 1 million per annum with us, grew over 40% from 37 in the first quarter of fiscal year '18 to 52 in the first quarter of fiscal year '19.

And of these, the number spending over GBP 5 million doubled from 5 to 10 during the same period.

On a rolling 12 months basis, revenue from clients who spend greater than GBP 1 million per annum with us increased 34% year-over-year in the first quarter of fiscal year '19, while revenue from those who spent over GBP 5 million increased 58% in the same period.

This is in line with our focus on growing our large account relationships built on the quality of our services and the impacts that technology can have on their business models.

We continued to expand in all 3 of our industry verticals.

Our Payments and Financial Services vertical grew 24% year-over-year.

Worldpay continues to grow and remains our largest client.

Revenue from Worldpay accounts for 9.8% of revenue at the end of September 2018 compared to 12.1% in the same quarter of the previous fiscal year and 9.4% in the previous quarter.

We continued to diversify our geographic and sector revenue mix.

We're a good way towards completing the integration of Velocity Partners.

As I mentioned in our last earnings call, we completed the integration of the sales team.

And this quarter, our combined teams signed up 5 new logos in North America, mainly in the TMT sector.

North America accounted for 27% of our revenue at the end of Q1 fiscal year '19, up from 15% in the same quarter last year and continues to expand strongly.

Expansion in our other sectors was strong, growing to 20% of our revenue in quarter 1 fiscal year '19, up from 11% in the equivalent period last year.

The consumer goods industry was one of the strong areas of growth and is facing significant challenges.

Some of the key areas relevant to the services Endava provides include digitization to drive differentiation, customer insights and buying behavior as well as changing consumer demands and engagement.

One of our recent projects in this vertical has been in the U.S. where Endava partnered with Citizen Watch to develop the new My Citizen app that will enhance the overall ownership experience and help streamline the timepiece registration process.

By giving users access to optical character recognition technology using their phones' camera, a user can now recognize their watch model using front and back of the watch scans.

With this, Citizen gains valuable insight into their customers, while watch owners now quickly and easily complete warranty detail, build their watch collection dashboard and gain access to user guides, video and other (inaudible) content.

With this information saved and managed within the My Citizen app, users will house all details in one location and receive notifications for new product releases and quick-tap access to setting instructions when daylight savings or time zone changes have been detected.

Endava is also working with a global CPG company to build a new total rewards system that will be launched to their employees in early 2019.

This brand-new platform replaces a legacy system and will enable both staff and managers globally to see their total rewards, enabling the company to manage employee compensation much more efficiently.

Endava has also won a partnership with a global consumer goods company initially as their European mobile application service provider.

As you know, on our last earnings call, we announced our partnership with Bain & Company bringing together Bain's management consulting services and Endava's next-generation technology services.

This partnership has been accelerated by our formal announcement, including a significant win starting up a digital transformation program for a Fortune 500 company and the joint delivery of an analytics tool that helps CPG clients to improve their category value creation discussions with retailers.

On the technology side, Endava is seeing an increase in the demand for strategic assistance in bringing DevOps culture and ways of working in traditional enterprise settings such as financial services, logistics and other sectors.

Broadly speaking, the demand is for expertise in the design and realization of continuous delivery pipelines as well as the enabling techniques and changes that teams need to embrace and build a DevOps culture.

Moving to a DevOps culture greatly accelerates agility within organizations.

Going beyond simple continuous integration systems to whole-scale continuous delivery approaches allows enterprises to embrace automation, take advantage of large-scale test automation efforts, reduce service downtime and increase the frequency of software releases.

Endava is well placed to support this demand by bringing cross-domain expertise to demanding, high-volume enterprise clients.

An Endava client in the global logistics space wanted to dramatically improve the availability and consistency of their online portal, a business-critical component of their overall customer experience and interaction model.

To achieve this, Endava helps them embrace agile and DevOps ways of working, gaining leverage through the provisioning of a continuous delivery pipeline.

As a result, uptime improved dramatically.

And releases, which previously took months to plan and execute, were now deployable in minutes, enabling the client to become much more responsive to their market.

We ended the quarter with 5,182 employees, a 32% increase compared to the same quarter in the previous fiscal year.

We increased our average operational employees by 268 compared to the previous quarter, for a total of 4,608 people.

Our average operational headcount increased 30% year-over-year.

During the quarter, we moved to a new and much larger office in New York City, where the majority of our U.S.-based sales team is located.

And finally, with Brexit drawing closer, we've reviewed any potential impact across the business.

Currently, we have not identified any clients who are adjusting their spending plans with us as a result of Brexit.

I will now pass the call on to Mark Thurston, our CFO, who will walk you through our financial results.

Thanks, John.

Here are some highlights for the most recent quarter.

Endava's revenue totaled GBP 66.4 million for the 3 months ended September 30, 2018, compared to GBP 47.5 million in the same period last year, a 39.7% increase over the same period in the prior year.

In constant currency, our revenue growth rate was 39.8%.

Our adjusted gross profit was GBP 26.8 million for the 3 months ended September 30, 2018, compared to GBP 18.4 million in the same period last year, a 46.0% increase over the same period in the prior year.

Our adjusted gross profit margin was 40.4% for the quarter, up from 38.6% for the same period last year.

The year-over-year improvement was mainly due to continued improvement in pricing and strong utilization.

Adjusted gross profit is our reported gross profit excluding allocated costs of sales and the impact of share-based compensation.

Adjusted gross profit margin is calculated as a percentage of our total revenue.

Our adjusted profit before tax for the 3 months ended September 30, 2018, was GBP 11.7 million compared to GBP 7.8 million for the same period last year, a 49.4% year-over-year increase.

Our adjusted profit before tax margin is 17.6% for the 3 months ended September 30, 2018, compared to 16.4% for the same period last year.

The year-over-year improvement in our adjusted profit before tax margin is mainly the improved adjusted gross margin offset by increased spending on SG&A due to Velocity Partners integration and public company running costs.

Adjusted PBT is defined as our profit before taxes adjusted to exclude the impacts of share-based compensation expense, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, fair value movements on contingent consideration and initial public offering expenses incurred, all of which are noncash other than realized foreign currency exchange gains and losses and initial public offering expenses.

Adjusted PBT margin is calculated as a percentage of our total revenue.

Our adjusted diluted EPS of 17p for the 3 months ended September 30, 2018, calculated on 53.8 million diluted shares, as compared to 13p for the same period last year calculated on 49.2 million diluted shares, up 30.8% year-over-year.

We are growing with our largest clients.

Revenue from our 10 largest clients decreased to 39% of revenue for the 3 months ended September 30, 2018, from 46% of revenue for the same period last year, but the average spend per client from our 10 largest clients increased from GBP 2.2 million to GBP 2.6 million.

We are also growing outside of our top 10 clients.

The number of clients who paid us at least GBP 1 million on a rolling 12-month basis grew to 52 at September 30, 2018, compared to 37 at September 30, 2017, and to 46 in June 30, 2018.

These large clients operate in all 3 of our geographical locations North America, Europe and U.K.

We continued to diversify our geographic mix.

In the 3 months ended September 30, 2018, North America accounted for 27% of revenue compared to 15% in the same period last year.

Europe accounted for 29% of revenue compared to 37% in the same period last year, and the U.K. for 44% of revenue compared to 48% in the same period last year.

Revenue from North America grew 156% for the 3 months ended September 30, 2018, over the same quarter of 2017, with Velocity Partners making a significant contribution.

Comparing the same periods, revenue from Europe grew 7%, and in the U.K. 30%.

We grew in all 3 of our industry verticals during the quarter.

Revenue from Payments and Financial Services grew 24% for the 3 months ended September 30, 2018, over the same quarter of 2017 and accounted for 53% of revenue compared to 60% in the same period last year.

Revenue from TMT grew 32% for the 3 months ended September 30, 2018, over the same quarter of 2017 and accounted for 27% of revenue compared to 29% in the same period last year.

Revenue from Other grew 139% for the 3 months period ended September 30, 2018, over the same quarter of 2017 and now accounts for 20% of revenue compared to 11% in the previous fiscal year.

Our free cash flow was GBP 0.3 million for the 3 months ended September 30, 2018, compared to GBP 2.2 million during the same period last year.

Free cash flow was impacted by exceptional cash outflows associated with our IPO and an increase in working capital arising from the timing of receipts from some of our larger clients.

In addition, we did not receive payment for the research and development from the U.K. tax authorities in this quarter as we did in the comparable period.

Our free cash flow is our net cash provided by or used in operating activities plus grants received, less purchases of noncurrent tangible and intangible assets.

CapEx for the 3 months ended September 30, 2018, as a percentage of revenue was 2.9%, down from 3.4% in the same period last year.

Our IFRS results for the 3 months to September 30 reflect a fair value adjustment to contingent consideration of GBP 5.8 million in relation to the Velocity Partners acquisition, which is shown as a charge in net finance expense.

The contingent consideration was recognized on acquisition as a financial liability but was settled on IPO date by equity shares.

The equity shares were measured using the share price at the IPO, which was higher than the original estimated share price used to record the financial liability at the date of acquisition.

The fair value adjustment is excluded as part of the adjusted profit before tax financial measure.

The financial liability was fully settled, and the other reserves in the balance sheet was increased by the equity shares to be issued.

Our guidance for Q2 fiscal '19 is as follows.

We expect revenues will be in the range of GBP 67.0 million to GBP 67.5 million, representing constant currency growth of between 33% and 34%.

We expect diluted adjusted EPS to be in the range of 15.0p to 16.0p per share.

Our guidance for the full fiscal year 2019 is as follows.

We expect revenues will be in the range of GBP 275 million to GBP 278 million, representing constant currency growth of between 25% and 26%.

We expect diluted adjusted EPS to be in the range of 64p to 66p per share.

This concludes our prepared comments.

Operator, we are now ready to open the line for Q&A.

(Operator Instructions) Your first question comes from the line of Maggie Nolan from William Blair.

I'm hoping you can give us a little more information on the 5 new logos that you signed in North America and whether any of these has potential to become meaningful customers, what kind of work you're doing and why you think you won the contracts, any additional information you can share.

Maggie, thanks for that.

Yes, 4 out of the 5 new logos that we signed in North America are in the TMT segment, and the work is across a whole bundle of different areas across Endava.

I haven't actually got the breakdown in front of me, and I might come back to -- as to what are the specific projects that we've been undertaking for them.

Sure.

That's fine.

And then turning our attention to adjusted PBT.

You had a strong quarter in terms of the margin there.

I know that that's a metric that you're looking to expand over the coming years.

Can you give us an update on the expectation for adjusted PBT margin for the full fiscal year and what level of expansion you expect to see?

So you're right.

We did have a good level of adjusted PBT.

So we were at 17.6%.

And we have guided over the medium term for 17%, but the quarter was very strong on adjusted gross margin due to high utilization.

We see that coming off somewhat as we go forward through the year.

And especially, we need to be cognizant of [main paid runs] taking place with effect from the 1st of January.

So I would view the quarter as being normally high but a sort of staging point on an annual basis sort of moving towards that 17% medium-term target.

Your next question comes from the line of Bryan Keane from Deutsche Bank.

Just want to ask on that guidance.

Is there a way to think about the tax rate expected and maybe share count for fiscal year '19?

Yes.

So the tax rate, adjusted tax rate, and which we're focusing on, for the quarter was 19.4%.

I would say, I would guide that we will be between sort of 19% and 20%, which is in line with what we've guided previously.

In terms of the share counts, we -- the current share count is 53.8 million for the quarter.

It will move up in Q2 by circa about 1 million as we get the full dilutionary impact of the IPO coming through and also the contingent consideration shares related to Velocity Partners.

Okay, helpful.

And then on headcount, obviously strong headcount growth.

Can you talk a little bit about expectations for headcount growth this year?

And in particular, if you look at your headcount, it's coming mostly from Central Europe -- yes, from Central Europe and Latin America, not so much in Western Europe and North America.

Is that the right way to think about headcount as it grows, growing in those areas versus Western Europe and North America as it goes forward?

So on headcount growth, I think, as we touched on last quarter, had fallen a little bit behind our revenue growth and pushing our attrition up a little -- not attrition, our utilization up a little bit.

And one of the things that's happened this quarter is that we caught up a little bit on the headcount growth, and we see that trend continuing.

The mixture between our initial delivery centers and our onshore people, we expect to maintain broadly.

And if you look at the mix between Latin America and Central Europe, that's also been broadly maintained.

So we're seeing all parts of the business growing pretty much in-step.

Okay.

And then just final question, just thinking about overall IT spend and maybe discretionary spend going into the fourth quarter.

It sounds pretty healthy, with no signs of weakness whatsoever, but could you just maybe talk about broader implications for IT spend as you talk to clients heading into -- or fourth calendar year quarter obviously and what people are saying?

Yes.

So the conversations we're having with clients remain very strong.

So not forgetting we operate within a subsegment of the market which is around next-gen technologies and digital and automation.

So we can see, continue to see new opportunities, new projects, new areas of business changes that we can [IDAs] and work on with clients.

And if we look forward, we see the mixture of our contracted and committed spend with clients and the pipeline that's coming through on top of that being a consistent mix with the guidance that we've given.

Your next question comes from the line of Brian Essex from Morgan Stanley.

I was wondering if maybe you could expand a little bit on the Worldpay relationship.

I mean it still remains a meaningful customer, which is nice to see that growing.

Considering the consolidation we've seen on that end, is the relationship still with legacy Worldpay?

Or have you started to see signs that they might be looking at utilizing your services throughout the broader consolidated company?

Maybe if we can just get a little bit more color on how that relationship is progressing.

Sure.

So the relationship with Worldpay remains strong, and we're building the much more senior relationships now with the guys in Cincinnati and so on as part of that.

As I touched on earlier, the Worldpay proportion of our revenues grew from 9.4% last quarter to 9.8% this quarter.

So that was a 13% quarter-over-quarter growth, and most of that came in the core part of our relationship with them rather than in the captive relationship that we have with them.

So that remains positive and strong.

We have a few conversations going with them in the U.S., but we expect it to take a quarter or 2 perhaps to develop and see how those will move going forward.

But the context that -- remains very positive in terms of our relationship with them.

Got it.

That's great to hear.

And maybe to follow up: Do you have a contribution from Velocity Partners in the quarter?

I think it was GBP 7.8 million last quarter.

And the new deals that you won in the U.S., were those Velocity deals, or were they legacy Endava sales force driven deals?

So we've integrated our sales teams, as I mentioned the last quarter, between the Velocity and the Endava guys, so it gets more and more difficult for us to separate out the specific revenues.

If you look at the 5 deals that we did in the U.S. and you apply them by salesperson (inaudible) came from, 4 out of the 5 were Velocity Partners salespeople and 1 was out of the Endava team.

So the Velocity guys are fitting in well and driving growth.

That doesn't reflect the reflective growth between the ex-VP client base and the Endava client base, which is, well, Mark, perhaps you could unpack a little bit on that.

Yes.

So I mean we're simply not going to call out the figures for you on Velocity, but you can tell the Q4 exit run rate.

You can think about the growth that sort of John has talked about, and you can get to our underlying constant currency organic growth from that.

I think more concerned or more interested in the impact that Velocity is having on your penetration of the U.S. market.

And I guess, to that end, can we assume that 4 out of 5 would be delivered out of Latin America?

Or would these be all Latin American deals?

What's the mix on the delivery side?

No, it's not a direct.

All of those 4 go to LatAm, and the other one doesn't.

So it is mixing up more than that now.

And we're starting to see cross-service of clients from Endava -- ex-Endava centers into North American clients as well as the LatAm centers building out.

And you can see that in the way the headcounts are expanding across LatAm as well as in the rest of the portfolio.

(Operator Instructions) Your next question comes from the line of Bryan Bergin from Cowen.

Just one from me.

I wanted to ask about the competitive environment for talent in Central America.

Are you guys seeing any increased competition from the large shore -- offshore vendors?

Most of the markets in Latin America remain very similar to what we experience in Central Europe.

The -- our ability to establish ourselves as an attractive destination to work and attractive brand through the projects that we do, through the way in which we develop our people and so on is having the same impact in Latin America as it has in Central Europe.

The one difference that's visible to us is that the times to recruit are generally slightly lower in Latin America than in Central Europe, i.e.

once you make someone an offer, they onboard more quickly in Latin America, but apart from that, we see great similarities.

Your next question comes from the line of Ashwin Shirvaikar from Citi.

I guess one question I had was, as the Velocity Partners acquisition becomes sort of a run rate for you guys in inorganic terms, are you looking to invest inorganically further in the U.S. and North America?

So we continue to keep an eye out for potential good inorganic opportunities.

And North America will be one of the areas where we pay great attention to, but we don't have anything lined up or a particular pipeline that's developed that we'd call out at the moment.

So it's just one of the things that we'll keep (inaudible).

Got it.

And then the other question I had was with regards to the new clients you signed up, a lot of them in TMT.

Is there a forward view in mind with regards to how you prefer to have that distribution of verticals down the road?

Do -- are you actively looking to lower the percentage contribution from Payments and Financial Services?

Or is this just kind of something that happened, that you just happen to sign 4 TMT clients?

So the thing that drives us in this space, Ashwin, is those technology waves and how they're hitting the various industries.

And clearly, payments has been a huge technology wave that we've ridden over the last 5 to 7 years.

And one of the things we're actively looking at is where are those waves hitting other industries, and I called out CPG in the script earlier as being one of the areas where we're seeing great acceleration.

We've seen a number of new clients coming onboard in that space over the last 12 months.

And so yes, we are actively looking to see other sectors where our next-gen technology and disruptive approach can make a real impact on those sectors and to establish a position and then ride the waves of change through.

Your next question comes from the line of Charlie Brennan from Crédit Suisse.

I just wanted to come back on the margin performance.

I think in your prepared remarks you called out favorable pricing in the quarter.

We're not hearing many companies talking about decent pricing at the moment, so can you talk us through the dynamic behind that and how you're getting such good pricing?

Charlie, yes, we are seeing pricing holding up pretty well.

And I mean margin is also a function of utilization and which has remained high, as I sort of indicated previous quarter, but we aren't seeing any sort of weakness in terms of the pricing that we can command from clients because they see the value that we deliver.

And we are getting a little bit of help from our exposure to LatAm, specifically to sort of Argentina with the devaluation of the currency, but the main sort of driver is pricing and utilization.

I think it's also true to say that new customers who are coming through with the high, visible impact, the technologies we're working on with them and how we're winning them as a result of that, you're seeing better pricing on the new customers coming through.

And so that's helping lift the overall pricing picture.

And just to be clear.

When you're talking about better pricing, does that mean that pricing is -- on a like-for-like basis is up year-on-year, or is pricing just better than you expected to achieve?

It's up year-on-year.

And we've seen a pretty good momentum through our fiscal '18, and it's continuing actually into the current year.

I mean we are in uncertain times at the moment, but our pricing is holding up well.

There are no further questions at this time.

I'll turn the call back over to management for closing remarks.

Well, thank you, everyone, for joining us on the call.

And we look forward to speaking with you on next quarter's call in the new year.

Thank you.

This concludes today's conference call.

You may now disconnect.