Endava PLC

NYSE:DAVA

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Endava Q4 FY '18 and Full Year FY '18 results. [Operator Instructions]

I would now like to turn the call over to Laurence Madsen, Investor Relations Manager. Please go ahead.

[Laurence Madsen, executive]

Thank you, operator. Before I pass the call on to John, I need to read the following disclaimer. During the course of this conference call, we will make forward-looking statements regarding future events or the future performance of the company, including plans for software development. Actual events or results, of course, could differ materially. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's most recent Form 20-F filed today. These documents contain and identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements. Please note that the forward-looking statements made during this call speak only as of today's date, and we undertake no obligation to update them to reflect subsequent events or circumstances, except to the extent required by law.

During this conference call, we also will discuss certain non-IFRS financial measures of our performance. Reconciliation of each of these non-IFRS financial measures to its most directly comparable IFRS financial measure can be found in the earnings release, which is posted on the Investor Relations section of our website.

Today's call is available via webcast and a replay will be available on the Investor Relations section of our website for the next 2 weeks.

I will now pass the call to John Cotterell, Endava's CEO.

[John Cotterell, executive]

Thank you, Laurence, and thank you, all, very much for joining us on our first earnings call since our IPO in July. We're pleased with our results for the year with revenue of GBP 217.6 million, up 36.5% year-on-year from the GBP 159.4 million in the previous financial year. Our revenue growth rate at constant currency was 37.2%. We ended the fiscal year with 258 active clients compared to 188 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 ended June 30, 2018, we recognized revenue for 14 new logos in all 3 regions and across all verticals.

We continue to diversify our geographic and sector revenue mix. The integration of Velocity Partners in the U.S. is progressing smoothly. We're on plan. Our sales teams are now integrated, and our delivery unit integration is underway. Overall, the Velocity Partners' team is excited and feeling very positive about the integration and being part of Endava. Importantly, the feedback from clients of Velocity Partners is positive, and they appear excited about the additional services and the additional capacity available to them.

We're expanding in all 3 of our industry verticals. while Worldpay continues to grow and remains our largest client. It accounted for 10.8% of revenue at the end of fiscal year 2018 compared to 13% in fiscal year 2017. And for the 3 months ended June 2018, it accounted for 9.4% of revenue.

I'd like to highlight our growing penetration in the Nordic region. We further solidified our presence in that market with the opening of an office in Copenhagen in January 2018. While we're particularly strong in the Payments and Financial Services vertical in our market, we're diversifying our presence into other verticals, including Logistics. We have 2 sales people now dedicated to the region.

We are seeing the technology wave beginning to accelerate in the insurance sector. Incumbents are seeing a steady stream of entrants with new tech-enabled business models that are redefining traditional insurance contracts and transforming the competitive landscape. In insurance retail lines, our offering of digital self service, the designing, developing and managing digital applications and platforms with value-adding services, has been adopted by retail insurers, Esure and Admiral. At Esure, we are working with them to build out their enterprise digital capability. While at Admiral, we've helped them build a mobile application.

In commercial lines, our offering of intelligent automation of core processes is currently being used at RSA Insurance and at Beazley. At RSA, we're building a custom smart solution to automate legacy systems, reducing manual effort significantly, while avoiding the need for inflexible and expensive robotic process automation tools. At Beazley, we're building an advanced proof-of-concept to extract metadata from incoming documents and then use this data to automatically classify and file the documents, reducing manual effort and increasing the consistency and accuracy of the process.

We ended the year with 4,819 employees, up 29% from 3,744 in the previous fiscal year. Our average operational employees totaled 3,957, up 24% from 3,181 in the previous fiscal year. We continue to expand the sales force, particularly in the U.S. where we made 3 new hires in the quarter-ended June 2018, with expertise in financials and retail. Additionally, we opened a new delivery unit in Timisoara, Romania, a major university town, last May. Timisoara is one of the 4 major university towns in Romania and was the only one where we were not present. We currently have 25 employees in this new location. While recruiting remains competitive, we remain an employer of choice in our key markets.

On the technology front, we remain very active in the automation of paper to digital, all with the goal of improving the customer experience as well as automating portions of tedious yet often complicated tasks. For example, in the consumer space, we've conceived and built a platform that uses dynamic image recognition, machine learning and natural language processing to automate the often skipped and mundane process of warranty registration. In the business user space, we have conceived and are building a platform to solve the very costly issue of ongoing communication and distribution of key system progress, status, health and function. We have an intelligent interface. The platform illustrates the status and progress of business activities using machine learning to predict completion times and potential holdups.

Lastly, this morning, we announced a global strategic partnership with Bain & Company, bringing together Bain's management consulting services and Endava's next-generation technology services. By virtually connecting Bain & Company's more than 8,000 consultants with Endava's next-generation technology and engineering expertise, the collaboration represents a step change in the way both businesses address the needs of the market. As an indication of commitment to this partnership, Bain & Company took an ownership stake in Endava via our IPO.

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

[Mark Thurston, executive]

Thanks, John. I'd like to begin by discussing performance for our most recent quarter. Endava's revenue totaled GBP 61.5 million for the 3 months ended June 30, 2018 compared to GBP 43 million in the same period last year, a 42.8% increase over the same period in the prior year. In constant currency, our revenue growth rate was 44.2%.

Our adjusted gross profit was GBP 25.1 million for the 3 months ended June 30, 2018 compared to GBP 17 million in the same period last year, a 47.8% increase over the same period in the prior year. Our adjusted gross profit margin was 40.9% for the quarter up from 39.5% for the same period last year. The year-over-year improvement is mainly due to continuous improvement in pricing and strong utilization. Adjusted gross profit is our reported gross profit, excluding allocated cost 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 June 30, 2018 was GBP 9.7 million compared to GBP 6.9 million for the same period last year, a 39.6% year-over-year increase. Our adjusted profit before tax margin is 15.7% for the 3 months at ended June 30, 2018 compared to 16.1% for the same period last year. The year-over-year decrease in our margin is mainly a result of higher expenses required to operate as a public company incurred as a result of our IPO and the integration of Velocity Partners. Adjusted profit before tax is our profit before taxes adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses 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 profit before tax margin is calculated as a percentage of our total revenue.

Our adjusted diluted EPS was 15p for the 3 months ended June 30, 2018, calculated on 51.3 million diluted shares as compared to 11p for the same period last year calculated on 49.2 million diluted shares, up 36.4% quarter-over-quarter.

We are growing with our largest clients. Revenue from our 10 largest clients decreased to 39% of revenue for the 3 months ended June 30, 2018 from 47% of revenue for the same period last year. But the annual average spend with a client from our 10 largest clients increased from GBP 7.8 million to GBP 9 million. We're also growing outside of our top 10 clients. Remember clients who paid us at least GBP 1 million on a rolling 12-month basis grew to 46 at June 30, 2018 compared to 34 at June 30, 2017. These large clients operate in all 3 of our geographical locations, North America, Europe and the U.K.

We continue to diversify our geographic mix. In the 3 months ended June 30, 2018, North America accounted for 26% of revenue compared to 15% in the same period last year, Europe accounted for 31% of revenue compared to 34% in the same period last year, and the U.K. 43% of revenue compared to 51% in the same period last year. Revenue from North America grew 159% for the 3 months ended June 30, 2018 over the same quarter of 2017, with Velocity Partners making a significant contribution. Comparing the same periods, revenue from Europe grew 27% and the U.K. 20%.

We grew strongly in all 3 of our industry verticals during the quarter. Revenue from Payments and Financial Services grew 26% for the 3 months ended June 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 46% for the 3 months ended June 30, 2018 over the same quarter of 2017 and accounted for 28% of revenue, unchanged compared to the same period last year. Revenue from other grew 116% for the 3 months ended June 30, 2018 over the same quarter of 2017 and now accounts for 19% of revenue compared to 12% in the previous fiscal year.

Our free cash flow continues to improve and was GBP 11.9 million for the 3 months ended June 30, 2018 compared to GBP 10.8 million during the same period last year, due mainly to improvements in our working capital. Our free cash flow is our net cash provided by or used in operating activities, plus grants received, less purchase of noncurrent tangible and intangible assets.

CapEx for the 3 months ended June 30, 2018 as a percentage of revenues was 2.8% down from 7.1% in the same period last year. This was primarily due to a higher level of build-out of offices at our national delivery locations during the 3 months ended June 30, 2017.

Turning to the full year. Endava's revenue totaled GBP 217.6 million for the fiscal year ended June 30, 2018 compared to GBP 159.4 million in the fiscal year ended June 30, 2017, a 36.5% year-over-year increase. In constant currency, our revenue growth rate was 37.2%.

Our adjusted gross profit was GBP 85.8 million for the fiscal year ended June 30, 2018 compared to GBP 61.1 million in the fiscal year ended June 30, 2017, a 40.6% year-over-year increase. Our adjusted gross profit margin was 39.4% for fiscal year 2018 up from 38.3% for fiscal year 2017.

Our adjusted profit before tax for the fiscal year ended June 30, 2018 was GBP 33.5 million compared to GBP 25.2 million last fiscal year, a 32.6% year-over-year increase. Our adjusted profit before tax margin was 15.4% for fiscal year 2018 compared to 15.8% for fiscal year 2017. The year-over-year decrease in our margin is mainly the result of higher SG&A expenses during the year due to cost incurred in the integration of Velocity Partners and higher expenses required to operate as a public company incurred as a result of our IPO.

Our adjusted diluted EPS was 53p for the fiscal year ended June 30, 2018, calculated on 50.4 million diluted share as compared to 40p for the fiscal year ended June 30, 2017 calculated on 49.3 million diluted shares, up 32.5% year-over-year.

Our 10 largest clients accounted for 42% of total revenue for the year ended June 30, 2018, down from 49% for the prior fiscal year. This list of clients remains fairly stable year-over-year.

Our geographic revenue mix for the year ended June 30, 2018 was 21% North America, 34% Europe, and 45% U.K. This compares to 16% North America, 34% Europe and 50% U.K. during the prior fiscal year. The acquisition of Velocity Partners in December 2017 contributed to our strong performance in North America, where revenue grew 76% year-over-year. Revenue from Europe grew 37% year-over-year, with the U.K. growing 23% year-over-year.

Revenue from Payments and Financial Services grew 36% year-over-year and accounted for 57% of revenue for the fiscal year ended June 30, 2018, unchanged from the previous fiscal year. Revenue from TMT grew 26% year-over-year and accounted for 28% of revenue for the fiscal year ended June 30, 2018 compared to 31% in the previous fiscal year. Revenue from Other grew 66% year-over-year and accounted for 15% of revenue for the fiscal year ended June 30, 2018 compared to 12% in the previous fiscal year.

Velocity Partners impacted the revenue split across our verticals in the fiscal year ended June 30, 2018, with the majority of Velocity Partners' revenue split evenly between TMT and Other, mainly Healthcare and Consumer Retail.

Our cash position remains strong. Our free cash flow grew to GBP 28.7 million for the year ended June 30, 2018 from GBP 11.2 million for the last fiscal year due mainly to improvements in our working capital.

Our CapEx expenses accounted for 2.5% of revenue in the fiscal year 2018 compared to 4.1% in fiscal year 2017, as explained in my comments on Q4.

Given the timing of the reporting of the quarter, we're unable to provide outlook guidance for the first quarter of fiscal 2019 and for the fiscal year ended June 30, 2019. However, we plan to provide guidance for both the second quarter fiscal 2019 and for the fiscal year ended June 30, 2019 when we report our first quarter of fiscal 2019 results.

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

[Operator]

[Operator Instructions] Your first question comes from Brian Essex from Morgan Stanley.

[Brian Essex, analyst]

John, I was wondering if can might be able to talk about the partnership with Bain. I know that they've been a good relationship for you in the past. How is this different than in the past? And how can we expect some of the economics from that relationship to resonate through your model?

[John Cotterell, executive]

Sure. I mean, as you've been aware, we've been working with Bain for the past 18 to 24 months and slowly building out what we've been doing with them. What we've really done is to formalize it through a partnership agreement that outlines the benefits of working together. I mean, essentially, if you look at the market with technology playing an increasingly critical role in every aspect of business, companies are realizing that they need to accelerate the development of their digital solutions. And actually by putting our businesses together in partnership, it brings really deep skills in the business and technology strategy space, the product ideation, technology development and employment, but also the organizational change management to our large clients who are going through these transitions. And actually, that's from an Endava point of view opening up conversations, very large transformations in partnership with Bain using our skills in a way that really complements those. They were keen take a small investment in Endava and they bought 0.5 million shares as part of our IPO. And today, we've reached a point where we wanted to formally tell the outside world about our partnership and how together we can help them with the transformations. So we've made good progress together, doing work together, but I think, with it now being public to the whole world, we see opportunities could accelerate what we're doing together.

[Brian Essex, analyst]

That's helpful. Maybe just a follow-up. If -- so as you kind of go-to-market, how many of these deals would be kind of Bain portfolio customers? And would they be the point of that initial relationship for incremental business? Or would it be a 2-way street where both sourcing deals and then maybe bringing them strategic consulting business and you're doing the technology bit?

[John Cotterell, executive]

Absolutely. So we set it up very much as a 2-way street, and we've not restricted each other from interacting with clients as part of the relationship that gets built through the partnership. So it's very much, I think, a balanced arrangement that enables us both to expand what we're doing in the marketplace.

[Operator]

Your next question comes from Bryan Keane from Deutsche Bank.

[Korey Marcello, analyst]

This is Korey Marcello on from Bryan Keane. Just wanted to ask a question, I guess, on the organic growth in the quarter. Can you call out how much Velocity Partners contributed? And maybe talk a little bit about that acquisition, how that's kind of trending versus your expectations?

[Mark Thurston, executive]

Sure. So velocity delivered reported figures of about GBP 7.8 million. So you can get it those in the 20-F. So if you strip those figures out on a constant-currency basis, the quarter growth would have been organically 25%. In terms of their performance, we're very pleased with progress. We've seen a little bit of acceleration in the revenue. The integration is proceeding well in terms of the sales and marketing. And again, we are starting to work more, more ways of working to get it from a delivery perspective as well. So we're very pleased with progress.

[Korey Marcello, analyst]

Okay, great. Then, I guess, I know you are guys aren't providing guidance today, but maybe you could speak a little bit to sort of the sustainability of the strong kind of mid- to high-20% organic constant revenue growth that we've seen in fiscal '18. Is there any reason why that kind of won't continue going forward or any kind of thoughts there would be helpful?

[Mark Thurston, executive]

So we continue to see strong growth in the business. So we saw a slight acceleration in terms of Q4 from what we've seen historically. That sort of has helped our margin as we were providing results, we sort of lagged slightly behind that pickup in acceleration. So we see it continuing certainly for the next quarter or so.

[Operator]

Your next question comes from Maggie Nolan from William Blair.

[Margaret Nolan, analyst]

Since we aren't going to be receiving formal guidance, I was hoping you could give a little bit of your insight into the changing macro environment. Are you hearing any talks from clients that things like Brexit in the U.K. or trade turmoil in the U.S. are going to have an impact on their budgets going forward? And how are you considering that for your forward results?

[John Cotterell, executive]

Thanks, Maggie. The macro environment from our point of view remains very good. We're not seeing pipelines drying up or projects being deferred at this point. The -- maybe 1 or 2 across our portfolio of hundreds of projects, but nothing out of the normal. In fact, as Mark touched on, we continue to see the growth prospects in the short term in line with our historic figures.

[Margaret Nolan, analyst]

Okay, great. And then I wanted to ask about the gross profit increase. You said that was in part because of utilization improving. Are you comfortable with where you're utilization sits right now? Or do you think there is additional room to improve utilization? And is that an objective of yours going forward?

[Mark Thurston, executive]

So yes, utilization did pick up a bit. As I said, we had a pickup in demand that went ahead of our own sort of supply of our people. So we had an uptick in the utilization as a result, which you can see in the strong adjusted gross margin we reported for the quarter, up 40.9%. That sort of quick uptick in revenue growth I would say that our supply, if I can put it that way, would come in line with the growth, and we can get down to more normal levels of utilization, so the margins I expect to tick down to something more sustainable that we've seen historically.

[Operator]

Your next question comes from Bryan Bergin from Cowen.

[Bryan Bergin, analyst]

Wanted to ask on the Worldpay account. Can you provide us just an update there on your views for more opportunity for growth?

[John Cotterell, executive]

Yes. So the Worldpay relationship continues to be very strong. The -- they've grown every quarter in the last 8 quarters before and after the Vantiv deal. The relationship on the captive remains positive, although that has flattened off in terms of growth, so the growth's happening on the core contract at the moment. We are in some conversations with the U.S. side of Worldpay now and those are very early days, and we don't really have a feel yet for how big those opportunities could be.

[Bryan Bergin, analyst]

Okay. And then just a follow-up on the Velocity Partners integration. As you've gone through this, anything unexpected, positive or negative? And then as -- can you just talk about what we should expect on the delivery expansion in Latin America?

[John Cotterell, executive]

Sure. So -- I mean, the way we go about these mergers and acquisitions is actually to integrate at the sales end first, so that the conversations we're having with customers move to the wider platform that Endava offers. And that is being completed and is starting to generate new opportunities and new business for us. The integration of the delivery side takes a little bit longer, just getting the engineering teams aligned in how we deliver and then taking customers through some of the adjustments that are necessary. But also pulling together and making sure that we garner the best that each organization does in terms of the delivery model that we have as a wider business going forward. That is well underway and has now put us in a place where we're starting to see an accelerated expansion across Latin America. And we're just at a point also where some of the expansion we have with existing Endava clients can be directed into those delivery locations to assist in that expansion. So very much on plan. We're very positive about that deal and the teams that have joined us through it.

[Operator]

[Operator Instructions] Your next question comes from Charlie Brennan from Crédit Suisse.

[Charles Brennan, analyst]

I've got 2 quick ones, actually. On Velocity, it looks like it's a slight sequential downtick in revenues in Q4 relative to Q3. Is there some seasonality in there that accounts for that? Or is there any business disruption that we should be aware of? And then secondly, I'm still not entirely clear for the reason that you're not giving Q1 guidance. You seem happy enough to say the visibility is good and momentum is good into the quarter. Why aren't we getting formal guidance?

[Mark Thurston, executive]

Right. So the guidance point is technical. So we're announcing 11th of October, so we are past 30th of September, which would be our next quarter, so we are headed closely, but strangely enough and can't give any guidance because we'll effectively be preannouncing the figures. So unfortunately, we can't provide guidance and those are the rules. So that's that. So part about Velocity, I don't think it has slowed down sequentially Q3 to Q4 even if you look at it on a constant-currency basis.

[Operator]

I have no further questions in queue. I'd turn the call back over to the presenters for closing remarks.

[Laurence Madsen, executive]

Thank you, everyone, for joining us this morning on our first earnings call. We look forward to speaking to you again in about 6, 7 weeks, as Mark said. Yes. Thank you.

[Operator]

Thank you, everyone. This will conclude today's conference call. You may now disconnect.