Endava PLC

NYSE:DAVA

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Endava Q4 Fiscal Year 2019 and Full Year 2019 Results Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Laurence Madsen, investor relations, you may begin.

[Laurence Madsen, IR Manager]

Thank you, operator. Good afternoon, everyone, and welcome to Endava's fourth quarter of fiscal 2019 and fiscal year 2019 earnings conference call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava's Chief Executive Officer; and Mark Thurston, Endava's Chief Financial Officer.

Before we begin a quick reminder to our listeners. Our remarks today include forward-looking statements, including our guidance for Q1 fiscal-year 2020 and for the full fiscal-year 2020 and other forward-looking statements. These statements are subject to risk 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 or other event to the extent required by law. Please refer to our SEC filing as well as our financial result, 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, CEO]

Thank you all very much for joining us today. Mark and I are very pleased to be here to provide an update on our business and financial performance for the three months ended June the 30, 2019, and for our fiscal year 2019.

Endava had another record quarter for Q4 fiscal year 2019 with revenue of £76.6 million, a strong growth of 24.6% year-on-year from £61.5 million in the same quarter in the prior fiscal year, all of it on an organic basis. Our revenue growth rate at constant currency was 22.7% year-on-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 added 20 new ones during the quarter in all regions and verticals.

We ended the quarter with 275 active clients, up from 258 at the end of the same quarter in the prior fiscal year. I'd like to reflect on our accomplishments in our first year as a public company. It's been an exciting journey for us, and our listing on the New York Stock Exchange has been a catalyst for our visibility. We continue to expand in all three of our industry verticals while accelerating our growth in new verticals.

The fiscal year ended June 30, 2019, our revenue totaled £287.9 million up 32.3% year-over-year. The total number of clients who generated revenue over £1 million increased by 37% year-on-year to 63%, while those generating revenue over £5 million increased by 88% to 15% during the same period.

In the last fiscal year, we grew in all of our regions and verticals. In North America, our revenue increased 73.8% year-on-year, in Europe by 7.8% and in the U.K. 31.4%. All of our verticals also grew very strongly, with payments and financial services up 23% year-on-year, TMT up 29.1% and Other up 73.1%.

We had strong revenue growth and improved operating margins. As we spent time talking to our customers about the challenges and opportunities they face in embracing digitization, we see a number of trends emerging. Whilst many organizations have embraced the opportunities provided by becoming a more API centric, there is an increasing realization that to gain broader agility and efficiency advantages, investments need to be made in decoupling and simplifying legacy architectures.

Customers are having to address their monolith challenge. This exercise can seem somewhat daunting, but it is our experience that aligning business objectives and roadmaps alongside technology change roadmaps, organizations have the opportunity to decouple at the same time as delivering change programs.

Increasing the organizations are also talking about the failure to realize the gains anticipated from adopting robotic process automation technologies. This is largely driven from using the tools and approach in a tactical versus strategic fashion. To truly realize the potential offered, organizations have to have roadmaps to not only automate the cumbersome manual processes, but also to describe how these processes are ultimately subsumed into core systems and platforms.

We believe that coming at the solution from the perspective of the business problem coupled with deep technical expertise allows us to propose more intelligent and sometimes custom developed automation solutions that go beyond what can be described by non-technical users.

Both of these macro trends highlight the need to consider systems combined, in architecture from a more evergreen perspective, rather than considering the lifecycle of systems from the perspective of projects and programs. Change should be embraced as a constant, when business and IT teams then embrace the benefits of thinking in products and placing user experience at the heart of what they do, there is a recipe for success.

The Endava online community remains very active, with over 30 postings on technology thought leadership in the quarter ended June the 30th 2019. Today, I'd like to highlight how our technical solutions and product innovation offerings are helping clients in the fast evolving world of TMT.

Endava’s creativity, combined with our technical expertise has been instrumental in helping our TMT clients develop and implement new technologies to reach new markets and further drive sales by innovating their products offering.

In the technology sector, we've utilized our experience, industry [Indiscernible] agile delivery to support the innovation, product development and engineering integration efforts of Poly [ph] formerly Plantronics and Polycom. We've been working with our engineering teams for the last eight years on developing their desktop, mobile and cloud software product lines, and helping them maximize the value of their headsets.

Endava is also a certified Cisco preferred supplier, and we've been working with them on Webex Conferencing, Webex teams and Cisco Java messaging, IP telephony, and video endpoints.

Two years ago, we began working with DisplayLink, a fabulous semiconductor company developing technology that enables seamless connectivity between devices and displays, irrespective of operating system or display connector, and whose chips are used in products from some of the world's leading PC and peripheral brands.

We started by developing a kernel mode driver for an emerging USB technology, an area that was new to us, which meant our teams were excited to tackle a new technical challenge. We quickly delivered a prototype driver, compatible with similar software stacks, developed by Microsoft and Intel. Nine months later, this driver is fully feature complete, and highly performant [ph] with DisplayLink using it to showcase their solutions to new OEM customers. DisplayLink increased the scope of work mid-development in order to build a similar kernel driver for their Android platform, accelerating significant new opportunities in the Android smartphone market.

We continue to expand our relationship with DisplayLink by using our creative and cloud services, and we are working as a partner across other business areas and operations. Other projects for WestCoast technology clients often include analysis of data to ensure the provision of excellent cloud based services to their customers, including subscription based services and loyalty platforms, which allow our clients to keep close to their customers.

We're providing near, real time data analysis and measurement solutions through the cloud to large technology clients to help them interact successfully with their customers, both B2B and B2C.

Our partnership with Bain & Company continues to grow strongly. We now have three clients who have registered over £1 million of revenue to Endava since we announced our partnership. To date, we have completed over 10 projects through this partnership, helping drive revenue growth for both businesses. Together, we're focused firstly on digital transformation programs.

Secondly, on working with PE firms to develop their investment thesis for prospective targets. And finally, on building great product that uses technology to help Bain accelerate their consultancy offerings.

Our client growth continues to translate into strong employee growth. We ended the fiscal year with 5,754 employees, a 19.4% increase from 4,819 at the end of the last fiscal year. While the competition for talent remains challenging, our strategy of being an employer of choice in the cities where we operate is strength, in recruiting and retaining talent. With a team of 32 highly experienced sales force specialists, based in Romania who joined us early June is already well integrated, and now working as part of Endava’s sales and delivery.

Salesforce is a disruptive technology for our existing client base, and this team is helping to accelerate our industry lines of business by giving us an extra dimension to explore with existing customers, plus creating opportunities with new organizations.

On a macro level, we continue to review the potential impacts of Brexit on Endava. Currently, we're not aware of any clients who are adjusting their spending plans with us, as a result of the uncertainties caused by Brexit.

I'm pleased to announce the appointment of Sulina Connal to our Board of Directors. She has served as a Director of Mobile and Connectivity Partnerships at Facebook and previously served as the Senior Vice President of Strategic Partnerships at Orange.

We're off to a strong start to the year, and despite macro uncertainties, client demand for digital transformation is not pervading. Demand remains strong in all geographies and verticals, and we remain optimistic about our ability to deliver sustainable growth in 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 the fiscal year, and provide guidance for the coming quarter and the new fiscal year.

[Mark Thurston, CFO]

Thanks John. Endavas’ revenue totaled £76.6 million for the three months ended June 30th 2019, compared to £61.5 million in the same period last year, a 24.6% increase over the same period in the prior year. In constant currency, our revenue growth rate was 22.7%.

Our adjusted profit before tax for the three months ended June 30 of 2019 was £13.5 million compared to £9.7 million for the same period last year, a 39.9% year-over-year increase. Our adjusted profit before tax margin was 17.6% for the three months ended June 30, 2019 compared to 15.7% for the same period last year. The year-over-year improvement in our adjusted profit before tax margin is mainly due to a continued positive pricing environment, FX tailwinds and a control of SG&A.

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, secondary offering expenses incurred, and stamp duty on transfer shares all of which are non-cash, other than realized foreign currency exchange gains and losses, initial public offering expenses, Sarbanes-Oxley compliance readiness expenses, secondary offering expenses incurred, and stamp duty on transfer of shares.

Adjusted PBT margin is calculated as a percentage of our total revenue. Our adjusted diluted EPS was £0.20 for the three months ended June 30 of 2019, calculated on 55.2 million diluted shares as compared to £0.15 for the same period last year, calculated on 51.3 million diluted shares, up 33.3% year-over-year.

Revenue from our top ten largest client’s accounts for 40% of revenue for the three months ended June 30 2019, compared to 39% in the same period in the prior year and the average spend per client from our top 10 largest clients, increased from £2.4 million to £3.1 million for the three months ended June 30, 2019.

We continue to grow outside of our top 10 clients. The number of clients who generated revenue of at least £1 million on a rolling 12-month basis grew to 63 at June 30, 2019 compared to 46 at June 30, 2018. These large clients operate in all three of our geographical locations North America, Europe, and U.K.

In the three months ended June 30, 2019 North America accounted for 28% of revenue compared to 26% in the same period last year. Europe accounted for 27% of revenue compared to 31% in the same period last year and the U.K. for 45% of revenue compared to 43% in the same period last year.

Revenue from North America grew 34.2% for the three months ended June 30, 2019 over the same quarter of 2018. Comparing the same periods, revenue from Europe grew 8.2% and the U.K. 30.5%. 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 June 30, 2019 over the same quarter of 2018, and accounted for 52% of revenue compared to 53% in the same period last year.

Revenue from TMT grew 21.9% for the three months ended June 30th, 2019 over the same quarter of 2018 and accounted for 28% of revenue unchanged from the same period last year. Revenue from Other grew 35.1% for three months ended June 30th 2019 over the same quarter of 2018, and now accounts for 20% of revenue compared to 19% in the previous fiscal year.

This growth was mainly driven by clients in the consumer products goods, services and education sectors. Our adjusted free cash flow was £8.9 million for the three months ended June 30 of 2019, compared to £11.9 million during the same period last year. This is largely due to timing of cash outflows in the comparative quarter.

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 June 30 of 2019 as a percentage of revenue was 2.9% compared to 2.8% in the same period last year. I'd now like to move on to some highlights for our fiscal year 2019.

Endava’s revenue totaled £287.9 million for the fiscal year 2019 compared to £217.6 million in the previous fiscal year, a 32.3% increase over the same period in the prior year. In constant currency, our revenue growth rate was 31.1%. Our adjusted profit before tax for the fiscal year 2019 totaled £52 million compared to £33.5 million for the same period last year, a 55.3% year-over-year increase.

Our adjusted profit before tax margin was 18% for the fiscal year 2019 compared to 15.4% 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, improved utilization and FX tailwinds.

Our adjusted diluted EPS was £0.76 for the fiscal year ended June 30th 2019 calculated on 55 million diluted shares as compared with £0.53 for the previous fiscal year calculated on 50.4 million diluted shares up 43.4% year-over-year.

Revenue from our top ten largest clients accounted for 38% of revenue for the fiscal year ended June 30, 2019 compared to 42% in the previous fiscal year. Additionally, the average spend per client from our top ten largest clients increased from £9 million to £10.9 million, a 20.2% year-over-year increase.

We grew in all geographies on a year-over-year basis with North America up 73.8% year-over-year, Europe 7.8% and the U.K. 31.4%. On a year-over-year basis, the revenue from payments and financial services increased 23%, TMT 29.1% and Other 73.1%.

The year-over-year growth in Other came mainly from consumer product goods, energy, healthcare, retail and services. Our adjusted free cash flow was £29.8 million for the fiscal year ended June 30 of 2019, compared to £28.7 million during the same period last year.

CapEx for the fiscal year ended June 30th, 2019 as a percentage of revenue was 2.5% unchanged from the same period last year. Turn to an agreement that we entered into with Worldpay in November 2016; we granted Worldpay an option to acquire a captive Romanian subsidiary that we created and staffed for Worldpay. On June 1, 2019, we entered into an agreement to captive to Worldpay and to terminally option and transfer agreements. And on August 31st, 2019 the transaction was completed.

Our guidance for Q1 fiscal year 2020 is as follows. We expect revenues will be in the range of £81 million to £81.8 million representing constant currency growth of between 20% and 21%. We expect adjusted diluted EPS to be in the range of £0.21 to £0.22 per share.

Our guidance for the full fiscal year 2020 is as follows. We expect revenues will be in the range of £346 million to £348 million representing constant currency growth of between 20% and 21%. We expect adjusted diluted EPS to be in the range of £0.85 to £0.88 per share.

Our guidance regarding constant currency growth is pro forma for the sale of the captive, which closed on August 31st. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of Bryan Bergin of Cowen. Your line is open.

[Jared Levine, Cowen]

Hey. Yes. This is actually Jared Levine on for Bryan. So I just have one question and a quick follow up after. So in terms of the cap-to-sale now completed, what is the updated outlook in terms of the broader FIS account and any cross-sell successes to date you can mention?

[John Cotterell, CEO]

Sure. Hi. Was it Joe?

[Jared Levine, Cowen]

Jared.

[John Cotterell, CEO]

Jared, Hi. Yes thanks for that. The – yes just to recap, so the captive deal closed at the end of August. Obviously the FIS deal with Worldpay also closed slightly more recently than that. I mean the relationship with Worldpay remains very strong. We've got a number of conversations going direct with FIS. But I think in the few weeks since that's closed, it's probably too early to actually see Cross sale [ph]. What we are seeing is some of the FIS strategy about what they want to do with Worldpay to start to cascade through into some of the backlog of work that we're starting to perform.

[Jared Levine, Cowen]

Got you. And then just one quick follow up. We notice the new board member anything to call out there as far as new potential opportunities there.

[John Cotterell, CEO]

Sulina is currently at Facebook. And she runs a number of their partner programs there. So you know we'll let her ease in as a Board member first, but hopefully overtime there might be some introductions there that she can make.

[Jared Levine, Cowen]

Perfect. Thank you. Congrats on the quarter.

[John Cotterell, CEO]

Thank you.

[Operator]

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

[Bryan Keane, Deutsche Bank]

Hi guys. Congrats on the solid results. Wanted to ask about clients [ph] over £1 million it looks like it dropped sequentially by £463. It looks a little bit unusual compared to the recent trend. Anything to call out there?

[Mark Thurston, CFO]

Hi. Hi Bryan. No not really. It's -- it's a 12 it's a 12-month measure, so any sort of minor change in activity quarter-on-quarter can relegate the client [ph] below the £1 million. I think, we'll give you a better sense of the progress actually is, if you look at it annually, and 20F [ph] hasn't. I think it's just come out. So it's hidden there in the detail, but – what’s very encouraging is actually the progress of a number of clients going up the band. So we call out in the 20F are over 5 million, 2 to 5. So over 5 million from 2018 went from 8 to 15 or 2 to 5 million went from 22 to 26. And then 1 to 2 million went from 16 to 22, so I think it's just one of those small movements that we'd get essentially from quarter-to-quarter.

[Bryan Keane, Deutsche Bank]

Got it. Got it. And then on, I know you guys talked about no impact from Brexit at U.K. Could you talk a little bit about the Europe geography. A lot of concern out there, on you know potential slowdown. Are you guys seeing anything or anything in the pipeline that could suggest pressure from Europe?

[John Cotterell, CEO]

Yes. So actually the reason why we're not growing as strongly in Europe is because we're pushing more of that new territory energy into the U.S. in terms of where we're expanding the salesforce and putting our investment. So you know the slower growth in Europe is more a function of our focus and energies over the last 12 months, than a function of actually lack of opportunities there. You know just to rewind, it was about 21 months ago we did the Velocity Partners deal, which gave us a big step up in the States. That integration is going very well. And you know combining those sales teams and beginning to drive the action and activity in the U.S. was a critical part of following through on that merger and acquisition.

So the organic growth that you're seeing in the U.S. absolutely plays to that. We will start to put some attention back in Europe and are starting to do so now and so I think over the next 12 months you'll see a pickup in the results from the energy we put into that.

[Bryan Keane, Deutsche Bank]

Okay, great. And then last question I had is on the revenue guidance, 20% to 21% constant currency both for the first quarter and for the fourth fiscal year. Looks like you guys are expecting pretty constant growth not a lot of fluctuation by quarter. Is that just -- that you are moving pieces inside there, or is that just steady demand that you're seeing you don't expect to see any real fluctuations in that revenue growth rate?

[John Cotterell, CEO]

So I certainly sort of looking out of Q1, we're not that far off from it. So you know that is a pretty sort of nail down sort of figure. The growth for the full year obviously is a good sort of 9 months off. So we have good sort of visibility going ahead and you know the demand for our services sort of continues. There may be some variation over the quarters, but I don't expect it to be significant.

[Bryan Keane, Deutsche Bank]

Okay great. Thanks for taking the questions.

[John Cotterell, CEO]

All right.

[Operator]

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

[Charles Brennan, Crédit Suisse]

Great, thanks for taking my questions. Just to actually. The first is a follow up on that revenue guidance. As you remarked, you've got basically 100% visibility of Q1. Your visibility is less than that for the full year as a whole. If I look at my mojo [ph] it looks like the second quarter comps are two or three points harder than Q1. Can you just give us some visibility into the known contracts that are ramping up and ramping down to give you some confidence that you can sustain that Q1 growth rates.

And then secondly, if we just dropped down through the P&L, we’ve seen -- we've seen margins ticking higher, you obviously called out the rising prices and FX benefits. Can you just update us on where you think the right sort of medium term margin window is for the company? Thank you.

[John Cotterell, CEO]

So you're actually right about the sort of visibility sort of Q1, Q2. So, I think there's no -- there's nothing sort of significant in terms of growth. I think the council consensus we have out there is quite sort of strong for Q2. We see more strength actually in the second half from where we're looking at the moment. So that's basically all I could say really about that.

In terms of margins, and our margins sort of structure, so absolutely right. We maintained our gross margin, adjusted gross margin going from Q3 to Q4. Basically that was a factor of utilization not coming off as strongly as we anticipated, because of the continuous strength. We were helped with the strong pricing environment that we're in, and we are getting a little bit of help on FX. I suspect that our Q1 gross margin will probably be as strong as our Q4 margin mainly because the utilization remains where it is, and we, as I’ve said that the pricing remains good. We are keeping a weather eye also on the Argentinian peso as well where we have a proportion of our cost base.

So I think the gross margins are going to remain where they are at the moment, going certainly through Q1, Q2, but going out further into the second half, which is when just to remind you, when we have our major pay round, that should adjust the margins down by a percentage point or so. And SG&A as we go through the year, it was pretty high as we sort of had flagged for Q4 at 22.7%. We had anticipated that moving down over the course of the year, but it will remain roughly about that level in the first half. So I think we're going to see some strong adjusted PBT margin in Q1, but then it will move down to levels that we're indicating in the guidance for the full year.

[Charles Brennan, Crédit Suisse]

And just a quick financial follow up. Certainly relative to my model, there was a nice earnings beat, but it looked like it was driven by interest income. Can you just remind us where the interest incomes come from, and what happens to the interest lines through this year?

[John Cotterell, CEO]

Yes certainly. So the income is basically because of the IPO proceeds that are current on deposit. They have not been sort of meaningfully deployed at the moment, and we are a cash generative sort of business. So you know we've had a net income for Q3 and Q4, and I think we will also see that in Q1. We are anticipating we have to take into account Charlie that we move our FX in those lines, but then also we're anticipating putting in place an extended revolving credit facility. We currently have a facility of 50 million and we see significant sort of upsizing in that, in time for Q2, Q3 and Q4. So the interest line will move up as we cover the commitment fee costs on that.

[Charles Brennan, Crédit Suisse]

Correct. Great, thank you.

[Operator]

[Operator Instructions] Our next question comes from the line of Maggie Nolan from William Blair. Your line is open.

[Unidentified Analyst]

Hi, this is Ted [ph] on for Maggie. So I wanted to ask about the new client adjustments this quarter. Could you give us an idea of what verticals those additions were, and if there are any high potential accounts there?

[John Cotterell, CEO]

So could you repeat the question, we were struggling to pick that up?

[Unidentified Analyst]

Yes. So wanted to ask about new client additions this quarter. Could you give us an idea of what verticals those additions were in, and is there any high potential accounts there?

[John Cotterell, CEO]

So there's new client additions, so seven of them were in the U.S. and out of those seven, four of them were in TMT. One was payments financial services, and the two others were both in healthcare. The six of them were in the U.K. one in the payments financial services space and five in the Other space ranging across education, healthcare, non-profit and some retail activity. Does that give you a feel for..?

[Unidentified Analyst]

Yes that's it. That's very helpful. And then as a follow up, I wanted to ask about 10 areas of the business that you believe will – you’re going to emphasize this year in terms of investments. So this last year in North America is clearly a priority for the business. Could you add a little color about which side of the business you are going to double down here in 2020? Thanks.

[John Cotterell, CEO]

Sure. Yes. So as you've picked up one of the areas that we’re starting to push energy in is ramping sales activity in Europe, certainly if we can find some M&A opportunities that are going to fit that Europe focus as well, we'll give those a lot of attention across the segments and so on that we operate in. There -- what we're always looking for is those sectors of the business where technology and the new technologies that are coming through are actually going to drive changes to business models and changes to the way in which organizations operate.

And, we've got our eyes on a few segments where we're seeing these things pick up, and certainly insurance in the financial world. We're seeing more and more activity and a few clients starting to really get going on their transformations, asset and wealth management. Also, that one's been going for a little while, but it continues to build momentum. If we look across to the other space where we see a lot of activity, healthcare now that we're more established in the U.S. is becoming a much bigger opportunity for us than it was over here in Europe. The logistics space, we're actually seeing some opportunity to look at convergence across logistics, travel, automotive essentially the whole mobility space around helping people and items move from one place to another.

And the changes of business models are being enabled through the technology through 5G etcetera that's starting to be applied to that space. So once again, in the early stages of shaping programs with clients around what could happen there and starting to see a pickup in execution.

[Unidentified Analyst]

That's very helpful. Thank you.

[Operator]

And we have no further questions at this time. And we'll turn the call back over to the presenters.

[John Cotterell, CEO]

Well thank you all for joining us today. As you've heard, through the call we remain optimistic about our ability to maintain our sustainable growth. And we look forward to speaking to you next quarter. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.