Endava plc

Ladies and gentlemen, thank you for standing by, and welcome to the NDAAVA PLC earnings release Q3 fiscal year 2020 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. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Lawrence Madsen. Thank you. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to NDAVA's third quarter of fiscal year 2020 earnings conference call. As a reminder, this call is being recorded. Joining me today are John Cottrell, NDAVA's chief executive officer, and Mark Thurston, NDAVA's chief financial officer. Before we begin, a quick reminder to our listeners. Our remarks today include forward-looking statements, including our guidance for Q4 fiscal year 2020 and the full fiscal year 2020. The impact of the COVID-19 pandemic and associated global economic uncertainty, the opportunity for new generation technology services, Endava's ability to participate in the recovery from the COVID-19 pandemic and timing thereof, and its ability to retain its employees and their income during the COVID-19 pandemic. Client demand for Endava services 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 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 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 the risk factor section of our annual report on Form 20F, filed with the Securities and Exchange Commission on September 25, 2019, and supplemented by the risk factor update filed as Exhibit 99.2 to our current report on Form 6-K, filed with the SEC on March 31, 2020, as well as other SEC filings. 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 relation 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, Laurence, and I'd like to thank you all for joining us today. I hope you and your families are all safe and well in these challenging times. Mark and I are pleased to be here to provide an update on our business and financial performance for the three months ended March the 31st, 2020, and to give a bit of color on how we are responding to the COVID-19 pandemic. Whilst we see significant short-term uncertainty, we'd like to give you some perspective on what Endave is experiencing and our actions in response. But firstly, looking at Q3 fiscal year 2020, Endava had another record quarter with revenue of 92.2 million pounds, a growth of 26.2% year on year from 73.1 million pounds in the same period in the prior year. Our revenue growth in constant currency was 25.7% year on year. If we perform or adjust for the revenue from the well-paid captive divested last August, our revenue growth on a constant currency basis was 30% year on year. Our strong revenue growth was driven by the expansion of our existing customers and the acquisition of new ones during the quarter. We continued to broaden our client base and ended the quarter with 395 active clients, up from 280 at the end of the same period in the prior year, a 41.1% year-on-year increase. Next, we want to turn to the ongoing COVID-19 pandemic and its impact on Indaba. Our priorities have been as follows. Firstly, the health and well-being of our people. Secondly, continuity of services to our clients. And finally, the protection of the jobs and incomes of our people, particularly with an eye to what we expect will be an upturn in demand as we all emerge from this crisis. After COVID-19 was declared a pandemic, we rapidly moved to a work from home model with almost 100% of our people able to work from home and took efforts to provide office environments that minimized the risk of exposure for the small number who needed to attend an office. These efforts kept our people healthy. Our business continuity plans were executed and this transition occurred over three intensive days with minimal disruption to productivity as evidenced by our excellent Q3 results. Home internet connections in our main delivery locations are state of the art and we have not seen connectivity present obstacles for our employees working from home. Clients have commented very positively on how quickly and painlessly we transitioned to work from home operations. Endava's distributed agile at scale model fully supports such a distributed workforce, enabling continued high productivity and quality of services. In fact, our measures show that over the eight weeks since our transition to working from home, we have seen a 5% to 10% increase in productivity. In this way, we have achieved our second priority of continued quality services to clients. I'd like to express my appreciation to all Endardens who have made this happen and continue to provide an excellent service to our customers. As the COVID-19 pandemic began to impact the global economy, many clients needed to reevaluate their priorities. And I'm pleased to say that the vast majority of our client teams have continued as originally planned, showing the criticality of the work Endava performs for our customers. We hold twice weekly calls with our team to discuss challenges and opportunities within our client base. Clients have articulated a need to preserve today and grow tomorrow, resulting in different priorities, depending on the sector and the anticipated speed of recovery. Some clients, particularly those in hard hit sectors such as travel and hospitality, are very focused on preserve today and have stopped projects or reduced team sizes. We've seen some projects delayed from starting due to clients being overwhelmed and unable to commission new work right now. And we anticipate these projects coming back quickly as clients recover. And some projects have been delayed for a longer period as part of cost-saving measures. These demand reductions have been balanced by other projects where prioritization has resulted in significant team increases to accelerate delivery and grow tomorrow. And others where specific COVID-19 related opportunities have arisen. In these COVID-19 driven opportunities, Our near-shore agile delivery model has been instrumental in helping our clients to pivot quickly and rapidly deploy new capabilities. Let me give a couple of examples. In early April, we were contacted to help a government that was implementing a pandemic response system on an AWS platform against incredibly tight timelines and coordinating work across four countries. Endava stood up the cloud-based infrastructure and services for a mobile application to track and manage the pandemic, as well as the data platform to support advanced data science activities. The next step for this project is to evolve and improve the platform to support more functionality within the mobile experience, as well as to enrich the data platform with additional sources. And one of the global investment banks we work with has temporarily introduced a soft hiring freeze, which impacted their change to bank plans. We're helping management fulfill their commitments despite their reluctance to increase headcount by using machine learning, data science, and predictive analytics to improve efficiencies and achieve delivery goals in the face of the current uncertainty. As we begin to look to the business environment beyond COVID-19 restrictions, we've been interested to see what is happening in Germany, one of our larger markets, where strict stay-at-home and similar orders are being eased ahead of those in other countries. We're seeing a definite shift to grow tomorrow with pipeline and revenues picking up and a clear investment in digital. Our revenue forecast for Q4 indicates a probable 5% to 10% increase in Germany on Q3 revenues as this uplift begins to come through. For example, the biggest amusement park in the German-speaking region, Europa Park, has been strongly affected by the COVID-19 restrictions. In order to help them prepare for reopening under extended hygiene measures, we are implementing gamified digital apps to incentivize social distancing and enable virtual queuing. The social distancing app will notify users in the park when they are too close to other visitors, and the virtual queuing will be integrated into the existing Europa Park mobile app to notify visitors when it's their turn to go on rides. This has enabled Europa Park to satisfy regulators and actively plan for reopening on the 1st of June. Following the cancellation of the Geneva International Motor Show, another one of our clients, Volkswagen, asked us to create a fully interactive Volkswagen virtual motor show. It allowed streaming in real time from the cloud to any device from mobile to desktop in order to provide an immersive showroom experience for over 30 cars, enabling interactive adjustment of features such as paint colors and rims entirely ideated and produced in a very tight timeframe of three weeks. This cloud streamed real time showcase was a world premiere for Volkswagen. The project received board acknowledgement and VW has made this virtual motor show an integral part of their digital strategy going forward. From conversations with clients, we anticipate that as the world attempts to emerge from the impacts of the first few months of this pandemic, Client focus will be even more concentrated on next generation technology services. These services will be digital, connecting clients with their customers and users to drive growth, and fixing throughput bottlenecks and breakages in digital processes and operations. Agile at speed, enabling much more flexible organizational and faster delivery models, the benefit of which has been massively demonstrated through this crisis. data analytics, enabling smart business decisions at speed, and automation, driving efficiency across their organization. These are the areas where Endava focuses, and we anticipate benefiting strongly from the predicted recovery as a result. We believe that we will therefore be able to deliver on our third priority of retaining our people and their incomes through this crisis period. Our client growth continues to translate into strong employee growth. We ended the quarter with 6,468 employees, a 16.1% increase from 5,573 in the same period last year. Endava and its employees have also been working to resolve some of the challenges created by this pandemic, in particular, We've been participating in numerous hackathons organized by supranational and national government agencies and other institutions globally in order to bring technology solutions to support global research and development efforts and to assist vulnerable people at risk. On the marketing front, we have recently launched a campaign to refresh our branding and go to market positioning. with the goal to align our messaging across the business and the market. Weaving the value that we provide to our clients, our areas of expertise, and our next-gen technology capabilities into something that is engaging, memorable, and exciting. Our new brand positioning centers on the contribution we've made over the last 20 years in reimagining the relationship between people and technology. While the current crisis has somewhat impacted our very near-term outlook, our fundamentals remain extremely solid with a strong balance sheet. Client demand for our services remains strong despite the current crisis, as digital transformation has become digital necessity for many. Mark and I and the entire team are extremely pleased with our excellent performance for Q3. And despite the challenging environment, We continue to have confidence in the opportunities ahead of us and in our ability to deliver value for all of our stakeholders, our clients, our investors, and of course our people, who are what makes Endava so special. I'll now pass the call on to Mark, who will walk you through our financial results for the quarter, provide guidance for the coming quarter, and update our guidance for the fiscal year.

Thanks, John. Endava's revenue totaled 92.2 million pounds for the three months ended March 31st, 2020, compared to 73.1 million pounds in the same period last year, a 26.2% increase over the same period in the prior year. In constant currency, our revenue growth rate was 25.7%. As John mentioned, if we pro forma adjust for the revenue from the WorldPay captive last year, our revenue growth on a constant currency basis was 30% year-on-year. Profit before tax for Q3 fiscal year 2020 was £18.3 million compared to profit before tax of £7.6 million in the same period in the prior year. The Ndava Limited Guernsey Benefit Trust, or EBT, the beneficiaries of which are Endawa's employees, funded the second and final tranche of a previously announced non-recurring discretionary employee bonus on May 5, 2020. The Q3 fiscal year 2020 results include a credit of £2.9 million arising from adjustment to the previously recognised bonus liability to reflect the prevailing share price and the exchange rate at March 31, 2020. Endava expects a true upcharge in Q4 fiscal year 2020 of approximately £3 million relating to the funding of the second and final tranche subject to exchange rate volatility upon payment. Our adjusted profit before tax for the three months ended March 31st 2020 was £16.0 million compared to £13.2 million for the same period last year. a 21.1% year-over-year increase. Our adjusted profit before tax margin was 17.4% for the three months ended March 31, 2020, compared to 18.1% for the same period last year. The year-over-year decrease in our adjusted profit before tax margin is mainly due to a bad debt charge during the quarter of approximately 3% of revenue arising from our review of the client base in light of the current economic uncertainty created by COVID-19. This charge has an equivalent 3% negative impact on our adjusted profit before tax margin. Adjusted profit before tax, or adjusted PVT, is defined as the company's profit before tax adjusted to exclude the impact of share based compensation expense, discretionary EBT bonus, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, initial public offering expenses incurred, Sarbanes-Oxley compliance readiness expenses incurred, net gain on disposal of subsidiary, secondary offering expenses incurred, stamp duty on transfer of shares, and fair value movement of contingent consideration. Share-based compensation expense, amortization of acquired intangible assets, and fair value movements of contingent consideration on non-cash expenses. Adjusted PBT margin is the adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was 23 pence for the three months ended March 31, 2020, calculated on 56.3 million diluted shares as compared to 19 pence for the same period last year, calculated on 54.9 million diluted shares, up 21.1% year over year. Revenue from our 10 largest clients accounted for 36% of revenue for the three months ended March 31st, 2020, compared to 40% for the same period last year. Additionally, the average spend per client from our 10 largest clients increased from 2.9 million pounds 3.3 million pounds for the three months ended March 31st, 2020. In the three months ended March 31st, 2020, North America accounted for 27% of revenue unchanged compared to the same period last year. Europe accounted for 25% of revenue compared to 27% in the same period last year. and the UK accounted for 45% of revenue compared to 46% in the same period last year, while the rest of the world accounted for 3% of revenue. Revenue from North America grew 25.7% for the three months ended March 31st, 2020, over the same quarter of 2019. Comparing the same periods, revenue from Europe grew 15.3% and the UK grew 24.2%. But excluding the impact of well-paid captive from the prior year period, comparative growth would have been 9.8% higher or 34%. We grew in all three of our industry verticals during the quarter. Revenue from payments and financial services grew 27.1% for the three months ended March 31st, 2020, excluding the impact of the well-paid captive from the prior year period. Comparative growth would have been 8.4% higher or 35.5%. Revenue from payments and financial services accounted for 54% of revenue compared to 53% in the same period last year. Revenue from TMT grew 15.7% for the three months ended March 31st, 2020, over the same quarter of 2019, and accounted for 25% of revenue compared to 28% in the same period last year. Revenue from other grew 39.1% for the three months ended March 31st, 2020, over the same quarter of 2019, and now accounts for 21% of revenue compared to 19% in the previous fiscal year. This growth was mainly driven by clients in the logistics and services sectors. I'd like to highlight that our exposure to the sectors most impacted by the current crisis, such as retail, travel and hospitality, is minimal and accounted for about 3% of revenue in the quarter ended March 31st, 2020. As I mentioned earlier, During the quarter, we took a bad debt charge when reviewing our receivables. This provision amounts to about 3% of revenue and is the key driver for the sequential quarter-over-quarter increase in SG&A as a percentage of revenue. We are controlling near-term discretionary expenses whilst continuing to invest in the business for the medium-term, long-term growth. As John mentioned, we have a strong balance sheet, and I would like to spend a bit of time on our current cash position Our adjusted free cash flow was £9.6 million for the three months ended March 31, 2020, compared to £11.4 million during the same period last year. We had a net cash position of £87.1 million at the end of March 31, 2020, and we had in place an unsecured revolving credit facility of £200 million. This revolving credit facility also provides for uncommitted accordion options for up to an aggregate of 75 million pounds of additional borrowing. As of today, we have not drawn on this credit facility. The underlying cash position and the cash generation of the business remains strong. Our adjusted free cash flow is our net cash provided by operating activities, plus grants received less net purchases of non-contangible and intangible assets. CapEx for the three months ended March 31, 2020, as a percentage of revenue was 2.4%, compared to 1.6% in the same period last year. At this time, it is difficult to predict the duration and full scope of potential impacts driven by the ongoing COVID-19 pandemic. At the beginning of Q4 fiscal year 2020, we began to see a reduction in the size of some of our client teams and delay in some projects due to the global economic uncertainty created by the COVID-19 pandemic. With these uncertainties and assumptions in mind, Endava is providing updated guidance for Q4 fiscal year 2020 and full fiscal year 2020. Our guidance for Q4 fiscal year 2020 is as follows. Endava expects revenues will be in the range of 86 million to 87 million pounds, representing constant currency growth of between 15.5% and 16.5%. Endava expects adjusted diluted EPS to be in the range of 15 pence to 16 pence per share. Our updated guidance for the full fiscal year 2020 is as follows. Endava expects revenues will be in the range of 346.5 million to 347.5 million pounds, representing constant currency growth of between 23.0% and 23.5%. Endava expects adjusted diluted EPS to be in the range of 92 to 93 pence per share. This EPS guidance adjusted for debt expense is broadly in line with prior guidance. Our guidance regarding constant currency growth is pro forma for the sale of Endava Technology SRL, also referred to as the WorldPay captive to WorldPay. The transaction closed on August 31st, 2019. This quarter, we are providing guidance for Q4 fiscal year 2020, and for the full fiscal year 2020 using the exchange rates at the end of April when the exchange rate was one pound to 1.25 US dollars and 1.15 euro. This concludes our prepared comments. Operator, we are now ready to open line for Q&A.

Thank you. At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. Your first question comes from Brian Bergen of Cowen. Your line is open.

Hey, hope family's doing well. Wanted to ask if you could talk about client behavior and really how that's progressed from April into the first few weeks of May. Really anything notable to call out, whether you're seeing any types of stabilization or the nature of projects that are being prioritized versus those being pushed.

Sure. Thanks, Brian. I hope you're all well as well. So I think as we've spoken to clients, their focus has fallen into two areas. There has been a sort of preserved today dimension around the conversation, and there's been a grow tomorrow around essentially clients seeing the opportunities that digital and similar next-gen technologies offer down the line and starting to think about how that's going to impact their business. Now the conversations have tended to be skewed a little bit by the sector of the client that we're talking to. So there have been some sectors that have been much harder hit by the current crisis and the governmental advice and restrictions that have been put on various forms of commerce. And so the sectors that are experiencing a tougher situation have actually pulled back a little bit. They've been much more focused on the preserve today dimension of their business, whereas the many other sectors are already starting to look through that and have conversations with us about where they want to invest and push forward in terms of growing tomorrow.

Okay. And then understand, you know, 4Q view is still relatively healthy here, all things considered. We understand, obviously, the visibility is tough here. Can you just give us a sense on whether the conversations you're having would indicate that June activity, the June quarter activity, would be a trough from a growth standpoint, or is it too early to call?

I think it's a little bit too early to call at the moment. I think it depends on people's assumptions about the shape of this dip at the moment, whether it's V-shaped or L. And you can see that the different geographies are recovering at different rates. You know, I referenced John's comment about Germany have coped well with the pandemic and are coming out of lockdown ahead of other geos. And We've been encouraged by what we see implicit in the guide, what looks like a growth of about 5% to 10% from Q3 to Q4. So it's very much dependent, I think, on how the pandemic sort of plays. And I think I'd echo basically what John was saying about how the client base responds to it in terms of, preserve today and grow tomorrow, looking through the disruption that we're encountering at the moment and how they can put their business on a better footing post-COVID.

Perhaps a little bit of sector analysis, given that that's what's driving that behaviour, helps a little bit. I think overall we're finding as a business that we're sitting in the sectors that are tending to be stronger. So, you know, The weaker ones around travel and hospitality, around retail and so on, outside of the grocery space, are very small sectors for us. Whereas others like banking, logistics, insurance, TMT, have held fairly steady and indeed are starting to pick up. Payments is an interesting one for us because it's our largest segment, and we expect that to be down in Q4 pretty much in line with the overall endowment guidance. However, if you look under the surface, there's two completely different dimensions going on. There's the merchant services area where there's been a strong downturn in volumes for our customers, and that's led to reductions in short-term investments and delayed project starts. But there's actually clear signs that investment even there is picking up. Whereas the other arenas in payment, such as online and e-commerce, open banking, digital onboarding, you've got clearing and real-time settlement and so on. In those areas, investment is picking up and matching off quite a bit of the downturn that we saw on the merchant services side.

Okay. Very helpful, Carl. Thank you. Take care.

Our next question comes from Ashman Steinmeier, City. Your line is open.

Hi, John. I'm Mark. Good to hear you're all well. And I guess my first question is, it's slightly more than a month before the next fiscal year start. I would imagine you're fairly deep into your planning process. I know you can't give guidance or outlook, but could you speak to maybe your planning assumptions as to how you're thinking through the current level of uncertainty and lower visibility? You know, commentary on headcount planning, resource planning, sales would be helpful. Thanks.

Okay, so let me give an overview and Mark might fill in with a little bit of detail. So in our current planning, obviously we've got some scenario dimensions to that to make sure in this time of uncertainty that the downside as well as the upside as we see it is covered. But from a budgeting point of view, we are assuming that we're going to see a step up in activity and budgeting and planning in terms of headcount and recruitment and locations and so on in order to be able to cater for that as and when it comes through. And if you look at our actions in Q4, we are retaining the workforce. Indeed, we expect to be growing slightly as we're still filling in some specialist skills and so on that we need for projects that are coming through. So even though we've got a downturn, we're holding the team together in the anticipation of needing them as the step-up comes through. Do you want to add anything to that?

I think that's right, John. You can see us anticipating the pickup, even though it is a little bit uncertain in this stage, as we are continuing to add headcount and capability to make sure that we are well positioned to deal with the upturn when it comes. But one of the short-term impacts of this is we are going to carry bench in the current quarter, which is what you're seeing in our revised outlook for the year in terms of the margin and EPS consequences.

Understood. Understood. Thank you for that. The other question I had was with regards to sort of the conversations you're having and as the near-term impact on volumes maybe comes through, Is there also a corresponding conversation with regards to pricing? I would think not in digital transformation and emerging tech type of work, given just not so long ago we were in a very tight employment situation. But I'd like to get your view as to how the pricing conversations are proceeding.

I can say that. I think pricing at the moment is remaining as we've seen in previous quarters. That can change reasonably quickly, but we haven't seen any softness so far. And I think that just, you know, reflects, you know, our position as a company in terms of the, you know, quality and specificity of the sort of services that we offer. So, you know, implicit in the sort of the guide for Q4, expecting our pricing, you know, to be maintained, and that's being borne out, you know, by conversations that we've had, you know, with clients, you know, since we recorded in Q3.

Got it. Thank you. Thank you. Thanks, Ashton.

Your next question comes from Brian Keene of Deutsche Bank. Your line is open.

Hi, guys. Good to hear you guys are doing well. Just want to ask about the guidance. Is this the current revenue run rate you're seeing in April and May, or does the guidance imply further deterioration? Just thinking about the 15.5% to 16.5% constant currency revenue guide, Just seeing how it's tracked so far to that so far in the quarter compared to what we might expect in June.

So it's not deteriorating. I think we suffered alongside a number of companies, a pretty rapid sort of shock. as a result of sort of COVID. So the sort of guide reflects what we are currently seeing. And we, you know, we've seen our April revenues and we have also looked out, you know, to June in terms of formulating this guide as well.

And so how does it, how does the business rebound? I mean, what do you see the pickup? Is it just that the sudden pauses come back and they say, hey, let's resume, or how does that look like?

So I think the thing that's been going on through this quarter and what's been driving the uncertainty is that we've had the highest level of clients reprioritizing, meaning a much larger volume of projects being stopped or delayed or teams reduced. But that being offset by a much higher than normal level of new business coming through. So the two things ending up with a net down as opposed to normal times we have a much lower level of projects being reduced and the new stuff driving the growth levels that you're used to seeing. So, you know, as we look forward, we're seeing a slowdown in that level of reductions. As Mark was saying, most of it came through and hit very hard through April. But we're continuing to see the new opportunities coming through. And so, you know, that's where we're then seeing a balance through May and June. And, you know, looking forward, our guidance around seeing opportunities coming from clients around digital and what we're terming digital necessity. There's a lot of clients who've hit issues as these larger digital volumes have hit them where some of their processes are broken and need fixing. And that's driving some quite urgent activity with clients that's leading some of the rampart we're talking about.

Got it, got it. And then my last question just for Mark is, Just thinking about protecting margins or how you're thinking about margins in the downturn, are there costs that can be taken out versus investments? You know, is there short-term, long-term investments that you can think about changing, or is this kind of a blip that there's not much to take out in terms of costs for the margin side?

Well, it could be a long sort of blip, but basically we're taking actions that are short-term in nature. So we continue to invest because basically we see it as a short-term phenomena, but we just don't know how long that will be. So we want to invest for the recovery of So that means maintaining a bench to make sure that we have the skills in place for when we recover. We are also selectively investing in marketing campaigns, obviously adapting them for the COVID environment. But we are tempering that with deferring expenditure, which isn't deemed essential in the near term. A pretty obvious one is travel has largely stopped, as you would expect. And we're looking at projects which can improve efficiency through IT. We're looking at those with a heavy sort of scrutiny. But I think we're taking a sort of balanced view. And our intention is basically to remain in good shape for when we come through this so that we can you know, sees the opportunity that will no doubt present itself when we're past the current situation.

Got it. Thanks for the call.

Your next question comes from Maggie Nolan of William Blair. Your line is open.

Hi, thank you. I'm wondering if you're seeing any signs of vendor consolidation at your clients You talked about, you know, your transition was seamless. If you are seeing any signs to the work from home environment and if you are seeing any signs of that, is this an opportunity for Endava to be able to pick up any market share?

Maggie, we are seeing some signs of that. And, you know, we do think there's a possibility of picking up market share. However, it's been a relatively small number of projects that we've actually signed off the back of clients not being able to use some of the other inventors that they were perhaps used to working with. So we don't know how quickly that's going to come through. I suspect it will take a little bit longer than hitting hard in Q1. But certainly there are conversations and opportunities that our sales teams are uncovering in that space already.

Got it. You know, you saw a nice uptick in Europe this quarter. We've talked about that in past quarters as kind of a medium-term focus. We've talked about private equity as a medium-term focus. Does that strategy have to be adjusted in the near term or are kind of these medium to long-term areas of growth intact even in the current environment? Or if not, what has changed?

Yeah, so certainly in the medium to long term, that focus absolutely remains. And, you know, we are seeing Europe for us as a business coming out of this a little bit ahead, perhaps led by Germany, as I covered in the opening remarks. But we will continue to invest in that. I think it may take us a little bit longer in Europe because the hiring process and so on around staffing up sales teams, et cetera, is a little bit slower and people might be a little bit more wary of changing at the moment, whereas we're not finding that in the US at all. We're continuing to be able to provision teams and so on on the sales side. Private equity, I think, is a different story. Obviously, In the current market, a number of M&A deals that are happening has dropped like a stone. It's really dropped, so the activity levels that we have on the PE front are right down, and we expect those to stay down until M&A levels recover. However, the underlying strategy, which is to build relationships with PE firms so that we have a route into their portfolio companies and can win some of the downstream transformation work after they've done deals, remains very much our focus. We actually had a win this week, which is the first major transformation deal of an Intuitus PE client portfolio company So the strategy is beginning to execute as planned, even though the actual M&A volumes are lower at the moment.

Understood. And then quick housekeeping. What is the organic growth embedded in the guidance? And thanks, guys. Glad you're doing well.

So, as I said, sort of pro forma constant currency guide is 15.5% to 16.5%, so the big point is 16%. It does include a quarter worth of XSS, as we sort of mentioned. So, the organic growth is probably around a 10% level.

Your next question comes from Mayank Tandon of Needham. Your line is open.

Thank you, John and Mark. Hope you're doing well. A couple of questions here. First, I was just wondering if you could talk a little bit about the sales process in terms of winning new logos. We're going to get to how important is it to win new logos at this stage to be able to fuel growth in fiscal 21. If we do get type of recovery in the economy where you get back to trendline growth, what is sort of the level of new logos you need to win to be able to sort of fill that funnel that you might, you know, need to drive that 20% plus growth eventually longer term. Thank you. Sure.

So, you know, we've always as a business had a reasonable proportion of new logos and new activity that we've won in a remote video conference style. And so we've used that experience that we have to rapidly pivot towards business winning in this way. And this occurs right through our sales cycle, from initial lead generation right through to closing deals. And we are continuing to close new logos through this period. I was looking a little, as we do in our regular calls, at the metrics. And we have seen a slight decline in new meetings by about 20% over the past eight weeks, but it's already returning to normal levels. And if you look through the overall pipeline today, it's the strongest that we've ever had right through the progression stages, but particularly in respect of deals to be closed. Now, much of this is medium to long-term in nature, not necessarily employer-shout-recovering one, I have to say. although that remains to be seen. But I do think it's a strong indicator of the medium-term horizon.

That's very helpful. And then just turning to Mark, sorry if I missed this, but did you talk about the DSO cycles, just wondering if you're seeing longer payment terms from your clients because of the uncertainty? And also, in that vein, if you could talk about capital allocation priorities as we go into the new fiscal year. Thank you.

uh so uh in terms of so receivables um we're not seeing any sort of significant change uh we we saw a similar level going from q2 to q3 and april is in line with what we saw in march um we continue to you know monitor clients you know payment records you know for delinquency and of course you know part of that um diligence basically resulted in the bad debt charge that we took in the quarter so at the moment you know I think the cash flow generation is strong for the business and we're vigilant in terms of monitoring the client base So in terms of capital allocation, I think as I underlined in the comments, we have a strong cash flow generative business. We have ample bank facilities. So liquidity is not an issue for us. We're doing the normal things in an environment like this, so we're scrutinizing investments in capex, as you'd expect. But we have, you know, far power to, you know, supplement the structure of the company through M&A should the right sort of opportunity sort of arise. If the comment is, you know, referring to are we looking to tap the equity markets, then we're not.

Mark, just on the M&A team, are you seeing more opportunities given, again, the uncertainty The valuations might be down for certain assets in the market. Does this create more of a tailwind for you in terms of doing tuck-in deals and strengthening your portfolio to come out even stronger on the other side of the pandemic?

I'll make sure.

Go on. No, no, you go ahead.

So, you know, the challenge with us on M&A is that while we continue to have conversations, it really needs in our business some face-to-face element. Now, you know, there are some businesses we're talking to who we met pre-pandemic. And, you know, so some of those could progress and where we feel pretty confident about them. But in terms of new opportunities coming into the pipeline, we're wrestling with how we do that before there's a little bit more travel and a little bit more opportunity for face-to-face conversations with people.

Great, that makes sense. Congrats on the quarter. Thank you.

Thanks.

Your next question comes from Jamie Friedman of Susquehanna. Your line is open.

Hey, guys. Glad to hear you're doing well. John, I was hoping you could share some perspective on how your payments customers are doing, at least at a high level. What's important to them now? Any change in cadence in their spending? Yeah, what's going on with the payments ecosystem?

Sure. So I covered a little bit of this on one of the earlier questions in terms of the volumes being down on merchant services, the merchant acquiring side of things. And that has led to some reductions on teams and delayed project starts in that area. However, it has been offset and we are seeing acceleration in other areas, namely the online e-commerce space, which is driven by a shift in consumer buying patterns. The open banking space, digital onboarding of merchants, clearing and real-time settlement are all picking up. So moving beyond Q4, we expect to see some expansion coming back into this segment, giving our recent conversation.

Got it. In terms of your prepared remarks, John, you profiled the amusement park and that fascinating use case, the social distancing. I'm just wondering, is that something that you could apply more broadly? Because it seems like a lot of industries could use a functionality like that.

Yes, and we're looking at that and talking to people about it. Early days.

Okay. And then, Mark, I apologize if I missed this. I should know this, but with regard to – so with the WorldPay captive, and I know it's got a different name than that, but when you're giving the U.K. or the North American growth rates, the 25-7, is that organic, meaning excluding – world pay? I know you gave the consolidated number, but do you have the regional number absent that asset disposition?

I do. So the results that we give are the reported numbers by the GEOs, so North America 25.7. But the well-paid captive was a UK, or majority of it was UK in terms of its delivery. So the UK reported growth was 24.2%. But again, if you strip out the captive, growth was around 34%.

Okay. All right. Thanks, guys. Be well.

Thank you. Thanks. Your next question comes from Alex Kurtz of KeyBank. Your line is open.

Yeah, thanks for taking the question here. Just wanted to revisit Germany and the strength that you're seeing or expect to see there. Is it anything beyond just the reopening sooner than maybe other countries that's driving it, or are there certain industries there that are outperforming especially that you're well exposed to. So just wanted to better understand a little bit more beyond just the timing of when business starts to open up in Germany.

Sure. So the sectors where we've seen some step up coming through is firstly in the broadcasting space, perhaps for obvious reasons. Insurance, payments, telecoms, and then some travel and hospitality in the Europe parks that I was talking about.

Okay, and just broadly speaking, as you've gone through this period and looking into the current quarter, has there been a reprioritization of certain projects? It sounds like it's at some level, yes, especially around e-commerce and maybe platforms like that. But just anything that struck you guys in the last month or so where things are being pushed down and things are starting to really move up to the top of the stack?

Yeah. So, I mean, this is very much in the theme that I mentioned earlier of preserve today, grow tomorrow. So that has caused a significant amount of reprioritization. So we've We've seen a higher level of projects being stopped and delayed and a higher level of new ones starting. It's interesting, the ones that are being delayed, about half of them are being delayed for cost-saving reasons in the Preserve Today category. The other half have been delayed mainly because clients are coping with the pressures of COVID, and they've been unable to initiate the new projects. And we expect those to come through fairly fast as clients get their own teams and organization settled down again. It's then very much sector-driven, so in terms of what's driving it. A lot of it falls into what we call this digital necessity where the sharp increase in demand across their digital platforms has actually revealed some broken or bottleneck processes that they actually need to fix. So logistics, there's been a lot around fixing digital flows, particularly around the last mile of delivery to enable that to continue to work well. Insurance has been pretty robust outside of travel insurance. But once again, significant digital necessity process issues. When they've got all their staff working from home, for instance, how do you... Some of the processes that previously worked in a call center environment don't work as well. Banking, there's been a lot of pickup in automation and data insights. And huge increases in volumes and digital banks that have caused visibility and some broken processes, so activity going on there. Hopefully that gives you a little bit of color of the sorts of things that are driving the new volumes offsetting some of the downturn stuff. Very helpful. Thank you.

Your next question comes from Charlie Brennan of Credit Suisse. Your line is open.

Perfect. Thanks very much. I've got two questions, if that's possible. The first is just a clarification, Mark, on your comments on bad debts. I missed the size of those in your prepared remarks. And how much revenue is supported by those bad debts? And does the loss of that revenue create a growth headwind for you for the next 12 months? And then the second question is just Digging deeper onto Q4, I'm still trying to understand the trends and the momentum. 15 or 16% growth is still very impressive in standalone terms, but that is a 15 point compression from Q3. That feels like it's a bigger impact from COVID than we're seeing elsewhere in the sector. Why do you think you're being hit more than most by what's happening with COVID?

uh hi charlie um so the bad debt uh was pretty significant it's about three percent of revenue in the quarter and we provide against specific clients mainly in the financial services space they were experiencing challenges mainly of a funding nature and whilst going through their fundraising They ran into delays because of the COVID situation. So we've been prudent in taking a charge against them. And obviously, we're in dialogue with them and monitoring the situation closely. So it is pretty sort of specific in nature. And as I said sort of earlier, we're not really seeing it.

Was that revenue booked in Q3? And do you assume that drops out in Q4? And is that one of the reasons why we're seeing this bigger than normal impact?

No, it relates to revenue in Q3 and some of it may be a little bit of Q, no it's probably mostly Q3 actually. We're providing services still to those clients and we are monitoring the sort of position These are one of these sort of situations where we're in conversation with them almost on a sort of weekly basis about how their funding is sort of progressing. So in terms of the outlook, it isn't a significant driver of that guide from Q3 to Q4. Where we've seen a sort of slowdown, as John has sort of highlighted, laid out has been mainly in the sort of payment space, which John went through in his earlier comments. We're seeing other sort of sectors remain sort of robust, but that was mainly why we saw the slowdown. So the bad debt isn't the driver of the growth headwinds. In terms of the second question about the 15%, 16% constant currency growth, I think it is pretty much in line with what we've seen the likes of EPAM comment on in terms of their guide for the next quarter. And I think also in terms of the global guide, I think they were guiding at something like, you know, 13 odd percent on a reported sort of basis. So I don't think we're out of kilter with what others are seeing.

Fine. Maybe I'll take it up with you a bit later. Thank you.

Yeah.

There are no further questions at this time. I will now return the call to our presenters.

Thank you all for joining us. Obviously, these are interesting and uncertain times, and I hope you've been able to get some real insights into how Endava is responding. You know, we set the business up in a recession back in 2000. We continue to grow through the global financial crisis. So we're incorporating some of our past experiences into how we respond to this crisis. And our belief is that this crisis has underlined the importance of digital and next-gen technologies to drive successful business models in future, and that this is going to drive a strong recovery for us as a business. So our focus right now is on preparing for that comeback, retaining and developing our capabilities, strengthening our client relationships. Our strong balance sheet and excellent delivery model mean that we're actually in a strong position to execute successfully, and therefore we look forward with confidence. I look forward to updating you next quarter on how things are going, and thank you for today.

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