Endava plc

Ladies and gentlemen, thank you for standing by, and welcome to Endava's earning release for the second quarter fiscal year 2021. 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker for today, Lawrence Madsen, Investor Relations Manager. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to NDAVA's second quarter of fiscal year 2021 conference call. As a reminder, this conference 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 Q3 fiscal year 2021 and for the full fiscal year 2021. Our expected near and medium-term revenue growth The potential impact of the COVID-19 pandemic and associated global economic uncertainty, our expectations regarding digital transformation of existing businesses and industries, the necessity of digital transformation for many companies, and Endava's ability to benefit therefrom. Anticipated client demand for Endava services, our expected ability to leverage our intellectual property to provide more cost-effective deliverables to our clients with greater speed, and our expectation regarding expansion opportunities, as well as other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. please refer to the Risk Factors section of our annual report on Form 20-F, filed with the Securities and Exchange Commission on September 15, 2020, which contains a discussion of important factors that could cause actual results to differ materially from those contained in any forward-looking statements. 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 the Investor Relations website. A link to the replay of this call will also be available there. With that, I'll turn the call over to John.

Thank you all. I'd like to thank you all for joining us today, and I hope you're all staying safe and healthy. Mark and I are pleased to be here to provide an update on our business and financial performance for the three months ended December the 31st, 2020. While the coronavirus vaccination campaign has started in many countries around the globe, life is far from normal, with many countries, including the UK, still in lockdown or facing similar restrictions. Whilst we continue to adjust to the impact of the pandemic, demand for our services continues to increase, as we've seen the acceleration of digital transformation clearly differentiating the leaders from the laggards. When the second surge of COVID-19 cases hit our main markets in the Northern Hemisphere at the end of last year, I mentioned to you that our customers were much clearer on their priorities than they had been immediately following the declaration of the pandemic and that we were seeing more business-as-usual type stability in decision-making. We did not see sudden decisions to stop or reduce project activity and demand for our services continues to grow. Indava had a solid Q2 for our fiscal year 2021, with revenue of £105.2 million, a growth of 22.5% year-on-year from £85.9 million in the same period in the prior year. Our strong revenue growth was once again driven by the expansion of work for our existing clients and the acquisition of new ones during the quarter. During the quarter, we continued to broaden our client base and ended the quarter with 521 active clients, up from 367 at the end of the same period in the prior year, a 42% year-on-year increase. Average revenue from our top 10 clients grew by 21% year-on-year. and revenue from clients who paid us above £5 million over the past 12 months increased 34.3% year-on-year. Additionally, we ended the quarter with 75 clients who paid us over £1 million per year, compared to 65 in the same period last year, representing a 15% year-on-year increase. We have adjusted our sales and marketing approaches in response to the reduced travel and in-person attendance at industry events. In September, we highlighted that we were seeing an increasing flow of new client opportunities, which start small with ideation or proof-of-concept engagements and then scale as we move into production system development. We're continuing to observe this trend with a greater number of new clients in the second quarter and with expanded £1 million-plus and £5 million-plus cohorts and top-ten revenue growth as engagements expand. On the technology side, Endava possesses significant intellectual property embodied in our know-how and reusable assets. One type of Endava IP is our accelerators – These are reusable project delivery assets that allow us to provide clients with deliverables of greater value more quickly and at less risk than starting from scratch. We develop our accelerators in response to repeated demand on our projects, so they are practical tools to accelerate our clients' success by packaging our hard-won experience. The accelerators reduce the time required for delivery, and know-how within the accelerator allows us to leverage higher margin deliverables at lower cost for our clients. Some of the accelerators we have developed recently are reusable components for payment systems, testing frameworks, and programming frameworks for data engineering projects. For example, over the past nine months, we built 15 payment accelerators that many payment implementation projects require, but that don't create differentiation or competitive advantage for our clients, such as tokenization, self-service onboarding, fraud engines, and cloud processing. We've implemented accelerators in four client programs, including for ClearCourse and Judea so far, and we're seeing an accelerating adoption. We provide these components in source code form to accelerate delivery of a larger program, enabling us to provide our clients with greater value in a shortened timeframe. With time to market being a key differentiator, these accelerators can provide our clients with an edge. I'd also like to highlight today some of the work we're doing in the fast-growing health tech sector. We believe digital transformation presents opportunities to transform the quality of services provided in health by making them more efficient, more secure, and more data-driven, whether in direct patient care settings or in the context of researching better ways to provide care. And this is where we have focused our energies. Endava has been partnering with WebMD Health Services for nearly 10 years, assisting them in their digital journey. We've helped WebMD develop corporate wellness solutions to help companies improve the health of their employees. We have also utilized our experience in distributed agile delivery to support the development of Clio's new digital platform, Lyft. Clio builds meaningful relationships with patients on drug therapy using artfully scripted, live, patient-centric conversations supported by digital outreach. Playo's purpose-built Lyft technology platform brings science into the art of human engagement with pretty cool data science to craft a mindful patient journey. A leading health tech provider partnered with Endava to develop a number of apps, allowing clinicians and patients to make the most of their time together. We built a triage app that configures online questionnaires, allowing clinicians to create a workflow through which patients can interact with a body map to highlight different areas of the human body where musculoskeletal pain is occurring before the patient is physically examined by the clinician. we built another tool allowing clinicians and patients to connect remotely via audio or video chat on computers and mobile devices. Additionally, we helped create a program called Patient Outcomes to allow clinicians to use home exercise or remote resolution programs in tandem with a patient's profile and match them up to increase the likelihood of patient enrollment and adherence to the program. Endava has recently been chosen by a leading provider of advanced healthcare solutions for the management of blood, plasma, tissue, and cells to support them with the design and implementation of the application infrastructure in AWS for one of their clients in Germany. We are leveraging our in-depth technical expertise in cloud infrastructure. and AWS partnership to minimize implementation costs while migrating their on-premises software into the cloud. Our solution will allow faster future cloud implementation for their clients as we automate the provisioning of infrastructure by building an infrastructure as code pipeline. Underlying all health tech is evidence-based practice drawn from scientific research. and we've been working with one of the pioneers in that area, eLife Sciences Publications Limited. eLife is a not-for-profit organization inspired by research funders and led by scientists. Their mission is to help scientists accelerate discovery by operating a platform for research communication that encourages and recognizes the most responsible behaviors in science. This means building technology to help scientists share their findings quickly and effectively. So we helped build an article hosting platform that used modern web front-end techniques. The result was the launch of a new journal website, transforming the way scientists share their research, including two groups focusing on COVID-19 research. It's been a privilege to build a solution that helps healthcare providers have a positive social impact in transforming patient care. Many of these examples have been innovative entrants to the health tech space. It was setting the pace in the transformation of health services and patient outcomes. Similar to our experiences with the FinTech space, we believe this innovation will cascade up to larger providers in health as the dramatic benefits of digital transformation are demonstrated, providing a long runway of expansion opportunities for next-gen providers such as ourselves. Our client growth continues to translate into strong employee growth. We ended the quarter with 7,464 employees. a 19.1% increase from 6,267 in the same period last year. We have increased our headcount organically every quarter since the start of the pandemic, and our attrition rate remains low. We recently added two employees in Sydney, Australia, to support clients in the region, and in Q3 for our fiscal year 2021, we also added one employee in Singapore. As lockdowns and similar restrictions ease, we expect to add to our headcount in Asia-Pac. The majority of our workforce continues to work from home, and productivity remains high. We're still defining our post-pandemic hybrid model for the new work environment, and we continue to recruit people on the basis that they must be able to regularly attend an Endava office. With this in mind, last quarter I mentioned the launch of the Endava Wellbeing Program, which is designed to ensure that endavans can access the wellbeing support that's right for them, be it through workshops, digital content, or masterclasses. We're delighted at how this has been welcomed by our people, with overall engagement levels continuing to increase. Since launch, close to 70% of endavans have participated in in at least one of these events. As shown by these results, client demand for our services continues to be strong as digital transformation continues to increase in strategic importance. Mark and I and the entire team are extremely pleased with our performance for the quarter just ended, despite the challenging pandemic situation. and we are excited about the opportunities emerging and remain confident in our ability to deliver value for all of our stakeholders. Let me end by thanking our people who, in these turbulent times, continue to deliver excellence, quality, and value to our clients in diverse homeworking contexts and who thereby enable the performance just outlined. We appreciate your dedication and loyalty. I'll now pass the call on to Mark, who will walk you through our financial results for the quarter and provide guidance for the coming quarter and the fiscal year. Thanks, John. Indaba's revenue totaled £105.2 million for the three months ended December 31, 2020, compared to £85.9 million in the same period last year, a 22.5% increase over the same period in the prior year. In constant currency, our revenue growth rate was 21.4%. Profit before tax for Q2 fiscal year 2021 was £10.6 million compared to loss before tax of £17.3 million in the same period in the prior year. The loss during the same period in the prior year was the result of the declaration of a non-recurring discretionary employee bonus, which we refer to as the discretionary EBT bonus, of £27.7 million in December 2019. Our adjusted profit before tax for the three months ended December 31, 2020, with £20.6 million compared to £20.5 million for the same period last year. Our adjusted profit before tax margin was 19.6% for the three months ended December 31, 2020, compared to 23.8% for the same period last year. Adjusted profit before tax, adjusted PBT, 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, net gain on disposal of subsidiary. Share-based compensation expense, amortization required in tangible assets, and unrealized foreign currency gains on non-cash expenses. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was 29 pence for the three months ended December 31st, 2020, calculated on 57.1 million diluted shares, as compared to 30 pence for the same period last year, calculated on 56.0 million diluted shares. Revenue from our 10 largest clients accounted for 37% of revenue for the three months ended December 31st, 2020, unchanged from the same period last year. Additionally, the average spend for clients from our top 10 largest clients increased from £3.2 million to £3.9 million for the three months ended December 31, 2020. In the three months ended December 31, 2020, North America accounted for 29% of revenue unchanged from the same period last year, Europe accounted for 27% of revenue compared to 23% in the same period last year, and the UK accounted for 42% of revenue compared to 45% in the same period last year, while the rest of the world accounted for 2% of revenue compared to 3% in the same period last year. Revenue from North America grew 23.7% for the three months ended December 31st, 2020, over the same quarter of 2019. Comparing the same periods, revenue from Europe grew 40.7% and the UK grew 14.2%. We grew in all three of our industry verticals during the quarter. Revenue from payments and financial services grew 12.3% for the three months ended December 31, 2020. Revenue from payments and financial services accounted for 49% of revenue, compared to 53% in the same period last year. Revenue from TMT grew 42.7% for the three months ended December 31, 2020, over the same quarter of 2019, and accounted for 28% of revenue compared to 24% in the same period last year. Revenue from other grew 25.1% for the three months ended December 31, 2020, over the same quarter of 2019, and now accounts for 23% of revenues. unchanged from the same period last year. This growth was mainly driven by clients in the mobility and health tech sectors. We now turn to our adjusted free cash flow, which is our net cash provided by operating activities, as grants receive less net purchases of non-current tangible and intangible assets. Our adjusted free cash flow was £18.7 million for the three months ended December 31, 2020, compared to £8.0 million during the same period last year. The prior comparative period included the first tranche of a one-off discretionary EBT bonus cash payment of £10.7 million. Our cash and cash equivalents at the end of the period remained strong, at £84.2 million at December 31, 2020, compared to £101.3 million at June 30, 2020. We spent £50.5 million net of cash acquired in the six months on our acquisition of Comtrade Digital Services in August. CapEx for the three months ended December 31, 2020. as percentage of revenue is 1.6% compared to 3.7% in the same period last year. Our guidance for Q3 fiscal year 21 is as follows. Endava expects revenues will be in the range of £110 million to £111.5 million, representing constant currency revenue growth of between 20.0% and 21.5%. Endava expects adjusted diluted EPS to be in the range of 27 to 28 pence per share. Our guidance for the full year fiscal year 21 is as follows. Endava expects revenues will be in the range of £423 million to £426 million, representing constant currency growth of between 22.0% and 22.5%. Endava expects adjusted values in EPS to be in the range of 110 to 113 pence per share. The constant currency growth figure quoted for the full fiscal year 2021 guidance still includes the pro forma adjustment for the well-paid captive, as it remains in the full year comparative. The above guidance for Q3 fiscal 2021 and the full fiscal year 2021 assumes the exchange rates at the end of January. then the exchange rate was 1 British pound to 1.37 US dollars and 1.13 euros. This concludes our prepared comments. Operator, you are now ready to open the lines for Q&A.