Endava plc

Good morning and welcome everyone to Endeavor PLC earnings release fourth quarter for year 2021 conference call. All lines have been placed on mute to prevent any background noise. There will be a question and answer session. If you would like to ask questions during this time, simply press star then the number one in your telephone keypad. If you would like to withdraw your questions, press the pound key. Thank you. And now I would like to turn the call over to our presenter for today, Laurence Madsen. You may begin the conference.

Thank you. Good afternoon, everyone, and welcome to NDAAVA's fourth quarter and full year fiscal 2021 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cottrell, NDAAVA's Chief Executive Officer, and Mark Thurston, NDAAVA'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 2022 and for the full fiscal year 2022, our perceived opportunities to potential impacts of the COVID-19 pandemic and associated global economic uncertainty, including with respect to our expectations regarding future work arrangements for our people, 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 ability to attract and retain employees, and our ability to execute on our sustainability objectives, 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 and 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-S, filed with the Securities and Exchange Commission on September 28, 2021, 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. The reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which you can find on our investor relations website. The 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. 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 you an update on our business and financial performance. for the three months ended June the 30th, 2021, and for the full fiscal year, 2021. While the COVID vaccine campaign remains underway around the globe, the Delta variant is challenging a full return to normality. But in Darva, we continue to prioritize the safety and wellbeing of our people with differing measures across the world. But this pandemic affects the countries and the communities in which they live and work. However, despite this difficult environment, we continue to experience very strong demand for our digital services in all of our regions and verticals, and the pace of increase in demand is only accelerating. Endava finished the year strongly with revenue of £133.6 million for Q4 of our fiscal year 2021, representing a 54.9% year-on-year increase in constant currency from £90.5 million in the same period in the prior year. We ended the quarter with an adjusted profit after tax for the period of £23.6 million, representing an 83.7% year-on-year increase from £12.8 million in the same period in the prior year. Our strong revenue growth continues to be driven by both the expansion of work for our existing clients and the acquisition of new ones during the quarter. We ended the quarter with 615 active clients, up from 416 at the end of the same period in the prior year, a 47.8% year-on-year increase. We continue to expand our penetration with our largest clients, as the average revenue from our top 10 clients grew by 31% year-on-year. And revenue from clients who paid us above £5 million increased 29.5% year on year. And we continue to increase the number of clients who are paying us in excess of £1 million per year, with 85 clients in this category, up from 65 in the same period last year, representing a 30.8% year on year increase. Moving on to our results for the full fiscal year 2021, we reported revenue of £446.3 million, representing a 30.4% year-on-year increase in constant currency, and adjusting for the sale of the WorldPay captive. Our revenue CAGR for the last five years stands at 29.4%. In the last fiscal year, we grew in all of our regions and verticals. Our North American business posted a solid revenue increase of 40% year on year. For the year, Europe grew 25.7% and the UK 20.3%. All of our verticals also grew nicely, with payments and financial services up 22.3% year on year. TMT up 34.1% and other up 30.9%. Our strong revenue growth continues to translate into solid profitability and we ended the year with an adjusted PBT margin of 20.6% compared to 19.5% in fiscal year 20. Assured by our acquisitions of five and level this past financial year, we continue to invest in our US business. Both Five and Level are culturally very similar to Endava, and our integrations of these businesses is progressing smoothly. Further, we are encouraged by joint commercial opportunities that have already presented themselves. We've had an opportunity to pull Five's product design teams into programs within new areas of two existing Endava clients, a US fintech and a UK insurer, as well as, inversely, bring to bear Endava's scale to grow and expand one of five's largest clients. Together with the team at Level, we're making meaningful commercial progress with a number of new clients, most interestingly with a US airline about an overall of their main digital experience platform. I'd actually like to highlight some of the work we are doing in the US, where we're working with clients in many different industries. As an implementation partner of Finzact, a next-gen cloud-native core banking platform, we're helping multiple U.S. banks implement core banking solutions as part of a broader digital transformation program. We are working with an alternative investment fintech to create a go-forward product strategy from business vision to high-level target state digital capabilities. The client is an alternative investments marketplace provider who has a rapidly growing business on both sides of the marketplace and needed to improve market responsiveness through increased delivery capacity and platform scalability. Through rapid product envisioning, we were able to distill the process visions of their leadership down to actionable and transparent goals. Building upon a clear set of outcomes, we help the client assess their existing digital capabilities to yield a clear path forward for their infrastructure, data, and delivery agility roadmap. Valley Bank's strategic vision is to take ownership of their technology estate and rebuild with best-in-class capabilities to drive innovation and speed to market. Part of this is embracing modern technology trends in architecture, platforms, and DevOps with a goal to deliver truly innovative, technology-enabled relationship banking through customer-friendly products that are much faster than they've been able to do in the past. Endava is helping Valley realize that technical vision, working on core platforms, marketing systems, client onboarding systems, and DevOps transformations across the bank. Core Digital Media, a top 10 advertiser in the US across display, paid search, mobile, and social marketing, has engaged with Endava for the last three years as a strategic technology consultant. Core Digital's new offering, My Wallet Joy, which provides content and tools to help their users to get a handle on the financial impacts of their life goals, was developed in large part by Endava staff working in tandem with core digital product owners and creators. In addition, Endava engineers have enabled core digital to modernize their core financial services environment from a legacy monolith architecture to a domain-driven design, microservices-oriented architecture, creating a more scalable and maintainable infrastructure. Indaba has also been working with a leading life sciences and diagnostics company on their front-end and back-end design in order to simplify their existing design. The project resulted in greater efficiency and allows the client to stay current with functional and security updates and upgrades. Moving on to the technology side, there are two trends that we've observed that I would like to highlight today. They are both focused on how building digital products used across a range of industries with our strategic services can drive demand for other services that we offer. The move from running IT projects to building software-based products has been underway for some years, but we're seeing a renewed level of interest across many industry sectors from both clients and potential clients who want to explore what this means for their business. This interest has led to a strong demand for digital product strategy and design expertise, helping clients to improve the digital experience for both their customers and their employees. In some cases, this focus is a new strategic direction, such as opening up a new direct-to-consumer channel. In other cases, it's about replacing old user interfaces with modern task-oriented ones And finally, it can also lead to rethinking the entire digital experience for existing successful business lines. This rethinking drives strong demand for our digital strategy, product design, user experience design, and user interface development expertise, as well as the modern software engineering capability we have to provide the underlying cloud-first application platform to support these digital workflows. Companies have also recognized the need to improve the efficiency of their internal software development activities and to improve their software developer experience. This recognition has led to increased demand for our software delivery automation skills, CI, CD, cloud automation, and in some cases, the creation of an entire new developer platforms to make enterprise developers more effective. Turning to the second trend, we've been performing software architecture reviews for many years and have developed a flexible and repeatable approach to delivering these engagements. As I mentioned last quarter, we've seen a lot of interest in application rationalization and modernization, particularly in financial services. We are now also seeing wider demand for more general architecture reviews to help clients understand the strengths and weaknesses of their existing software applications and to work with them to identify options for their future evolution. We find that this review often leads to long-term software development engagements. as the application roadmaps we help clients define require significant amounts of work to refactor, rebuild, or even entirely replace parts of their application estates. Growth in FinTech continues to be very strong, as we see widespread innovation and change occurring across many parts of the financial services industry. And we continue to expand in this area, including payments, insurance, banking, and asset management. The move to cloud computing, the constant innovation in payments, the widespread use of APIs to access componentized services, the emergence of modern API-based software package vendors, and the entrance of challenger startups in established business areas are all trends that are driving demand for our services. Our client growth continues to translate into strong employee growth, We ended the fiscal year with 8,883 employees, a 34.1% increase from 6,624 in the same period last year. In the last fiscal year, we added 2,259 net new employees, of which 756 were in the last quarter. We continue to be an employer of choice in our core locations. which allows us to continue to recruit the best talent. Importantly, our attrition rate remains extremely low. We believe people join Endava for a career, not to work on a single assignment, and that is our ability to keep our employees engaged and challenged that has allowed us to keep our attrition level low, while competition for talent remains strong. we are not having difficulties recruiting and retaining the employees we need, although we are careful to avoid overexpanding as a result of the huge demand that we touched on earlier. While more employees are choosing to return to the office, the majority of our workforce continues to work from home most of the time. We're committed to a hybrid model of in-person and remote working as the best way to allow flexibility for our people whilst enabling team creativity and productivity to thrive. We are slowly ramping the hybrid model back up as the pandemic conditions evolve. We remain very focused on providing the best work environment for our employees. Our We Care program focused on diversity, inclusion, and the well-being this last quarter. which we launched with our first Indaba Inclusion Week. We hosted a number of inspiring speakers and impactful masterclasses covering topics ranging from the role we all play in a truly diverse workforce through to disability support and parenting. And we were delighted to see over 3,000 attendees from across the business engage. In August, we also launched our diversity and inclusion forum, which builds on the great work we have already done in this space. The forum is designed to bring together a representative group of endowments who will share their voice and play a part in shaping our inclusion agenda going forward. In addition, we've started rolling out our inclusive leadership training. and also enhanced INDAVA's Speak Up Safely initiative by introducing a network of reps across the business, which gives our colleagues a new way to raise concerns confidentially and brings a human face to the process. We were also delighted this quarter to have INDAVA recognized by the Romanian Business Services Forum with three awards, including Business Services Company of the Year and Employer of the Year. Our Endava Wellbeing Programme, which continues to experience high levels of engagement with over 7,000 attendees to our masterclasses and over 2,700 attendants in our wellbeing workshops, was also recognised as Best Wellbeing Initiative. These awards reinforce the recognition that Endava strives to be an employer of choice in our key markets, attracting and retaining the best people. Finally, I'm pleased to announce that today we have just published our first WeCare Sustainability Report, which highlights our ongoing commitment to meet our environmental, social and governance responsibilities. You can view the report in the WeCare section of our website, where you will also find a short video of the highlights. As demonstrated by our results, we believe that our services are at the core of our clients' digital journey. We're excited about the opportunities in front of us and remain confident in our ability to deliver value for all of our stakeholders. Let me end by thanking our people for their resiliency and adaptability as they continue to deliver excellence, quality and value to our clients in diverse home and hybrid working contexts. They enable the performance I've just discussed. And Garvans, we appreciate your dedication and loyalty. I will 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 new fiscal year. Thanks, John. Before we get into the numbers, I'd like to apologise for the delay in moving our reporting date. The closed process took longer than we anticipated as we had to work with our auditors to settle on the treatment of cash received post year end for a large receivable. This resulted in an overall bad debt provision release in the quarter of £1.3 million, which is shown on the face of the profit and loss account. This item boosted the already strong quarter delivered by the underlying business. Endava's revenue totalled £133.6 million for the three months ended June 30th, 2021. compared to £90.5 million in the same period last year, a 47.7% increase over the same period in the prior year. In constant currency, our revenue growth rate was 54.9%. Profit before tax for Q4 fiscal year 2021 was £18.5 million compared to £6.7 million in the same period in the prior year. Our adjusted profit before tax for three months ended June 30th, 2021 was £29.3 million compared to £15.2 million for the same period last year. Our adjusted profit before tax margin was 21.9% for the three months ended June 30th, 2021 compared to 16.8% 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 of acquired intangible assets, and unrealized foreign currency gains are non-cash expenses. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was 41 pence for the three months ended June 30th, 2021, calculated on 57.5 million diluted shares, as compared to 23 pence for the same period last year, calculated on 56.4 million diluted shares. Revenue from our 10 largest clients accounted for 36% of revenue for the three months ended June 30th, 2021, compared to 40% for the same period last year. Additionally, average spend per client from our 10 largest clients increased from 3.6 million pounds to £4.9 million for three months ended June 30th, 2021, representing a 31.1% year-over-year increase. In the three months ended June 30th, 2021, North America accounted for 37% of revenue compared to 31% in the same period last year. Europe accounted for 21% of revenue compared to 24% in the same period last year, and the UK accounted for 40% of revenue compared to 42% in the same period last year, while the rest of the world accounted for 2% compared to 3% in the same period last year. Revenue from North America grew 77.4% for the three months ended June 30th, 2021, over the same quarter of 2020. Comparing the same periods, revenue from Europe grew 26.9%, The UK grew 40.8% and the rest of the world grew 10.7%. We grew in all three of our industry verticals during the quarter. Revenue from payments and financial services grew 46.4% for three months ended June 30th, 2021. Revenue from payments and financial services accounted for 51% of revenues compared to 52% in the same period last year. Revenue from TMT grew 33.2% for the three months ended June 30th, 2021 over the same quarter of 2020 and accounted for 25% of revenue compared to 28% in the same period last year. Revenue from other grew 70.8% for three months ended June 30th, 2021 over the same quarter of 2020 and now accounts for 24% of revenue compared to 20% in the same period last year. We now turn to our adjusted free cash flow, which is our net cash provided by operating activities, plus grants received, less net purchases of non-current tangible and intangible assets. Our adjusted free cash flow was £32.6 million for three months ended June 30th, 2021, compared to £0.4 million during the same period last year. Our cash and cash equivalents at the end of the period remained strong at £69.9 million at June 30, 2021, compared to £101.3 million at June 30, 2020. We spent £35.9 million net of cash acquired on the acquisition of Level during the quarter. CAPEX for the three months ended June 30th, 2021, as a percentage of revenue was 1.7% compared to 1.9% in the same period last year. I'd now like to move on to some highlights for our fiscal year 2021. NDAVA's revenue totaled £446.3 million for the fiscal year 2021 compared to £351.0 million in the previous fiscal year. a 27.2% increase over prior year. In constant currency, our revenue growth rate was 29.6% and adjusted for the sale of the world paid captive, 30.4%. Profit before tax for the fiscal year 2021 was £54.4 million compared to profit before tax of £25.3 million in the prior year. Our strong revenue growth continues to translate into solid profitability, and our adjusted profit before tax for the fiscal year 2021 totaled £92.1 million compared to £68.6 billion in the prior year, a 34.2% year-over-year increase. Our adjusted profit before tax margin was 20.6% for the fiscal year 2021 compared to 19.5% for last year. The year-over-year improvement in our adjusted profit before tax margin is mainly due to a continued positive pricing environment, foreign exchange rate tailwinds, and control of SG&A expenses. Our adjusted diluted EPS was £1.30 for the fiscal year ended June 30, 2021, calculated on 57.1 million diluted shares as compared to £1.00 the previous fiscal year calculated on 56.1 million diluted shares, up 30% year-over-year. Revenue from our 10 largest clients accounted for 35% of revenue for the fiscal year ended June 2021, compared to 38% for the previous fiscal year. Additionally, the average spend per client from our 10 largest clients increased from £13.4 million to £15.6 million, up 16.5% year-over-year. We grew in all geographies on a year-over-year basis, with North America up 40% year-over-year, Europe up 25.7%, the UK up 20.3%, and the rest of the world up 18.1%. However, excluding the impact of the well-paid captive from the prior year period, comparative growth in the UK would have been 1.7% higher or 22.0%. On a year-over-year basis, revenue from payments and financial services increased 22.3%. However, excluding the impact of the well-paid captive from the prior year, comparative growth in this segment would have been 1.4% higher or 23.7%. On a year-over-year basis, TMT increased 34.1% and other increased 30.9%. The year-over-year growth in other came mainly from mobility, retail and health tech. Our adjusted free cash flow was £82.7 million for the fiscal year ended June 30th, 2021, compared to £31.4 million during the same period last year. we spent £97.6 million net of cash acquired on acquisitions completed during the fiscal year. CapEx for the fiscal year ended June 30th 2021 as a percentage of revenue was 1.3% compared to 2.8% during the same period last year. Our guidance for Q1 fiscal year 2022 Endava expects revenues will be in the range of £143.0 million to £145.0 million, representing constant currency revenue growth of between 56% and 58%. Endava expects adjusted diluted EPS to be in the range of 42 to 44 pence per share. Our guidance for the full year fiscal year 2022 is as follows. Endava expects revenues will be in the range of £608 million to £615 million, representing constant currency growth of between 38% and 40%. Endava expects adjusted diluted EPS to be in the range of £1.61 to £1.67 per share. This above guidance for Q1 fiscal year 2022 and the full fiscal year 2022 assumes the exchange rates at the end of August, when the exchange rate was one British pound to 1.38 US dollar and 1.17 euro. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.