Endava plc (NYSE:DAVA) Q1 2024 Earnings Call Transcript

Endava plc (NYSE:DAVA) Q1 2024 Earnings Call Transcript November 15, 2023

Endava plc beats earnings expectations. Reported EPS is $39, expectations were $0.42.

Operator: Good morning and welcome to the Endava First Quarter Fiscal Year 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the conference over to Laurence Madsen, Head of IR. Please go ahead.

Laurence Madsen: Thank you. Good afternoon, everyone, and welcome to Endava’s first fiscal year 2024 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 presentation and our accompanying remarks today include forward-looking statements, including but not limited to statements regarding our guidance for Q2 fiscal year 2024 and for the full fiscal year 2024, the improvements in the overall headwinds facing our industry, and the impact of such changes on our ability to grow revenues, and in particular, growth and expansion in our industry verticals, our continued business optimization actions, enhancements to our technology and offerings, the impact of adverse microeconomic conditions, and our business strategies, plans, and operations.

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 the 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 we undertake no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. For more information, please refer to the Risk Factors section of our annual report filed with the Securities and Exchange Commission on September 19, 2023.

Also, during the call, we’ll present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Reconciliation of such non-IFRS measures to the most directly comparable IFRS measures are included in today’s earnings press release, as well as the investor relations, both of which you can on our investor relations website site or on the SEC website. A link to the replay of this call will also be available on our website. With that, I’ll turn the call over to John.

John Cotterell: Thank you, Lawrence. I’d like to thank you all for joining us today and I hope you’re all well. We’re pleased to be here to provide an update on our business and financial performance for the three months ended September 30th, 2023. We reported revenue totaling GBP188.4 million for Q1 of our fiscal year 2024, representing a 0.6% year-on-year decrease in constant currency from GBP196.2 million in the same period in the prior year. Sequentially, revenue was up by 0.2% in constant currency on the previous quarter. We ended the quarter with an adjusted profit for tax for the period of GBP29.8 million, representing a 15.8% adjusted profit for tax margin. On our last earnings call in September, I mentioned that we’re inherently conservative, but are seeing real signs of improvement, which should impact our second-half of fiscal year 2024.

Whilst the world has become more unstable over the past two months, we continue to see sizable new opportunities entering and progressing through our funnel, as well as new assignments commencing and scaling. I will shortly go through some case studies, and a number of these illustrate work, which starts small and ramps as we move to production environments. Mark will come to our guidance later, which we have broadly maintained on the basis that the uplift in the second-half continues to firm up. We continue to prioritize our efforts on larger relationships that can grow and scale. We have a total of 145 clients, each paying us in excess of GBP1 million per year in the quarter just ended, compared to 140 in the same period last year, representing nearly a 4% year-on-year increase.

Additionally, we had 33 clients, each paying us in excess of GBP5 million per year in the quarter just ended, compared to 25 in the same period last year, representing a 32% year-on-year increase. Over the last several years, we’ve seen an interesting trend emerge with many of our customers. The proliferation of application programming interfaces, or APIs, are the common building block for modern products and services has opened the door to a new way for companies to interact with their partners and customers. Many of these companies have begun extending functionality externally that would historically have been reserved for use inside their organization. An example of this is embedded finance, where financial services products are made available to other organizations.

This has meant that companies and industries, including health, retail, automotive, tech, logistics, and insurance have all started to embed financial services products into their customer journeys. For these businesses, this often provides new revenue streams, wider value-added services and often increased customer retention. For the end customer this is manifested in experiences such as being offered an instantaneous loan at the physical point of sale and buying from a retail, being offered temporary insurance when taking a scooter ride, being able to see real-time availability of parking spots to reserve and pay for them directly from a mobile app, or being able to have your car infotainment system store your payments credentials and automatically pay for tolls as you pass by a checkpoint.

All of these are real world examples of solutions that Endava has helped our clients build. Endava is finding opportunities to help the providers, build their embedded finance solutions, but also with the businesses across many industries, who are embedding these services into their customer journeys. Endava’s experience enabled us to engage very early to help establish strategy, build proof-of-concepts, and then integrate and develop production systems. Digging a little deeper, the emergence of payments as a service, as a subset of the use cases under the embedded finance umbrella has played particularly well to Endava strengths and rich history in the payments and financial services space. Our deep expertise in building large scale payment systems and integrating with major payment providers across the world has made us a go-to partner for customers looking to incorporate payment services into their businesses.

Additionally, many of the creators of those payment services are banks or other financial institutions that Endava also has strong experience supporting. Our unique position in the payments industry has allowed us to help customers in retail, media, logistics, transportation and many other industries design, build and integrate key financial services technology to enable their payments, lending and issuing as a service products. Today, I’ll highlight some of the projects we’re working on in embedded finance. In the mobility space, we are working with a global car manufacturer, which had first embedded their first generation of payment services into both the app and the in-car experience, allowing consumers to seamlessly pay for services such as fuel, parking, or charging from their car.

Endava was initially approached to consult on how to build an embedded payments ecosystem in order to expand the client’s presence globally and to allow it to interact with a vast network of external parties. We advised the client on how to streamline their platform by building a robust and scalable architecture, how to integrate to the complex network of payment partners, and how to commercially structure the proposition across multiple geographies. The project evolved, and Endava is now working on building the client’s new target state platform, including payments orchestration as a unifying component, which will enable the addition of new components as the client expands globally. Building on this experience, we continue to find and help other global automotive OEMs, who are seeking to engage with their customers and discover new embedded payment revenue streams through strategic consulting and downstream execution.

In the healthcare space Endava has been working with a U.S.-based company that provides a comprehensive suite of practice management, electronic record-keeping, patient engagement, billing, and collection solutions to medical practices. The suite of services includes an arrangement with their payment processor, whereby the client embeds their products and services, including pulse terminals, web-based payments, and so on for costs borne by patients. With their existing payment processing model and processor arrangements, they were unable to take advantage of increased payments revenue. Endava provided a payment strategy, financials, and operational processes that allowed our client to add net new recurring revenue streams to their business.

In the insurance space, Endava has been developing the new gold standard in customer experience for one of the largest healthcare insurers in North America. We are engaged to take a holistic look at the infrastructure and member experience and create the vision and roadmap for member experience, including embedded payments. We are now working with the new ecosystem partners to create the implementation plan and execution strategy for 2024. This includes a new payment gateway to deliver a new modern payment experience to their members. In the payment space, we are working with Paytrix, a startup company based in the U.K., to assist with the greenfield development of their product. Realizing the increasing need for efficient B2B payments and support for increasingly complex geographical routes, they wanted to introduce a product that would enable smooth integration from leading financial services providers worldwide through a single contract and API.

The objective is to offer a straightforward and adaptable solution that unlocks access to a diverse ecosystem of providers. The benefits would translate into a service that platforms could use to seamlessly embed complex payments transfers and allow them to easily expand into new geographical markets. We used our payments and architecture expertise to identify the overall business requirements and help the client with the product ideation and discovery. We helped design an enterprise-level architecture that is intended to be reusable and scalable. A minimum viable product was developed and launched within five months. It enabled real-time transactions with an internal back office for staff members and an external user interface for end customers.

Also in the payment space, we formed a strategic partnership with Stripe, which marries industry-leading product capabilities that are best-in-class engineering capabilities. Stripe has been a pioneer in embedded finance, offering the ability for merchants to use their services to collect payments and even offer cards to their customers. However, global platforms are complex and require industry-specific expertise. Working in collaboration across insurance, automotive, banking and gaming Endava helped bring Stripe’s vision to life. Recent examples include our work in the automotive industry to enable an industry-first peer-to-peer marketplace, allowing users to create their own revenue streams from their car, whilst also providing a more carbon neutral option to people running multiple cars.

A leading European payment Fintech, which provides services to address the needs of the rapidly growing B2B marketplace, was facing strains due to its rapid growth. The client services over 2,500 leading platforms and marketplaces. To support its growth, the client needed a partner that would transition their current infrastructure to a modern, scalable, and globally transportable cloud approach, whilst not jeopardizing their regulated status. Endava was selected as their provider of choice, both financial services and AWS expertise. The migration of both staging and production was done successfully on an extremely tight deadline of less than four months, enabling the business to continue to grow without service interruption. We helped a U.K. payment platform define and develop a scalable and modern embedded finance product.

Their vision was to offer a tailable and fully embedded finance experience into their customers’ website. The service offers merchants access to multiple lending partners from a single user experience, enabling the offering of tailor-made lending options to meet a range of different market requirements. The product we built allows for a complete consumer journey with lender-specific loan products, soft eligibility checks, and account creation. We’re also building for them a merchant service portal, as well as a lender servicing portal allowing for the full merchant journey assisting with onboarding flows, know your customer, know your business and anti-money laundering checks. The flexibility and scalability of this platform allows our client to quickly adapt to ever-changing market demands.

Endava has been working with Explore Technologies, a global platform integrating virtualized SaaS solutions and embedded payments to help everyday life businesses succeed. We helped them to enhance their U.S. payments platform to enable them to serve a more global market by migrating to Azure Cloud and developing a new payment processing capability for the U.K. and EU. The global payment platform now allows for automated merchant onboarding and reconciliations and is supported via application program interfaces, software development kits for web and mobile, as well as native payment app technologies. With our support, Explore Technologies is solidifying its position as an industry leader in seamless software and embedded payment solutions for businesses in the early education, fitness, and well-being and field services verticals.

On the technology side, we continue to see demand for experienced-based capability in the generative AI space. Increasingly, our conversations are moving beyond simple internal use cases, and instead moving to a requirement to industrialize and harden proof-of-concepts, and then readying them for enterprise deployment. As we continue to have more in-depth conversations with our clients about the benefits from AI of manual efficiency, process augmentation, and autonomous agents, we are increasingly using our internally developed AI platform to rapidly demonstrate how our clients can benefit from these powerful tools. Following a recent conversation with a client, rather than simply responding with a presentation of our recommendations, our team built a working solution using simulated data that directly fits into the client’s workflow.

As this was developed on our platform, we could also demonstrate how this technology can be deployed into an organization rapidly, whilst knowing that the solution will scale with future usage patterns. This approach shows how leveraging AI technology within our teams can have a rapid impact on our sales cycle and customer satisfaction, as well as delivering more than just a standalone proof-of-concept. Enterprise systems utilizing the latest AI technologies are also demonstrating a requirement for new ways of working and expertise. Similar to how clients better DevOps ways of working to best leverage cloud computing, we are seeing the need to consider AI workloads and the requirement for model management, forced feedback, monitoring, and so on, requiring an evolution of DevOps way of working, which we are calling MLOps.

It is this holistic view of how to leverage new technologies that places Endava at the heart of clients’ emerging AI journeys. Regarding our recent acquisitions in Asia Pac and the U.S., the integration process is progressing smoothly, and I’m excited about the prospects for our expanding global footprints. As we work towards achieving our Vision 30, we recently introduced one Endava, a leadership program built around delivering career growth, growing leaders, and fostering a culture of diversity and belonging. For the last three years, Endava wellbeing has supported our people through a wealth of resources, master classes and workshops organized around four pillars, mind, body, home and community. We’re committed to expanding the support we offer to ensure wider relevancy to our diverse global community.

In celebration of World Mental Health Day, we launched online well-being retreats, providing an immersive experience for renewed energy and focus. Additionally, we recently received the EcoVadis Silver Medal for 2023. This places us in the top 25% in our industry and in the 85th percentile for all companies for integrating positive ESG practices across our business. Improving on the bronze medal we received in 2022, this achievement recognises our ongoing commitment to making a positive impact in supporting our people, customers and the communities where we operate. We ended the quarter with 11,761 employees, a 2.5% decrease from 12,065 in the same period last year. In the current environment, our recruitment is focused on areas of demand, as well as continuing to strengthen our sales and marketing team.

I’d like to take this opportunity to thank all Endavan’s for their loyalty and determination over the past quarters, as we have persevered through recent headwinds. We will continue to manage the business for the long-term, maintaining our culture and organizational health and creating exciting solutions for our clients and their customers. Despite the recent challenges, based on our conversations, we believe clients’ activities in exploring and commissioning new products will overtake the headwinds of recent quarters and see us return to growth. 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.

Mark Thurston: Thanks, John. Endava’s revenue totalled GBP188.4 million for the three months ended September 30, 2023, compared to GBP196.2 million in the same period in the prior year, a 3.9% decrease over the same period in the prior year. In constant currency, our revenue declined 0.6%, which reflects a 7% positive inorganic contribution during the quarter. Sequentially, revenue was up by 0.2% in constant currency on the previous quarter. Profit before tax for Q1 fiscal year 2024 was GBP17.3 million compared to GBP38.6 million in the same period in the prior year. Our adjusted profit before tax for the three months ended September 30th 2023 was GBP29.8 million, compared to GBP39.5 million for the same period in the prior year.

Our adjusted profit before tax margin was 15.8% for the three months ended September 30, 2023, compared to 20.1% for the same period in the prior year. Our adjusted diluted earnings per share was GBP0.39 for the three months ended September 30, 2023, calculated on 58.4 million diluted shares as compared to GBP0.54 for the same period in the prior year, calculated on GBP58.1 million in shares. Revenue from our 10 largest clients’ accounts for 35% of revenue for the three months ended September 30, 2023, compared to 33% for the same period last fiscal year. Additionally, the average spend per client from our 10 largest clients increased from GBP6.4 million to GBP6.5 million for the three months ended September 30 of 2023, as compared to the three months ended September 30th 2022, representing a 2.3% year-over-year increase.

In the three months ended September 30 2023, North America accounted for 30% of revenue, compared to 35% in the same period last fiscal year. Europe accounted for 25% of revenue, compared to 22% in the same period last fiscal year. The U.K. accounted for 35% of revenue, compared to 40% in the same period last fiscal year, while the rest of the world accounted for 10%, compared to 3% in the same period last fiscal year. Revenue from North America declined 15.6% for the three months ended September 30, 2023, over the same period last fiscal year, comparing the same periods, revenue from Europe grew 8.8%. The U.K. declined 16.0% and the rest of the world grew 180.2%. Starting this quarter, we are providing additional granularity on our vertical mix.

Revenue from payments declined 14.7%, the three months ended September 30, 2023, over the same period last fiscal year, and accounted for 27% of revenue, compared to 30% in the same period last fiscal year. Revenue from banking and capital markets or BCM declined 14.4%, the three months ended September 30, 2023, over the same period last fiscal year, and accounted for 14% of revenue, compared to 16% in the same period last fiscal year. Revenue from insurance grew 32.3% for the three months ended September 30th, 2023 over the same period last fiscal year and accounted for 8% of revenue, compared to 6% in the same period last fiscal year. Revenue from TMT declined 1.9% for the three months ended September 30, 2023, over the same period last fiscal year, and accounted for 23% of revenue unchanged from the same period last fiscal year.

Revenue from mobility grew 6.7% for three months ended September 30, 2023, over the same period last fiscal year and accounted for 11% of revenue, compared to 10% in the same period last fiscal year. Revenue from other grew 4.7% for the three months ended September 30, 2023 over the same period last fiscal year and now accounts for 17% of revenue, compared to 15% in the same period last fiscal year. Our adjusted free cash flow was GBP16.0 million for the three months ended September 30, 2023, compared to GBP21.8 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period remained strong at GBP168.2 million at September 30, 2023, compared to GBP164.7 million at June 30, 2023. Capital expenditure for the three months ended September 30, 2023, as percentage of revenue was 0.4%, compared to 1.7% in the same period last fiscal year.

Now turning to our outlook for Q2 and the full-year fiscal 2024. As John mentioned in his remarks, we continue to see sizable new opportunities entering and progressing through our funnel, as well as new assignments commencing and scaling. So in that regard, the guide is little changed than initially outlined on our last earnings call. We still anticipate an uplift in revenues, starting in Q3 of fiscal year 2024 with recovery to historic levels of growth and profitability by Q4 of fiscal year 2024. With that context, let me now turn to the guide. Our guidance for Q2 fiscal 2024 is as follows: Endava expects revenue will be in the range of GBP184 million to GBP185 million, representing constant currency revenue decrease of between 8.5% and 8.0%.

Endava expects adjusted diluted EPS to be in the range of GBP0.28 to GBP0.29 per share. Our guidance for the full-year fiscal year 2024 is as follows: Endava expects revenue to be in the range of GBP791 million to GBP805 million, representing constant currency growth of between 1.0% and 2.5%. Endava expects adjusted diluted EPS to be in the range of GBP1.59 to GBP1.60 per share. This above guidance for Q2 fiscal year 2024 and the full fiscal year 2024 assumes the exchange rates on October 31, 2023, when the exchange rates was 1 British pound to 1.21 U.S. dollar and 1.15 euro. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ashwin Shirvaikar of Citi. Please go ahead.

Ashwin Shirvaikar: Thank you. And thank you for all the incremental details with breakdown that you provided. I guess the first question, I have is with regards to the higher visibility that you seem to allude to, is there a way to perhaps quantify that in terms of how much is already contractually lined up, so to speak, versus how much more needs to get sold and get ramped? And then a related question is, obviously, in the last fiscal year, you had a couple of very idiosyncratic impacts to your revenues, for example, FIS in the PE situation, if you can provide an update on what’s included in your outlook as it relates to those?

John Cotterell: Yes, thanks Ashwin. I’ll just give a little bit of headlines to frame it and then Mark will come in with a little bit of detail. So from a client point of view, we’re basing it on our sort of historic visibilities that we’ve had coming through the pipeline. Now that’s always been a mixture of contracted business, committed business, and pipeline business that’s coming through. And we’re following the normal patterns that we’ve had in terms of assessing that. Now, what we’re seeing and what we were reporting last quarter and continue to see growing is quite a lot of strength in terms of new opportunities coming into the top of the pipeline and advancing through the pipeline. And it’s based on those with appropriate levels of probability, using the same ones as we’ve applied historically, that we’re basing the uplift coming through in the second-half of our financial year, so we followed the normal pattern.

I think to frame it, we essentially see a pre-COVID world returning. It’s highly competitive as it’s always been, but it’s a context where we do well as a business with the opportunities that are coming through with our differentiated products and services to clients. And it’ll take a while to work out of a system the nine months or so of pause in client decision-making, which is what’s essentially created headwinds for us over the past three quarters. But as that works through, we see the normal patterns coming through in the pipeline that we’re seeing coming through our system. Mark, any more color on there?

Mark Thurston: Yes, I think just to back up what John was saying, we forecast business bottom up every month. We scrutinize the pipeline and the conversion rates from contracted into committed. The pipeline is firming, which means it becomes a smaller proportion of the guided revenues for Q3, Q4. So the contracted and committed revenues is stepping up as a proportion from the previous guide. And then if you — I think you asked about the in the idiosyncratic elements previously as well, so like MasterCard and FIS. So again, we have not changed any of the assumption that we had there, which is basically that MasterCard was going to step down in terms of activity in Q2, which is embedded in the guide. It’s no different from the initial guidance, and we relatively flat as we go into the second-half, as we pivot onto new types of work with them.

And again, with FIS, basically we are flatlining that in terms of the outlook, and that is no different from what we said last time, although with the change in ownership, we would anticipate that we would get additional work with them, but we have not factored that into the guide. And then the final point I think you touched on PE, again we have not changed that assumption that we had in the initial guide, which is basically that PE business for us will be flat throughout the year.

Ashwin Shirvaikar: Appreciate that. And then the second question is with regards to headcount — in the quarter headcount down sequentially. Obviously, you have pretty meaningful sequential growth in the second-half of the year? How quickly can you pivot, I guess, headcount to go to appropriate levels of headcount increases when you see the demand come through?

John Cotterell: So we would expect to be able to ramp the headcount pretty much a month or two ahead of the projects that are coming through. In the current environment it isn’t as tough as it has been historically to recruit and bring good people in. If it starts to toughen up, you know, we will just ramp ahead of that. It’s pretty easy for us to respond as we have done over all of the years of growing the business on ramping headcount alongside the demand from clients. And we don’t anticipate being able to do that as we go into the second-half. But in Q3, we still have a bench which we would burn through, so it’ll be a Q4 issue as it emerges.

Ashwin Shirvaikar: Understood. Thanks, and congratulations. Good work.

John Cotterell: Thanks, Ashwin.

Operator: The next question is from Bryan Bergin of TD Cowen. Please go ahead.

Zack Ajzenman: Hi, thanks. This is Zack Ajzenman on for Bryan. First question we have was on the demand side. Can you maybe provide some more color on these larger deal opportunities that support your optimism in the second-half of the year? Are there certain common factors driving this influx of activity and how would you characterize the pace of these deal ramps versus more normalized times?

John Cotterell: Yes, so, I mean, we’re seeing it in a number of areas. The pace and the demand actually is strong, compared with our pre-COVID situation. But we maintain an element of conservatism, just given what’s happening in the wider macro. The sorts of things that we’re seeing coming through are our traditional digital transformation services. I touched on a whole bundle of those around the embedded finance area in my opening remarks, and we’re certainly seeing a lot of activity coming from that. We’re also seeing platform transformation type work where clients have ended up with multiple platforms and they’re looking to get some economies out of consolidating those, perhaps pushing them a little bit harder into the cloud space with some of the benefits that come from that transition, a little bit more than the lift and shifts that one has seen historically.