Q1 2023 Endava PLC Earnings Call

Good afternoon, Good day, and welcome to <unk> first quarter of fiscal year, 'twenty 23 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

<unk> on your telephone keypad. After today's presentation, there will be an opportunity to teach whilst questions.

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I would now like to turn the conference over to.

Laurence Madsen head of.

Investor Relations at Indaba plc. Please go ahead.

Thank you good afternoon, everyone and welcome to and that's the first quarter of fiscal year 'twenty two 'twenty three conference call. As a reminder, this conference call is being recorded joining me today are Tom Cottrell, MFS, Chief Executive Officer, and Mark Thurston <unk>.

That's chief Financial Officer.

Before we begin a quick reminder to our listeners.

Our remarks today include forward looking statements, including our guidance for Q2 fiscal year 'twenty 'twenty three and for the full fiscal year 'twenty 'twenty three and other forward looking statements regarding our business and operations.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from Dallas is contained in the forward looking statement.

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 education 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.

The Securities and Exchange Commission on October 31st 2022.

Also during the call well present, both I mean as far as I know I FRS financial measures a reconciliation of non I S. R. S. Two alright.

Measures is included in todays 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 Ross.

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 2022.

We reported another solid quarter with revenue totaling 196.2 million pounds for Q1 fiscal year 'twenty two 'twenty three.

Representing a 33% year on year increase.

From $147 5 million pounds in the same period in the prior year.

We ended the quarter with an adjusted profit before tax for the period of 39.5 million pounds, representing a 20.1% adjusted profit before tax margin.

Despite continued global macroeconomic uncertainty we remain in a strong demand environment.

The recent political challenges in the U K of course apprehension in the market.

And I'd like to emphasize that we have little exposure to UK centric businesses and around 80% bought revenue. The U K is derived from multinational companies with a global transformation agenda as we book revenue in the country, where the service is delivered.

I am pleased that we recently launched a second weekend sustainability report, which gives more insights into our ESG approach and priorities and can be found on our investor website.

We are building on our commitment to prioritize the wellbeing of our people.

We want to ensure that all arent orphans have options available to support their mental health and wellbeing should they need it at any point in their careers, while working with us.

We now have a number of trained and Dorba wellbeing champions across the organization, who act as a point of contact and advocates of our welding also helping direct and dolphins to available resources.

We're also making progress towards our environmental ambition of achieving net zero emissions from our organization and value chain.

We've been working towards alignment with the S. P T I criteria and setting and subsequently validating targets.

This involves defining a baseline for our emissions data against which to measure our progress.

We engaged pricewaterhousecoopers to provide limited assurance over selected metrics related to the greenhouse gas emissions disclosures included in our published sustainability report.

On the revenue front, we grew in all geographies and verticals during the quarter.

As usual our 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 715 active clients.

Up from 658 at the end of the same period in the prior year and 9% year on year increase.

Importantly, we continued growing the number of larger clients with a total of 140 clients paying us in excess of 1 million pounds per year compared to 93 in the same period last year.

Presenting an impressive 51% year on year increase.

As the ideation phase is brought to life, we believe that the opportunity to scale engagement and production systems as realized significantly expanding activity and client footprint.

For over 20 years in Dallas payment bus co has been providing payments expertise to the financial services sector.

This includes helping banks payment service providers credit and debit card companies acquirers fin techs and paychex with their payments to states.

We see continued strong demand in the vertical with a constant runway to cater to the ongoing digitization of payments globally.

In parallel to this payment. So that's cool we have created the payments horizontal to help customers across industries integrate the online payments experience.

This is essentially deploying our 20 plus years of payments knowledge and capability and financial services into other industry verticals.

We're seeing a significant demand for our services across various sectors, including retail automotive Airlines insurance health care providers and particularly in marketplaces.

The underlying theme is that companies are increasingly taking direct ownership of the payments value chain we.

We are seeing a big increase in work, helping clients analyze the payments experience they provide to their customers and how they collect revenue for themselves and on behalf of third parties.

These projects include building on boarding in K Y C solutions.

Real time payments for claims and micro payments and insurance.

In car payments and automotive.

And payment facilitators in health care.

Reduced payment costs and create new revenue streams.

Across all verticals one of the key areas, we are active in his payments orchestration.

Many large global businesses have extremely complex payments as states as a result of global expansion transition from brick and mortar stores to e-commerce adoption of new payment options as well as acquisitions and product diversification.

As a result these clients now have very siloed payment infrastructures by region, often with multiple regional partnerships and commercial agreements.

This makes integrations maintenance and partner management, a very expensive process.

And David it's been helping businesses across many industries to simplify that payment platforms and as a result has enabled it to reduce the cost of ownership and centralized supply of buying power.

This allows clients to go to market with new services quicker to be more competitive.

To offer an improved customer experience.

As a result, new revenue streams that created by increasing throughput of successful transactions and reducing costs.

And delivery is helping market places with their payments complexity and is also helping businesses across all industry.

Adopt marketplace models.

Market places add value by streamlining supply chains, reducing costs, enabling access to a wider network of vendors and more rapid product and service diversification.

Market places introduce new revenue streams for our clients with payments, becoming the key driver of revenue growth.

We work with payments and financial services companies needing to transform their platforms to support their clients to adopt this business model.

We also work directly with businesses the adult this business model and need to transform their platforms.

For example, we are working with Patrix, a payments company to help them bring to market our products that with Latin marketplace platforms more easily pay suppliers and harder to reach regions such as Asia Pacific.

While supporting traditional close to home payment approaches.

Okay.

In the mobility area, where having more combos sections and engaging in more projects around the future digital enablement personal transport and the evolution of mobility as a service.

Colin manufacturers are rapidly having to adjust the digital user experience demanded by young Tobias.

This includes the need to enable call us to become payment devices and a personal mobility device through digitally enabled subscription sharing and rental models.

Our expertise with user experience consumer facing mobile and web platforms, APR enablement and critical scalable systems.

Coupled with our relationships in the automotive sector position.

Positioned us well for this emerging market for our services.

We're working with Lincoln co a disruptor in the automotive space.

We initially help them to bring one of the first call subscription models to market rapidly followed by helping them enable call round us to share cost for a marketplace.

This office call Ryan has their own revenue stream and extends the reach of the Lincoln brand to both directs a scribe and a wide network of occasional users.

Additionally, there was a growing number of new financial services companies looking to offer business solutions.

Indaba is using its payments experience to help those new company scale and build out connections to hundreds of global payments platforms.

We're also working with companies such as stripe and planet as they look to diversify their existing global portfolios.

We're working with global payments orchestrator, helping them to solve complex payments challenges improve.

Efficiencies and reduce costs.

And the other is helping them scale their latest technology to increase the number of solutions. They all sorts of clients.

Planet specializes in solving complex payment challenges in the retail and hospitality sectors and working with our network of global partners.

And the other how to modernize their product offering, making it cloud native and able to support both online mobile and in person payments, we continue to support their evolution as they build out that connected commerce platform that helps retailers and hotels connect software and payments to put in.

The customer experience first.

We're excited about our payment horizontal model as payments is increasingly becoming a key focus for companies outside of the traditional payment industry.

We continue our geographical expansion and diversification.

We recently announced the acquisition of lexicon in Australia.

Lexington partners with clients to build new digital solutions or accelerate digital transformation programs across enterprise systems products, and Iot using an agile delivery methodology.

Lexicon is 127 operational employees are in Australia and Vietnam.

I'm excited about our growth prospects in the Asia Pacific region.

Our client growth continues to translate into strong employee growth. We ended the quarter with 12065 employees, a 25.5% increase from 9616 in the same period last year.

While competition for the best talent remains strong we remain very successful in recruiting the people, we need and our attrition rate remains low.

In summary, as demonstrated by our financial results demand for our services remains strong.

We are successfully navigating a challenging global macroeconomic environment and remain excited about the opportunities in front of us and confident in our ability to execute on our objectives.

I'll now pass the call onto 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 .

And Tavis revenue totaled $196 2 million pounds for the three months ended September 32022, compared to $147 5 million pounds in the same period in the prior year, a 33% increase over the same period in the prior year.

In constant currency, our revenue growth rate was 25, 9%.

Well the before tax for Q1 fiscal year, 'twenty 'twenty screen with check point 6 million pounds compared to $24 9 million pounds in the same period in the prior year.

Our adjusted profit before tax for the three months ended September 32022.

$39 5 million pounds compared to $34 8 million pounds for the same period in the prior year.

Our adjusted profit before tax margin was 21% for three months ended September 32022, compared to 23, 6% for the same period in the prior 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 amortization of acquired intangible assets realized and unrealized foreign currency exchange gains or losses.

Fair value movement of contingent consideration all of which are noncash items.

Adjusted PBT margin is adjusted PBT as a percentage of total revenue.

Our adjusted diluted EPS was <unk> 54 pence for three months ended September 30 of 'twenty to 'twenty two calculated on 58.1 million dollar to chess as compared to 49 pence for the same period in the prior year calculated on $57 8 million diluted shares.

Revenue from our 10 largest clients accounted for 33% of revenue for the three months ended September 30 of 2022 compared to 36% for the same period last fiscal year.

Additionally, the average spend per client from our 10 largest clients increased from $5 3 million pounds to $6 4 million pounds for the three months ended September 30th 2022.

Presenting a 23% year over year increase.

In the three months ended September 30 of 2022, North America accounted for 35% of revenue compared to 36% in the same period last fiscal year.

Accounted for 22% of revenue compared to 20% in the same period last fiscal year and the U K accounted for 40% of revenue compared to 41% in the same period last fiscal year.

While the rest of the world accounted for 3% unchanged from the same period last fiscal year.

Revenue from North America grew 26, 1% for three months ended September 30 of 'twenty to 'twenty two.

At the same quarter of fiscal year 'twenty to 'twenty.

Comparing the same periods revenue from Europe grew 41, 7%. The UK grew 32, 3% and the rest of World grew 74, 5%.

We grew in all three of our industry verticals during the quarter.

Revenue from payments and financial services grew 38, 3% for the three months ended September such as 2022 revenue from payments and financial services accounted for 52% of revenues compared to 50% in the same period last fiscal year.

Revenue from TMT grew 21, 5% for three months ended September 32022 over the same quarter of 2021 and accounted for 23% of revenue compared to 25% in the same period in the prior year.

Revenue from other grew 33, 9% for three months ended September 32022.

Same quarter of 2021, and now accounts for 25% of revenue unchanged compared to the same period in the prior year.

We now turn to our adjusted free cash flow, which is on 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 $21 8 million pounds for the three months ended September 32022, compared to $16 5 million pounds. During the same period last fiscal year.

Cash and cash equivalents at the end of the period remains strong at $182 4 million pounds of sand, but temper that yes, 2022 compared to $162 8 million pounds of genes that just 'twenty to 'twenty two.

Capex for three months ended September 30th 2022 as a percentage of revenue was one 7% compared to two 3% in the same period last fiscal year.

Our guidance for Q2 fiscal year 'twenty 'twenty three is as follows.

<unk> expects revenues to be in the range of 204 million pounds to 206 million pounds, representing constant currency revenue growth of between 23% and 24%.

And David expects adjusted diluted EPS to be in the range of 56 to 58 pence per share.

Our guidance for full year fiscal year 'twenty 'twenty screen is as follows.

And <unk> expects revenues to be in the range of 843 million pounds to 852 million pounds, representing constant currency growth of between 23 and 24%.

And Delmarva expect suggested diluted EPS to be in the range of 237 to 242 pence per share.

This above guidance for Q2 fiscal year 'twenty, three and for full fiscal year 'twenty 'twenty three assumes exchange rates to the end of October 2022.

When the exchange rate was one British pound to go and put one in six U S dollar.

1.16 year.

This guidance seems to take into account potential micro and macro economic headwinds.

This concludes our prepared comments operator, we are now ready to open the line for Q&A.

We will now begin the question and answer session.

I'll ask a question you May press Star then one on your telephone keypad if.

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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily.

I'm Bill our roster.

The first question comes from James Faucette with Morgan Stanley . Please go ahead.

Hey, this is Jonathan on for James Thanks for taking our questions when.

And when you initially provided your fiscal 'twenty three outlook you talked about there being.

Conservatism contemplated in it.

How has that changed over the course of the quarter and what's being factored into your current outlook.

Thanks, Jonathan.

I mean, we're seeing a mixture of responses to the macro uncertainties some clients are trimming or delaying.

But others are accelerating in terms of what they're doing and growing their spend with us.

They're awesome sector themes to this.

So.

Some sectors, such as payments, including the horizontal that's cross sector that I described.

During the opening remarks banking capital markets insurance mobility that includes especially automotive and travel we're seeing strong.

Loan growth in those areas still no sign of pullback.

And actually those are areas, where as a company we have a particularly high exposure are across all of those that I've. Just mentioned is about 70% of our business.

We are seeing some weakness I become more apparent particularly in TMT.

All geographies.

The area that is most visible to us as is around west coast Tac.

That that is a saying.

Seeing a sharper pull back.

And that's probably the one change that we'd go from when we guided last time.

It's not a huge part of our business. So it hasn't had a huge impact so the rest of it is just maintaining the prudent caution that we had in our guide last time.

That's really helpful color. Thanks for that how how do you see that impacting your pace of hiring over the coming quarters relative to the roughly 30% head count growth that you've previously characterized as comfortable feeling.

Yeah, So the way we hire in line with.

The revenue growth actually slightly below because with salary inflation and so on which we pushed through into Reits with with clients.

We grew up with it.

Our revenue slightly faster than we grow the head count and.

And we will do the same in the year ahead.

So with that guide of 23% to 24%, we'd anticipate our head count growth around the 20% Mark Hum wishes pulled back from the sort of 30%. So that way you are hitting it earlier in the year.

I always insightful thanks, guys.

Jonathan.

The next question comes from Bryan Keane with Deutsche Bank. Please go ahead.

Yeah, I wanted to ask about Mark.

Pricing and price increases what have you been able to pass through and you know would have clients been saying about those.

Pricing has been a good first basically I mean, they are Q1 and you can see in our gross margin was slightly stronger than.

Anticipated as we sort of made comments about rebuilding the bunch back too.

The pre COVID-19 level, which we've done but she's a.

The margin headwinds in costs in terms of the people costs, where we expected, but actually rates were better than anticipated.

Page so it remains a positive pricing environment.

Got it got it and John just to follow up on on those comments on on kind of the West Coast Tech is there a percentage of revenue that business is in and how do we get a sense of what the spend looks like are they you know they were going up.

<unk> was 20% to 30% and now it's minus 10 to 20 or just trying to get a sense of of the pull back in that particular vertical.

Yeah, I haven't got a detailed analysis on that but.

It would be at around the 5% Mark of our total business that is exposed to the west coast.

<unk> clients.

And yes, I would put it in the it's been growing in the 20% to 30% range and it's probably shrinking.

25, 30% now.

We are we are as I mentioned seeing stronger growth in other places so the displacement of those teams.

Who are who have strong teams.

He's helping with seating growth and other clients.

So you know, sometimes a little bit of a pullback in one space can be healthy for our business because it enables acceleration elsewhere in and that's what we're seeing here.

Okay. Thanks for the color solid results here. Thanks.

Thanks, Brian .

The next question comes from Bryan Bergin with Cowen. Please go ahead.

Hi, good afternoon. Thanks.

Appreciate all the detail you offered on the payments business and I wanted to dig into that vertical a bit more but just given the long term experience you've had in the sector and with past downturns can you just compare their behavior now versus what you've seen in prior cyclical pullbacks and as you think about the exposure in the in the payments business, how reliant is the work.

That youre doing how reliant is the underlying client volumes in this space.

Sure. So the behaviors that were saying is similar to what we've had in past recessions.

And you know historically in previous recessions payments was a bit of a larger proportion of our business than it is now.

And you know in previous recessions, we carried on growing even join me.

Global financial crisis, we grew in.

The 20 to.

30% range in 2008 2009, a lot of that was driven by the payments work that we're doing.

So that remains solid I think the one characteristic that I would call out some of the larger payments processors that are trimming a little bit and that probably is volume related.

But we're seeing you know more than made up for by all of the more innovative payment products that are being created.

There is continuing to grow out of the payments portfolio.

So payments as a whole still growing strongly.

Okay.

Okay. Okay that makes sense and then just on margin to some Mark you mentioned the pricing helped gross margin improvement can you can you comment on how you see that progressing over the course of the year and also mix and utilization.

Yeah. So I think for Q2, I think we would anticipate sits slightly nudging up in terms of the adjusted gross margin.

The utilization is going to improve slightly over Q1 as wave we've reached out so a bench position and sort of alluded to you know pricing improvements actually as well and then the second half I think it will step up again I know, we usually see the named.

Named pay round go through so the average cost will will move up.

But I anticipate that we will offset that with a continued sort of rate increases and I think also I think that utilization is going to notch up as well. So I anticipate actually the gross margin to be potentially stronger in the second half than it has been in the first half.

Okay very good thank you.

The next question comes from Maggie Nolan with William Blair. Please go ahead.

Alright. Thank you this is jesse on for Maggie.

So first John It was nice to hear all of that color about the payments vertical and the horizontal model. There are you able to provide any insight into the diversification of that vertical.

How much does each contribute or anything else to get a sense.

No we don't break that out so where we do payments work insight retail, we count that as a retail revenue.

Because obviously it so it's a retail client is pulling the work through.

The payments horizontal is just number one a very good way of breaking into new sectors.

Because it's a it's a scale area that those sectors retail being an example.

We need in order to improve the customer experience that I have.

But we wouldn't break it out as a horizontal I think that would get quite complicated in terms of reporting.

Okay understood and then I had a follow up on margins. So the company has taken a measured approach to price increases in the mid single digits, you've talked about do you find that pricing combos with clients are easier because of this gradual approach.

Yeah.

Yeah, certainly I mean, we've we've adopted the view over the years actually.

We'd rather do a gentle are more incremental adjustments to price rather than rather than big ones.

And our customers appreciate that even through the boom of 12 months ago.

We put in.

Sensible.

Low single digit type adjustments.

And you know I suspect.

While I believe that that is actually helping with us continuing to have price adjustments.

Now when when things are a bit tighter with clients and we are seeing those adjustments coming through as Mark mentioned a moment ago.

That's great to hear thanks for taking my question.

Thanks Jesse.

Yeah.

The next question comes from.

My uncle <unk> Tandon with Needham. Please go ahead.

Thank you congrats to John and Mark on a strong quarter I wanted to ask more on the supply side given that demand is still healthy, but maybe moderating a little bit at the margin as you mentioned does.

Does that mean the supply pressures that you were seeing are easing a little bit in terms of just being able to recruit the talent that you need to meet demand and the implications for attrition and wage inflation, but if we do see this trend continue but any commentary around that would be very helpful.

Yeah, I mean, certainly the ability to attract great people.

Is it a little bit easier than it was.

12 months ago.

It remains a competitive market. So I don't think it will ever step away from being that.

But you know in the office in a strong position, we compete well for great talent and being able to bring them in.

The our attrition has continued to drop so it went down to 12.6% down from 12, 7% law school to say not a huge adjustment.

On the wages side.

The the wells the pressures in the market a little bit lighter, it's still very competitive.

And we're obviously operating in a in a world where cost of living pressures are high.

So balancing all of those things out.

I think we're in a sort of sensible.

Low single digit wage inflation environment lining up with the the price.

<unk> that we've been talking about pushing through.

So actually you know.

Pretty stable across those two elements.

Even with all the underlying turmoil.

That goes into those figures.

Okay.

That's very helpful. And then if I could just follow up with the question around the guidance.

What is the contribution from the acquisition that you did in Australia that are built in the updated guidance.

And also just to be clear what is the FX movements relative to where you guided last quarter or what is embedded in the new guidance. Just so we can frame it better.

Sure So the Australian acquisition impact.

In Q2 is about.

2% of revenue and for full year about 1.5%.

And in terms of the movement in terms of the currency is probably enough that pretty much back where they were when we when we guided at the end of fiscal 'twenty. Two so I think the U S. Dollar was I think 117 116.

And similar for.

The euro as well.

Okay.

That's helpful. Mark Thank you so much.

The next question comes from Jamie Friedman with Susquehanna.

Please go ahead.

Hey, guys. This is a williams speaking for Jamie.

Just wanted to ask a quick question on the margins are nervous that your adjusted PBT margins fell year over year is this just a the company reverting back towards its medium term goal of around 17% can you go over some of the drivers of that.

Yeah.

Yeah.

So the big driver was basically gross margin. So if you're talking about the quarter say for Q1, a year ago, we were just shy of 43%.

The adjusted basis, and that 44% and the big sort of movements. There was that we put through.

Above.

Yeah, a big salary increase and Jeremy 22, reflecting the hot labor market that we were in we have substantially recovered that through.

Rate rises.

And in those two elements sort of net each other out for the team patches basically being around sort of utilization, where we were running pretty hard this quarter last year.

We are certainly up in.

Hello.

In the low seventies.

A building if they the bench backup to more normalized levels are set where we're building it from that point of about 6% to 9% where it is now that's about three percentage points of utilization. That's the key impact. That's also the gross margin.

And then you know when you if you look at SG&A.

It is it is up it was very light if I go back to Q1, FY 'twenty, two as a bass or 15%.

So while we had an adjusted PBT margin around almost 24% it was pretty exceptional it was just like.

Everything went right quarter and what you're seeing now at just over 20% is a more normalized view that we have.

Yeah, just to add to that.

We are targeting holding that at 20% not carrying on down to 17 not us.

That's great.

Got it I appreciate that and then wanted to ask about Patrix, if I heard correctly that sounds exciting could you say more about that.

I can't say too much more about it.

It's a payments company.

The operating globally, it's a marketplace type situation.

Yeah.

They allow people to pay suppliers in order to reach regions, such as Asia, Pacific's IPO, if you're buying internationally.

Patriots basically helps you to do that.

More simpler and more cost effectively.

Yeah.

Setting out into bank type rigs to do a similar thing.

Got it thanks, so much guys congratulations.

Yeah.

Thanks William.

Okay.

This concludes our question and answer session I would like to turn the conference back over to John Cultural CEO for any closing remarks.

So thank you all for joining us today.

You'll have noted demand for our services remains strong were seeing good demand.

In in all verticals and geographies and so we remain positive about our business position. Despite the context of macro uncertainty.

And we look forward to speaking to you in early 'twenty 'twenty three on our next earnings call. Thank you.

Okay.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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