Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Endava Earnings Release Q2 Fiscal Year 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Laurence Madsen, Investor Relations Manager, you may begin your conference.

Thank you, operator. Good afternoon, everyone, and welcome to Endava's Second Fiscal 2019 Quarter Earnings 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 remarks today include forward-looking statements, including our guidance for the third quarter of fiscal year 2019 and the full fiscal year 2019 and other forward-looking statements. These statements are subject to risk and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and 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 our SEC filings as well as our financial results press release for more detailed description of the risk factors that may affect our results. 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 Relation 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, and thank you all very much for joining us today. Mark and I are pleased to be here to provide some updates on our business and financial performance for the three months ended December 31, 2018. Q2 fiscal year '19 was another record quarter for Endava with revenue of £71.8 million, a strong growth of 43.6% year-over-year from £50 million in the same quarter in the previous fiscal year and 8.2% growth sequentially over Q1. Our revenue growth rate at constant currency was 42.4% year-on-year. This remarkable revenue growth was driven by the expansion of our existing customers, particularly our larger ones, as well as the acquisition of new customers. We now have 60 clients who spend over £1 million on a rolling 12-month period from 42 a year-ago. And of these, the number spending over £5 million more than doubled, from 6 to 13, during the same rolling 12-month period. We also expanded the overall number of customers, seeding the business with new customers who will be the future engines for growth. We ended the quarter with 271 active clients compared to 262 at the end of September 2018 and 197 at the end of the same quarter in the previous fiscal year. We continue to expand in all three of our industry verticals and see acceleration in our newer verticals, underpinning our belief that the next-gen technology is reaching more industries and driving deeper levels of disruption. And we are at the center of an ongoing technology and business revolution that shows no sign of slowing down. For instance, Gartner projects that by 2022, two thirds of all customer experience projects will make use of IT automation. And by 2021, 70% of organizations will integrate AI to assist employees' productivity. From the very beginning, Endava…

Thanks, John. Here's some highlights for the recent quarter. Endava's revenue totaled £71.8 million for the 3 months ended December 31, 2018, compared to £50.0 million in the same period last year, a 43.6% increase over the same period in the prior year. In constant currency, our revenue growth rate was 42.4%. Our adjusted gross profit was £30.4 million for the 3 months ended December 31, 2018, compared to £19.3 million in the same period last year, a 56.9% increase over the same period in the prior year. Our adjusted gross profit margin was 42.3% for the quarter, up from 38.7% for the same period last year. The year-over-year improvement was mainly due to continued improvement in pricing and continued strong utilization. Adjusted gross profit is our reported gross profit excluding allocated cost of sales and the impact of share-based compensation. Adjusted gross profit margin is calculated as a percentage of our total revenue. Our adjusted profit before tax for the 3 months ended December 31, 2018, was £13.6 million compared to £7.5 million for the same period last year, an 80.7% year-over-year increase. Our adjusted profit before tax margin was 18.9% for the 3 months ended December 31, 2018, compared to 15.0% for the same period last year. The year-over-year improvement in our adjusted profit before tax margin is mainly the improved adjusted gross margin. Adjusted PBT is defined as our profit before taxes adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, fair value movement on contingent consideration, initial public offering expenses incurred and SOX readiness expenses, all of which are non-cash other than realized foreign currency exchange gains and losses, initial public offering and SOX readiness expenses. Adjusted PBT margin is calculated as…

[Operator Instructions] Your first question comes from Ashwin Shirvaikar of Citi.

Good quarter here and good guidance. I guess my question is -- my first question is with regards to talent, which I think is addressed a little bit in the prepared comments, but given the -- given that some of your competitors have either acquired or are building out presence in a couple of your core geographies, like Romania, could you comment on whether you're starting to see any kind of impact as it relates to talent?

Yes. Thanks, Ashwin. So recruitment of quality staff in each of our locations is always a challenge. It always requires a successful business to build a good market presence, a good brand and proposition, a good career proposition, to attract and retain the best. And we're continuing to find that. Now I think you're referring to one or two organizations that have moved into -- through acquisition, I think, mainly into Romania. The reality is that those companies have been there for a while. So Cognizant, for instance, acquired Softvision. We looked back and we can see that we'd lost three people to Softvision over the previous three years, so a very, very small attrition to them. We haven't seen any since the Cognizant move at all. And I think the other one who's done something is Globant, and we haven't seen anything with them at all.

Great. No, that's very candid and then very good to hear as well. Just the other question I had, the other segment, obviously, very strong growth there partly driven by Velocity and your comments on North America. I was most curious about the comment you had that North America, even without Velocity, had the fastest organic growth across the board. So what's driving that? Is it partly maybe the fact that you are now public? Is it the presence of the acquisition of Velocity was seen as a commitment to the geography? Is it delivery being a little bit more same or similar time zones? What is the thing that you are doing? Any of the -- I mean, can you give some more details on what's going on there?

Sure. So actually, you picked up on all the key points there. So just to give the headlines, we were up 161% on the equivalent quarter last year. Actually, the number for organic growth in the U.S. was 43.7% on a constant-currency basis, so it was very, very strong. And I think the deal we did bringing Velocity Partners on board absolutely confirmed our commitment to the U.S., significantly enhanced our presence and credibility. You put that alongside the New York Stock Exchange listing and the recognition that we see in the U.S. for companies who have listed, and we've seen a very strong and positive response by U.S. customers. And of course, with the significant strengthening of our Latin American delivery, we have much, much more near-shore capability. And that was always a little bit of a little bit of an issue for us on the West Coast, as you are aware. So we've seen a lot of really good activity on the West Coast emerging from that.

Your next question comes from Brian Essex of Morgan Stanley. Your line is open.

Great. I was wondering if you could dig in a little bit to your Worldpay relationship and how that's progressing, given the, I guess, ownership changes at that customer. Have you been able to expand that relationship? And what the outlook might be for deepening the relationship within the larger organization.

Sure. So yes, the Worldpay relationship continues to be strong, continues to grow. In Q2, we grew by 6% over -- sequentially over Q1, which was of course itself, was an excellent quarter. The rest of the business, the rest of Endava, is growing fast. So it means Worldpay is continuing to shrink very slowly as a proportion of the Endava business while growing itself. So it's now sub-10%. So we were 9.7% in Q2 compared to 11.2% in Q2 last fiscal year and 9.8% in Q1. The relationship remains very good. We continue to commission new teams and move into new project areas. We're having much more meaningful conversations around some opportunities in Cincinnati, but there's nothing signed. And we started providing teams to them from Latin America, just giving some greater time zone coverage on a key program that they have. So very positive.

Maybe just a follow-up on the pricing front. It seems like -- and I think you commented in the -- in your prepared remarks that pricing was driving some margin improvement there. Can you maybe unpack that a little bit and help us understand, where are you seeing the better pricing? Is this from any particular type of region, customer or contract type?

Yes. So our pricing continues to expand. It's a reasonably favorable environment, more so with new customers than the larger, old ones, where we're going through inflationary-type price discussions with them. But overall, it's an encouraging environment, and as Mark commented, we've seen the benefit of that on to our gross margin. It's pretty much across the board in all the geographies, across all the sectors there. It's pretty universal, and I think very much down to the fact that we're operating in this next-gen technology space where the differentiation and the opportunities for change that we can bring to our clients means that they're amenable to the pricing that we have because they can see the impact, the positive impact on their business.

And you get a sense for it, Brian, when you look at our revenue per head, which we measure as the revenue over the average operational head. So ended the quarter at 59,000 compared to this equivalent quarter last year of 54,000. So that's almost 9% increase. Now part of revenue per head is utilization and rates, but it gives you an indication of the progress that we're making in this environment on the rate discussions.

Your next question comes from Bryan Bergin of Cowen. Your line is open.

I wanted to dig in on the Bain relationship here. It sounds like you're continuing to show traction there. Can you comment on how you're seeing the client wins driving more industry diversification? I think you mentioned -- are there other industry opportunities that you like through the Bain relationship? And then also, how is the nature of these deals compared to your existing engagements? Are these potentially larger in overall scale?

So yes, we're seeing a lot of activity with Bain. And of course, we announced the Bain partnership to the world at the beginning of October, and we're reporting Q2 numbers here. So it's quite a short time period over which to see change. But now that we've made our partnership public, we've seen quite a lot of activity. So the main areas are in financial services, CPG, retail and private equity, as I touched on. The interesting thing on the private equity side is that obviously then applies across many, many industries, essentially helping customers to evaluate potential acquisitions, giving some insights into how technology can be used to transform those business models and drive improved performance. And clearly, we hope that where our private equity customers proceed with the deal, that we'd be well placed to assist them in the execution of the transformation strategy. So we're at that very much front end of what we're doing in that space. So it's another route into those strategic conversations with clients about how technology can transform their business models going forward.

Okay. And Mark, can you comment on the sustainability of the margin strength? How are you thinking about the gross margin from here as you go in through the second half?

So we had a very strong adjusted gross margin, so at 42.3%. And we sort of trailed in -- coming to the quarter with anticipated strong utilization and pricing, which has been driving it. But people should bear in mind, going forward, that we moved our main pay round from June to January. So we have put through the majority of our pay rises through in January, which was to align with the local tax authorities in the locations that we operate in. So the gross margin will be impacted in Q3. We also see the utilization coming off slightly from where it has been through the most recent quarters. So the margin will -- gross margin will come down slightly. And -- but as we go through the rest of the year, we would then seek to recover those cost increases by moving our rates up with the clients and therefore start to recover the gross margin. So in summary, Q3 will come off somewhat from the quarter that we've just seen.

Your next question comes from Maggie Nolan of William Blair.

Wanted to talk about the good growth that you saw. You said in part, it was driven in particular by some of your larger existing customers. Can you give us a little more detail there? Is this a couple of customers in top 5, top 10? Any particular geographies or verticals that they're sitting in?

Yes. So the growth is pretty much across the board. There's a mixture of sectors and so on that are covered by our top clients. And I think one of the encouraging things for us, given our roots in Payments and Financial Services, is the amount of opportunity that we're seeing to take on technology transformation stories into other sectors. And some of those other sector clients, CPG and so on, are making it into our top 10 client base now as well as our traditional sectors. And I think that's one of the very exciting things, is that you see these technology waves coming through and impacting different sectors. Actually, it is carrying us across into different parts of the economy and different segments.

Yes, I mean, I think we're seeing [good] strength bases. I mean, if you look at the average spend in the top 10, that's increased, and also the average spent outside the top 10. So it's good, solid progress across the portfolio.

Okay. Great. And then what's your appetite for M&A, like, right now? And how does the acquisition pipeline look?

So on the M&A front. We've been absorbing Velocity Partners. It was an absolutely crucial deal for us in expanding in the U.S. and so on, as we've touched on earlier. And clearly, we had a very busy year last year going through the IPO process. But we're now back to looking and talking to people on the M&A front. Our strategy remains the same, focused on tuck-in level deals that are going to add capability from a sectoral domain point of view, geographic or technology perspective. And we've had a few conversations, but there's really nothing progressed to a point where it's worth calling out at the moment.

[Operator Instructions] Our next question comes from Bryan Keane of Deutsche Bank. Your line is open.

Let me ask the demand question another way. So if you look at the second quarter revenues and earnings, it came in ahead of your guide. So what caused it to be above expectations when you guided a quarter ago? Because it does look like second quarter organic growth accelerated. So maybe something surprised you guys a bit on the demand side.

No surprises, basically. I think we still have trailed, the momentum in the business was strong. We did say that we felt good about the business and we still continue to feel good about it. And we're a newly established public company and we want to perform and guide as such. So there was no sort of significant lurch or an improvement that wasn't foreseen.

I mean, I think at a very small level, there was a little bit less holiday take, and which converted into billing that we didn't anticipate, but it wasn't material.

And remind us, as you go into every quarter and you give guide on the quarter, what's your level of visibility to the revenue and the earnings?

It's pretty strong. I think as we've outlined before, we have good visibility. We split our revenues down into contracted and committed. So near term, the visibility is very strong. We tend to be at the sort of 90% to 95%, and sometimes a little higher. So we do have good visibility.

Okay. And the last one I had was just on utilization. Mark, I think you said utilization expected to drop a little bit going into the third. Just curious, any reasons for that? And then should we expect it to pick up back in the fourth? Or is just utilization running a little hot right now?

So I think we highlighted this all in Q1, Q2, the utilization had picked up mainly because the business accelerated going into the financial year, and our supply of our people to sort of deliver on those revenues sort of lagged slightly behind that. And as a result, utilization revved up slightly higher than we're comfortable with. But the supply side of the business has now sort of caught up, utilization is coming down to our more sort of standard norms. And I don't see at the moment any particular sort of revving going forward. So we're in that sort of comfortable level at the moment.

Your next question comes from Charles Brennan of Crédit Suisse. Your line is open.

I've just got a question on your guidance, actually. If I look at my model, it looks like, in the prior year, the growth comp eases slightly in the third quarter versus the second quarter. And yet when I look at your guidance, it looks like you're assuming a slight downtick in organic growth. Can you give us the reasons behind that? Is that just simply some Brexit uncertainty you're factoring into the guidance? Is it some known contracts that are ramping down that we should be aware of? Or is it just sort of usual Endava conservatism?

So as usual, Endava conservatism. Typically, when we're going from Q2 to Q3, we do see a slight slowdown, down from quarter-to-quarter on a run-rate basis. And it's not marked when you look at the year as a whole, but it's particularly a pattern we do see, mainly because most of the companies we provide our services to have a fiscal year that begins in January, so freshly agreed budgets starts to come on stream in the quarter. And this quarter is really no different to that. But we're seeing positive momentum, and you can see the sort of confidence that we feel by the full year guidance.

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

Thank you. And thanks, everyone, for joining us on this call. As you all picked up, we're optimistic about our ability to continue to deliver sustainable growth, and we look forward to speaking with you on next quarter's call. Thank you.

This concludes today's conference call. You may now disconnect.