Ladies and gentlemen, thank you for standing by, and welcome to the Endava Q2 FY 2020 Results. [Operator Instructions]. I would like to hand the conference over to your speaker for today, Laurence Madsen, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's Second Quarter of Fiscal Year 2020 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 Q3 fiscal year 2020 and the full fiscal year 2020 and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. Please refer to our SEC filings as well as our financial result press release for a 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. A reconciliation of the non-IFRS to IFRS measures is included in today's earnings press release, which you can find on our Investor Relations website. A link to the replay of this call will also be available there. With that, I'll turn the call over to John.

Thank you, Laurence, and thank you all very much for joining us today. Mark and I are pleased to be here to provide an update on our business and financial performance for the three months ended December 31, 2019. Endava had another record quarter for Q2 fiscal year '20, with the revenue of £85.9 million, a growth of 19.6% year-on-year from £71.8 million in the same period in the prior year. Our revenue growth in constant currency was 20.5% year-on-year. If we pro forma for the revenue from the Worldpay Captive last year, our revenue growth on a constant currency basis was 24.5% year-on-year. Our strong revenue growth is driven by the expansion of our existing customers and the acquisition of new ones during the quarter. We continue to broaden our client base and ended the quarter with 367 active clients, up from 271 at the end of the same period in the prior year, a 35% year-on-year increase. The total number of clients who generated revenue over £1 million on a rolling 12 months basis was 65, an increase of 8.3% over the same period of the prior year. While Worldpay remains a very large and fast-growing client for us, in Q2, following the sale of the Captive, it was no longer our largest client. Last week, we celebrated 20 years since I founded Endava, 20 years of reimagining the relationship between people and technology, 20 years of transforming business models, reimagining user experiences and opening up new markets through the creation of technology products. We started the business in the financial services space in the city of London, but are increasingly expanding into other sectors. Today, I'd like to spend a little time on retail and CPG, which is a fast-growing segment for Endava. Customers are becoming sophisticated…

Thanks, John. Endava's revenue totaled £85.9 million for the three months ended December 31, 2019, compared to £71.8 million in the same period last year, a 19.6% increase over the same period in the prior year. In constant currency, our revenue growth rate was 20.5%. As John mentioned, if we pro forma for the revenue from the Worldpay Captive last year, our revenue growth on a constant currency basis was 24.5% year-on-year. Loss before tax for quarter two fiscal year 2020 was £17.3 million compared to a profit before tax of £9.4 million in the same period in the prior year. The loss during the quarter is the result of the declaration of a nonrecurring discretionary employee bonus of £27.7 million in December 2019. The Endava Limited Guernsey Employee Benefit Trust, or EBT, funded the first tranche of the bonus through the sale of Endava's Class A ordinary shares in November 2019. Funding of the second tranche by the EBT is expected to occur during the second half of fiscal year 2020. As previously disclosed, the EBT, whose beneficiaries are our employees, was holding certain class A ordinary shares for sale in the event it decided to fund a discretionary cash bonus to our employees. Our adjusted profit before tax for the 3 months ended December 31, 2019, was £20.5 million compared to £13.6 million for the same period last year, a 50.8% year-over-year increase. Our adjusted profit before tax margin was 23.8% for the 3 months ended December 31, 2019, compared to 18.9% for the same period last year. The year-over-year improvement in our adjusted profit before tax margin is mainly due to an FX tailwind and continued positive pricing environment. We also benefited from a one-off gain from Argentinian credits relating to payroll taxes, which previously could not…

[Operator Instructions]. And your first question comes from the line of Mayank Tandon.

I just wanted to get some thoughts on the pipeline coming into this year. I'm assuming you've had conversations with clients run budgets for the upcoming calendar year. So I just wanted to get your thoughts around how does that look versus, say, a year ago? And maybe in terms of deal sizes, scope and size versus, say, 12 months ago, how is that shaping up?

Mayank, so the metrics on the pipeline for us look very similar to the picture that we had a year ago. You're quite right, customers shape up their budgets. Some of it happens towards the end of the last calendar year, but much of it firms up during the first couple of months or so of each calendar year, and we're seeing good clarity on that. And it's following a similar pattern to previous years.

Got it. And then maybe just pivoting to margins. Obviously, the margins have been running hot, well ahead of your medium-term targets. So sorry if I missed it, but I wanted to get some thoughts on what are the levers that bring the margins back down in the back half of the year for your guidance? Is it utilization? Are there other factors that will play a role in margins coming down in the rest of the year?

Mayank, so we benefited this quarter from the Argentinian fiscal credit, which I can give you some detail if you're interested in. But that contributed about 0.8 percentage points to our adjusted PBT margin. But as you pointed out, our adjusted gross margin was strong even including that. Some of that is the benefit of FX because the pound has strengthened against the U.S. dollar and the euro, but it's also the positive pricing environment. But in terms of going forward, we're coming up to our major pay round at Endava, which takes effect from the 1st of January, and that has gone through, and that will reduce our adjusted gross margin by 2, 2.5 to 3 percentage points. And in tandem with that, Q1 and Q2 have benefited from additional working days of 66 days each. And this quarter, Q3, we have 65 days, and that reduced working day. So you're paying people, but you're receiving 1 less day of revenue, that's about a 1 percentage impact. So in tandem with the gross margin coming off somewhat, we also see SG&A picking up. It was positive in terms of the percentage this quarter. But we're victim of our own success in terms of the share price. So we've lost our emerging growth status. And so we have to have our SOX assertation reviewed by our auditors. And we're having to do that in pretty short order and that is going to boost our SG&A in the second half. So it's a combination of factors that play for a reduced level of margin, both at the adjusted gross margin and the adjusted PBT margin for the second half of the year.

And your next question comes from the line of Bryan Bergin.

I wanted to start just a little bit on M&A target flavor. Can you comment on the financial profiles of the two targets here as far as growth and profitability? And on Exozet, can you give us a sense of that size? And whether that you would say brings a new sub-vertical for you within TMT or is it more so a scaling of the TMT capability there?

Sure. So in terms of the size for Intuitus, we can talk about historic figures. So they generate about £5.5 million in the 12 months, and it's going back some time in 2018. They generate comparable EBITDA margin to Endava. And they are also growing a good lick, not quite as fast as we are. The last 4 years, the CAGR has been about 18%. There will be a little bit of noise around sort of revenue per head because they have a freelance associate model. So they have around 24, 25 people who are permanent. So that will distort our metrics in terms of revenue per head, but it's not significant because Intuitus is about sort of 1% of Endava overall. Exozet is generating around €15 million annually. So in pounds, that's about sort of £12 million. Their growth rates, again, are similar to Endava. Margin profile is lower than ours. They have a number of onshore - heavier onshore mix to Endava, so around 156 people. All of those are onshore by our definition. Because of the work they do as well in that onshore mix, their revenue per head is also slightly than Endava. But again, you have a - once you put them part of Endava, it has negligible effect in terms of dilution. So hopefully, that gives you an idea of the size. I don't know if John wants to comment on...

Just on the sub-vertical question, most of their work fits into TMT, the media space broadcasting fitting within media with some of it in other. So it actually aligns with our verticals. We were very keen on that. One of the reasons that we wanted to do the Exozet deal was to give - stop that push in Europe that we've been talking about and give a better critical mass aligned with our existing sectors in Europe. So it fits very, very well from that point of view.

Okay. That was helpful. And then, I guess, just on Europe. Can you just comment on the performance there? Are there any particular clients or any verticals that are performing slower than others right now?

So the main thing to say about Europe is that we haven't pushed and invested as much in Europe as in the U.K. and the U.S. over the last year, I've commented on that in most of the earnings calls recently. And so it's by our own decision that we haven't seen the growth in Europe. As I called out last time, we're starting to push some of that attention back into Europe. The Exozet deal is very much part of initiating and strengthening that push into Europe. And we will now start ramping sales teams and so on across Europe to start to see some benefit. I have to say from a market point of view, it will probably take a while to come through. We have to bring the sales guys in, get them up to speed. It takes them a while to mature to the full level of bookings that we expect from them. So just as with the U.S., over the last 2 years, we've been ramping, and you see the effects there. We'd expect to start to see that come through in Europe over the next 12 to 18 months.

Your next question comes from the line of Maggie Nolan.

In some of your large verticals like payments and telecom, is there any exposure to or opportunity from recent M&A activity in those industries?

You're talking about across potentially some of our clients and so on where they're emerging?

Yes, exactly.

Yes. So I mean, in the payment space, we've seen this a number of times over the years, where our clients have bought businesses that will become part of larger businesses. And that has pretty much universally been a good move for us where it's opened up wider opportunities. And we've seen work within the client expand as a result of that. I mean, that happened with the Mastercard acquisition of Vocalink. It happened with Worldpay following the merger with Vantiv. And then, of course, more recently, following the FIS acquisition, we've seen acceleration coming through from that. So generally, where that happens, it's a positive move for us. And we can see 1 or 2 others that are in process, but in the public realm with clients where we can see work lining off the back of that. So yes, it's a good driver for us.

Okay. Great. Good to hear about acceleration coming off the FIS acquisition. And then on the work that you're doing in - with PE firms, when you do that due diligence work upfront, how consultative are you during that process? And are you using that as an opportunity to pitch those types of changes and improvements that you would make? And then is there any kind of upcharge for consulting services like that?

Yes. So I'd probably split the answer to that into three spaces. There's some work that we've traditionally done direct with PE and that can happen doing due diligence. It can happen after they've bought the portfolio company and indeed some of the relationships have started with the managers of those portfolio companies after they've established their strategy. And at all stages of that process, we're looking to position Endava's capability to do execution of their investment thesis through the platform changes that they're looking at. Obviously, there's the relationship with Bain, where we're working alongside them with some of the larger PE firms. And once again, in those situations, we're helping the client to put together their investment thesis, but once again, very much positioning for Endava's ability to help with the execution downstream. With the Intuitus guys, their business model has been to just be doing the IT and digital due diligence with a little bit of downstream, very, very small amount, really. So we are going through that process of helping them to understand the Endava capability and how to position that with clients. And we are seeing - I think we've seen 1 downstream piece of work come through from that since November when we did the deal, which is actually faster than we expected. So yes, we are seeing that flow coming through.

And your next question comes from the line of Ashwin Shirvaikar.

Congratulations on your 20-year anniversary.

Big movement.

So I guess, my first question is with regards to the operational headcount growth, seemed like it was 13% versus the, obviously, much higher revenue growth. I think you've mentioned a couple of the elements, pricing and utilization and so on, maybe there's a timing of higher impact. But can you quantify the relative part of the gap, if possible, and provide a view on how some of these metrics might evolve?

Yes. So if I just focus on, say, the constant currency growth, so our revenue was 20.5%. And as you point out, the closing headcount was 16.3%, but that can mislead because we had the headcount for Exozet at the end of December, but very, very small contribution in terms of revenue. So it's the average headcount that's probably the better metric, which grew 12.9%. So there is that gap in terms of the rate. The way I tend to think about is the revenue per head, which joins the 2 metrics quite nicely together. And that is really a function of utilization and pricing or rate per man days we refer to at Endava. So our revenue per head has grown to £62,800 at the Q2, which compares with £61,700 in the last quarter. And year-on-year, that £62,800 compares with the £59,300 in Q2 FY '19. And what you need to bear in mind when we quote those figures, I'd say it's a function of utilization of rate is actually our utilization was marginally higher than wherever they were used to, it was in the low 70s. We're now at a more normalized level, which is high 60s. So you can infer from that, that a lot of it is from the positive pricing environment that we're operating in at the moment.

Understood, understood. Okay. And what's the expected inorganic contribution for the rest of the year in GBP, I guess? And let me throw in the broader M&A question as well. Obviously, a very healthy cash balance here, which actually grew. So if you could comment on your M&A pipeline, where might it be focused?

Sure. So in terms of the guide, so we guide in two ways. We give the constant currency growth, and also we give an absolute figure based on what we anticipate the exchange rates to be, which we just select the end of January, as we said on the call. So our guidance for the second half, you've roughly got around 2% of our increased constant currency growth coming from the contribution from Exozet. So I think we raised our guidance from the previous full year by sort of 3 percentage points, 1% is reflecting the beat that we've had in Q2 and then the balance is reflecting that uplift or contribution for the 6 months from Exozet.

And then on your M&A question, our focus there continues to look for sensibly sized, tuck-in sized businesses, big focus on geography and the geographic expansion that we're looking for with our focus there being on Europe and the U.S.A. still. Of course, we're looking for businesses that will strengthen us in our current sectors, particularly where we've got a geographic weakness in that sector. But also, we're just keeping an eye out for businesses that are bringing in technology that we think is going to be exciting. The Rest of the World, as you will have seen from our numbers, is starting to pick up. So we've just got a weather eye on what the right moment is to use M&A to accelerate that as well.

Your next question comes from the line of James Friedman.

And let me echo the congratulations both on the strong numbers and the 20th. I'll just ask my two upfront, if I could. Mark and John, in your prepared remarks, you emphasized a benign pricing environment. I was hoping you could dimensionalize that a little bit. Is this what you're used to? Or is it getting better, even better than better? And then, John, I want to get your perspective on IT budgets. We're about 6 weeks in now. How are things shaping up for your clients in terms of their budgets for calendar '20?

Well, we don't explicitly call out prices, you can tell from the answers I've given thus far. But we've seen strength basically since the IPO in our rate per man-day, and we've almost seen sort of sequential growth on some quarters of a modest sort of nature and certainly growth year-on-year. And what we're seeing - are we seeing any sort of slowdown in that? No, we're not currently.

And on your IT budget question, I mean, I think this is a function of the segment of the market that Endava is focused on. We're focused on the areas where companies are continuing to invest and that's all driven by the level of change that the technologies that we're working with enable and the impact that they have on our clients' business models. So we continue to see a lot of new opportunity areas with clients, areas where we can ideate and drive change in their business. So I think compared with larger competitors, who are perhaps more exposed to other segments of the market where clients are pulling back budget, we see a lot less reaction to that. It's a benefit of being a pure-play in the next general or digital-focused business area. So we continue to see the growth opportunities coming from budgets flowing in our direction.

And your next question comes from the line of Joseph Foresi.

This is Daniel Reagan, on for Joe. So you had mentioned about a 2% contribution from Exozet in the second half. I'm just curious about organic growth. Can you breakdown how we should think about organic growth for the fiscal year and longer term for the company?

Well, we're not really deviating from what we've said since the IPO, which is that we'll grow at plus 20% constant currency year-on-year. And in some quarters, we have grown faster than that, but that basically remains our sort of guide.

Got you. Excellent. And you also provided some color on factors that got us to the 23.8% adjusted PBT margin. Can you provide a little more color on how we should think about the PBT range for the full fiscal year and longer term? Are there any updates on that?

So as I sort of said at the start of the Q&A, I think our adjusted PBT margin will come off in the balance of the year because it has been pretty strong where it was 20%, 20.5% for Q1, 23.8%, but there are some one-offs in there. Again, in terms of whether we're sort of going to rebase our outlook in terms of the adjusted PBT margin, which we stated at the IPO is 17%, I'd like to get Q3 under my belt and see what that brings before we look forward. But I think where we will probably get to over the longer-term is that as Endava grows and we maintain a good level of adjusted gross margin, we will get the leverage over SG&A. We're impacted this year as I said upfront because we have to invest and making sure that we are SOX compliant for the orders through assertation. But I think once we're past that, then the growth should exceed our level of SG&A and be margin accretive. But we'll probably provide more update on that when we go to Q3.

And there are no further questions at this time. I'll turn it back over to the speakers.

So thank you all for joining us today. You will have gathered that Mark and I remain confident about the opportunities ahead of us, and look forward to speaking to you again next quarter. Thank you all.

Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference call. You may now disconnect.