Ladies and gentlemen, thank you for standing by, and welcome to the Endava Earnings Release First Quarter Fiscal Year 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to one of your speakers for today, Laurence Madsen, Investor Relations Manager. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Endava's First Quarter of Fiscal Year 2021 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 Q2 fiscal year 2021 and for the full fiscal year 2021, our expected near- and medium-term revenue growth, the potential impact of the COVID-19 pandemic and associated global economic uncertainty, our expectations regarding digital transformation of existing businesses and industries, the necessity of digital transformation for many and Endava's ability to benefit therefrom, and anticipated client demand for Endava's services as well as other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results 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 the Risk Factors section of our annual report on Form 20-F filed with the Securities and Exchange Commission on September 15, 2020, which contains and identifies important factors that could cause actual results to differ materially from those contained in any forward-looking statements. Also during the call, we'll present both IFRS and non-IFRS financial measures. A reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which you can find 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. I would like to thank you all for joining us today, and I hope you're all staying safe and healthy. Mark and I are pleased to be here to provide an update on our business and financial performance for the 3 months ended September 30, 2020. Now we're coming to the close of an extraordinary calendar year. And unfortunately, the pandemic continues to reap damage on lives and economies, with some regions back in lockdown. Within all these challenges, the good news for Endava has been that digital transformation has become even more of a priority in the new world order. And we continue to see growing numbers of engagements with existing and new clients on how to shape their digital future and transform their operating model. COVID-19 has accelerated recognition of the amount of digital transformation work still to be done and has brought forward the urgency to do it now. As I mentioned previously, the Endava enterprise distributed agile delivery model was designed to be extremely flexible. And it has served us well, enabling a fast reaction and protecting our business performance and our people in this rapidly changing business environment. With the second wave of COVID-19 hitting our main markets in the northern hemisphere, there is a question about whether we will see similar uncertainty and volatility in customer decision-making as was experienced in March and April when the first wave hit. This time around feels very different. In communications with our customers, they are much clearer on their priorities in the current pandemic environment, and we're seeing more "business as usual" type stability in decision-making. So far, we have not seen sudden decisions to stop or reduce project activity, while we are seeing plenty of new projects and expansion of existing projects in…

Thanks, John. Here are some highlights for the most recent quarter. Endava's revenue totaled GBP 95.1 million for the 3 months ended September 30, 2020, compared to GBP 82.4 million in the same period last year, a 15.5% increase over the same period in the prior year. In constant currency, our revenue growth rate was 16.9%. And as John mentioned, if we pro forma adjust for the revenue from the Worldpay Captive last year, our revenue growth on a constant currency basis was 20.1% year-on-year. Profit before tax for Q1 fiscal year 2020 was GBP 8.7 million compared to profit before tax of GBP 17.5 million in the same period in the prior year. Our adjusted profit before tax for the 3 months ended September 30, 2020, was GBP 18.2 million compared to GBP 16.9 million for the same period last year, a 7.8% year-over-year increase. Our adjusted profit before tax margin was 19.2% for the 3 months ended September 30, 2020, compared to 20.5% for the same period last year. Adjusted profit before tax, adjusted PBT, is defined as the company's profit before tax adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, net gain on disposal of subsidiary, share-based compensation expense, amortization of acquired intangible assets, unrealized foreign currency gains and noncash expenses. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was 26p for the 3 months ended September 30, 2020 calculated on 56.6 million diluted shares, as compared to 24p for the same period last year calculated on 55.4 million diluted shares, up 8.3% year-over-year. Revenue from our 10 largest clients accounted for 39% of revenue for the 3 months ended September 30, 2020, compared…

[Operator Instructions] Your first question this morning comes from Bryan Bergin from Cowen.

I want to ask here on calendar '21 budget outlooks for clients. So it seems you obviously had improved visibility to reinstate the full fiscal year outlook. Can you provide some color on the conversations you're having with clients, what they're telling you about their calendar '21 spending intentions? And any broad trends you're picking up and those that are different?

Bryan, thanks for that. Yes. So visibility is actually pretty good, in line with my opening remarks. We're seeing clients have got clear priorities of what they want to invest in, and we're seeing those plans come through. I think probably the best way of illustrating that is our contracted and committed spend as a proportion of our guidance is at normal levels for this time of the year. So our ratios indicate that we're in a normal place. I think interestingly looking at budgets for next year, in conversations with clients this week following the announcement of the vaccine, a number of clients have indicated that additional budget might become available if the vaccine enables activity to normalize, things like travel, et cetera. So there's -- it's clear that clients are still -- where their business is being restrained by the impact of the pandemic on economic activity, that they are still holding back a little bit. But if the world normalizes, we may see some of that come through.

Okay. That's good to hear. And then on Comtrade, can you just give us a comment on the integration process there and the progress you're making? Does that bring any large relationships as well? I see the big jump in client count. That would seem to suggest otherwise. But I'm just curious if there are any large potential enterprise relationships that they may have that you can push on as well?

Sure. I mean the integration is going very well. They're a very positive and aligned team. And of course we have teams in region, in Belgrade in Serbia and so on. That means it isn't a pandemic-constrained relationship that we're building because people in the local market are able to see each other. The reaction in the local market from a recruitment perspective has been very, very positive. It's actually seeing the 2 brand leaders combine, and that had a very, very positive impact. We're seeing a number of joint bids, nearly 10 opportunities that we're working on together already. And there's been a number of new names that we've already closed in the last 3 months or so. The alignment across the business is very good, and they bought some real strengths. For instance, a couple of the examples that I gave in the opening remarks around mobility stories that have come from CDS, and which we're using to leverage. And so the Aer Lingus example, for instance, where spend is continuing. And the intralogistics company that we were talking about, that is a very, very large multinational. So there are large clients there with quite substantial spend with CDS where we're looking and seeing opportunities to scale what we're doing with them.

Your next question comes from Charlie Brennan from Crédit Suisse.

Great. I've got two, if that's possible. Firstly, just to pick you up on those mobility comments, there's much more focus around that industry than we normally get from you. Is that something that you need to bulk up through M&A route, and you more mix up to expect more deals in that space? And then on an unrelated topic, can I just talk about the organic trends? It may well be my numbers that are wrong, but on an organic basis if you strip out the acquisitions, it feels like Q1 growth was a little bit slower than Q4. And then when I think about your guide for the second quarter, you've got a full quarter of Comtrade in there. It feels like there might be another slowdown in organic growth. Have I got my numbers right? And what's the reason do you think for the relative caution in your organic guidance?

So let me do the mobility one first. Charlie. So yes, mobility, we put that into these opening remarks basically as part of a launch and pulling together of all the stuff that we're doing in the mobility space. And there's a lot of overlap of activity of how technology is impacting those different industries that we've put under the mobility banner. Now actually we've already been doing M&A to beef up what we've put in that space. So I mentioned a couple of those examples have come from the CDS deal. The automotive examples that I went through in the opening remarks came from the Exozet deal, the business in Berlin that came on board last December. And then a lot of the logistics work is from Endava for many years back. So it's an area that we've already been focused on in terms of looking to see whether we could beef that up with some M&A. It is strengthening as a proportion of our business, one of the fastest-growing areas albeit from lower levels of turnover. But we do see a big opportunity there just because of those macro trends that are gathering speed. And so we will, as part of any other M&A that we're looking at, we're looking to see whether there's a mobility component to it. But we're not just going to focus on that in terms of our M&A strategy. Mark, do you want to...

Yes. So just on the -- there isn't any slowing in the organic growth. So I mean when we were guiding for Q1 sequentially, which is what we were focusing on, it was about 4%. We've done 5%. And actually the differential between the 4% and the 5% is FX. So the FX headwinds were less stronger than anticipated, mainly because of the dollar. And then you look at the guide for Q2, again focusing on sequential, we're going at 9.5% at the top of the range. So there is a pickup, and the only sort of contribution -- additional contribution from CDS as you may recall this quarter that we're in, Q2, we will have a full quarter contribution from CDS, whereas in Q1 we actually had about 6 weeks. So we're getting half as much again contribution. So I mean the CDS contribution for this quarter is relatively modest. And in terms of sort of our pro forma excluding Worldpay, constant currency growth where we're roughly around that sort of 20%. So I don't see any slowdown in organic growth that you're seeing. Maybe we can pick it up off-line.

Our next question comes from Ashwin Shirvaikar from Citi.

Good quarter here. I wanted to ask as you think of your ideation to production end to end, in the current mode of how you work, it's easy to see perhaps that the production parts of it are maybe easier to do in a remote fashion. You've always done it that way. What about the ideation piece? How has that adapted?

Ashwin, thanks for the question, yes. So I mean you all have picked up from my opening remarks that we strongly believe that we will end up with a delivery model post-pandemic that has a mixture of people face to face in the office in teams doing sprint kickoffs and retrospectives, doing some of that ideation, particularly in the early stages of programs where the scrum teams are working on how new technology can be introduced. But that needs to be more of a face-to-face activity going forward. Having said that, somewhat to our surprise, we're actually seeing good ideation happening and clients who are very happy with things that we're coming up with during this pandemic period. However, it is our belief that to really get the best out of it, teams need to form and do some face-to-face activity to enable that to happen, to drive the best ideation. And so it is going to be part of our model going forward. And that's why we're making sure when we recruit people even during this period that they are able to attend Endava offices. And we're not just picking people up all over the world, which I know some of our competitors are looking at doing. But then the productivity metrics that I touched on that have been improving is very much at the production end, as you're touching on. So once you get in production developers can work at home and have the space to concentrate. That a little bit more. You get good productivity when you're building out systems, which is what you're touching on, I think.

Right, right. No, I just wanted to, based on your comments, I wanted to confirm that the ideation piece was actually happening. It can obviously be done better or more efficiently face to face, but it doesn't mean that it has ground to a halt, or is happening inefficiently based on what you just said. The other question I had was you've done, obviously over the course of your history, a number of acquisitions. Are you finding perhaps that it has become or becoming a bit more of core competency where you can use the current situation to accelerate M&A.? I mean many other companies seem to be doing that. It is difficult for one company to get -- to do everything? And so just a question on M&A. And can you speed up M&A? You certainly have the balance sheet for it.

Yes. So I mean M&A for us is always a balancing act between seeing good businesses that are going to really add value to Endava. And there's a lot of businesses being touted around out there at the moment, but it needs to be balanced with our ability to integrate. We're very strong believers that the worst thing you can do with M&A is to do too many and get indigestion. You don't integrate properly. The people therefore don't settle down in Endava well. You don't fully extract and exploit the sales messages and strengths of the organization that you're bringing through if you don't integrate properly. So we've, as you've noted, done many M&A deals over the last 10 years or so. We've always focused on making sure that there's a clear integration before [Technical Difficulty] or more, and we're continuing to do that. Having said that, there are some very good opportunities out there, and we keep an eye on that to make sure we're not missing out on something that's going to be really additive to Endava's capability. We have got in place an integration team who are permanently available to do these integrations now, and that does enable us to run a little bit faster than we did 4 or 5 years ago.

Our next question comes from Bryan Keane from Deutsche Bank.

I wanted to ask about the new client growth, or at least the increase in total number of clients. Was most of that increase, looks like about an 85 increase, was that just from the acquisition of CDS in the total? Or was there a bigger growth in organic growth in new clients this quarter?

So there was contribution from CDS, so well spotted. But we also managed to grow the roster on an organic basis as well. So we're continuing to add clients organically.

Got it. And Mark, any comments on the pricing environment currently? But also when you've given the outlook, what have you incorporated into price going forward for the guide for the fiscal year?

Yes. So I think the pricing we're seeing at the same levels as we saw in Q4, so it's remaining relatively robust. Q4 was down on Q3. So we are certainly seeing some stability, so reflects our sort of outlook.

Got it. And then for the fiscal year, what will be now the contribution from acquisitions, just so we can get our models correct?

So in terms of the guide, we haven't obviously factored in anything we haven't done. So in terms of the revenue guide, it includes CDS from the acquisition date, which was mid-August, so 10.5 months. So the useful sort of run rate to think about is our Q2, which is clean if I can call it that. So it has all the most recent acquisitions in the last sort of 12 months. And then that gives you the base to extrapolate for the rest of the year.

And then how much was CDS then? How much should that be at least on an annual contribution? And then I guess we can figure it the quarterly.

I won't give you the exact sort of figure. But I mean when we said with CDS, we acquired 460 delivery heads, and they are at about a 10% discount to our revenue per head. So you can impute an annual revenue of around sort of 25 million, but then you have to take into account those 10.5 months. So hopefully that gives you some help in computing those figures.

Our next question comes from Mayank Tandon from Needham & Company.

Congrats, John and Mark, on a good quarter. I wanted to pivot over to margins. What are you looking at in terms of margin trajectory for the remainder of the year? Maybe the puts and takes around that as well. Specifically utilization, is there still more room to expand utilization? Or do you feel like you capped that out, the growth will be more driven by head count and pricing?

So in terms of the sort of outlook, we've had a good quarter as you can see for Q1. So the PBT margin was about 19.2% adjusted basis. And that was driven by strong performance on our gross margin, adjusted again is around 43%. I expect that to come off from that level as we look into sort of Q2, mainly because there's a number of small one-off factors in the Q1 results, particularly around some call it an R&D tax credit. And I expect utilization to come down sort of slightly as we recruit into that demand that we see in the second half. So the second quarter utilization will come down slightly. I then think for the balance of the year, we will then start to pick up as we grow into that people bench that we're recruiting to. So I think overall, we will -- in terms of full year, our gross margin will be slightly below what we reported in FY '20, probably a percentage or so. And probably our -- and it's implied basically in the guide, our adjusted PBT margin will be something between 18% and 18.5%.

Great. That's very helpful, Mark. And then maybe a broader question on the talent, just given the reacceleration in revenue. I was wondering if you're having more competition for talent? I would imagine given that digital transformation are faster these days. So maybe just some thoughts on talent acquisition. Can you hire the skill sets to meet the demand improvement? And any implications that you see for employee attrition going forward and wage inflation routes?

Sure. So yes, it's an interesting market at the moment. Obviously, the pandemic impacted through Q4. A lot of other companies laid people off during that time, and that has made employees a little bit more nervous in the market. Endava didn't lay anyone off, and actually we continued to grow organically all the way through the period. That's had a very, very positive impact on the markets that we're operating in. So our attrition levels are at historic lows. And our ability to recruit in the employee proposition, if you like, that we have in the marketplace has been significantly strengthened in all the locations that we operate in. So as a result, we are recruiting very, very strongly at the moment, and we've had very strong levels of acceptance. So October, we've had the highest month ever by some distance in terms of numbers of people accepting a job offer at Endava. So we remain in a very strong and confident position about our ability to attract the talent that we need in the markets that we operate in.

John, sorry, just to be clear. Any implications for wage inflation and attrition levels going forward, given your comments, do you see over the remainder of fiscal '21 and maybe longer term?

So at the moment, attrition levels are still trending down. We expect that, that will turn at some point, just as the market starts to normalize and return trends perhaps slowly upwards to more normal attrition levels. But we are very substantially below normality at the moment, even on a rolling 12-month basis, which includes a lot of period before the pandemic hit. In terms of wages that we're paying, inflation is below normal at the moment. Having said that, we have our pay round to come in January. And so there's always a step-up in our costs that happen in January simply because that's the moment when the vast majority of our staff receive their annual increases. I don't know if there's anything you want to say on that part?

No. That typically has an impact obviously on gross margin. It's anywhere between 1% and 2%. And then we start to recover that through renewals and discussions with clients. So this is a normal pattern that we've seen historically.

Our next question comes from Maggie Nolan from William Blair.

On the point about your hiring plans, some of your peers are using hiring outside of their normal office hubs as a way to structurally change their cost structure versus historical spend. I'm wondering if you're able to achieve something similar, even when you're expecting that employees have some level of frequency of in-person office visits in the future?

Maggie, yes, we -- so we've observed some of our peers doing that. Actually, we've seen them appear in some of the places that we are not actually taking any Endava employees, but hiring outside of the places where they have offices. We've decided we're not going to go down that route. Our belief is that whilst working from home has been demonstrated to work and be a real added value in terms of delivery model, we think moving to a 100% working from home by putting people in cities and countries that we're not even in is not a sustainable long-term model for the way in which Endava does business. And in part, that's the ideation dimension that Ashwin was asking about earlier. The ideation element of how Endava operates, i.e. the multidisciplinary teams who are able to look at technology from a business perspective and come up with new ways of using it to transform business models and do that in proof of concepts and prototypes before we get into production, we believe requires teams to gel in a way that you can't achieve if they're working all over the map and never meeting each other in person. So we are continuing to hire people within range of our offices, so that they can spend a day or 2 or sometimes 5 a week working together in the office. And we -- this is an area that is going to have huge debate, I'm sure, over the next 6 to 12 months. But it's very much the Endava view that in order to sustain our business model and the quality of what we do for clients, we will need teams to have a good amount of face-to-face time going forward.

Got it. And then I found the mobility trend pretty interesting. I know that you mentioned it's a long tail. But I'm wondering if the demand for services within mobility has been increasing just in these current environments, given some of the implications on things like supply chain and globalization in general. I'm wondering if you have any comments there.

Yes. I mean whilst we see mobility as being that very long transformative trend that I touched on in the opening remarks, there's definitely been a push in some of those areas very strongly over the last 6 months; logistics, last mile deliveries, et cetera, being a couple of areas. By contrast some of the other dimensions in mobility, such as airlines and travel, has had a massive brake put on it. So it's a mixed story. The automotive area has been interesting because a lot of the push in that space has been around marketing and how do you continue to get your cars in front of people when they're not going to visit a dealer in the way that they have done historically. So that's pushed a lot of the products that we've been engaged in the automotive space around. So very mixed stories about what's happening under the covers during COVID in the mobility space.

Nice quarter.

Thanks, Maggie.

Thank you.

Our next question comes from Steve Enders from KeyBanc.

Just wondering, I think last quarter you talked quite a bit around digital necessity projects. But wondering if you're -- have seen any change in those kind of project dynamics, and if we're kind of back to a new normal in terms of project dimensions and the demand for them?

Steve, yes, so there is some of the digital necessity stuff. I mean the -- just picking on my last comments about mobility, some of that last mile stuff has been digital necessity where much higher volumes have hit the logistics and distribution industry. And investment in their systems to enable customer service to keep up with the higher volumes that are going through has been a big step-up in activity over the last 6 months. Having said that, I think if you look at what clients are spending and talking to us about now, there's much more of a shift back to their longer-term trends and investments, rather than the fixing the problems that emerged during March and April.

Our next question comes from James Faucette from Morgan Stanley.

I wanted to see if you could give us a little bit of incremental color on the different verticals and activity and outlooks there. You mentioned a little bit what was going on from a mobility project perspective. But can you speak to the wider trends and engagement levels and kind of what you're expecting in each of those areas?

Yes, thanks. Thanks, James. Yes, so let me pick out in the areas that we're seeing a pickup. So we've seen a pickup in banking; in payments; insurance. In all 3 areas of TMT, i.e. tech, media and telco, media being the strongest of those 3. And then in other in the mobility space that we've talked a bit about, and in retail. Travel and entertainment is still very challenged, but actually we have little exposure to them as a business. It has impacted some of the other spaces. So payments, while being up very strongly on e-commerce and things like self-service onboarding and even PIN on glass, and the open banking arena in the area of payments attached to trials, so cross-border payments and FX-related activities, we've seen a drop down in activity. Likewise in insurance, whilst most of the insurance spaces are looking strong, travel insurance has taken quite a strong pullback. So there is a bit of a cross-sector impact happening from those sort of macroeconomic effects that are visible around travel.

Got it. That's really helpful. And then just a quick question, as we've heard increasingly this narrative behind vendor consolidation and how the current environment is creating a situation where at least some customers will reevaluate, do they really need as many IT service vendors as they're using, et cetera? Are you seeing that at all? And you're obviously doing quite well. So what do you think may be, if that is happening, contributing to your ability to take share and maintain position? Is it just your focus? Or are there more specific skill sets and abilities you're delivering to the customers?

Yes. So I mean vendor consolidation is definitely happening. We're not focused as a business on getting into conversations with procurement departments around vendor consolidation activity. We're focused on in each of the business areas that our clients are in, on how can technology make a big impact on that business, change their business models, improve efficiency and so on. And so we tend to see ourselves growing market share in clients as we drive those conversations through proof of concepts and prototypes turning into projects and so on. And clients do make larger and larger multiyear commitments to us. And probably behind the scenes, they are consolidating what they're doing with other vendors, often probably in the legacy space, where we don't play. So that compression of spend with vendors who provide legacy support is benefiting us. But it's not a directly competitive activity, if you understand what I mean, because we're offering a rather different service. Having said that, I have observed some of the other players talk about seeing a weakening of demand in some of the areas that we're in, like payments where we continue to see a strengthening of demand. And so it could well be that they're getting consolidated out of some of the markets where we're seeing strong growth.

Our next question comes from Bryan Satterly from Robeco.

Congratulations on a great quarter. I wanted to touch on something that was said earlier about the number of clients added over the past quarter because there was quite a lot, about 85 clients. A lot of that's come from an acquisition, as you mentioned. But maybe you can give us some color on the types of clients that are on board? Are they big companies, small companies, in any particular sector? And then as of late, what's been the most successful new logo acquisition channel?

Yes. So the main movement was, as I said, our acquisition of Comtrade, CDS. So that brought roughly around 60-odd clients with it. We've been on-boarding new logos basically across the place. I wouldn't say there's any been any particular sort of sector. Obviously, you have to take cognizance of the relation -- the current sort of situation in the mobility subsegment of travel. But it has been across the geographies and also sectors, so it's been a good quarter sequentially for us.

And just on your second question around new logo acquisition, we – so our pipeline comes through by seeking to set up meetings with clients, put our propositions in their industry space in front of them, move that forward through proof of concepts, that then turn into larger production systems. Now we do that very much on an industry-focused basis. And interestingly, the channels that open up meetings in different industries can be quite different. So whereas in payments, we would see strength through LinkedIn as a channel, through shows and events. In other areas like insurance, you see other activities such as cold calling being much stronger. It also actually varies geographically by market. So the response you get into the U.S. through the different channels is going to be different to Europe, with the U.K. somewhere in the middle. The key though is that is our propositions that we develop around how technology can impact these different industry segments. And that’s what gets engagement with clients when we’re able to talk about their business very much at a business level and how technology can impact and transform it, and then get them interested in a proof of concept that gets the whole ball rolling. So those are – that’s our successful logo acquisition.

This concludes the Q&A portion of our call. I will turn it back for any closing remarks.

Great. Well, thank you all for joining us today. As you all have noted that even although the pandemic continues to reach a terrible impact, we're actually more confident that our clients have incorporated the challenges into their investment plans. And we're seeing a much more stable decision-making than we saw back in March and April. So we've therefore guided for the full fiscal year, and we're feeling pretty positive about our business position. I look forward to seeing you all on our next earnings call in February.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.