Good morning, and welcome everyone to Endava plc Earnings Release Fourth Quarter Full-Year 2021 Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session. [Operator Instructions] Thank you. And now I would like to turn the call over to our presenter for today, Laurence Madsen. You may begin the conference.

Thank you. Good afternoon, everyone, and welcome to Endava's fourth quarter and full-year fiscal 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 Q1 fiscal year 2022 and for the full fiscal year 2022. Our perceived opportunities to potential impacts of the COVID-19 pandemic and associated global economic uncertainty, including with respect to our expectations regarding future work arrangements for our people; our expectations regarding digital transformation of existing businesses and industry; the necessity of digital transformation for many companies and Endava's ability to benefit there from; anticipated client demand for Endava's services; our ability to attract and retain employees; and our ability to execute on our sustainability objectives, 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 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 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 a discussion of 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 on our Investor Relations Web site. 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. Well, I'd 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 three months ended June, 30, 2021 and for the full fiscal year 2021. While the COVID vaccine campaign remains underway around the globe, the Delta variant is challenging a full return to normality. At Endava, we continue to prioritize the safety and wellbeing of our people. With differing measures across the world, as this pandemic affects the countries and the communities in which they live and work. However, despite this difficult environment, we continue to experience very strong demand for our digital services in all of our regions and verticals and the pace of increase in demand is only accelerating. Endava finished the year strongly, with revenue of £133.6 million for Q4 of our fiscal year 2021, representing a 54.9% year-on-year increase in constant currency from £90.5 million in the same period in the prior year. We ended the quarter with an adjusted profit after tax for the period of £23.6 million, representing an 83.7% year-on-year increase from £12.8 million in the same period in the prior year. Our strong 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 615 active clients, up from 416 at the end of the same period in the prior year, a 47.8% year-on-year increase. We continue to expand our penetration with our largest clients. And the average revenue from our top 10 clients grew by 31% year-on-year. And revenue from clients who paid us above £5 million increased 29.5% year-on-year.…

Thanks, John. Before we get into the numbers, I'd like to apologize for the delay in moving our reporting date. The closed process took longer than we anticipated, as we had to work with our auditors to settle on the treatment of cash received post year end for large receivable. This resulted in an overall bad debt provision release in the quarter of £1.3 million, which is shown on the face of the profit and loss accounts. This item boosted the already strong quarter delivered by the underlying business. Endava's revenue totaled £133.6 million for the three months ended June 30, 2021 compared to £90.5 million in the same period last year. A 47.7% increase over the same period in a prior year. In constant currency our revenue growth rate was 54.9%. Profit before tax for Q4 fiscal year 2021 was £18.5 million compared to £6.7 million in the same period in the prior year. Our adjusted profit before tax for three months ended June 30, 2021 was £29.3 million compared to £15.2 million for the same period last year. Our adjusted profit before tax margin was 21.9% for the three months ended June 30, 2021 compared to 16.8% 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 or share-based compensation expense, discretionary EBT bonus, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains or losses, net gain on disposal of subsidiary. Share-based compensation expense, amortization of acquired intangible assets and unrealized foreign currency gains are non-cash expenses. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was £0.41 for the three months ended June 30, 2021, calculated on 57.5 million diluted shares as…

Thank you, presenters. [Operator Instructions] Your first question comes from Ashwin Shirvaikar of Citi. Your line is now open.

Thank you, and congratulations on the good quarter and results. I think my question is, I mean at this point, we obviously know that the end market environment is incredibly strong, the evidence of sustainability of this environment as well. The supply side seems to be where some of these challenges are. But you don't, at least in your prepared remarks, I didn't see any evidence that you're seeing the same. Are you doing something differently with regards to hiring, retaining, or is it basically less competitive geographies? Could you maybe comment a little bit more on the supply side with regards to the ability to keep hiring?

Sure, and thanks, Ashwin. I mean, the recruitment of quality staff is always a challenge. And it requires successful businesses to build a market presence and a career proposition that's going to attract and retain the best. You touched on the strength of demand. The reality is that it is running ahead of our ability to deliver on the supply side. Having said that, we've always guided the market that a sort of 25% to 30% headcount growth organically is our sensible ceiling, without growing beyond that place where our ability to onboard, train, equip our teams to perform in the Endava way is going to work. But there's a few factors that are playing into it at the moment that -- and meaning, we're being able to rev a little bit beyond that usual ceiling. Firstly, our attrition remains low, and it's around the 10% mark, so it's moved up slightly from the last quarter, but still well below the 15% that we target. And also, you'll be aware that during the summer of 2020, as the pandemic hit, we didn't make any layoffs. And we continue to promote staff in accordance with their experience and capability, which meant that, last year, we ended up growing a slightly more senior staff profile than we would normally have. And those two factors together, the lower attrition and that more senior profile has given us additional headroom for growth. And that's enabling us to push our headcount organically at greater than the 30% max that we'd normally go at, without destabilizing our expansion. That's on the headcount side. It's probably worth noting that that level of headcount growth converts to a higher revenue growth, and given the price rises that we're also achieving. But yes, it is -- we're seeing market demand that is higher than that as well. So, it is a careful balance of making sure that we don't over-rev the business and start to lose the culture and the way in which we operate by over-expanding.

Thank you. No, those details are quite useful. One of your comments at the very beginning of your prepared remarks was that not only is the environment strong, but it is also accelerating. And I just wanted to get your view with regards to as you found your outlook, what assumptions did you make with regards to the accelerating or still accelerating part of demand?

Hi, Ashwin.

Hi.

We - the demand is, as you put it out, strong. We're recruiting very quickly into that demand curve. We have taken a sort of account of pricing within that, because as we're recruiting people, we are looking at packages to make sure that overall attrition stays in the right place. We have been, as you'd expect, organically, growth is very strong in terms of the outlook for Q1. And in terms of the full-year, we guide out to June. We also are forecasting sort of strong growth there as well. But I think it's -- we haven't baked in all the pricing improvements that we think could be achieved in this market in the guide. But the underlying question about the strength of the demand is reflected in our guidance.

I think just to add to that, our business model, as you are aware, is to start with smaller ideation phases with new clients or proof of concepts that we do. And that's a small assignment that brings to life the way in which technology can impact our clients' business model. And as we bring that to life, there's an opportunity to scale what we're doing with that client as we take those systems into production. And that can significantly expand activity in the client footprint. And you'll have observed in our numbers that those new clients coming in is also expanding quite rapidly over the last year going from 416 to 615. So, we can see those bobbling up into larger engagements. And that's part of the acceleration that we're seeing.

Got it. Understood. Thank you.

All right. Thanks, Ashwin.

[Operator Instructions] Your next question comes from Bryan Bergin of Cowen. Your line is now open.

Hi, all. Thank you. A little bit of a follow-up question on the nature of client conversations and demand. Curious, is the expanded urgency and prioritization of transformation initiatives translating to any changes in the contractual terms? So, are you seeing any changes in terms such as the average duration of engagements or opportunities around gain sharing of other non-linear revenue? And anything just to call out or quantify around that potential incremental pricing strength?

So, let me pick up the first bit. No, the structure of client engagements is following our traditional pattern, and is getting bigger as we scale, so our larger clients are getting larger, as you'll have observed. There is a little bit of a shift to slightly more fixed outcome contracts, where we put some quality measures in alongside the T&M that we're delivering to clients. And that gives clients a little bit more assurance about our delivery, as well as giving us some potential upside as we do well. Mark, anything on that?

Just in terms of the pricing, I think I'm still -- going to still reiterate the comments to Ashwin. Q4, we had a very strong revenue per head. Sequentially, we were up from around a 63 to 64 to 68. We foresee that continuing as we outlook into the remainder of the year. And the guidance is basically being -- not prejudging that we will be able to secure all the price rises that we think we will do over the overall period.

Yes, I mean just on price, we're very, very focused on delivered value to clients. And our whole ideation approach enables us to articulate value early in the decision-making cycle with clients. And that helps to protect prices for us.

Okay, makes sense. And than a follow-up just around travel resumption, so as you built the forecast for '22, can you dig in a bit more on around your assumptions for costs around the operating model on travel? Are you assuming the current mix here in work-for-home or are you building back some increase of onsite, and the associated costs with that?

We are building in increased travel, basically in the second-half of the guide. We foresee things opening up as our sales teams get in front of clients. It's -- but the -- in terms of the sort of impact on revenue side, in terms of as sort of [indiscernible] us visiting clients, et cetera, that is not going to be significant, although we are baking in much more travel as our teams see clients and sales engagements with clients in the second-half. But it's not a seismic change in terms of the profitability profile.

All right, thanks, guys.

Thanks, Bryan.

Your next question comes from Mayank Tandon of Needham. Your line is now open.

Great, thank you, and congratulations on the strong quarter. Maybe John or Mark, I wanted to just ask about the client penetration opportunity, you shared some metrics around the Top 10 accounts and I think the fiscal year '21 had you at £15.5 million average revenue in your Top 10. How much can that grow, just trying to get a feel for the runway within the Top 10 client portfolio as we move forward?

So, most of our Top 10 are very large enterprises, where there's a lot of opportunity to grow what we're doing with them. In fact, it's one of our key parts of our business model is to start with a client in one product area, do the ideation as they see the impact that they can have on their business, they take that product into production. And as it's successful, expand what we're doing with them to accelerate success in the market. But then, with these large customers, there's often many other parts of their business where once they see that success that comes out of working with us, they're keen to pull us into other business areas and to push product forward across their other lines of business. So, that's where the client penetration opportunity comes from. That's what a big part of what drives the growth in our, it is part of our planning model to see our larger clients continue to grow, although obviously, as the business scales, they slowly come down as a proportion of our overall business.

And I think you can see that sort of momentum, as we went through Q4 because the average spend of the Top 10 increased by something like over 15% because in our full-year slides, you can see the year-on-year, but growth in the Top 10 certainly accelerated in Q4.

That's helpful color, thank you so much for that. And then, just a quick follow-up, I wanted to ask about the margin trajectory as we move through the year. Obviously, you have the wage pressures, how are you able to offset that if you could just talk about the levers that you have in the model to negate the impact of wage pressures? And how should we expect the margins to run over the course of fiscal 2022? Thank you.

So, I expect sort of near-term Q1, our gross margin which was a key sort of focus, we will be equivalent basically for the exit rate at Q4 but I think we will follow the traditional picture that we have, as we go through the year because our major pay round goes through 1st of January. So, we always get some dilution of margin as those pay rises go through and that we recover it over the balance of the year. So, I don't think there's going to be much change from that sort of traditional sort of picture, where our gross margins will be relatively strong in the first two quarters of the year, the main pay rise goes through. So, we take a little bit of a knock back, and then we recover it through the balance of Q3, Q4. I think the only sort of difference or things to add about that, there will be some downward pressure as we offer competitive packages; we want to keep attrition in the right place. Notice, we said it's at 10% this quarter. And that's what we -- where we like to sort of keep it within those sorts of parameters and managing our overall sort of grade distribution and onboarding the people that we need, we think we can manage that pressure.

Great, thank you for taking my questions. Appreciate it.

Thank you.

Your next question comes from Bryan Keane of Deutsche Bank. Your line is now open, Mr. Keane?

Yes, hi guys. Congrats on the phenomenal growth. Just looking at the verticals, it looks like other has become a bigger percentage from last quarter, I think it was 20% of mix now, it's 24%, that was a decent sized move. Was that due to the acquisition that moved that, or is there some extra demand instead of consumer healthcare and retail that's pushing up that percentage?

It's a mix of the two, to be honest. So, Levvel, our acquisition that came in the beginning of quarter strengthen payments and financial services, but equally it has good strength in other particularly around sort of mobility. But we are seeing good momentum in that segment is one were particularly sort of excited about?

Yes, the mobility space is really accelerating for us, perhaps not a surprise, a lot of it around last mile deliveries and retailers improving their service to clients. Retails another area that's been expanding, we've done well out of our understanding of the payments, landscape, and the impact that can have on retailers. How to help them with frictionless payments, or buy now pay later and so on. And then the other strength area and others been health, which has move forward strongly over the last year.

Got it. So, and then just one question on the guidance, Mark, just thinking about the cadence of the revenue growth, it starts at 56% to 58% growth, and then to the full-year it's 38% to 40%. How much of that is some of the acquisitions run off? Do you have any extra M&A in there from acquisitions not amount or not announced? And then, just trying to get a feel that it's still incredibly strong for the year versus the growth of the industry, any thoughts on sustainability of that 38% to 40% growth rate?

Yes, I mean the -- we're obviously getting a full contribution, basically up until we lacked the Levvel acquisition, which will be Q3. So, expect to see very strong organic constant currency growth Q2, Q3, probably dropping off from where we've guided. And then, Q4 will be clean. So we don't bake in any anticipated M&A, but certainly exiting sort of q4 will be north of that 20% constant currency organic target that we set ourselves. So, the short answer, I guess, to the top end of that 40%, is that you'll be seeing organic growth over 30% of that component. And the balance will be the M&A contribution.

Got it, super helpful.

And just on the sustainability.

Yes, go ahead, John.

Yes, so one of the things that you'll be aware of that we're looking for as a business is, is where technology is driving, what we call long wave change driven by all the digital technologies that are out there. So the industries that we're focused on have all been around where technology is driving significant game changing, structural change in those industries. And those long ways, the example, payments that's been running for 15 years or so we see that continuing pace, decades, looking forward from now, and then, as you get into the other spaces that we're in banking, insurance, asset and wealth management on the payments and financial services side, the tech arena, particularly the clients in the West Coast, the telco space, the media space, and then some of the ones we just touched on in other around mobility and logistics, health, retail, and so on. All of these are going through long wave chains. And actually, there's a lot of cross sector convergence happening as well, where the ability of technology to integrate through API's and so on across sectors, is transforming business models in the ways in which sectors interact with each other. And we placed ourselves in the center of those. So sustainability wise, as touched on a moment ago, it's still from our point of view feels like it's accelerating. And not as a long-term -- not as a short-term blip, but as part of that long-term transformation that's happening across these industries.

Got it. Congrats again. Thanks.

Thanks, Bryan.

Thanks.

Your next question comes from Jamie Friedman of Susquehanna. Your line is now open.

Hi, great results here. Couple of questions, John, do you have any perspective yet on next year's IT budgets to sort of very high level? And then I'll ask my follow up at the same time. In your prepared remarks John, you mentioned, I couldn't quite -- it wasn't your phone, my phone, but there was something that happened with a top five client in payments and fintech vertical, I thought it may have related to an acquisition, if you could elaborate on that one too? Thank you.

I'll let Mark look for the second one. I mean, the interesting thing about the IT budgets question for us is that a lot of the budget for the work that we do with our clients isn't really coming out of a traditional IT budget framework. Its clients who are looking from a business point of view to create technology product in the market. And that's what's driving their investment cases and the work that they're doing with us. So, I'm sure somewhere it links back to invert the capital spend framework that they have within their organization, but I'm not sure that it links back to IT budgets specifically. Certainly, we don't find ourselves sitting talking about IT budgets with our clients very often. And Mark could be picked up on the other?

Yes, I think Jamie, you are referring to clients who paid us over £5 million rather than top five, is that right, and we were talking about an increase, we didn't talk about movement in the top five clients per se.

I thought you had alluded to a fintech that came in or got expanded because of maybe the five acquisition one of the acquisitions, but if that's too specific, just maybe more general. John, in your prepared remarks, you talked about the API progression in the payments and fintech space, we usually rely on you to for some great insights into end market. So, you know, just in general, what are you excited about in the payments world these days?

So, I mean, in the payments world, one of the things that's very exciting for us is how it is a door opener into other sectors for us. So, for example, as I touched on a moment ago in retail, helping clients to move towards frictionless payments, being able to walk into a store, pick something up and walk out again, or a smoother ecommerce experience or buy now pay later. What we're finding is that whilst retailers are dependent on the payment providers for the back end processing, they're starting to look to pick up some of that payments ecosystem themselves to create differentiation in the marketplace to get better information and data on their clients and so on. So, we're working directly with retailers on some of those things. Similarly, in the banking world, the banks are keener to get involved in the payments arena, a lot of that's driven by open banking where their back end capabilities and the open banking regulations allow them to create new products and services that look a little bit different to traditional payments world. We're helping a lot of banks with those sorts of things. And there's a lot of industries where micro payments makes a big difference, where you want to collect small amounts of cash from clients and how you do that in a cost effective way. Subscription models are growing, and that has a big impact on the payments world and the way in which we can help clients to do that. So, one of the very exciting areas for us is how payments is pushing into other sectors and helping us open those sectors up. And of course once we as touched on get a good product flying for a client in other sector, it helps us push into other parts of that business.

All right, thank you, guys, congrats again.

Thanks.

Thank you.

Your next question comes from Maggie Nolan of William Blair. Your line is now open.

Thank you. Congrats on the good results. John, in your remarks you talked about application rationalization and modernization and general architecture reviews, that feels like maybe it is a bit more tied to traditional IT budgets. And I'm curious how Endava is really kind of differentiating from competitors in this area?

Yes, so I mean, so that whole arena that I was touching on there is around how the back end is implementing the digital product that we're helping clients to put in place. So, essentially, as you take product through that ideation phase into prototypes and into production, you start to really stretch the product into the back end in terms of the added value that you can deliver to clients. And so, that's where we get into these application reviews, architectures and so on is around as the product is being extended into multiple countries, as you're adding functionality and so on, as it has success in the market. What do you need to do to your back end to ensure you have continued differentiation in the market that your speed to market isn't being slowed down? And the other points of differentiation, functional and so on, can actually be added. So, that's where we get into the back end. So, we're not just going along with the clients and saying, let's do a big architecture study for you, in the way many of our competitors would is much more driven by our understanding of the product that we're building and what needs to therefore be driven on the back end to enable that to take forward.

Okay, thanks. And then as you continue to grow in the U.S. and North America, are these clients being won through competitive processes? Are you taking market share from other providers, and are the pricing dynamics any different in that region?

So, the U.S. feels very similar to the other geographies of the business in terms of the way in which we win business, the ideation approach that we take means that we are much more rarely than our competitors getting involved not through an RFP process. But getting involved through an ideation of what a new product or a product enhancement could do for a client. And so, we focus on that, that space, often very small, initial engagements then scale as the vision of what can be done gets the client excited about investing further, and then spending money to get that into production environments. That is just as true in the U.S. in the way in which we're expanding in the U.S., as it is in Europe, in the U.K. and the Rest of the World as we're building out there, so that there's isn't any difference, it is across all three sectors. So, the payments, financial services, TMT and although we're seeing activity in all of those areas, health in the U.S. is one which is leading for us really, I think the whole health sector and how technology can be applied as more advanced in our experience in the U.S. than in Europe, and the U.K. So, health is one that's pulling on. Tech is another one where we're working with West Coast businesses where we're seeing a lead out of the U.S. and then that's pulling on the rest of the business in our other geographies.

Okay, thank you.

Thanks, Maggie.

Your next question comes from James Faucette of Morgan Stanley. Your line is now open.

Hey, this is Jonathan on for James. Thanks for filling us in here. I want to build on from the pricing questions that have already been asked, how are clients responding to the pricing dynamics you mentioned, has there been any pushback around pricing increases, and you envision more clients moving towards fixed outcome contracts?

I think our clients understand the wider backdrop, that what we do alongside others is special, and requires being able to onboard talent, and there is a battle for it. And so, whilst maybe likes rate increases as a client, they understand that we're competing in a global market for that talent. And as long as those conversations are sensible, and we continue to deliver good outcomes and excellent work for our clients, then it isn't usually a difficult conversation. In terms of --

Just to add to that, I think the key thing with our clients is to be able to demonstrate the value add to their business is going to come through the engagement and because of our approach which helps to bring to life, what the technology is going to do for the business, it really helps clients frame up their business cases. And once you've got a good business case and a good product that's flying, it's a very different discussion around what we all need to do sensibly, we need to demonstrate to clients that we're sensibly pricing, but they are much more amenable to that, because the route to delivering their outcome is much more strongly visible by staying engaged with Endava. So, that's the nature of the conversations we're having with, we're not trying to push prices down our clients throats without demonstrating value.

That's helpful color. And one more if I may, look you've highlighted the success at both FIVE and Levvel, how are you thinking about incremental acquisition, there is still a focus on expanding US-based capabilities, what else are you looking at? And how is the current landscape and pipeline?

Yes, so I mean obviously, we've had very successful mergers with other businesses, and FIVE and Levvel and full CDS have all gone very well. And we're very pleased with them, actually very excited about them as businesses and the value that they add to Endava. We continue to look for the right opportunities. We're very choosy. There's a lot of -- there's a lot of opportunities out there. But we're choosy on where we engage. There's nothing to report at the moment. But as soon as there is, we will obviously bring that to market. In terms of our strategy, it remains, as I've articulated before that we want to look for businesses that are going to strengthen our geographic diversification, so pushing forward in the U.S., increasingly looking to Asia-Pacific to see whether there are good businesses there that will add to the sales teams that we thought on the ground out there. We also look for businesses that are going to accelerate us in the right sectors where we see these long wave opportunities. So, businesses that are going to bring know how and capability in those sectors and help us accelerate. And occasionally, we look for business that's going to give us some technology capability that we don't have a need quickly, that third is actually quite rare, we're good at building the technology capabilities that we need ourselves. But we do keep an eye out just in case, and of course often the deals that we do bring some element of all three components of that. So, we keep looking, there's a lot out in the market that we're very choosy.

Very helpful. Congrats on the results.

Okay, thanks, Jonathan.

Thank you. No more questions. Presenters, you may continue.

Thanks for that. Thank you all for joining us today. As you all have noted, demand for our services actually remains very strong. We are seeing good demand in all our verticals and geographies, and remain very positive about our business position as we go into FY'22. We are excited about the opportunities that this year offers. Keep well, and we look forward to seeing you on next earnings call. Thank you.

This concludes today's conference. Thank you all for joining. Have a great day.