Endava plc (NYSE:DAVA) Q2 2024 Earnings Call Transcript
Endava plc (NYSE:DAVA) Q2 2024 Earnings Call Transcript February 29, 2024
Endava plc beats earnings expectations. Reported EPS is $30, expectations were $0.37. Endava plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Endava Second Quarter Fiscal Year 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Laurence Madsen, Head of Investor Relations. Please go ahead.
Laurence Madsen: Thank you. Good afternoon, everyone. And welcome to Endava second quarter of fiscal year 2024 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 presentation and our accompanying remarks today include forward-looking statements, including, but not limited to, statements regarding our guidance for Q3 fiscal year 2024 and for the full fiscal year 2024; the overall headwinds facing our industry and business, including macroeconomic conditions and the global geopolitical climate and the impact of such headwinds on our ability to grow revenues, and in particular, growth and expansion in our industry verticals; the impact of our investment and cost saving initiatives on our financial performance; our acquisition of GalaxE Solutions, including expected synergies from your transaction, and the overall impact on our business; enhancements to our technology and offerings; demand from clients for our technology services; our ability to create long term value for our clients, our people and our shareholders; and our business strategies, plans and operations.
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 we undertake no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. For more information, please refer to the Risk Factors section of our annual report filed with the Securities and Exchange Commission on September 19, 2023.
Also, during the call, we will present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Reconciliations of such non-IFRS measures to the most directly comparable IFRS measures are included in today's earnings press release, as well as the investor presentation, both of which you can find on our Investor Relations site or on the SEC website. The link to the replay of this call will also be available on our website. With that I'll turn the call over to John.
John Cotterell: I'd like to thank you all for joining us today. And I hope you're all well. We're pleased to be here to provide an update on our business and financial performance for the three months ended December 31, 2023. As we noted in our press release, obviously, the environment continues to be challenging. Our results and guidance reflects headwinds in IT spending, particularly on discretionary projects, and in the payments and banking and capital markets verticals. That said, we believe we have a very well positioned and strong business. We are confident that despite current softness in demand, in the longer term, the opportunity for us is very attractive. We want to make sure Endava continues to be well positioned to create long-term value for our clients, our people and our shareholders.
We continue to pursue our strategy to ensure that, while we are rightsized for the current demand environment, we are also making necessary investments in our business to position ourselves for when discretionary CapEx picks up again. We're seeing three key trends in the market. One, while budgets are up this year, and there's a lot of work to be done, in the short term, spend is being deferred as clients continue to be cautious. As one client put it, we have the budget for a substantial ramp up with Endava, but we're going to go slow for now and see how the year unfolds. Secondly, we are seeing deeper demand for vertical and technology expertise. And thirdly, the growing importance and relevance of a broader diversified delivery footprint.
Given these trends, we're continuing to make organic and inorganic investments in a disciplined way to, number one, diversify our revenue, our delivery and invest in technology and domain capabilities. Secondly, attract great talent and take advantage of the difficult times many others are facing to invest in and add to our leadership. And thirdly, evaluate acquisition opportunities that help us accelerate our growth strategy. Some of these investments may result in lower near term margins, given the current market environment. As we know, it takes courage to invest in uncertain times. But we continue to make sure we are being disciplined in pursuing our strategic objectives. Moving on to our results, we reported revenue totaling £183.6 million for Q2 of our fiscal year 2024, representing an 8.1% year-on-year decrease in constant currency from £205.2 million in the same period in the prior year.
We ended the quarter with an adjusted profit before tax for the period of £22.7 million, representing 12.4% adjusted profit before tax margin. Some of the large projects we mentioned last quarter have not scaled up to expectations yet, while others have remained in the pipeline for longer than expected as a result of client hesitancy. We now have numerous projects where discovery work has been done, but clients are hesitating on when to commit the sizable spend needed to build production ready systems. Alongside this short term change to our growth expectations, we've started our business optimization program in order to facilitate a return to the medium term to our 20% constant currency organic revenue growth and 20% adjusted profit before tax margin.
We remain focused on investing in growth, while simultaneously reducing corporate complexity and eliminating inefficiencies. We believe this will improve our competitiveness and enable us to further invest in growth. Let me tell you about some of these strategic initiatives where we are investing. We will continue with our global industry focus, which is a key additive differentiator. Additionally, we are increasing our use of automation and accelerators to deliver outcomes for our clients more quickly. Increasingly, we are being requested to participate in larger scale enterprise systems integration work. And as a result, this will be a focus of activity in the coming quarters. We are bringing together our close-to-client delivery and nearshore delivery teams under one manager per region in order to further build consistency in our delivery capability.
We're starting to see the benefits of our combined sales and client delivery operations, resulting in a more cost effective organization, greater collaboration across industries and regions, and the development of senior multidisciplinary leaders that will ensure Endava is able to continue to scale. We're using the slowdown period as an opportunity to invest in senior go-to-market leadership, attracting dealmakers, who are difficult to shift in the boom times. And we undertook a rebranding exercise at the end of January, which has been very well received. In the last 12 months, we hired a dozen deal makers from leading competitors across our industry verticals. On the technology front, we want to help our clients embrace and explore new technologies more rapidly.
Therefore, in addition to our core delivery competencies, we are creating new teams called pods that will be singularly focused on helping our clients accelerate and invent the future around new and emerging technologies. Pods represent an opportunity for differentiation by demonstrating our thoughts and delivering leadership across industry verticals against a key set of technologies and capabilities. The pods pull together existing Endava experts with exceptional thought and delivery leadership within a fast evolving technology domain. They will work with our industry teams to establish thought leading propositions around high momentum technologies and working alongside our delivery locations to ensure that appropriate skills are built and available at scale as acceleration is realized.
We're building pods for AI, cloud, intelligent automation, cybersecurity, quantum, sustainability, embedded and physical computing. The right time to invest in these go-to-market technology and sales arenas. And these efforts will lay an even stronger foundation on which to scale as markets return. In addition to the release of our results today, I am thrilled to announce our acquisition of GalaxE Solutions to strengthen our healthcare vertical, as well as establish delivery capabilities in India. This is our largest acquisition to date, and it aligns with our strategic vision of expanding our global delivery footprint and further diversifying our revenue base. GalaxE was started in 1993 by the CEO, Tim Bryan, and is a leading provider of digital transformation and product development services to blue chip US companies with a significant client base in the healthcare vertical and delivery capabilities in India.
I met with Tim and his leadership team and visited their delivery centers in India, and I'm excited about the synergies we can create between the two companies. This acquisition significantly expands our presence in the fast growing and exciting healthcare sector in the US. Additionally, with GalaxE, our global delivery footprint now expands to India, the deepest IT talent pool in the world where GalaxE has nearly 1,200 employees. GalaxE will strengthen our North American management team and brings decades of offshore delivery know-how to Endava. In addition, GalaxE has developed a strong accelerator enabled capability, facilitating the understanding of existing enterprise systems and enabling change. This capability, alongside of Endava's existing strength in delivering next generation technology, will allow us to open new opportunities and go deeper into enterprise transformation work, delivering more insightful and predictable outcomes.
Mark will provide more details on the transaction shortly. I'm excited to share that we announced yesterday that we're expanding our strategic partnership with Equiniti, a leading international provider of tech enabled, shareholder, retirement and remediation services. We have established a five-year partnership of £75 million to support the delivery of transformative product and tech roadmap. This deal strengthens our existing three-year relationship and delivers significant growth for Endava in our capital markets vertical. With the extension of this partnership, Equiniti has become one of Endava's top 10 clients globally. This revenue is net new, and is an example of the sizable project opportunities that are being slower to convert than expected last quarter.
I'd like to provide you with an update on projects we are working on in North America. In our banking and capital markets vertical, we are working with Early Warning Services in launching Paze, an easy online checkout solution offered by banks and credit unions. Endava is accelerating speed to market with the expediting of test environments and the development of an SDK for merchant integrations. We continue to drive market expansion as an integration partner of Early Warning, enabling Endava to drive value across all verticals. Endava is working with a leading fintech company in the alternative investment space, based in North America. Our two-plus year partnership started with a platform envisioning project, working directly with their entire C suite to translate their growth ambitions into executable backlogs in order to jumpstart an actionable delivery plan.
We helped build out their Snowflake based data lake and end-to-end data pipeline, enabling sales and operational reporting. Additionally, we provide ongoing support for internal integrations with systems and external integrations with reporting providers. Endava is working with the American Endowment Foundation, or AEF, one of the nation's largest independent donor advised fund sponsors, to help organize their donor advise fund platform. We're supporting their leadership team with their digital transformation journey. The goal is to harness technology and automation, to optimize the end-to-end fund management process, by improving the user experience for firms, financial advisors, donors and internal AEF team members. By curating a seamless interface for both existing clients and prospective partner firms, we will help to scale and streamline AEF's overall internal operational efficiency.
In our TMT vertical, we are working for a large US sports media company, organizing their data by building a platform to centralize, monitor and show interactive reports for financial information. The financial data visualizations encompass details relating to ticketing, events, payments, customer information, video visualization and streaming. The centralized information allows our client to make real time data-based decisions and monitor their top sales indicators. Mobile gaming remains an important revenue contributor for clients in the gaming sector. We are collaborating with a global brand in both the console and casual game market, reshaping their direct to consumer platforms to revolutionize their monetization strategy. Through the implementation of streamlined processes, exclusive deals, tailored and compelling transactional interfaces, and loyalty rewards programs, we are enticing mobile gamers to explore web platforms, fostering a more immersive community focused user experience beyond the confines of the game.
In the aviation space, Endava is partnering with Delta Airlines, helping them launch and support Delta Sync, a suite of personalized experiences and offers aimed at creating new ways for customers to enjoy their time on board. Endava worked with Delta to establish a cutting edge, agile product strategy and design approach, which has improved customer satisfaction, increased member acquisition, and delivered value to strategic partners through customer engagement. We will continue to bring to bear our capabilities in support of Delta's ongoing investment into industry-leading products and the best-in-class customer experience. We're working with many of the leading brands across different segments of the automotive OEM landscape. From back office and plant floor operations to in-car experience, we are helping our clients leverage technology to solve problems and improve revenue.
For example, we used optical character recognition and artificial intelligence to digitize paper vehicle documentation, which expedited processing, improved accuracy and reduced manual labor. We used computer vision and synthetic data generation techniques to accelerate and deepen learning for AI models. We are also helping a top carmaker leverage virtual reality and AI to optimize and validate the design of production processes, to reduce the time required to commission and build. And lastly, we are helping to design and deploy a scalable cloud architecture to enable over-the-air capabilities for millions of vehicles. On the technology side, we are rapidly moving to the point where AI touches just about every project. We continue to see a wide variety of work in our pre-sales pipeline, right across the ideation to operation cycle, and we continue to see a significant increase in client interest in exploring the potential of generative AI.
These conversations are becoming more focused, as clients want to investigate specific applications for their business. This is happening across several industry verticals, including insurance, pharmaceuticals, technology, gaming, telecoms, banking, and capital markets. In many cases, clients are taking steps in exploring potential applications. And we help them do this through workshops, and practical proof of concept work. We're also seeing some more forward looking organizations start to actively explore new types of application, such as AI agent automation and combinations of generative AI with other emerging technologies, such as knowledge graphs. Clients are increasingly looking to us for their AI implementation roadmaps, in particular in the insurance and tech sectors.
A few examples of our involvement here include work with a large US insurer to explore how they can use generative AI to grow their business, a workshop to demonstrate how generative AI can help a London market insurer and advisory engagement to explore personalization of omnichannel customer communication for a large telecoms company, as well as creating a number of generative AI powered tools for a wealth tech company, and also building an evaluation framework for a question answering bot in the gaming industry. We're also pleased with the level of client interest in our inhouse generative AI based platform, which enables the exploration of a wide range of potential applications of the technology through practical prototype implementations alongside of our clients.
Two examples include code generation for pharmaceutical statistics for a global pharmaceutical company and a multi agent prototype, which took a claim through multiple stages and scenarios for a large US insurer. Our deep partnership relationships with major technology providers continue to bear fruit. Here are a few tangible examples of projects we're working on, starting with an exciting generative AI based prototype of a voice and text based call center assistant on Google Cloud for a major UK insurer. We recently held a multi-day hackathon at our offices in Charlotte to explore the latest advances in Microsoft Semantic Kernel platform, targeting the healthcare industry, and developed two compelling prototypes in the areas of pharmacy automation and critical care triage.
Internally, we're seeing the early benefits of generative AI in our processes, with production use of tools increasing productivity and generating sales material, producing client insight for our private equity business, as well as helping to generate insights on our workforce. We recently held our Endava Innovation Lab with a total of 75 teams participating in this global innovation competition. And this year, 80% of the finalists applied AI in some practical way, illustrating how knowledge of AI has spread right across the firm. Globally, our recent acquisitions in Asia-Pac and in the US are integrating smoothly. And I'm excited about the prospects of our expanding global footprint. We continue trusted partnerships with NGOs, supporting inclusive education, including Niya, an NGO dedicated to bridging the technology skills gap for refugees by providing free training and matching talent with opportunities around the world.
Additionally, we are also leveraging our technical expertise to help solve complex environmental and societal issues. We recently teamed up with the Resilient Building Council in Australia to launch a bushfire resilience app tailored for Australians, empowering users to gauge their preparedness in the event of a fire, providing an easy to use solution to protect homes and communities. We ended the quarter with 11,539 employees, a 5.3% decrease from 12,183 in the same period last year. In the current environment, our recruitment is focused on areas of demand and, as I mentioned earlier, the strengthening of our senior go-to-market leadership. I'd like to take this opportunity to thank all Endavans for their commitment and determination as we persevere through these headwinds.
We will continue to manage the business for the long term, maintaining our culture and organizational health and creating exciting solutions for our clients and their customers. We believe clients activities in exploring and commissioning new products will overtake the headwinds and see us return to growth. I will now pass the call on to Mark who will walk you through our financial results for the quarter and provide guidance for the coming quarter and fiscal year.
Mark Thurston : Thanks, John. Endava's revenue totaled £183.6 million for the three months ended December 31, 2023 compared to £205.2 million in the same period in the prior year, a 10.6% decrease over the same period in the prior year. In constant currency, our revenue declined 8.1% from the same period in the prior year, within the range we provided to you last quarter and reflected a 5.3% positive inorganic contribution during the quarter. Sequentially, revenue was down by 3.6% in constant currency on the previous quarter. Profit before tax for Q2 fiscal year 2024 was £10.6 million compared to £20.3 million pounds in the same period in the prior year. Our adjusted profit before tax the for three months ended December 31, 2023 was £22.7 million compared to £43 million for the same period in the prior year.
Our adjusted profits before tax margin was 12.4% for three months ended December 31, 2023 compared to 20.9% for the same period in the prior year. Our adjusted diluted earnings per share was £0.30 for three months ended December 31, 2023, calculated on 58.6 million diluted shares, as compared to £0.59 for the same period in the prior year, calculated on 58.0 million diluted shares. Revenue from our 10 largest clients accounted for 34% of revenue for the three months ended December 31, 2023 compared to 31% for the same period last fiscal year. The average spend per client from our 10 largest clients increased from £6.5 million to £6.3 million pounds for three months ended December 31, 2023 as compared to the three months ended December 31, 2022, representing a 3.1% year-over-year decrease.
In the three months ended December 31, 2023, North America accounted for 31% of revenue compared to 33% in the same period last fiscal year. Europe accounted for 26% of revenue compared to 23% in the same period last fiscal year. The UK accounted for 34% of revenue compared to 39% in the same period last fiscal year, while the rest of the world accounted for 9% compared to 5% in the same period last fiscal year. Revenue from North America declined 14.5% for three months ended December 31, 2023 over the same period last fiscal year. Comparing the same periods, revenue from Europe grew 1.3%, the UK declined 22.3% and the rest of the world grew 44.8%. Revenue from payments declined 20.8% for the three months ended December 31, 2023 over the same period last fiscal year and accounted for 26% of revenue compared to 29% in the same period last fiscal year.
Revenue from banking and capital markets declined 25.2% for three months ended December 31, 2023 over the same period last fiscal year and accounted for 14% of revenue compared to 17% in the same period last fiscal year. Revenue from insurance grew 10.4% for the three months ended December 31, 2023 over the same period last fiscal year and accounted for 8% of revenue compared to 7% in the same period last fiscal year. Revenue from TMT declined 5.2% for three months ended December 31, 2023 over the same period last fiscal year and accounted for 23% of revenue compared to 22% in the same period last fiscal year. Revenue from mobility declined 4.1% for the three months ended December 31, 2023 over the same period last fiscal year and accounted for 11% of revenue compared to 10% in the same period last fiscal year.
Revenue from other grew 3.3% for the three months ended December 31, 2023 over the same period last fiscal year and now accounts for 18% of revenue compared to 15% in the same period last fiscal year. Our adjusted free cash flow was £33.6 million for the three months ended December 31, 2023 compared to £37.0 million during the same period last fiscal year. Now cash and cash equivalents at the end of the period remained strong at £198.6 million at December 31, 2023 compared to £164.7 million at June 30, 2023. Capital expenditure for the three months ended December 31, 2023 as a percentage of revenue was 0.8% compared to 2.0% in the same period last fiscal year. As John mentioned, we announced the acquisition of GalaxE today. Consideration for this acquisition totals up to $405 million, primarily in cash with some stock, with $30 million conditional upon future performance.
Transaction is expected to close in early April 2024, subject to the completion of customary closing conditions and approvals, and therefore is not contemplated in our current guidance. Now turning to our outlook for Q3 and full year fiscal 2024. On our last earnings call, we highlighted the number of large deals being progressed and a general strengthening of pipeline. Whilst the large deals pipeline has continued to grow in number and value, they have been slow to progress. In addition, deals that we have [indiscernible] and are proving slow to ramp up into the production phase, given the uncertain macroenvironment, creating hesitancy among clients. This has mainly been the case across all industry verticals. This weakness is most pronounced in payments and in banking and capital markets.
Payments companies are taking a very cautious view on the macroenvironment. This has resulted in slower release of IT budgets, and we are seeing projects being delayed. In banking and capital markets, we're seeing regulatory work take precedence over large transformation work. Thus, in setting the revenue guide, we've set a narrow range for Q3, given where we are in the quarter, but set a wider range around Q4, which reflects the uncertainty we're seeing in pipeline conversion. The top and bottom of the range for Q4 would be 7% and 0.5% sequential for growth on the midpoint for Q3 respectively. Consequently, whilst this uncertainty persists, our business optimization program that John mentioned earlier, will focus on actively managing headcount appropriately in this environment, with a particular focus on our seniority pyramid.
As a result, we expect to take an exceptional charge in H2 associated with headcount reduction. Guidance has been set with these actions underway and reflects the savings we anticipate achieving. With that context, let me now turn to the guidance. Our guidance for Q3 fiscal year 2024 is as follows. Endava expects revenue to be in the range of £174 million to £176 million, representing constant currency revenue decrease of between 12% and 11% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of £0.17 to £0.19 per share. Our guidance for full year fiscal year 2024 is as follows. Endava expects revenue to be in a range of £722 million to £735 million, representing constant currency revenue decrease between 7% and 5% on a year-over-year basis.
Endava expects adjusted diluted EPS to be in a range of £1.09 to £1.22 per share. This above guidance for Q3 fiscal year 2024 and the full fiscal year 2024 assumes exchange rates on January 31, 2024 when exchange rate was 1 British pound to 1.27 US dollars and 1.17 euro. This concludes our prepared comments. Operator, we're now ready to open the line for Q&A.
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