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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Tessa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Endava Earnings Release First Quarter Fiscal Year 2019 Conference Call [Operator Instructions].
Ms. Laurence Madsen, Manager of Investor Relations, you may begin your conference.
Thank you. Good afternoon everyone, and welcome to Endava's first quarter earning 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 '19 and for the full fiscal year 2019 and other forward-looking statements. These statements are subject to risk and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance.
Please note that these forward-looking statements made during this conference call speak only as of today's date and the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. Please refer to our SEC filings as well as our financial results press release for a more detailed description of the risk factors that may affect our results.
Also during the call we will 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 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 very much, everyone, for joining us on our Q1 fiscal year '19 earnings call. We're pleased with our results for the quarter with revenue of £66.4 million, up 39.7% year-on-year from £47.5 million in the same quarter in the previous fiscal year.
Our revenue growth rate at constant currency was 39.8%. We ended the quarter with 262 active clients compared to 258 at the end of June 2018 and 192 in the same quarter in the previous fiscal year. We define active clients as those who paid us for services over the preceding 12 months period.
Additionally, during the quarter, we recognized revenue from 15 new logos in all three regions and across all verticals. The number of our largest clients who spent greater than £1 million per annum with us grew over 40% from 37% in the first quarter of fiscal year 2018 to 52 in the first quarter of fiscal year 2019. And of these, the number spending over £5 million doubled from five to ten during the same period.
On a rolling 12 months basis, revenue from clients who spent greater than £1 million per annum with us increased 34% year-over-year in the first quarter of fiscal year '19 while revenue from those who spent over £5 million increased 58% in the same period. This is in line with our focus on growing our large account relationships, built on the quality of our services and the impact that technology can have on their business models.
We continue to expand in all three of our industry verticals. Our payment and financial services vertical grew 24% year-over-year. Worldpay continues to grow and remains our largest client. Revenue from Worldpay accounted for 9.8% of revenue at the end of September 2018 compared to 12.1% in the same quarter of the previous fiscal year and 9.4% in the previous quarter.
We continue to diversify our geographic and sector revenue mix; we're a good way towards completing the integration of Velocity Partners. As I mentioned in our last earnings call, we completed the integration of the sales team and this quarter, our combined team signed up five new logos in North America, mainly in the TMT sector.
North America accounted for 27% of our revenue at the end of Q1 fiscal year 2019, up from 15% in the same quarter last year and continues to expand strongly. Expansion in our other sectors was strong, growing to 20% of our revenue in quarter one fiscal year 2019, up from 11% in the equivalent period last year. The consumer goods industry was one of the strong areas of growth and is facing significant challenges.
Some of the key areas relevant to the services Endava provides include digitization to drive differentiation, customer insights, and buying behavior, as well as changing consumer demands and engagement. One of our recent projects in this vertical has been in the US where Endava partnered with Citizen Watch to develop the new My Citizen app that will enhance the overall ownership experience and help streamline the timepiece registration process by giving users access to optical character recognition technology using their phone's camera.
User can now recognize their watch model using front and back of the watch scans. With this, Citizen gains valuable insight into their customers, while watch owners now quickly and easily complete warranty detail, build their watch collection dashboard and gain access to user guides, video, and other targeted content.
With this information saved and managed within the My Citizen app, users will house all details in one location and receive notifications for new product releases and quick tap access to setting instructions when daylight savings or times zone changes have been detected.
Endava is also working with a global CPG company to build a new total reward system that will be launched for their employees in early 2019. This brand-new platform replaces their legacy system and will enable both staff and managers globally see their total rewards, enabling the company to manage employee compensation much more efficiently.
Endava has also won a partnership with a global consumer goods company initially as their European mobile applications service provider. As you know, on our last earnings call, we announced our partnership with Bain & Company, bringing together Bain's management consulting services and Endava's next generation technology services.
This partnership has been accelerated by our formal announcement, including a significant win starting up a digital transformation program for a Fortune 500 company, and the joint delivery of an analytics tool that help CPG clients to improve their category value creation discussions with retailers.
On the technology side, Endava is seeing an increase in the demand for strategic assistance in bringing DevOps culture and ways of working in traditional enterprise settings such as financial services, logistics, and other sectors. Broadly speaking, the demand is for expertise in the design and realization of continuous delivery pipelines, as well as the enabling techniques and changes that teams need to embrace and build a DevOps culture. Moving to a DevOps culture greatly accelerates agility within organizations.
Going beyond simple continuous integration systems, the whole scale continuous delivery approaches allows enterprises to embrace automation, take advantage of large-scale test automation efforts, reduce service downtime and increase the frequency of software releases.
Endava is well placed to support this demand by bringing cross domain expertise to demanding, high volume enterprise clients. And Endava client in the global logistics space wanted to dramatically improve the availability and consistency of their online portal, a business critical component of their overall customer experience and interaction model.
To achieve this, Endava helps them embrace Agile and DevOps ways of working, gaining leverage through the provisioning of a continuous delivery pipeline. As a result, uptime improved dramatically and releases, which previously took months to plan and execute, were now deployable in minutes, enabling the clients become much more responsive to their market.
We ended the quarter with 5,182 employees, a 32% increase compared to the same quarter in the previous fiscal year. We increased our average operational employees by 268 compared to the previous quarter for a total of 4,608 people. Our average operational headcount increased 30% year-over-year.
During the quarter, we moved to a new and much larger office in New York City, where the majority of our U.S. based sales team is located. And finally, with Brexit drawing closer, we've reviewed any potential impact across the business. Currently, we have not identified any clients who are adjusting their spending plans with us as a result of Brexit.
I will now pass the call on to Mark Thurston, our CFO, who will walk you through our financial results.
Thanks, John. Here are some highlights for the most recent quarter. Endava's revenue totaled £66.4 million for the three months ended September 30, 2018, compared to £47.5 million in the same period last year, a 39.7% increase over the same period in the prior year. In constant currency, our revenue growth rate was 39.8%. Our adjusted gross profit was £26.8 million for the three months ended September 30, 2018, compared to £18.4 million in the same period last year, a 46.0% increase over the same period in the prior year.
Our adjusted gross profit margin was 40.4% for the quarter, up from 38.6% for the same period last year. The year-over-year improvement was mainly due to continued improvements in pricing and strong utilization. Adjusted gross profit is our reported gross profit, excluding allocated cost of sales and the impact of share-based compensation. Adjusted gross profit margin is calculated as a percentage of our total revenue.
Our adjusted profit before tax for the three months ended September 30, 2018 was £11.7 million compared to £7.8 million for the same period last year, a 49.4% year-over-year increase. Our adjusted profit before tax margin was 17.6% for the three months ended September 30, 2018, compared to 16.4% for the same period last year.
The year-over-year improvement in our adjusted profit before tax margin is mainly the improved adjusted gross margin offset by increased spending on SG&A due to the Velocity Partners integration and public company running costs.
Adjusted PBT is defined as our profit before taxes, adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, realized and unrealized foreign currency exchange gains and losses, fair value movements on contingent consideration, and initial public offering expenses incurred, all of which are non-cash, other than realized foreign currency exchange gains and losses and initial public offering expenses. Adjusted PBT margin is calculated as a percentage of our total revenue.
Our adjusted diluted EPS was £0.17 for the three months ended September 30, 2018 calculated on 53.8 million diluted shares as compared to £0.13 pence for the same period last year calculated on 49.2 million diluted shares, up 30.8% year-over-year.
We are growing with our largest clients. Revenue from our 10 largest clients decreased to 39% of revenue for the three months ended September 30, 2018 from 46% of revenue for the same period last year, but the average spend per client from our 10 largest clients increased from £2.2 million to £2.6 million.
We are also growing outside of our top 10 clients. The number of clients who paid us at least £1 million on a rolling 12 month basis grew to 52 at September 30, 2018, compared to 37 at September 30, 2017 and to 46 in June 30, 2018. These large clients operate in all three of our geographical locations; North America, Europe, and UK.
We continue to diversify our geographic mix. In the three months ended September 30, 2018, North America accounted for 27% of revenue compared to 15% in the same period last year. Europe accounted for 29% of revenue compared to 37% in the same period last year and the UK for 44% of revenue compared to 48% in the same period last year.
Revenue from North America grew 156% for the three months ended September 30, 2018 over the same quarter of 2017 with Velocity Partners making a significant contribution.
Comparing the same periods, revenue from Europe grew 7% and the UK 30%. We grew in all three of our industry verticals during the quarter. Revenue from payments and financial services grew 24% for the three months ended September 30, 2018 over the same quarter of 2017 and accounted for 53% of revenue compared to 60% in the same period last year.
Revenue from TMT grew 32% for the three months ended September 30, 2018 over the same quarter of 2017 and accounted for 27% of revenue compared to 29% in the same period last year. Revenue from other grew 139% for the three months period ended September 30, 2018 over the same quarter of 2017 and now accounts for 20% of revenue compared to 11% in the previous fiscal year.
Our free cash flow was £0.3 million for the three months ended September 30, 2018, compared to £2.2 million during the same period last year. Free cash flow was impacted by exceptional cash outflows associated with our IPO and an increase in working capital arising from the timing of receipts from some of our larger clients.
In addition, we did not receive payment for the research and developments from the UK tax authorities in this quarter as we did in the comparable period. Our free cash flow is our net cash provided by or used in operating activities, plus grants received, less purchases of non-current tangible and intangible assets.
CapEx for the three months ended September 30, 2018 as a percentage of revenue was 2.9% down from 3.4% in the same period last year. Our IFRS result for the three months to September 30 reflects a fair value adjustment to contingent consideration of £5.8 million in relation to the Velocity Partners acquisition, which is shown as a charge in net finance expense.
The contingent consideration was recognized on acquisition as a financial liability, but we settled on IPO date by equity shares. The equity shares were measured using the share price at the IPO, which was higher than the original estimated share price used to record the financial liability at the date of acquisition. The fair value adjustment is excluded as part of the adjusted profit before tax financial measure. The financial liability was fully settled and the other reserves in the balance sheet was increased by the equity shares to be issued.
Our guidance for Q2 fiscal 2019 is as follows. We expect revenues will be in the range of £67.0 million to £67.5 million, representing constant currency growth of between 33% and 34%. We expect diluted adjusted EPS to be in the range of £0.15 to £0.16 per share. Our guidance for the full fiscal year 2019 is as follows. We expect revenues will be in the range of £275 million to £278 million, representing constant currency growth of between 25% and 26%. We expect diluted adjusted EPS to be in the range of £0.64 to £0.66 per share.
This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.
Thank you. [Operator Instructions] Your first question comes from the line of Maggie Nolan from William Blair. Please go ahead.
Hi, guys. I am hoping you can give us a little more information on the five new logos that you signed in North America and whether any of these has potential to become meaningful customers, what kind of work you're doing and why you think you won the contracts. Any additional information you can share.
Hi, Maggie, thanks for that. Yes, four out of the five new logos we signed in North America are in the TMT segment and the work is across a whole bundle of different areas across Endava. I haven't actually got the breakdown in front of me and I might come back to it as to what are the specific projects that we've been undertaking for them.
All right, that's fine. And then, turning our attention to adjusted PBT, you had a strong quarter in terms of the margin there. I know that that's a metric that you are looking to expand over the coming years. Can you give us an update on the expectation for adjusted PBT margin for the full fiscal year and what level of expansion you expect to see?
So you're right. We did have a good level of adjusted PBT. So we were at 17.6% and we have guided over the medium term for 17%, but the quarter was very strong on adjusted gross margin through high utilization. We see that coming off somewhat as we go forward through the year and especially need to be cognizant of our main pay rounds taking place with effect from the 1st of January. So I would view the quarter as being abnormally high, but on a sort of staging points on an annual basis that moving towards that 17% medium term target.
Understood. Thank you, and congrats on a good quarter and guide.
Thank you.
Thanks, Maggie.
Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead.
Hi, guys, congrats on the healthy results here. Just wanted to ask, on that guidance, is there a way to think about the tax rate expected and maybe share count for fiscal year 2019?
Yeah. So the tax rate -- adjusted tax rate which we're focusing on for the quarter was 19.4%. I would guide that we will be between sort of 19% and 20% which is in line with what we've guided previously. In terms of the share counts, the current share count is 53.8 million for the quarter. It will move up in Q2 by circa about 1 million as we get the full dilutionary impact of the IPO coming through and also the contingent consideration shares related to the Velocity Partners.
Okay, helpful. And then on headcount, obviously strong headcount growth. Can you talk a little bit about expectations for headcount growth this year? And, in particular, if you look at your headcount, it's coming mostly from Central Europe and -- yeah, from Central Europe and Latin America, not so much in Western Europe and North America. Is that the right way to think about headcount as it grows -- growing in those areas versus Western Europe and North America as it goes forward?
So our headcount growth, I think, as we touched on last quarter, had fallen a little bit behind our revenue growth, pushing our attrition up a little -- not attrition -- our utilization up a little bit. And one of the things that's happened this quarter is that we've caught up a little bit on the headcount growth and we see that trend continuing.
The mixture between on the issue of delivery centers and our onshore people, we expect to maintain broadly. And if you look at the mix between Latin America and Central Europe, that's also been broadly maintained. So we're seeing all parts of the business growing pretty much instead.
Okay. And then just final question, just thinking about overall IT spend and maybe discretionary spend going into the fourth quarter, it sounds pretty healthy with no signs of weakness whatsoever, but could you just maybe talk about broader implications for IT spend as you talk to clients heading into our fourth calendar year quarter obviously and what people are saying?
Yeah. So the conversations we're having with clients remain very strong, so not forgetting we operate within a sub-segment of the market, which is around next-gen technologies and digital and automation. So we continue to see new opportunities, new projects, new areas of business changes that we can ideate and work on with clients. And if we look forward, we see the mixture of our contracted and committed spend with clients in the pipeline, that's coming through on top of that, being a consistent mix with the guidance that we've given.
Okay, helpful. Thanks for taking the questions.
Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead.
Hi, good morning and thank you for taking the question. I was wondering if maybe you could expand a little bit on the Worldpay relationship. I mean, that still remains a meaningful customer, which is nice to see that growing. Considering the consolidation we've seen on that end, is your relationship still with legacy Worldpay or have you started to see signs that they might be looking at utilizing your services throughout the broader consolidated company? Maybe if we can just get a little bit more color on how that relationship is progressing.
Sure. So the relationship with Worldpay remains strong and we're building much more senior relationships now with the guys in Cincinnati and so on as part of that. As I touched on earlier, the Worldpay proportion of our revenues grew from 9.4% last quarter to 9.8% this quarter.
So that was a 13% quarter-over-quarter growth. Most of that came in the core part of our relationship with them rather than in the captive relationship that we have with them. So that remains positive and strong. We have a few conversations going with them in the US, but we expect it to take a quarter or two perhaps to develop and see how those will move going forward, but the context, it remains very positive in terms of our relationship with them.
Got it. That's great to hear. And maybe to follow-up, do you have a contribution from Velocity Partners in the quarter? I think, it was £7.8 million last quarter and the new deals that you won in the US, were those Velocity deals or were they legacy Endava sales force-driven deals?
So we've integrated our sales teams as I mentioned last quarter between the Velocity and the Endava guys. So it gets more and more difficult for us to separate out their specific revenues. If you look at the five deals that we did in the US and you apply them by sales person as to which sales force they came from, four out of the five were Velocity Partners sales people and one was out of the Endava team. So the Velocity guys are fitting in well and driving growth. That doesn't reflect the reflective growth between the ex-VP client base and the Endava client base which is -- well, Mark, perhaps you could unpack a little bit on that.
Yeah. So, I mean, we're not going to pull out the figures for you on Velocity, but you can take the Q4 exit run rate. You could think about the growth that John has talked about and you can get to our underlying constant currency organic growth from that.
Yeah. I think more concerned or more interested in the impact that Velocity is having on your penetration of the US market. And I guess to that end, I mean, can we assume that four out of five would be delivered out of Latin America or would these be all Latin American deals? What's the mix on the delivery side?
No, it's not a direct. All of those four go to LatAm and the other one doesn't. So it is mixing up more than that now. We're starting to see cross service of clients from Endava, ex-Endava centers into North American clients as well as the LatAm centers building up. And you can see that in the way the headcounts are expanding across LatAm as well as the rest of Endava.
Great. Okay, and very helpful. Thank you very much and congratulations on the results. Good quarter.
Thank you, Brian.
Thank you.
[Operator Instructions] Your next question comes from the line of Bryan Bergin from Cowen. Please go ahead.
Hey, guys, nice job. Just one for me. I wanted to ask about the competitive environment for talent in Central America. Are you guys seeing any increased competition from any of the large offshore vendors?
Most of the markets in Latin America remain very similar to what we experienced in Central Europe. Our ability to establish ourselves as an attractive destination to work and attractive brand through the projects that we do, through the way which we develop our people and so on is having the same impact in Latin America as it has in Central Europe.
The one difference that is visible to us is the times to recruit are generally slightly lower in Latin America than in Central Europe, i.e., once you make someone an offer, they onboard more quickly in Latin America. But apart from that we see great similarities.
Thank you.
Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead.
Thanks. I guess one question I had was, as the Velocity Partners acquisition becomes sort of run rate for you guys in inorganic terms, are you looking to invest inorganically further in the US or North America?
So we continue to keep an eye out for potential good inorganic opportunities and North America would be one of the areas where we pay great attention to, but we don't have anything lined up or particular pipeline that's developed that we pull out at the moment. So it's just one of the things that we'll keep looking at.
Got it. And then the other question I had was with regards to the new clients you signed up, a lot of them in TMT. Is there a forward view in mind with regards to how you prefer to have that distribution of verticals down the road. Are you actively looking to lower the percentage contribution from payments and financial services or is this just kind of something that happened that you just happen to design for TMT clients?
So the thing that drives us in this space, Ashwin, is those technology waves and how they are hitting the various industries and clearly payments has been a huge technology wave that we've ridden over the last five to seven years. And one of the things we're actively looking at is where are those waves hitting other industries.
And I called out CPG in the script earlier as being one of the areas where we're seeing great acceleration, we've seen a number of new clients coming onboard in that space over the last 12 months. And so, yes, we are actively looking to see other sectors where our next-gen technology and disruptive approach can make a real impact on those sectors and to establish a position and then ride the waves of change through.
Got it. Understood. Thank you. See you next week.
Thank you.
Your next question comes from the line of Charlie Brennan from Credit Suisse. Please go ahead.
Good morning. Congratulations on the results and thanks for taking the question. I just wanted to come back on the margin performance. I think, in your prepared remarks, you called out favorable pricing in the quarter. We're not hearing many companies talking about decent pricing at the moment. Can you talk us through the dynamics behind that and how you're getting such good pricing?
Hi, Charlie. Yes, we are seeing pricing holding up pretty well. I mean, margin is also a function of utilization, which has remained high as I sort of indicated previous quarter. But we aren't seeing any sort of weakness in terms of the pricing that we can command from clients, because they see the value that we deliver. We are getting a little bit of help from our exposure to LatAm specifically sort of Argentina with the devaluation of the currency, but the main sort of drivers is pricing and utilization.
I think it's also true to say that the new customers who are coming through with high visible impact, the technologies we're working on with them and how we're winning them as a result of that, you're seeing better pricing on the new customers coming through. So that's helping to lift the overall pricing picture.
And just to be clear, when you're talking about better pricing, does that mean that pricing is on a like-for-like basis is up year-on-year or is pricing just better than you expected to achieve?
It's up year-on-year. We've seen a pretty good momentum through our fiscal 2018 and it's continuing actually into the current year. I mean, we are in uncertain times at the moment, but our pricing is holding up well.
Great. Thank you.
Thanks, Charlie.
There are no further questions at this time. I'll turn the call back over to management for closing remarks.
So thank you everyone for joining us on the call and we look forward to speaking with you on next quarter's call in the New Year. Thank you.
This concludes today's conference call. You may now disconnect.