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Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Endava's Third Quarter Fiscal Year 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]
Thank you. Laurence Madsen, Investor Relations Manager, you may begin your conference.
Thank you, operator. Good afternoon, everyone, and welcome to Endava's Third Quarter of Fiscal 2019 Earnings Conference Call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava's Chief Executive Officer; and Mark Thurston, Endava's Chief Financial Officer.
Before we begin a quick reminder to our listeners. Our remarks today include forward-looking statements, including our guidance for Q4, fiscal year 2019 and 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 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 our SEC filings as well as our financial results press release for more detailed description of the risk factors that may affect our results.
Also during the call, we'll present both IFRS and non-IFRS financial measures. The reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which you can find on our Investor Relation website. The link to the replay of this call will also be available there.
With that, I'll turn the call over to John.
Thanks Laurence and thank you all very much for joining us today. Mark and I pleased to be here to provide an update on our business and financial performance for the three months ended March 31st, 2019. Endava had another record quarter for Q3 fiscal year 2019 with revenue of £73.1 million, a strong growth of 24.7% year-on-year from £58.6 million in the same quarter in the prior fiscal year. Our revenue growth rate of constant currency was 23.2% year-on-year.
This revenue growth is 100% organic. Since our acquisition of Velocity Partners was completed at the end of December 2017. Our revenue growth is strong and driven by the expansion of our existing customers and the acquisition of new ones during the quarter. We added 16 new clients during the quarter in all regions and verticals. We ended the quarter with 280 active clients, up from 271 at the end of December 2018 and 249 at the end of same quarter in the prior fiscal year.
We continue to grow our largest client. We now have 67 clients who spent over £1 million on a rolling 12 months period, up 42 a year ago and 60 in the last quarter. Additionally, we continue to grow the number of large account. The number of clients spending over £5 million during the rolling 12 months period ended in March continues to grow strongly to 15 from 6 during the same period last year and 13 at the end of Q2 fiscal year 2019. We continue to expand in all three of our industry verticals and see acceleration in our newer verticals as we remain in the early innings for digital transformation and Endava is well-positioned to accelerate this revolution for our clients.
We continue to make solid progress with our business in North America which grew 33.8% year-on-year 100% organic expanding in every vertical. North America accounted for 27% of revenue compared to 25% in the same quarter last year. On the technology side, we continue to see a pair of macro technology trends namely the move to cloud native architectures, as well as enterprises focusing on secure and streamlined paths to production for their software applications facilitating transformation initiatives. These trends combine to drive a strong interest in DevOps and in particular how to integrate security into DevOps practices. So called DevSecOps.
Based on our project experience, we're developing reusable solutions to help some of our large clients develop capability in this area. In more technical work, the general awareness of and move to micro services and containerization continues to be of interest. Focus now moving to awareness of common difficulties, as well as just the benefits, which we see as a healthy development. Further, the overarching trend of organizations striving to effectively leverage data and analytics has led to many organizations being forced to revisit their understanding and governance of their data.
As a result, we see many chief data officers setting up data ownership and governance frameworks within the business before looking for commercialization opportunities. In line with the desire to extract value from core data assets, organizations are also seeking new ways to better leverage their investments in internal knowledge and recognize the need to move beyond document repositories and search to create context and understanding from information. Building the next generation of knowledge management platforms, organizations can act automation, AI and key contributors to empower larger enterprise teams and enrich business value.
Across these topics and along with many others, we are actively working to build and strengthen the technical communities in the cities where we work for our staff, the local communities and the clients. In the last 12 months, we have hosted 42 technical and digital community events. 13 of which are our high-impact Tech Flow events covering such subjects as quantum computing, experience fuel technologies and the digitization of humanity, applied machine learning and the demystification of DevOps.
Now, today I'd like to highlight how our industry experienced, and offering of tech solutions is helping clients in one of our fastest growing verticals namely investment management. A rich heritage in this industry is solidified over the past five years into a significant part of the Endava business. Revenues from these clients grew on average by over 70% year-on-year over the past three years. Our clients are choosing us for our industry knowledge and our engineering quality. Prominent industry players including Jupiter Asset Management, Man Group and some of the industry's most important counterparties such as TP ICAP recognize our experience in field and the value-add we bring to technology delivery.
Additionally, our partnership with AQR has grown over the last four years. Innovation and excellence in engineering is the cornerstone of the relationship. We're hoping to reduce costs and meet the needs of investors in an increasingly competitive market. We started work originally with Aberdeen Asset Management to build two core platforms that are now adopted as platforms of choice across the merged Aberdeen Standard Investments, with the entire industry battling fee pressure and budgets being continually squeezed. We implemented a cutting-edge cost-saving Azure cloud based architecture and have helped consolidate 120 corporate and investor websites onto one core next-generation platform, giving Aberdeen Standard Investment industry-leading fast to market distribution capabilities.
We also helped realize the power of an organization's data estate. In an age of ever-increasing data volumes using the right information at the right time is a differentiator within the industry. And being able to access all the data within an established organization is a significant advantage. We felt one client achieve this by delivering a central services platform which serves up investor data from disparate data sources, provide a seamless unified investor experience. For quant driven investment management firms, we've been working on streamlining their data states, making insights more accessible to investment strategy decision-makers, whilst also reducing costs by implementing market data repositories, which eliminate the need for multiple purchases of the same market data set.
We're building robust, faster market responses to regulatory change. We recently delivered solutions across the ever-increasing regulatory landscape. Many firms find it difficult to present the right data at the right time to meet new reporting standards. Our solutions have most recently helped a range of clients meet the challenge presented by the likes of PRIIPs and MiFID II regulation and comply with deadlines imposed by regulators. Our partnership with Bain & Company is progressing strongly bringing in two more active projects over the last quarter and successfully driving revenue growth for both businesses. We now have two clients who've registered over £1 million of revenue to Endava in the six months since we announced our partnership.
The client undertaking the digital transformation strategic review that we mentioned on our last earnings call is one of those clients and is now moving into implementation with us. And a fortnight ago I and Endava team had the pleasure of attending the Bain Worldwide Partnership Conference in Hong Kong to brief the Bain Partners on progress and some of our joint success stories. This has resulted in an additional step up of relevant and exciting opportunities to pursue together with Bain & Company. Our client growth has translated into strong employee growth. We ended the quarter with 5,573 employees and 18.6% increase from 4,700 at the same point in the previous fiscal year.
We remain an employer of choice in the cities where we operate. This month we won the Brand of the Year award in Romania. We also became a principal launch partner of the FinTech Alliance, a multi-faceted digital engagement platform that brings the global FinTech ecosystem together to explore, engage and do business. The FinTech alliance will be the first ever community driven platform for the FinTech industry providing a fully inclusive environment to support in tech growth.
And finally an update on Brexit. We continue to review the potential impact of Brexit on Endava. Currently, we are not aware of any clients who are adjusting their spending plans with us as a result of the uncertainties caused by Brexit. Even with all the macro uncertainties, demand for our services remains strong and our pipeline is healthy in all geographies and verticals. We remain optimistic about our ability to deliver sustainable growth in the future.
I'll now pass the call on to Mark Thurston, our CFO who will walk you through our financial results of the quarter and update guidance for the rest of our fiscal year.
Thanks John. Endava's revenue totaled £73.1 million for the three months ended March 31st, 2019 compared to £58.6 million in the same period last year, a 24.7% increase over the same period in the prior year. In constant currency, our revenue growth rate was 23.2%. Our adjusted profit before tax for the three months ended March 31st, 2019 was £13.2 million compared to £8.5 million for the same period last year, a 55.7% year-over-year increased.
Our adjusted profit before tax margin was 18.1% for the three months ended March 31st, 2019 compared to 14.5% for the same period last year. The year-over-year improvement in our adjusted profit before tax margin is mainly due to continued positive pricing environment and an FX tailwind. Adjusted profit before tax is defined as the company's profit for the period adjusted to exclude the impact of share based compensation expense, amortization required intangible assets, realized and unrealized foreign currency exchange gains and losses, initial public offering expenses incurred, Sarbanes-Oxley compliance readiness expenses, fair value movement of contingent consideration, secondary offering expenses incurred and stamp duty on transfer of shares all of which are non-cash other than realized foreign currency exchange gains and losses, initial public offering expenses, Sarbanes-Oxley compliance readiness expenses.
Secondary offering expenses incurred and stamp duty on transfer of shares. Adjusted profit before tax margin is calculated as a percentage of our total revenue. Our adjusted diluted earnings per share was £0.19 for the three months ended March 31st, 2019 calculated on 54.9 million diluted shares as compared to £0.13 for the same period last year calculated on 51.1 million diluted shares, up 46.2% year-over-year. Revenue from our 10 largest clients accounted for 40% of revenue for the three months ended March 31st, 2019, unchanged from last year, but the average spend per client from our Top 10 largest clients increased from £2.3 million to £2.9 million for the three months ended March 31st, 2019.
We continue to grow outside of our Top 10 clients. The number of clients who paid us at least £1 million on a rolling 12-months basis grew to 67 at March 31st, 2019 compared to 42 at March 31st, 2018, and to 60 at December 31st, 2018. These large clients operating all three of our geographical locations, North America, Europe and United Kingdom. In the three months ended March 31st, 2019, North America accounted for 27% of revenue compared to 25% in the same period last year. Europe accounted for 27% of revenue compared to 31% in the same period last year, and the United Kingdom 46% of revenue compared to 44% in the same period last year.
Revenue from North America grew 33.8% for the three months ended March 31st, 2019 over the same quarter of 2018. Comparing the same periods, revenue from Europe grew 10.4% and the United Kingdom 29.5%. We grew in all three of our industry verticals during the quarter. Revenue from Payments and Financial Services grew 22.7% for the three months ended March 31st, 2019 over the same quarter of 2018 and accounted for 53% of revenue compared to 54% in the same period last year.
Revenue from Telecoms Media and Technology grew 17.6% for the three months ended March 31st, 2019 over the same quarter of 2018 and accounted for 28% of revenue compared to 29% in the same period last year. Revenue from other grew 43.6% for the three months ended March 31st, 2019 over the same quarter of 2018 and now accounts for 19% of revenue compared to 17% in the previous fiscal year. This growth was mainly driven by clients in the consumer products goods, services and healthcare sectors.
Our free cash flow was £11.4 million for the three months ended March 31st, 2019 compared to £7.2 million during the same period last year. Our free cash flow is our net cash provided by or used in operating activities plus grants received less net purchases of non current tangible and intangible asset. CapEx for the three months ended March 31st, 2019 as a percentage of revenue was 1.6%, unchanged compared to the same period last year. Our guidance for Q4 for fiscal year 2019 is as follows.
We expect revenues will be in a range of £75 million to £76 million representing constant currency growth of between 21% and 22%. We expect adjusted diluted earnings per share to be in the range of £0.17 to £0.18 per share. Our updated guidance for full fiscal year 2019 is as follows. We expect revenues will be in the range of £286 million to £287 million representing constant currency growth of 31%. We expect adjusted diluted earnings per share to be in the range of £0.73 to £0.74 per share.
This concludes our prepared comments. Operator, we are now ready to open the line for Q&A.
[Operator Instructions]
Our first question comes from the line of Brian Essex from Morgan Stanley. Your line is open.
Hi. This is Jonathan on for Brian. Congratulations in the quarter and thanks for taking my questions. I was wondering if you could describe the growth dynamics in North America particularly as it relates to your vertical exposure.
Sure. So it's probably worth just replaying back that the US has been expanding well for us. I think built on the deal that we did bring Velocity Partners in December 2017 that really established our critical mass in the US. And that alongside the NYSE listing last summer has given us much more visibility in the US. So that's actually led to a really positive response from US customers and the build up in the services that you see driving that organic growth there.
I mean some of the area is actually very much across the board. So both within our payments financial services arena, in the TMT arena and in the other segment as well. And I think one of the areas to call out is the health space, health tech which is much faster than anything in the US than we generally see in the UK and Europe. And so as we've got that greater exposure we're seeing some more activity in that space. But it is right across the board in the US that we're seeing growth.
Got it, that's helpful. And how would you view your relationship going forward with Worldpay given the recent M&A activity in space?
Sure. So the relationship with Worldpay remains very strong continues to grow. In Q3 Worldpay actually grew by 5% over the Q2 number, and that was a 19% year-over-year picture. So it actually took them up to 10% of revenue in Q3 compared to 9.7% in Q2. And actually that's driven by us expanding the areas where we're working with them; we continue to expand what we're doing in the e-commerce space. But we're also expanding into other types of projects that we're working on with them for instance in the omni-channel space. The -- obviously there's the captive and we still continue to expect to sell that to Worldpay as previously disclosed and it remains around 3% of our overall turnover. So nothing any more significant than it has been.
And I think you were touching on the -- their M&A activities as well. So since they made their FIS announcement and the conversations that we've had with the senior leadership at Worldpay has highlighted their expectation that for at least the next 12 months they expect our programs to continue as planned. And in the longer term their expectation is that the Worldpay will be a significant driver of growth within the FIS portfolio and some of the acceleration areas they are looking for things like integration of --they're acquiring platform into FIS products, expansion into other geographies, they call that LatAm, where FIS has particular strengths. And so both of these would be likely to lead to further platform investment for which Endava is well-positioned. So we've remained very positive about the relationship with Worldpay and about the outlook for us.
Our next question comes from the line of Bryan Bergin from Cowen. Your line is open.
Hi, thank you. I wanted to ask, there are 16 new clients. Can you comment whether there was any notable major client opportunities in those new accounts and can give us a sense of the spread of those across industries or regions?
Yes. Sure. So I mean some of those were in the US, so I won't repeat the comments I've already made about expansion in the US. But across the business as a whole, they touched all sectors and all geographies and very much fell into the typical space of what we do in terms of the driving change through new technology, and technology clients where everything from things where we're getting close to the chip to improve performance right through to user experience driven changes, driving changes and improving business models for clients.
It is literally across all sectors and so on. So very difficult to call out trends.
Okay. And then on hiring efforts as it relates your margin. Was the level you added here this quarter is that where you expected it to land and as for any -- you mentioned there be some margin moderation on a sequential basis. And as you think about let's say the next year ahead, are there any particular regions onshore nearshore that you're expecting to ramp your efforts for potentially new office openings?
So in terms of the headcount growth, we sort of did trail that in sort of comments about guidance for the quarter. So you see that our adjusted gross margin came off marginally from Q2 that was in part sort of driven by the utilization coming down somewhat because we had indicated we were operating it slightly elevated levels compared to previous history. And so the growth in headcount is trending to where towards that level of utilization that we see sort of a more normalized level for Endava. I think just to add so the gross margin as well, we also trailed but our major pay round goes through in the 1st of January which it did so that also reduced the margin down.
But it's probably worth pointing out that FX had an impact as well in terms of it sort of mitigated some of that increasing cost benignly from Q2 to Q3. The other question you had about nearshore, onshore mix, shall I pass it, John?
Sure, yes. The areas that we're focusing on I mean we want to double down on the growth that we're getting in the US. So we're looking at expanding and adding a couple of offices in the US over the next six months or so. From a near shore point of view, we are in the next six months or so just really continuing to expand in the countries that we are already in. We are adding some satellite officers in line with the hub-and-spoke strategy that we've articulated previously. And so we'll start to see some of those come on stream over the next couple of quarters as well. But we're not pushing into new countries in the short term.
Our next question comes from the line of Maggie Nolan from William Blair. Your line is open.
Hi, congrats from me as well. I wanted to kind of unpack the strong adjusted PBT margin. Obviously, you saw a big increase year-over-year. Can you kind of disaggregate for us how much of that was the pricing environment that you mentioned and how much of that was foreign currency tailwind?
Sure. So in terms of sort of the sequential movement, so we had a marginal sort of decline at the adjusted gross margin level. It was about 0.5 percentage point. The rate environment remains positive for us on a constant currency basis. So that actually contributed to quarter-on-quarter margin growth, but what then pinned it back was reduced utilization which we trailed for the quarter and we should see some downward movement in terms of utilization going into Q4. And increased cost base because of the annual sort of pay round that went through for our major territories also impacted margin.
But we were helped by the sequential strengthening of GBP against both the US dollar and the EURO. So that gave us say a 0.5 percentage sort of uplift at the gross margin level offsetting some of those headwinds. In terms of then adjusted operating charges or SG&A, we've also trailed at this. We expect this to be an increasing percentage of revenue certainly as we go through this fiscal year as we put in place the public company costs and indeed we did see an uptick of about 0.5 percentage points from Q2 into Q3. So that left or adjusted PBT margin I think that the other sort of factors such as depreciation and net financing came sort of in the rounding. That contribution -- that combination of those two aspects basically the gross margin and the SG&A created a downward movement on our adjusted PBT margin from 18.9% to 18.1%.
Thank you and for my second question in terms of Europe. Can you unpack a little bit more what's going on in that region? What you're seeing in terms of growth opportunities? Do you think the current level that Europe's growing at is kind of where it will sustainably grow for a period of time? Or what are you expecting in terms of the dynamics there? Thank you.
Sure. I mean so the European growth obviously a little bit slower than our other regions. But I would attribute that more to our focus on North America than any macroeconomic dynamic that we're seeing in Europe. And as obviously the next six months is like as I called out we want to double down on what's going on in North America. But as that comes through we have -- we will push more effort back into Europe and comfortable over then see the growth rates pick up again there.
Our next question comes from the line of Bryan Keane from Deutsche Bank. Your line is open.
Hi. Congrats on the solid results. Wanted to ask about the Top 10 clients. I noticed it increased a bit this quarter versus decreasing last quarter. So just trying to figure out the change in the delta there.
Yes. That is right basically what you had going on there is it's been basically stable and the mix between payments and non-payment clients is stable. But actually two of the clients merged which impacted the percentages you sort of noticed. So that merging essentially sort of brought in an additional client ups previously sitting outside the Top 10 into the Top 10 and that's reason solely for the increased -- a proportion of revenues resulting from the Top 10.
Okay, that's helpful. And then when I look at the number of new clients now north of a £1 million, it's up 25 year-to-date. Over the last two years that number grew only at 12. So essentially you're more than double that growth rate. What's causing that change in growth for new clients? Is that Velocity or is that being a public company and now more trust in Endava?
Bryan, it is a bit of both of those things. So Velocity brought in a number of clients that were running at that run rate. And as we lapped the full year they dropped into that £1 million plus category. But also our visibility and our scale is going up. So as we scale as an organization and including the Velocity number, our growth rate was over 40% in last court. So you'd expect to see a good step up which we saw from -- to 60 last quarter and so now we're incrementing a fairly sensible rate as we go forward.
Do you have to increase the amount of sales to go after the opportunity now?
In terms of the sales team, absolutely. We're scaling that as we go pretty much in line with the growth of the business to -- you have to provision the sales force six to nine months ahead of it impacting sales. So that's consistent with the way we've done it historically and we're continuing to do that.
Our next question comes from the line of Ashwin Shirvaikar from Citi. Your line is open.
Hi, John. Hi, Mark Hey, so I'm trying to figure out how we should think of expectations heading into fiscal 2020, given since IPO you've obviously done better than expectations with a higher base of revenues. At the same time, we do have what seems like contracts seem to be ramping faster, but you also seem to have maybe, and I don't want to put words in your mouth but is there a sales bandwidth issue where you're trying to pick between North America and Europe? So can you help us think about a few quarters out including fiscal 2020?
And so as touched on earlier, we are focusing a lot of our sales investment in the US. That's not an exclusion of Europe; it's just that we're doubling down there a little bit more than we are in Europe. So we'd expect to continue to see growth in Europe just not at the same level that we're going for in North America. Was there any other color in terms of numbers that you wanted to add?
Not really. I mean we've stated that sort of growth model around the potential clients generates 20% in revenue growth that we top up with new logos. So we're not going to sort of hint at guidance for next year, we're going to leave that until we choose the full year numbers which will be probably sometime in September and at that stage give guidance.
Got it, got it, I thought I'd try to get a kind of a preview on that but we could leave it for three months later. I do want to kind of go back to, I think John you it was you who had comments on the FinTech Alliance. Is that I mean that those sorts of efforts seem to be potentially non-traditional sales distribution type efforts. Could you comment a little bit on that?
So I mean it's more of a marketing thing than a sales thing. And the FinTech Alliance is something that's been launched in the UK basically to capitalize on all the activity that's going on in FinTech in the UK particularly around London, and provide a forum, a community that could help accelerate that. And we were invited to be one of the four launch partners on that. And I just thought it would be an excellent thing to support and of course give visibility to Endava in our home FinTech community which of course is the core of where the whole business started. So that's why we've supported it and it'll be really good for our profile.
Our next question comes from the line of [Indiscernible] from AtomView Capital. Your line is open.
Hey, John. Hey, Mark. Thanks from for the results. They were great. Thank you. A couple of follow-up questions for me. On the margins, so Q3 was obviously like you said before a bit lower in terms of margin than Q2. You said lower utilization, you increase the wages in January and you also had the SG&A, the higher SG&A due to the public company costs, right. And I remember you said at the previous call that Q3 will be tough but then you should start recouping those higher wages as you go through the year. So does that I mean does that mean that the 18.1% adjusted PBT margin is the new sort of new floor?
I mean you were helped a little bit-- you were helped a little bit by FX but otherwise public costs, higher wages, it seems that now that you increase your rates going forward you should go higher than lower right in terms of PBT.
So I think there's a few things to say about that. So the utilization is still at attenuated sort of levels at the moment, although it's been pegged back in Q3. So we'd expect to lose some percentage basis points on the gross margin as utilization comes down. You're quite right about the pay rise. We tend to recoup it over there the 12 months ahead as we have renewal conversations with clients. So we tend to recruit that margin dilution that we experienced when we put through the pay rises. And I think also that the pricing environment continues to be positive, but we still don't have in place all of our public company costs. So I think SG&A will still continue to run above the levels that we've --we has done historically. So I think it's too early to call about whether we have a new target adjusted PBT margin. I'd say the point that we've performed above that for the last sort of three quarters.
But it was caused by acceleration in a business that ramped up the utilization and in fact flowed through to our adjusted gross margin, but an ongoing longer term medium term basis. It's too early to call that upward revision to that target that we set out at the IPO.
Okay, great, thank you. And the second question is about sort of inorganic growth at the IPO stage you said that let's get comfortable with this Velocity acquisition and then that seems to be now done is growing very nicely. It's integrated. Are you looking at new targets to add to your portfolio into your sort of your business? Should we expect some sort of small or medium-size M&A to aid the organic revenue growth going forward?
So, yes. And thanks for raising that. Yes, M&A is very much part of our thinking and obviously Velocity when we did that just over a year ago on December 17th was a bigger deal than we normally do. And so we took our time making sure that was properly integrated and really working for us. But we are now back to looking and talking in the market about M&A opportunities. Our strategy remains the same. So focused on tuck-in level deals. We'll add capability from a sector or the main point of view, from a geographic or a technology perspective.
And we do have a few conversations going but there's nothing progressed to a point where it's worth calling out at the moment.
End of Q&A
We have no further questions in queue. I'll turn the call back to the presenters for closing remarks.
Thank you and thank you all for joining us on this call. As you'll have picked up, we remain optimistic that our market focus and execution ability is going to continue to enable sustainable growth. And we look forward to speaking with you at our next quarterly call. Thank you.
This concludes today's conference call. You may now disconnect.