Hello, and welcome to the Endava Q1 Fiscal Year 2022 Financial 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]. I would now like to turn the call over to Ms. Laurence Madsen. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to Endava’s first quarter fiscal 2022 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 2022 and for the full fiscal year 2022, and statements regarding our perceived opportunities and anticipated future growth, 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, potential technological advances across the industry, our expectations for future partnerships and other credentials, anticipated client demand for Endava services, our ability to attract and retain employees, our integration of front-end level, 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 or timing predicted or implied by such forward-looking statements and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date and the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. Please refer to the Risk Factors section of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on September 28, 2021, 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 website. A link to the replay of this call will also be available there. With that, I'll turn the call over to John.

Thank you, Laurence. I'd like to start by thanking you all for joining us today. I hope you're staying safe and well. We're pleased to be here to provide an update on our business and financial performance for the three months ended September 30, 2021. At a headline level, we continue to experience very strong demand for our digital services in all of our regions and verticals. While we're very focused on recruiting talented people, we remain in an environment where demand outweighs supply. And therefore, we're having to be selective in the work that we take on. Endava reported revenue of £147.5 million for Q1 of our fiscal year 2022, representing an almost 61% year-on-year increase in constant currency for £95.1 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of £34.8 million, representing a 91% year-on-year increase from £18.2 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. I mentioned on previous calls that we were seeing an increasing flow of new client opportunities which starts small with ideation or proof of concept engagements, and then scale as we move into production and system development. The scaling of these projects has engagements expand, is now driving the growth of the larger clients and the increased spend by these clients. As a result, we ended the quarter with 658 active clients up from 501 at the end of the same period in the prior year, a 31% year-on-year increase. Importantly, we grew the number of larger clients with a total of 93 clients who are paying us in excess…

Thanks, John. Endava’s revenue totaled £147.5 million for three months ended September 30, 2021 compared to £95.1 million in the same period last year, a 55.0% increase over the same period in the prior year. In constant currency, our revenue growth rate was 60.8%. Profit before tax for Q1 fiscal year 2022 was £24.9 million compared to £8.7 million in the same period in the prior year. Our adjusted profit before tax for the three months ended September 30, 2021 was £34.8 million compared to £18.2 million for the same period last year. Our adjusted profit before tax margin was 23.6% for the three months ended September 30, 2021, compared to 19.2% for the same period last year. Adjusted profit before tax, adjusted PBT is defined as the company's profit before tax adjusted to exclude the impact of share-based compensation expense, amortization of acquired intangible assets, and realized and unrealized foreign exchange gains and losses, all which are non-cash items. Adjusted PBT margin is adjusted PBT as a percentage of total revenue. Our adjusted diluted EPS was £0.49 for the three months ended September 30, 2021, calculated on 57.8 million diluted shares as compared to £0.26 for the same period last year, calculated on 56.6 million diluted shares. Revenue from our 10 largest clients accounted for 36% of revenue for the three months ended September 30, 2021, compared to 39% for the same period last year. Additionally, the average spend per client from our 10 largest clients increased from £3.7 million to £5.3 million for the three months ended September 30, 2021, representing a 42.0% year-over-year increase. For the three ended September 30, 2021, North America accounted for 36% of revenue, compared to 29% in the same period last year, Europe accounted for 20% of revenue compared to 25% in…

[Operator Instructions]. Your first question comes from the line of James Faucette with Morgan Stanley.

I want to ask first, if you're seeing any changes around client behavior and decision-making in that current environment, and especially when so many people are facing headcount constraints especially in their IT departments?

James, thanks for that. Client behavior is very much a lot of time driven by the business opportunities and challenges that are staying in the digital space environment. So there's a lot of demand flowing from those business needs and the projects work are emerging from that. Now, demand in the space is far exceeding supply right across the whole business, and so that is of course, driving them to have conversations with organizations like ourselves, who have the skills and capabilities to execute on their business challenges. Now that's what potentially a change in behavior from before but there is definitely higher volumes of that coming through and hitting us.

And then on that point of hiring, et cetera, can you provide an update on your own? Are you still comfortable with the previous maximums of how quickly you can grow your own headcount in a quarter or a year? And can you just kind of give an update of what that looks like and how are you thinking about your current recruitment algorithm, et cetera?

Sure. I mean, the recruiting stuff has always been a challenge and getting the right talented people. It requires successful businesses to build a really good market presence with a career proposition that's going to attract and retain the best. And that is very, very crucial in the current market at the moment. Now things you were touching on, we've always guided that we can do sort of 25% to 30% organic headcount growth as a sensible scaling where the ability to onboard people, deploy them into projects, and make sure they're operating with the quality and the Endava approach, that is going to enable us to deliver effectively to our clients, it’s the constraining factor which sort of caps into that 30%. Now, currently our attrition is actually running very low, actually around the 12% mark over the last 12 months, which is still below the 15% that we target. And that's giving us a little bit of headroom on that 30% max that we can only go for. And it's actually trending down. If we look at our rolling three months attrition, that has been moving down over the last four months. One of the things that happened through the pandemic period, a year ago was actually, we didn't lay off staff. We held on to them. We continue to promote them during that slightly slower growth period. As a result, Endava just became a little bit more senior than we normally are in terms of our grades. And that's also provided a little bit of headroom in terms of being able to expand. So, we run a little bit above the 30%, I think we’re about 34% year-on-year on mark. Yes, that’s part of what has enabled that to happen.

Your next question comes from the line of Bryan Bergin with Cowen.

Just given the magnitude of growth right now, and demand outstripping supply, can you talk about your near considerations for maintaining the high levels of adjusted PBT margin versus reinvesting even more at a higher level to try and support elevated growth for an extended period?

Hi, Bryan. I mean we had a very strong quarter where our adjusted gross margin was just shy of 43%, and that reflects a reasonable level of utilization and stuff. So it hasn't really picked up significantly quarter-on-quarter in a stable environment. We've always talked about high 60s to low 70s, so that the higher end of that sort of range. And then on the pricing environment for us remains good, which sort of supports that gross margin outlook. I think the only comment is around the battle for talent. We are seeing -- we're going to have to face sort of cost pressures, we onboard new people, as you go, our headcount sort of meet the strong demand that we see. So we have to be competitive in the marketplace with our packages and also to keep our people within Endava and developing their career. So we've got an eye on attrition and keeping that in a sensible place. So I think there's definitely cost pressures that we're seeing. It's not going to become immediately apparent how strong they are, because we have our major pay round in January, but there are definite sort of cost pressures there in the sort of near term, but we're confident in the medium term, let’s say over the next 12 months that we will be able to recover those through pricing and discussions with our clients. And then I guess the other component for adjusted PBT margins, SG&A, this quarter, it was a pretty low percentage, about 15%, which is a little bit of delayed spend if you compare it to last quarter. I expect it to pick up in the coming quarter. We are definitely spending more on sales and marketing and also there's some integration activities we have with our most recent M&A, but we're just going back to around a 16.5% 17%. But I think in the medium-term, we will always have that algorithm for us, which is maintaining the gross margin I that sort of 40 plus percent area. And it is leveraging our SG&A and we will get occasional sort of variations in that from quarter-to-quarter but doesn't change the long-term outlook.

And it’s worth just adding to that. Over the last nine months or so, we have been investing in our industry vertical space. So specifically accelerators, propositions to industry segments within the market to strengthen our position in the market, and that is part of what's helping accelerate the demand that we are seeing. But we've been doing that within the framework of the results that we've been delivering.

And then just as you lean into that U.S. opportunity further, should we expect an even more substantial LatAm build out on the operational front? Can you kind of give us a sense on how you're thinking about the footprint expansion in the LatAm region over kind of 2022?

So the whole Americas is expanding really well for us. And if you actually looked at what we did in the U.S. this last quarter, it was actually at 107% in constant currency terms that we expanded in the U.S., and that is very, very strongly linked to what we're doing in LatAm, having all the percentages. But the LatAm acceleration is significantly faster than we're seeing in Central Europe at the moment as we're scaling for that growth that we're seeing in the U.S. Do you have another, Mark? We will take that out in a moment.

Yes. I mean, the LatAm growth was very strong. If you look at it year-on-year, very strong, really sort of embedded the approach within the assured delivery of our North American revenues, which has proven that sort of accelerator there. So, we're really encouraged by the growth that we're seeing there.

We'll pull that out and drop it in later than the call.

Your next question comes from the line of Jamie Friedman with Susquehanna.

So, John, in your prepared remarks, you talked a bit about the Metaverse and I couldn't help, but ask for some use cases. I know you talked about 3D, but can you share some other use cases that you're seeing potential demand for from clients?

Yes, at the moment it is much more in the space of augmented reality, virtual reality and mixed reality type solutions that we're putting together with clients. So for instance, we're helping a client in the industrial space, a large German client who is using augmented reality to actually review large machinery things like turbines and so on, so an engineer can remotely send the drone and review equipment the other side of the world using a headset to view what's happening through the drone, as an example. So -- and these sorts of applications are starting to appear quite a lot sort of IoT related in different segments. And a lot of it is at the more experimental and of testing the boundaries of what is going to be profitable with clients, that ideation type stuff that we do with clients. And then a few of them are scaling. Training is another area where actually, with the working from home environments and so on, we've been able to set out training situations, once again with real equipment that actually enables someone who is unable to travel to be trained on how to do maintenance and so on and how to guide local maintenance in remote factories and so on.

And then Mark, just as we're building out for quarters for the year, you gave the Q2 in the fiscal year. But how much M&A contribution is there? And then is there a particular time at this point where it fades, like assuming you don't do more, which you may, but absent that, did accounts get different in the second half?

Yes, so there is an M&A contribution in our constant currency in FQ1, 61%, about 15% of that is a contribution from M&A, and then implied in the guide for Q2 where we are guiding at a 44% overall, but actually it's a 49% constant currency. So it’s a contribution of 39%. So you've got -- in organics, you've got about 10%. For the full year the guide at the top end, which is 41%, we've got an M&A contribution of 7%, leading the organic elements at 34%. So there's a saving of M&A contribution basically because of the acquisitions that we did towards the tail end of Q3 FY ‘20 with FIVE and Levvel. So they run the full sort of 12 month cycle. So when you get to Q4 in the guide, will be totally sort of organic. And that will be certainly above the sort of 20%.

So I just wanted to sort of answer that question that we had earlier from, Bryan, about the attrition in LatAm headcount. So year-on-year it’s been 61%. So you have roughly about 1,400 people in LatAm.

Your next question comes from line of Maggie Nolan with William Blair.

Just a follow-up on that. Is that delivery mix is a big factor in driving your rev per delivery head up over time? Or could you get a little bit more granular in what's been driving that up particularly the strength this quarter and then how sustainable you feel about this?

Yes. I mean, we’ve been making very good progress on the revenue per heads, certainly actually around just over £69,000, and you can see that sort of in the headcount growth year-on-year of 37%, and that we're delivering constant currency revenue growth for 61%. So part of that is coming from increased utilization probably about 8% or so. There's a slight shift in our on-shore, near-shore mix. So with the acquisition of Levvel and FIVE, that proportion has increased. So instead of being around sort of 6%, 8%, that contributes an element of growth there at around 6%. And then, the actual rate in terms of the services that we can deliver on a man-day rate basis contributes about 9% to take sort of 61%. So the revenue per head metric is again -- remain at this higher level, because the mix of on-shore, near-shore isn’t going to change significantly. And basically we are at I think the top end of our utilization, which is just the low sort of 70s. The only thing that is going to then potentially drive it higher will be the man-day rate, which is again how we recover that pressure for the cost base over the balance of the year. But I think the revenue per head is going to remain pretty stable, but probably a little bit of upside given the pricing environment.

It's probably worth just noting that although we've increased utilization against same quarter last year, it was actually very low last year at 67%. So we moved it up to 71%. That's what drove the 8% element of the utilization component going into that revenue per head. So we are keeping a level that's sustainable for the high growth that we experience, as you know we're running utilization about lower than many of the larger peers in the business and that is to enable our growth rates to continue.

The other thing I wanted to ask about -- the other segment is growing quite well, and it's becoming a more sizable piece of your business. So any granularity on particular sub-verticals that are really driving that, particular clients or projects, anything of that nature we should be keeping our eye on as a future growth driver?

It’s well -- it obviously is contributing an element to that, particularly sort of North America. So there's a good contribution from Levvel and FIVE as part of that growth. But actually, we're seeing strong growth in mobility, which we sort of talked about on previous calls and also in health tech space as well as retail CPG. So I think the mobility thing is -- we think that is really driving the growth this quarter followed by health tech space. So it's those sort of three verticals that we've talked about previously. And I think certainly sort of Levvel and FIVE have given us as acceleration in that space.

Your next question comes from the line of Mayank Tandon with Needham.

Congrats, John and Mark on a strong quarter. I wanted to go back to John's comment around the 25% to 30% headcount growth. So if we think about that as the benchmark in terms of headcount and given the pricing leverage, there may be some more room for utilization, can we then assume that the embedded organic growth is probably going to run somewhere closer to what Mark you said, you'll finish fiscal ‘22 more like a medium term outlook. Just curious if that is a sustainable level as you look at the demand climate today?

Yes. So the exit rates we were sort of on the previous question talking about which is a clean organic figure, we'll certainly be in the 20s. We will certainly be in this sort of low to mid 20. And we don't really see that changing. We think the demand is strong at this stage in the sort of cycle, because we've got a major sort of pay round to go through. And then that influences the conversations we have with clients. So to a certain extent we're being a little bit cautious in that growth outlook into next year, but I've been cautious in the sort of near term. My confidence in our ability to pass on those -- the competition for talent and the packages that it requires to secure people and keep attrition rates should be at sensible levels. I'm confident in our ability to recover that through price increases.

Certainly it's true that the 25% to 30% of the headcount growth range, historically we've also achieved price increases and so on. So the revenue growth has trended above the headcount growth in the past. And we don't see any reason why we wouldn't be able to achieve that going forward.

That's very helpful. Then I wanted to ask just about the verticals and service lines, obviously doing really well across your portfolio today. Any areas that you want to be in that you would call out as maybe target areas, whether it's organic build out or through M&A that you would look to maybe expand into both from a vertical standpoint and from a service line perspective?

So at the moment, we're focusing on the areas that we've highlighted to you guys in the past, in essence, the insurance payments and the banking and capital markets, the fintech areas, if you like, in those financial services, arenas, the TMT space, which is coming through strongly. And then within other, we've stuck with health, CPG and retail and the mobility space with a little bit of activity coming through, in what we call private equity. It's a cross-industry area, but it's driven by the relationships we have with private equity firms. Now that is turning up 1 or 2 other areas that are looking at interest and maybe in a year or 2 through M&A or otherwise through some of these client relationships that are coming through our private equity practice, we might see ourselves moving into that. So energy is one of those that we've got operating at a small level at the moment. There's also interestingly some mining activity where digital is even hitting a business like that now.

Your next question comes from the line of Moshe Katri with Wedbush Securities.

Okay. Thanks. Let me add my congrats on very strong results. I have 2 here, 2 questions. First, it's kind of exciting to see the growth in the U.S. and obviously, this is a relatively new market for endeavor. Any specific differences based on what you've seen so far in terms of your ongoing interactions with the U.S.-based clients or enterprise customers that you're seeing, are you planning to run this a bit differently versus what you've done in the past? And then how are the specific verticals do you think will be probably the leading in terms of growth down the road for Endava here? That's my first question.

So yes, the U.S. has been very strong. I mean, we've always run the business with a mindset that says you need local people in each market, who are going to make things happen. And that is as true in our client markets, U.S., Europe and so on. It's also true in the way in which we run our delivery operations with Romanians in Romania, Argentinians in Argentina and so on running things. So that's pretty fundamental to having a team who understand what's happening in the local market and respond. In the U.S., we are seeing a lot more strength in the nonfinancial services space. And that is -- that's very good news for us. It helps with our diversification strategy, not just geographically, but pushing into other sectors. So we're seeing strength in the mobility space. We're seeing demand coming through strongly in retail. Technology is one of the big strengths that we see in the U.S., big West Coast clients who are using our services to build out critical products such as the web conferencing or work from home type platforms that we're all familiar with. We work on some of the big names there. So -- and that is different to what we see in, say, Europe around technology. Health is also a space where the U.S. market is much more innovative and fast-moving than we see in Europe and so we've been able to tap into that. It's early days for us at the moment because we haven't had that history of a lot of activity and health coming out of Europe, but we're getting real traction over here in the U.S. and seeing that move forward.

And then just a follow-up. Given the extensive kind of knowledge and work that you've done in fintech and payments and dealing with, with some of the players, including the neo banks, any thoughts on kind of building your own platform and trying to kind of leverage that in terms of infrastructure and kind of being able to market that to some of your fintech kind of customers?

Yes, thanks for that question. It's one of the areas where we've been clear that we're not going to go down the route of building a product. There are a number of reasons for that. One of the key ones being you end up, to some extent, competing with your own clients because you harvest knowhow that you build in an industry by working with them and so we've adopted the view that we won't build product, and we won't, therefore, cause any sensitivities with the client base that we work with. The one thing that we do is we build what we call accelerators, which are components that are fairly standard, frequently used across the different spaces in which we operate. And that can help accelerate the projects that we're working on with clients and clients are very, very positive about those accelerators where we deliver them.

[Operator Instructions] Your next question comes from the line of Bryan Keane with Deutsche Bank.

I want to ask about open banking, the demand there. Is there a material ramping of payment volume there yet or is it still in the development phase?

Well, that's a pretty big question. Open banking is well beyond the development phase and is a huge facilitator for alternative payment types. It's stronger in Europe at the moment, but we're starting to see it open up in the U.S. as well and it's driving a lot of activity. There's a lot of hugely value-added services that can be built on the open banking platforms. And we're definitely seeing that move very strongly in systems that are in use in the market with millions of customers on them.

Got it. And the payment volume inside there, especially in account-to-account has been ramping pretty significantly?

Yes, very much so.

And then the only other question I want to ask on was M&A, just further appetite, maybe what you're looking at potentially and valuations willing to fit?

Yes. So M&A is one of the areas that we keep a close eye on. We're seeing many opportunities, high single digits per week of opportunities get right across our desks, but few of them have the right DNA. That DNA been similar enough to Endava for us to integrate the ideation to production, agile approach to doing business, utilizing next gen technology. We're always looking for that. So we remain very choosy on where we engage. And the strategy remains the same, which is to use M&A to help with our diversification strategy as in bringing geographic balancing and pushes into geographic areas that we're looking to expand faster, sector acceleration so some of those long wave change opportunities that we see in different industries where an M&A opportunity is going to bring acceleration in the right spaces for that, we'll look very closely at it. And occasionally, there's an organization that brings some technology that we've not been able to develop or nurture ourselves. It's actually very rare. Often, some deals will bring elements of all three. So we're continuing to look very hard and have conversations, nothing that I can report on at the moment but if anything material happens, of course, we'll report to market.

How about valuations, John? Have they changed much given the market trend?

Yes. So, I would say valuations have moved up a little bit over the last 12 months in particular. There's a little bit of extra competition. I think the market is beginning to understand the Endava business model and organizations that operate that way are becoming more attracted to the general ones in the market and so that's pushed valuations up maybe around 20% over the last 12 months. And that makes it more important for us to choose wisely which businesses we're going to buy and integrate.

At this time, there are no further questions. I would like to turn the call back over to Mr. John Cotterell for closing remarks.

Well, thank you all for joining us today. As you'll have noted from the call, demand for our services remains very strong. We're seeing good demand across all of our verticals and geographies. And so we remain very positive about our business position. Mark and I look forward to speaking to you early next year on our next earnings call. Thank you all.

This concludes today's conference. You may now disconnect.