Endava plc (DAVA) Earnings Call Transcript
September 10, 2020
Earnings Call Speaker Segments
Good morning, everyone, and welcome to our next session. I'm Ashwin Shirvaikar. I'm Citi's payments processors and IT services analyst. And next up, we have Endava. And from Endava, it's my pleasure to introduce John Cotterell, who is the CEO and founder. John, welcome. Thank you for doing this for us. One quick note on the logistical front, if you want to ask questions at any time. Just e-mail me the questions. You'll see a couple of e-mails at the bottom of your screen. And I'll just incorporate the questions in our flow. It's -- in case you don't see it, it's ashwin.shirvaikar@citi.com. Same e-mail used for 20-some years. And it's on all my records, so should be straightforward.
Let me -- let's start off -- lots to get to here. John, let's maybe -- because there are always a few investors in the room that are -- that can be relatively new to the name, so maybe let's start with a setup question, maybe 2, 3 key points. What differentiates Endava in a crowded IT services market?
Sure. Thanks, Ashwin. So Endava is a next-gen technology company. We're all about accelerating disruption by delivering rapid, technology-fueled evolution to enterprises. So from ideation to production, we use our engineering expertise to deliver enterprise platforms that are capable of handling millions of transactions a day. So we're all about looking for how technology can create use cases and business models that are going to be transformative for our clients' businesses. We don't take on legacy work. So the IT services market might be crowded, but there are very few pure-play and digital-focused companies like us around. And while I'm speaking, I should probably just highlight that as we announced last night, we have our earnings call for our full year to the end of June coming out on Tuesday morning before the market opens. So there are going to be some elements that I'm going to need to skirt around to avoid leading the market ahead of that call.
Yes. No, thank you for mentioning that. Looking forward to those earnings. Let's talk maybe about demand, always a good place to start. And I know Endava has historically had a very specific way of going to market, a specific way of training its salespeople, bringing them up, making them productive. What changes in the current environment, sort of post-COVID -- or during COVID environment? How has that changed?
Well, so -- I mean the pandemic has forced clients to review their priorities, think about where they need to invest. And one of the effects of that is it has placed the digital space, transformation space at the forefront of what they need to address in order to survive and thrive as businesses. If you look at the initial reaction in the marketplace, a lot of that was around preservation of what they had and making sure that things carried on working as they went through the complexity of moving from working in offices to people working from home, as they saw, in the digital space, volumes in many cases take significant steps up in activity. There were things that broke that needed fixing, what we call digital necessity. That was the first reaction. And now clients are beginning to move and look beyond that. So for many of them, they can see a trend line, which has been brought forward by maybe 10 years in some cases of digital adoption across their marketplace. A trend of steady increase and improvement has taken a massive leap up. And so that has caused clients to strategically look at what investments they need to make. Whereas perhaps they had plans that said, we will invest around this in order to grow market share and keep that trend line moving up. Now suddenly, the trend line has let up, and they're needing to invest in order to make sure that customer experiences, the processes, the delivery mechanisms, et cetera, are improved, because there's been an effect, in many cases, of customer service actually dropping. And whilst that's been acceptable to consumers in a pandemic context, it's one that organizations need to step up and address so that, that gain on the trend line is actually capitalized and turned into an ongoing business change. So that's where we're seeing a lot of the work going in post-COVID hitting around helping to make that happen.
Okay. Okay. So let me just start maybe at a fairly basic level. We always think of Endava as ideation to production company. When I think of ideation, and maybe it's because I just grew up in a different environment, I think of a few people sitting around a table and flowcharting stuff as to how things...
The old brainstorm...
Yes, yes, yes. So does that work as effectively? I mean I know you're very much a virtual company from the get-go. But give us a flavor of how the ideation process maybe changes. And then we will get -- do the same thing with production.
Sure. I mean -- so ideation is, I think, genuinely facilitated by having people in the same room. And so part of our model was to send teams over to sit in clients' premises as for 2 weeks, get projects kicked off, get the creative juices rolling and so on. So we've had to bring in a whole load of tools and approaches to facilitate that. We still don't think it's quite as good as it will be when you can get people together. But the balance to that is that in the current environment, there is no other way to do it. So people are prepared to pay the price in order to make progress at this time. Having said that, it's not terrible. The teams are making good progress. We've had business where the entire process from first meeting with a client right through the sales process, initiating projects and getting that ideation rolling and then starting delivery of proof of concepts and actually getting into multiple scrum teams, delivering that entire process has been done in a virtual context. And it has worked and it is delivering productively.
Okay. Is that, in British, not terrible, which means it's actually quite good? Or...
I think it is, yes. We keep falling into that, don't we. Yes, it's actually been very good.
I just wanted to make sure. So with regards to delivery and production, how about that? Is that easier then to -- because your delivery has always been from places like Cluj and so on and so forth. So is that much easier, because that was always the case?
Yes. So -- I mean, we, as an organization, have been designed to do distributed delivery from day 1. We have our Agile at scale distributed model, and that is all about enabling teams in a mixture of locations to work effectively together. And so that meant that as we transition to people working from home, but actually it happened very quickly and very easily. And I think the big challenge in doing that -- I mean, it's a challenge for some people. But the challenge of the infrastructure is not as high as the challenge of effective working methods that you need in order to make a distributed model work. So because we were set up for that, we very, very quickly implemented that. As I called out in the last earnings call, we saw a significant step-up in productivity of around 5%. And we've continued to see that as the business has rolled forward into many months of working from home now. So a real strength in terms of ability to operate productively and continue to deliver effectively to clients. The one area, which we were touching on a moment ago, is the initiating new projects where I do believe that you benefit from getting people together. And that will be part of our model going forward. I think going forward, you will see working from home as a much more constant mix, part of the mix in the way that we operate. But that will be mixed in with times where teams get together with clients and actually initiate projects where you do some of the Agile ceremonies on a biweekly basis together and so on.
Understood. Understood. If you can, could you comment on how the nature of demand itself is changing? I mean, you all get, of course, the initial impact and then, to some extent, persistent impact that certain verticals like travel faced. But thinking more broadly about demand from a functional perspective, what kinds of work are more popular today, what are clients seeking?
Yes. I mean -- so I've touched on some of this in the earlier comments about the cycle that clients went through where this is sort of digital necessity, and now they're moving into a more strategic address the trend change volume that's come through. I mean let me perhaps bring it to life with some examples. So for instance, in the merchant acquiring space, there was a shift of quite a lot of merchants from essentially card-present transactions to more e-commerce style transactions, as they shifted their business model to sending things to people rather than people coming into shops to collect, et cetera, et cetera. And that -- then there was a sudden shift in terms of onboarding of new merchants and so on, all of which needed to be done in a digital way. So the digital onboarding area saw a jump up, whereas clients in the same space perhaps throttled back a little bit on investment in their core merchant services. And so that's where you saw the sort of shift, where the digital requirement was needed. Another area is logistics. So a lot of our clients in logistics space saw big step-ups in volumes. There were retailers or others that they were working with, where there was a desperate need to increase volume. They turned to the logistics providers who were more flexible and more set up to handle this, i.e., had done their digital work and wanted their -- then to provide a service to them. So then you're actually needing to plug those digital platforms into new retailers very quickly to enable those additional volumes to come through for that client. So it's that sort of work that got pushed forward.
Got it. Got it. I want to ask about how -- and maybe this is pertinent, given where we are with your fiscal year, and I'll stay away from numbers completely, I understand. But your planning process itself, how that is involved? How you think today of revenue visibility and all the other things that go into an annual planning process?
Yes. So I mean, clearly, these have been more uncertain times than perhaps we're all used to with constant and steady growth in the digital world and clients going through a bit of a reprioritization. That did mean they moved where they were spending as opposed to they just stopped spending, just to be clear on that. But when clients go through that process, they stop a project, they start a new project that might mean a couple of teams are running get stopped. The new project takes a while to ramp up, because you go through that ideation phase with a smaller team so that you get a little bit of a dislocation as you move from one set of spend to another. That, of course, has meant we had to pay very, very close attention to where those shifts were happening and how we redeployed people in the business very fast through that time of rapid change. So that pushed our planning processes, coming back to that, forward a little bit in terms of much, much closer, more granular twice-a-week type reviews of what was going on across the business. Looking out longer term, we've always operated on the basis of having a 7-year plan and we refresh it every 2 years. And that plans out in terms of the way the business is going to scale, how and when we should be looking to move into new geographies, how and when we should be looking into new industry segments and which ones have got those technology waves coming through that is going to drive demand 2 years down the line, 5 years down the line and so on. And so with that backbone, we've always had a wider framework that we can pull things up against. It also covers what -- how many cities we need to be in, what locations, when we should get into Asia Pac and so on, it's all part of that planning process.
Got it. Got it. Okay. Since you mentioned, A, geography, I did want to get deeper into a different one. Europe, which, at least to me, seems to be a refocus, again not suggesting that you had lost focus or anything like that, but you made a couple of acquisitions. And the reemphasis on growing in Europe, what was driving that push? Were you seeing something that was changing in the market? Was that opportunistic that was available to you? Are there certain verticals that you wanted to get into? Just explain the Europe re-push, if you will.
So I mean, let me just wind it up a level and give a more general picture. So we started Endava in the U.K. back in 2000. And for the first, I don't know, 8 or 9 years, we were an entirely U.K.-focused business. Then as we started to see that we could take our capabilities on to a more global footing, our mindset has been around establishing in new locations perhaps using a bit of M&A to give that a push forward, properly integrating, making sure that the organic growth that we've got in that new geography is absolutely fine and then moving on and looking at another one. Now we -- just because of our location in the U.K., we've been able to win clients in Continental Europe without particularly needing to establish presence or huge critical mass there. But we prioritized above expanding that, the U.S. market. And there were a couple of reasons for that. One was that we wanted to list in the U.S., so we wanted some presence on the ground in the U.S. before we did that. And then secondly, having done the listing, there was an opportunity to capitalize on that in terms of brand presence, the respect that people in the U.S. have for businesses that can have actually New York listing and so on that would enable us to accelerate. So we did a fairly big deal for us at the time with Velocity Partners. That took our U.S. revenues to around the 20% mark. And then we had a couple of years where we just really wanted to focus on making sure that the organic growth of that newly combined business in the U.S. was really flying, which we've done, and you've seen over the last few quarters that the growth in the U.S. has been higher than across the rest of the business as that has come through. And having got that working, it was time to put some attention back on to Europe, which is why you've seen the M&A and less visibly investments in our sales teams and the offices across Europe to get Europe stepping up the gears. So it's a quite conscious and deliberate timing and approach.
Got it. And going forward, how do you balance sort of the focus and the investment across regions? Is that going to be a much more balanced approach? Or is it kind of opportunistic? How should we think of that?
So when we -- are you focusing on M&A or wider investment question?
Wider investment question. We'll get into M&A in just a bit.
Okay. So from an investment point of view, we are seeking to get a more balanced portfolio. So at the moment, we are circa 40% just over in the U.K. We're just under 30% in the U.S. and a little bit less than that in Europe, with 3% in the rest of the world. So over a 5-year period or so, we see the U.S. growing more strongly so that it increases its proportion of Endava's business. We see Europe growing more strongly than the U.K., but not as strongly as the U.S. so that U.K. and Europe combined perhaps start to become with an equilibrium with North America. And then the big push for us is going to be expanding over that period of time, that 5 to 7 years in the rest of the world. And that will probably need some M&A to push it along. So the investment in terms of that geographic expansion is around making sure that those different trend lines of growth are achieved so that we get that redistribution of where we sit across the world.
Got it. Got it. Okay. Understood. Now let's get into M&A. And when I kind of think of comp trade and I think of Exozet, maybe let's start with talking about the rationale. Some of it's already covered, I understand that. But is there also maybe a verticalized look? Because you have a tendency to be very heavily domain focus -- domain expertise focus. So perhaps talk about those 2 from that perspective?
Yes, sure. So let me start with the Exozet one that was back in middle of December that we completed that. That's a very digital end of the spectrum as in agency-ish business. They do a lot in augmented reality. They do a lot in the media broadcasting space, Netflix type front ends, if you like, and so on. So the main reason for that was because within Europe, we didn't really have that creative strength that we have in the rest of the world. And by that, I mean Continental European Union rather than U.K. So Exozet gave us that. They also significantly strengthened our presence in Germany with really strong German leadership. I'm a great believer that in countries that we go into, we need locals who are leading the business and building relationships with clients and not expat-driven in any way. So that was a huge asset out of the Exozet deal. And it's settled in really well and is delivering against that vision. We switched to Comtrade Digital Services, CDS. I first met those guys in January 2019. So it took about 18 months from meeting them to do the deal. I was hugely attracted to them as a business there. The alignment in terms of culture and leadership style and so on is very, very close to the way in which we operate. The fit with Endava and in a number of respects, so number one, from a verticals point of view, they sit quite heavily in what we call Other, which is obviously the new -- the emerging areas that we're moving into from a client sector point of view as a business. So they added significant strength in that arena with some very, very good use cases of technology application into those spaces. Secondly, from a geography point of view, their customer geographies was almost an exact match with where we wanted to strengthen our presence across the European Union. And 85% of that business is European Union and then 10% U.S. And then from a delivery point of view, the delivery locations, are in the Adriatic, so in Slovenica, Bosnia and Serbia and ex-Yugoslavia region, if you like. And when you put that alongside the presence we already had in that space, it takes us up to a real leading position with 2 very well respected brands, enabling us to establish ourselves as employer of choice in that ex-Yugoslavia area in a similar way to the way we are in Romania and Moldova. So you put all of those things together and it was just a very, very good fit. They weren't on the market when I met them 18 months ago. So I had -- the reason -- that's the reason it took so long to persuade them that they should join the Endava family, and they never went through a process with -- an auction process with the market. It was a one-to-one deal all the way through.
Okay. Okay. No, that's great to know the background on that and then how they fit in. I am getting questions from investors. I'm going to incorporate one of them here, and then we'll go -- broadly also talk about talent. The question is what proportion of the business is about transformative company-wide projects versus shorter-term, more one-off type deals? And as you think of the company going forward, any comments you might have on average length, visibility, things like that?
So I'm not sure that I could give a number. I mean, let's say, most of our client relationships fall into the category of ongoing long-term relationships where we do multiple projects for clients over a period of time. And a lot of that comes from the fact that the huge proportion of our client base is those global blue chips who are doing multiple things across their businesses within the company. So our core focus as a business is to win a piece of work with a client. It might be a very small piece of work. But actually, through that, demonstrate how we operate and what impact our approach to the utilizing technology to impact business models can have on their business. And then as clients see that, they start to pull us into other parts of their business. So under that client relationship umbrella, there could be short-term projects that are proving our capability and so on. But the vast majority is going to then fall into -- under that long-term relationship umbrella of clients pulling things off. I think the other characteristic of the market that we operate in is it's very much a product mindset where you're building a digital product, a digital capability and taking it to market. And then as it succeeds in market, it needs continual investment to expand its capability, its functionality, add new businesses that you're dealing with, add new geographies that you're operating in, new jurisdictions where you have to cater for the legislation, et cetera, et cetera. And this means that successful products are continually invested in by our clients. An example I've given many times is the e-commerce space with Worldpay, where we started working on that with them in 2011. And that has continued to grow and scale to the point that we have 25 scrum teams working on that, adding new countries, adding new functionality and capability that's going to enable them to enlarge their market share.
Got it. Understood. The -- let's talk about talent, because it's obviously a supremely important part of the equation. I guess, let's start at the top and from a talent strategy perspective, attracting and retaining high-skilled talent, how do you do that, the process of that? And then do you see a talent shortage, which might be a different thing pre- and post-COVID? But could you talk about those factors?
Yes, sure. So I mean fundamental is we aim to be the employer of choice in the cities that we operate in. I touched on that when describing the reasons for the -- one of the reasons for the deal with CDS in the Adriatic region. Now the way in which we do that is probably what you're touching on there. So key to it, number one, the sort of work we're doing with our clients in the digital space is the exciting stuff in the technology, in the creative world. So that gives us a huge advantage in seeking to recruit people in the regions. We're doing the sort of work they want to join. And that is not true of all the other organizations that are operating in the cities that we are in. The second area is that we build very close and strong relationships with the universities in the towns that we're in. And by that, I mean, Endavans will go and lecture on the course. We will work with the university professors on shaping courses so that they're practical for the students when they merge. We focus on making sure that we've invested in and we become a leading player in terms of size in each of these cities that we're operating in. So then for students who are coming through, they get exposure to our people. We're seen as the big player in the market. We've got the interesting projects. It makes us a very attractive proposition in terms of someone to join. When they then join Endava, we have an approach, which we call 'Pass It On, which is the way in which we give people the opportunity to grow their skills, grow their careers and so on. And the way Pass It On works is for senior people, they're encouraged to share their skills with more junior people or people who don't have them in the teams that they're working in. And for people who are looking to grow a new capability to look around and see someone they're working alongside who has that and to get them to pass it on. It actually creates strong bonds within the teams as well, because it means people who are learning on the job, they're not about to go down the road and get another job when they're being incredibly well developed in the organization. So that has a benefit for us that it actually lowers attrition, and almost always, I've been able to report our attrition figures are well below not just the market, which is incredibly high on average, but below our much closer peers. So that means we're retaining the people who've come into Endava. I think one just final aspect is that we run a program of encouraging people to introduce others that they know from the industry who are good into in Endava. And about 40% of the people who join us each year have come through that recommendation from an existing Endavan each year. You add to that the 30% that are coming through the university route that I was just talking about means you're only hunting for 30% of your growth each year in sort of head hunt fashion in the market. So you put all those things together, and that's how we're on top of talent and not struggling with it. We never end up reporting we've got a talent problem.
Okay. Okay. No, that's good to hear. And you partly addressed this, and maybe you'll say to me that you fully addressed this. But delivery is still highly concentrated in Romania. Of course, you picked up the Adriatic. You have some in Moldova. But you can still broadly say, Central and Eastern Europe. Are there plans perhaps to diversify beyond that, that we should think about? Forgot to mention, of course, you have some Latin America. You have Velocity. But yes, I mean, could you talk a little bit about concentration of delivery talent?
Yes, sure. So I mean, LATAM is, I think, it's 14% or 15% of our headcount is Latin America. And actually, the organic growth in Latin America was higher than it was in Central Europe last year. So we are pushing the accelerator in terms of growth there in support of that higher growth I've already called out in the U.S. markets. But looking beyond that, we do want to double down in the position that we have in Latin America to see that grow. We're also -- as you all have seen this year, we've started to call out our rest of the world revenues. That's consistent with the approach that we've taken that I described earlier on this call, where we seek to establish some customer relationships in a new geography first and then as we are developing demand in that new geography. And by that, I mean, those sort of time zone differences. That we then start to look at putting delivery capability in place so often through M&A. So as rest of the world is building up, we're starting to sniff around the question of establishing some delivery capability in the Asia Pac region. Which -- where we might go to in respect to that, whether there's an M&A deal that would help accelerate us doing that, et cetera, is all on our agenda over the next couple of years or so.
Understood. Understood. The -- I guess, one other question on hiring is with regards to -- it's more of a conceptual question. I'm not trying to sniff it on what you meant to say on Tuesday. But there has been a long-term promise of 20% organic growth. As you break down getting to 20% growth, there's a piece that comes from pricing, there's a piece that comes from talent utilization, all of those various factors that build it out. What level of hiring growth do you need in the current environment to get 20% organic growth? So in some sense, it's more of a pricing and utilization question, I think.
Yes. So I mean, we've run 3%, 4%, 5% below revenue growth in terms of headcount growth, the difference being the pricing that we've achieved -- pricing improvements that we've achieved. So where we've delivered, let's take 20%, then we've typically been 15% or 16% headcount growth in order to deliver that sort of organic growth. And that's been fairly consistent year-on-year for the last 4 or 5 years.
Yes. Yes. Okay. Okay. One last quick question on margins. I know we're winding up on time. And the -- it's less about what specifically one might think of margin expectations in the near term, but more about how you think of operating leverage in the model. If you could talk about that?
Yes. So I mean, if you look out over the next few years, we're fairly confident that our adjusted gross margin that we can keep that fairly stable going forward. So the leverage opportunity that we see is against the SG&A costs. Now there's a couple of reasons for that. One is the last 2, 2.5 years, there's been an unusually high level of investment in SG&A related to public company costs and being a new company on the market. Auditor's fees, Sarbanes-Oxley, all those sorts of things cost money. And so we've -- that's meant that SG&A has been pumped up a little bit. As that starts to come off, we could get some leverage against it. I have to say, we may choose not to leverage it and actually to reinvest that in areas that we think could drive higher growth levels. So it could be a leverage that we reinvest rather than dropping into the profit line to make sure we hold that top line growth and keep it growing.
Okay. Well, it eventually gets back to higher profits even with...
Absolutely.
Okay. I mean we're running out of time. I just want to say thank you very much for your insights. Appreciate you doing this. I know we'll hear from you more in just 3 or 4 days here. So I appreciate you doing this.
No, thanks, Ashwin. Enjoyed it. So thanks for the chat.
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