Endava plc (DAVA) Earnings Call Transcript & Summary

So we don't run into Globant and EPAM that often. I think it's just a very large market that we're both operating in, and there's a lot of space for expansion without running into each other all the time. So we probably would have run into EPAM maybe in 1 or 2 of those deals that we closed last quarter. I don't think we ran into Globant at all. Our geographic footprint with Globant is more diverse. So they're not very strong in Europe whereas we've got 70% of our business over here, just under; whereas they're stronger in the U.S., which is only 30% of our footprint. So that's probably why we don't run into Globant as much. Sorry, what was the second part of your question?

Well, I'm just trying to figure out if it's sole-sourced or are you guys having to beat out the competition? I mean is it an RFP process? Just trying to get a sense of how you're winning in win rates on the business pipeline.

Yes. So for the majority of our business, we actually enter clients through a fairly small ideation or an initial piece of work around the proof-of-concept and so on because what we're doing is we're engaging the client with how technology could make an impact on some part of their business. Now because of the nature of those sorts of discussions, it's very often not through any sort of a competitive process. We've got their attention, we've shown them what something could do and they're engaging us to flesh it out and bring it to life. And as that -- as they get excited about that, they then scale the teams and we take them into production. And that frequently happens without going through an RFP process. Where RFP processes do come along is downstream where we're starting to scale into multiple teams. And the procurement departments are looking for some benefit as we scale, and that's where they'll introduce an RFP. Now of course, doing an RFP, when you've established your reputation in a client and you're already demonstrating that you can deliver value to the business, is very different from an RFP when it's your first entry point to a client. So we expect to have a very high win rate on the RFPs that we then engage in.

I was going to ask about your guys' investments in technology that position DAVA as that kind of next generational digital services company. What's the go-to-market strategy as it relates to next-generation tech? And how do you differentiate yourself when you're pitching your services versus the peers?

Yes, sure. So I mean the technology is important, and the ability of our teams to be able to use technology and execute successfully with the technology is fundamental. But it's not what we sell. What we sell is the impact that technology has on business models and use cases in terms of impact on customers. And that is done through bringing technology to life through proof-of-concepts and prototypes. So the ability of our teams to engage with a client, and over a week or 2 to plug some chatbot capability into their call center and show how quickly that could deliver value to their systems, is what gets the client's attention. Then the ability of our teams to actually use that technology and make it effective means that we scale it and implement it across their customer-facing systems. So it's that process applied in all sorts of different ways across many technologies is the way in which we sell.

I know you guys talked a little bit about the Bain & Company partnership. Can you just talk about what's left for expansion in that deal? And what are some of the benefits you've been able to get out of it?

Yes, sure. So I mean -- so just to repeat the sort of fundamentals of it. So Bain are a high-end strategic consultancy, looking at organizational change and business strategy. Endava fits into that product engineering space where we're able to help our clients put technology-based product together and take it to market and scale it through good envisioning and engineering, so very, very complementary skills between the 2 organizations. And if you look at it from a Bain point of view, an increasing proportion of what they do for clients requires technology capability to -- in terms of both envisioning directions that clients' businesses could take but then also executing on it. And they've gone down the route of rather than building their own capability by hiring technical people and engineers or buying a business with that capability, they've chosen to go down the partnership route and put an exclusive partnership in place with Endava to enable both of us to execute successfully together. So over a period of over the last 2 years has been around digging into how that works, doing some projects with clients and putting an effective joint proposition together. The first of those is the one that I was calling out on the earnings call earlier around retail banks and insurers and how putting platforms together that use both existing product capability, or accelerators if you like, and Endava's engineering capability to execute that those clients could have a much, much faster route to market where they don't really have effective digital platforms at the moment. And we don't see that replicated across other industries and other segments. And the other benefit that we have with Bain is they give us a global footprint in terms of the sorts of conversations that we can have with clients because they're a global organization. And Endava, whilst we have the ability to execute globally for clients, we don't have sales footprint right across the globe just yet.

John, I want to switch gears and just ask about the overall portfolio being more geographically diversified. Since you've gone public, you've moved, obviously, into strengthening in North America. When you look at the book of business now, is it is it the right mix of geographies? Or would you like to expand and strengthen in other areas?

So we see ourselves on a path to a more balanced portfolio across the globe, meaning that what we're doing in North America should be equivalent, maybe even slightly ahead, of what we're doing in Europe and the rest of the world should build up to become much stronger than where it is now, maybe in the sort of 40-40-20 type categories, looking at North America, Europe and the rest of the world. So a lot of work still to be done in terms of continuing that progression. It is one I'm very pleased with the progress that we've made over the last 5 years. Five years ago, we were over 70% in the U.K. And it's one that we will continue to press on, both through organically through where we invest in building sales teams but also through inorganic in terms of the M&A decisions that we make.

And can you talk a little bit about the strategic rationale around the CDS acquisition that you guys just completed?

Yes, of course. So I mean the CDS guys, I first met back in January 2019, a little over 18 months ago, and had an immediate and strong affinity to the way in which they were running their business with the leaders that they have there. But also when you step back from it, the fit with Endava, from a point of view of the geographic and industry segments that we were in, was very, very good. So they have -- 85% of their business is in the European Union. There's about 5% outside of the European Union, not in the U.K., and about 10% in the U.S. So in terms of us pushing that European footprint that we were looking for, it was a very, very good fit. And it strengthened us in the European markets that we're looking to expand on. It wasn't jumping into new ones like France and Spain at this point. And secondly, when you look at the industries that they were in, a lot of them fitted into the, what we call, other space at the moment. So they have some really good capabilities and use cases where they've used technology in other industries that we're looking to expand in over time. So putting those 2 things together, it was going to significantly strengthen our story to customers in the European Union around our capabilities and the things that we've done with other customers in that geography and, secondly, strengthen our position in some of those new industries that we're pushing into as we diversify away from the payments and financial services and TMT focus that we have at the moment. So CDS was a really good fit from that point of view. There was also, just as a by, the footprint of the people sitting in the Adriatic Region x Yugoslavia, if you like, was very strong and enabled us as we put that together with the teams that we have already in the Adriatic, gave us a very, very strong presence there. And indeed, our objective in each of the locations that we're in is to become the employer of choice. CDS had a very, very good reputation. Put alongside ours, it has really, really strengthened our position in that market, both in scale and in reputation, so a very, very good deal. I was very excited to complete on it and bring those guys onboard.

How does their growth rate compare on top line to your guys' kind of 20-plus percent growth that you guys have been running at? And is there a margin profile similar to Endava's?

So their growth rate historically has been in the same territory. More recently, it's slightly lower because of their exposure to some of these other territories, such as travel and hospitality. But I do believe, in due course, when those industries recover, that will give us some upside in terms of that growth rate coming back for those clients. From a margin point of view, it is a few percentage points below where we sit in Endava. And the other key metric that I look at is the revenue per head, and their revenue per head is just a few percentage points below ours. So you put all of those pieces together and there's an opportunity to just, through sensible small increments, increase their KPIs to the same levels of Endava going forward.

And what's the appetite now to add more acquisitions? I don't know if CDS is the right size. I think they had something like 460 employees or so. Or do you do smaller or larger tuck-ins? How do you think about that when you add acquisitions? And is the appetite still strong even though you just have made a couple here recently?

Yes. So I mean their 460 is the operational head count, billable head count, if you like. Yes, so we will continue to look for the right tuck-in acquisitions that sit in that sort of small to high single-digit percentages of Endava's size. We're not keen on very, very large acquisitions. I think in a -- my view is in a services world, if you buy a business that's too large, you have cultural problems as you integrate, and it actually slows the growth of the overall organization down whereas if you do tuck-ins, you can get businesses with a close enough cultural fit that will successfully go through that integration and transition as you execute on the deal. So looking forward, we will continue to look for M&A opportunities that add capability in those industry segments where we're looking to expand; or in the geography segments, from a client point of view, where we're looking to hit the accelerator. So high on our list is going to be potential U.S. businesses that are going to add that little bit of acceleration in the U.S. for us or indeed in the rest of the world as we're now starting to venture outside of Western Europe and North America and see opportunities there. We've grown that 3% largely opportunistically without salespeople on the ground across the rest of the world, and there's definitely an opportunity for us to start to move into that space.

I know we only have about 90 seconds or so, but I wanted to ask about margins. You guys beat margins pretty strongly versus our expectations in the quarter. Can you just talk about margins and cost control during the pandemic? And can you continue to improve margins long term? Or is it more just keeping margins stable as you grow the top line?

Yes. So I mean, on the short term, so the pandemic, essentially, as the top line picked up in that second half of the quarter, that dropped through into the bottom line because our cost base didn't really change. So that's why we had the margin acceleration in Q4. Looking forward, our expectation is that we do get leverage against some of the particularly public company costs that we've had to incur, and that will start to come down. I think it's likely though that we'll reinvest that, from the point of view of sales and marketing and so on, so that we can actually double down on making sure the organic growth continues to come through rather than dropping it through into bottom line as a higher margin.

Okay. With that, John, we'll keep it there. I know you're busy with earnings. Thanks for taking the time to give us some color on that and the overall business, and congrats on the report.

Thanks, Bryan. Appreciate it. Talk to you soon.

Okay. Bye.

Cheers.