Endava plc — Form 20-F summary
Reporting period: Fiscal year ended June 30, 2019, with comparisons to fiscal 2018 and 2017. Although the request references 2018 Q4, this filing is an annual report and does not provide a complete standalone Q4 income statement or cash-flow summary. Financial statements are audited and prepared under IFRS in British pounds.
Business context
Endava provides technology services, including digital transformation, Agile development and automation, principally to clients in Payments and Financial Services and Technology, Media and Telecommunications. At June 30, 2019, it had 275 active clients and 5,754 employees. Its largest client was Worldpay.
Key financial metrics
| Metric (£ millions unless stated) | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | 287.9 | 217.6 | +32.3% |
| Gross profit / margin | 98.8 / 34.3% | 72.2 / 33.2% | Margin +1.1 percentage points |
| Operating profit / margin | 33.0 / 11.5% | 25.4 / 11.7% | Profit +29.6% |
| Profit before tax / margin | 30.1 / 10.5% | 24.7 / 11.3% | Profit +22.1% |
| Net profit / margin | 24.0 / 8.3% | 19.0 / 8.7% | Profit +26.5% |
| Operating cash flow | 35.3 | 34.0 | +4.0% |
| Adjusted free cash flow (non-IFRS) | 29.8 | 28.7 | +3.8% |
| Cash and cash equivalents at year-end | 70.2 | 15.0 | +55.1 |
| Total assets / liabilities / equity | 222.7 / 56.3 / 166.3 | 151.0 / 81.5 / 69.5 |
At year-end, borrowings were £21,000, principally finance leases; no amount was outstanding under the primary revolving facility. Working capital was £82.7 million, compared with a deficit of £3.0 million in FY2018. The facility is secured and subject to leverage and interest-coverage covenants. Management said cash, operating cash generation and available facilities were expected to cover needs for at least 12 months.
Material changes and unusual items
- Revenue grew across all reported verticals and geographies. North American revenue rose 73.8% to £79.2 million; revenue from the “Other” vertical increased 73.1% to £56.9 million.
- Gross margin improved, while SG&A rose 40.9% to £65.9 million and increased to 22.9% of revenue, reflecting public-company costs and higher support spending.
- Share-based compensation increased to £12.0 million from £1.5 million. It is a substantial expense and should be considered when assessing reported versus adjusted profitability.
- Net finance expense increased to £2.9 million, including a £5.8 million fair-value charge related to acquisition contingent consideration, partly offset by foreign-exchange gains.
- The company received £44.8 million of net IPO proceeds in FY2019 and repaid borrowings. Cash-flow working capital was a £11.5 million use of cash, mainly reflecting higher receivables and accrued income.
- Worldpay represented 9.8% of FY2019 revenue. Endava completed the sale of its Worldpay-dedicated Romanian subsidiary on August 31, 2019; the subsidiary had contributed about 3.2% of group revenue and employed 146 people at completion. The related build-and-operate agreement ended. Worldpay was acquired by Fidelity National Information Services in August 2019.
Outlook, commentary and risks
The filing gives no specific numerical revenue or earnings guidance. Management’s stated priorities include expanding existing client relationships, winning clients in new verticals and North America, hiring and retaining delivery staff, increasing nearshore capacity, developing next-generation technology capabilities and selectively pursuing acquisitions. Capital expenditure was £7.3 million in FY2019; management expected it to rise in the near term and said FY2020 spending was expected to be funded by operating cash flow and cash balances.
Key risks include dependence on major clients and concentrated sectors, clients’ ability to end engagements, competition for skilled employees and wage inflation, utilization and project-pricing risk, foreign-exchange exposure, and execution and integration risks from acquisitions. The filing also highlights Brexit and regulatory uncertainty, data privacy and cybersecurity obligations, and potential disruption to client relationships following the Worldpay sale and acquisition. Endava does not anticipate paying dividends for the foreseeable future.
IFRS 16 was due to be adopted after the reporting date; management preliminarily estimated a right-of-use asset and corresponding lease liability of £34 million to £42 million. The filing reports no material legal proceedings or contingent liabilities at June 30, 2019. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Confirm that the relevant comparison is FY2019 versus FY2018: the filing does not present a full 2018 Q4 standalone financial summary.
- Track the revenue, margin and client effects after the Worldpay subsidiary sale, the termination of its build-and-operate agreement and Worldpay’s acquisition by FIS; the sale price is described only as within a previously disclosed range.
- Assess the quality and sustainability of earnings in light of £12.0 million of share-based compensation and the contingent-consideration fair-value charge; distinguish IFRS results from management’s non-IFRS adjusted measures.
- Monitor receivables and cash conversion: operating cash flow was broadly flat despite strong revenue growth, and working capital absorbed £11.5 million in FY2019.
- Check lease accounting and commitments: operating lease commitments were £58.5 million at year-end, and the IFRS 16 estimate was preliminary.
- Note an inconsistency within the filing’s narrative PBT-margin discussion; the audited income statement and selected financial data show FY2019 PBT margin of 10.5%, versus 11.3% in FY2018.