Endava plc — Form 20-F summary
Reporting period: The filing is an annual report for the fiscal year ended June 30, 2018, not a 2017 fourth-quarter filing. Financial statements are audited and prepared under IFRS as issued by the IASB, in British pounds.
Business context and financial performance
Endava provides technology services, including digital transformation, Agile development and automation, primarily to clients in Payments and Financial Services and Technology, Media and Telecommunications (TMT). It had 258 active clients and 4,819 employees at June 30, 2018. The December 2017 acquisition of Velocity Partners expanded its North American client base and Latin American delivery capacity.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | £217.6m | £159.4m |
| Revenue growth | 36.5% reported; 37.2% constant currency | 38.1% reported; 28.5% constant currency |
| Gross profit / margin | £72.2m / 33.2% | £50.6m / 31.8% |
| Operating profit / margin | £25.4m / 11.7% | £23.1m / 14.5% |
| Profit before tax / margin | £24.7m / 11.3% | £21.7m / 13.6% |
| Net profit / net margin | £19.0m / 8.7% | £16.8m / 10.6% |
| Operating cash flow | £34.0m | £14.7m |
| Free cash flow (non-IFRS) | £28.7m | £11.2m |
| Cash and cash equivalents | £15.0m | £23.6m |
| Borrowings, including finance leases | £19.8m | £29.5m |
| Working capital | (£3.0m) | £11.0m |
Adjusted profit-before-tax margin, a non-IFRS measure, was 15.4%, compared with 15.8% in FY2017. Total assets were £151.0m and total liabilities £81.5m at year-end. The company reported that it repaid its revolving-facility borrowings in August 2018 after its IPO.
Material changes versus FY2017
- Revenue increased 36.5%; growth at constant currency accelerated to 37.2% from 28.5%.
- Gross margin improved 1.4 percentage points, but operating margin fell 2.8 points and PBT margin fell 2.3 points. SG&A rose 69.6% to £46.7m, including £4.6m of IPO preparation costs and higher public-company and acquisition-related expenses.
- Operating cash flow more than doubled, helped by working-capital movements, including a £16.4m increase in accruals. Cash nevertheless declined, with investing outflows including £26.4m net for Velocity Partners.
- Revenue from North American clients rose 75.8% to £45.6m, representing 21.0% of revenue. Velocity Partners contributed £15.3m of revenue from its acquisition date.
- The top ten clients’ share of revenue decreased to 41.5% from 49.1%; Worldpay remained the largest client, at 10.8% versus 13.0%.
Outlook, risks and unusual items
- Management said cash, operating cash flow and available facilities were expected to meet anticipated needs for at least 12 months. It expected capital expenditures to increase in the near term as operations expand. No specific revenue or earnings guidance is provided.
- Key risks include reliance on retaining clients and winning follow-on work, skilled-personnel recruitment and retention, pricing and utilization, competition, integration of acquisitions, and exposure to the Payments and Financial Services and TMT sectors.
- Worldpay’s agreements include termination provisions and an option to acquire Endava’s captive Romanian subsidiary; Worldpay may also terminate certain agreements for convenience. The subsidiary contributed 2.9% of FY2018 revenue. Worldpay was acquired by Vantiv in January 2018.
- Currency mismatch is material: 40.3% of FY2018 sales were denominated in pounds, while 70.3% of expenses were denominated in euros or U.S. dollars. Endava had not hedged foreign-currency transactions since FY2017.
- The July 2018 IPO, after the reporting date, raised approximately $53.0m net for the company; a portion of proceeds was used to repay facility borrowings. The filing also reports £4.6m of FY2018 IPO preparation expense.
- Velocity Partners acquisition accounting included £12.5m of contingent consideration liabilities at June 30, 2018 and substantial goodwill; the filing says the contingent consideration’s fair value increased after the IPO. In August 2018, Endava identified Argentina as hyperinflationary and was assessing the financial-statement effects.
- Endava did not pay dividends in FY2017 or FY2018 and did not anticipate paying them in the foreseeable future. It reported no material legal proceedings and no contingent liabilities at June 30, 2018.
Important facts for investors to verify
- Confirm the period under review: this summary covers the year ended June 30, 2018, not 2017 Q4.
- Track Worldpay contract commitments, termination rights and the potential transfer of the Romanian subsidiary.
- Assess whether margin pressure, acquisition integration costs and IPO-related costs persist as revenue scales.
- Review post-IPO debt repayment, liquidity, negative year-end working capital and the timing of contingent acquisition payments.
- Check the effects of Argentina’s hyperinflationary accounting treatment and future IFRS 16 lease accounting on reported results and liabilities.
- Consider the dual-class share structure: Class B shares carry ten votes each, concentrating voting control, and the filing states the company does not anticipate dividends.