IT technology consulting company Endava's (NYSE:DAVA) strong top-line growth has propelled its stock to become a four-bagger for shareholders who've held the stock since it went public in July 2018. But this young upstart has plenty of room to run. On the "Small Cap" show, recorded on Feb. 8 on Motley Fool Live, Motley Fool contributor Brian Feroldi covers the company and its strategy, and dives into the nuts and bolts of its impressive 33% compound annual growth rate.

 

Brian Feroldi: This is Endava. Here is the stock's return I always like to say winners keep on winning. This company, no doubt about it, big time winner since coming public roughly in 2008. Early multi-bagger returns. So far so good. The company is about $5 billion which sneaks in this category of small caps but it's a bigger small-cap company. It does trade on the New York Stock Exchange.

So what is Endava? The real gist is it's a pure-play consulting company. They're focused on a couple of key areas; they help with engineering, enterprise agility, and automation services. A company would hire Endava to help them make a transition from on-premise to the cloud, or help them design a new product from scratch, or to help them reorganize their business to become more efficient. Endava specializes in IT consulting.

If you're familiar with the company Globant, ticker symbol GLOB, this is a very similar company, very similar business model. Globant is based in South America. This company is based in the United Kingdom and it gets most of its business from the U.K. and Western Europe. But like Globant, it's expanding geographically, but very similar business idea.

Endava was founded in the year 2000, and the founder is still the CEO to this day, the largest shareholder. It has grown organically and inorganically over time. It started out in the U.K. as an IT consultancy company, expanded to Europe, and it expanded to the United States around 10 years ago, roughly expanded to Latin America. It has done so both from partnerships, for example, it has partnership with Bain, as well as acquiring smaller companies which gets its foothold in the door [of a new geography]. It started with 60 employees, it now has over 7,000 employees. I'm pretty sure last time I saw 6,500 of them were consultants. The vast majority of its employee base are revenue generators for the company.

This gives you a sense of where it operates at scale. Again, its home base is in the U.K. and it's building sales offices around the globe so that it could get closer and closer to its clients. Currently no presence at all in the Asia region, but there's no reason to say it couldn't get there eventually.

Here's a quick overview of what they do. They help businesses to define their tasks and come up with strategies, come up with processes to analyze their business decision. They can help if you want to get outsourced engineering experience. That's the core of what Endava does.

It breaks down its revenue generation into three broad categories. If a company needs help with a digital evolution, help[ing] a company and go from analog to digital. That's a big part of what the company does. Agile transformation has been a big theme for this company. If a company has on-premise software and they would need to transition that to the cloud, there's obviously a lot of business risks that goes on with [that transition and] companies want hand-holding to help them get that done. That is something that Endava can help with. Finally is automating internal tasks. Endava can help to build software to make processes far more automated.

These are the industries that they operate in right now. The biggest area is payments, but they are branching out and every year they open up new industries for themselves and you can see [that] over time. Currently, over half of their revenue is in the payments and financial services space and that used to be a far, far bigger area of focus for them. Over time, they have gradually diversified away.

The second biggest area for them is technology, media, and telecommunications. For example, Adobe is one of their biggest customers and they finally have another cabinet they just call other, which includes again, things like mobility, telecommunications, and they also call that retail and consumer goods markets, where actually a big growth area for the company. They've gradually shifted their reliance away from the payments market.

They've also gradually shifted away from their over-reliance on the UK. In 2015, three-quarters of the revenue was in the U.K. That's down to the 40 percentile range and you see Europe and North America are gradually starting to grow and they've also got a small focus on rest of the world. They are steadily diversifying their business over time.

Here's a nice slide that they showed about what kind of capabilities they can offer just within payments, for example. Payment seems like a relatively straightforward thing, but these are some of the technologies that they now offer consulting on. Do you want to help integrate Blockchain? Do you want to help with the biometrics for payments? Do you want to help with augmented reality and extended reality, etc., etc.? They train their employees on each of these categories, and then they sell their services out to interested customers.

What's great about the consulting business is that while it's very, very hard to get a new client, once you have a client, they tend to be extremely loyal. There is a lot of revenue visibility for this company. Over on the left here, this is the total number of clients that the company has. So in 2015, they only had 112 total clients, and they've basically 4x'd that over the pursuing five years. More importantly, so their top 10 clients, you can see that their spending with Endava just grows and grows and grows. They do a really good job of increasing their project growth within their core client bases. This is just the top clients that also goes for really all of their clients. So not only are they growing the total number of clients, they are gradually increasing spend per client. It's very much like a software-as-a-service business model.

At the same time, they are gradually reducing their reliance on their top clients. Five years ago, again, 66% of their revenue came from their top 10 clients. That's down to the 30s and at the same time the number of clients that are spending more than one million pounds. Again, U.K. companies, so it's reported in pounds, has grown substantially. There are now up to 66 clients that will spend over a million pounds with Endava in any given year.

For investors, this small print down here is the most exciting part. Over the last five years, almost 90% of revenue on each fiscal year was generated from clients in the previous year. So any given time, they can basically forecast out 90% of their revenue that's already booked and within their book of business. That makes these businesses extremely predictable. That's something that's really exciting about the consulting space in general.

They've been profitable for years. You can see that their revenue has just consistently grown at a 33% compound annual growth rate. More recently, it did slow due to COVID, but the long-term history here is very strong growth and they're doing so profitably.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.