Endava plc (DAVA) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reveals a weak financial outlook with decreased revenue guidance and EPS, compounded by unexpected credits impacting performance. Despite the optimistic long-term view on AI transition and new deals, the immediate financial health and guidance adjustments are concerning. The market cap suggests moderate volatility, leading to a likely negative stock price reaction.

Key Financial Performance

Revenue GBP 178.2 million for the 3 months ended September 30, 2025, compared to GBP 195.1 million in the same period in the prior year, representing an 8.6% decrease. In constant currency, the revenue decreased 7.3%. The decline was attributed to an unexpected credit made to a client and failure to convert certain non-large strategic pipeline opportunities into revenue.

Loss Before Tax GBP 8.5 million for the 3 months ended September 30, 2025, compared to a profit of GBP 4.2 million in the same period in the prior year. The loss was influenced by the unexpected client credit and pipeline conversion issues.

Adjusted Profit Before Tax (PBT) GBP 9.9 million for the 3 months ended September 30, 2025, compared to GBP 19.2 million in the same period in the prior year. The adjusted PBT margin was 5.5%, down from 9.9% in the prior year. The decrease was due to the same factors affecting revenue and loss before tax.

Adjusted Diluted Earnings Per Share (EPS) 15p for the 3 months ended September 30, 2025, compared to 25p in the same period in the prior year. The decline was consistent with the overall decrease in profitability.

Revenue from Top 10 Clients Accounted for 36% of revenue for the 3 months ended September 30, 2025, in line with the same period last fiscal year. However, the average spend per client decreased from GBP 7.1 million to GBP 6.4 million, representing a 9.9% year-over-year decrease. FX movements contributed to a 2% decrease, with the rest of the decline in line with the overall business performance.

Regional Revenue Distribution North America accounted for 42% of revenue, Europe for 24%, the U.K. for 28%, and the Rest of World for 6% for the 3 months ended September 30, 2025. Revenue from North America decreased by 1%, driven by FX movements, while Europe declined 12.8% due to weakness in the TMT and mobility verticals. The U.K. decreased 17.9% due to client reclassification, and the Rest of World increased 9%.

Adjusted Free Cash Flow GBP 9.2 million for the 3 months ended September 30, 2025, up from GBP 3.5 million during the same period last fiscal year. The increase was attributed to improved cash management.

Cash and Cash Equivalents GBP 47.2 million at September 30, 2025, compared to GBP 59.3 million at June 30, 2025, and GBP 52.8 million at September 30, 2024. The decrease was due to ongoing operational and investment activities.

Borrowings GBP 193.2 million at September 30, 2025, compared to GBP 180.9 million at June 30, 2025, and GBP 132.6 million at September 30, 2024. The increase reflects higher financing needs.

Capital Expenditure 1.7% of revenue for the 3 months ended September 30, 2025, compared to 0.6% in the same period last fiscal year. The increase was due to higher investment in infrastructure and technology.

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Operating Highlights

DavaFlow AI-native change delivery lifecycle: Endava has branded its AI-native change delivery lifecycle as DavaFlow, which integrates AI into every activity of the delivery lifecycle. It is organized into four phases: Signal, Explore, Govern, and Evolve, with human oversight guiding AI contributions.

AI-enabled content studio: Developed for an e-learning provider, this studio streamlines the content lifecycle for over 7,000 courses, reducing authoring efforts by approximately 30% and projecting time savings of 30%-50% when scaling updates.

AI-assisted code modernization: For a U.S. retail pharmacy chain, Endava upgraded a core handheld application using AI-assisted analysis, achieving a 25%-30% reduction in manual effort and a 20%-25% reduction in migration time.

AI-enabled digital assistance: Implemented for a leading U.K. bank, this system provides employees with fast, secure access to internal and market data, improving query resolution times and policy compliance.

Multiyear strategic relationship with a payments company: Endava secured a $100 million partnership to streamline the client's technology platforms and enhance capabilities using AI and advanced engineering.

Partnership with OpenAI: Endava expanded its partnership with OpenAI, enrolling engineers in OpenAI's certification program and creating a joint go-to-market framework, resulting in measurable results in the insurance sector.

Collaboration with Google Cloud: Endava increased its engagement in Gemini enterprise projects, including AI-enabled digital assistance for a U.K. bank, ensuring compliance and safety in enterprise environments.

Sales leadership realignment: Endava hired a Chief Growth Officer for Europe and North America, sharpening customer engagement and improving the opportunity pipeline.

AI talent expansion: Endava hired 470 AI-skilled professionals through its Dava.X Academy and conducted training events to address client challenges.

Focus on AI integration: Endava is embedding AI across its technology stacks and operating models, transitioning from incremental changes to large-scale AI adoption.

DavaFlow training: All delivery teams are required to complete DavaFlow training and immersion by the end of the financial year to enhance AI-native delivery capabilities.

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Risk or Challenges

Transition in business models and delivery approach: Challenges associated with transitioning to AI-driven business models and delivery approaches, which may impact operational efficiency and client satisfaction.

Unexpected client credit: An unexpected credit made to a client in the United States negatively impacted financial performance for the quarter.

Non-conversion of pipeline opportunities: Certain non-large strategic pipeline opportunities did not convert into revenue as anticipated, affecting financial results.

Revenue decline: Revenue decreased by 8.6% year-over-year, with specific declines in Europe and the U.K. due to factors like FX movements and reclassification of clients.

Profitability challenges: Loss before tax of GBP 8.5 million compared to a profit of GBP 4.2 million in the prior year, with adjusted PBT margin dropping from 9.9% to 5.5%.

Client concentration risk: Revenue from the 10 largest clients accounted for 36% of total revenue, with a 9.9% decrease in average spend per client.

Geographic revenue weaknesses: Revenue from Europe declined by 12.8% and the U.K. by 17.9%, driven by sector-specific weaknesses and client reclassification.

Borrowings increase: Borrowings increased to GBP 193.2 million, up from GBP 132.6 million in the prior year, potentially impacting financial flexibility.

Guidance adjustments: Lowered revenue assumptions for non-large deal pipeline and ongoing impact of the client-specific issue in the U.S. on fiscal year guidance.

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Guidance & Outlook

Revenue Guidance for Q2 Fiscal 2026: Endava expects revenue to be in a range of GBP 179 million to GBP 182 million, representing a constant currency revenue decrease of between 8% and 7% year-over-year.

Revenue Guidance for Full Fiscal Year 2026: Endava expects revenue to be in a range of GBP 735 million to GBP 752 million, representing a constant currency revenue decrease of between 4.5% and 2.5% year-over-year.

Adjusted Diluted EPS for Q2 Fiscal 2026: Endava expects adjusted diluted EPS to be in the range of 15p to 17p per share.

Adjusted Diluted EPS for Full Fiscal Year 2026: Endava expects adjusted diluted EPS to be in the range of 80p to 88p per share.

Pipeline Conversion Assumptions: The company has reassessed its non-large deal pipeline and lowered its conversion into revenue assumptions for the fiscal year.

Impact of Client-Specific Issue: A client-specific issue in the United States will continue to affect the remainder of the fiscal year, impacting revenue.

Revenue Uplift in Second Half of Fiscal Year 2026: Three large signed engagements are expected to partially underpin revenue uplift in the second half of the fiscal year.

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Shareholder Return Plan

Share Repurchase Program: Endava remains committed to its share repurchase program. As of October 31, 2025, the company repurchased 7.1 million ADSs for $115.9 million under the program. There is $34.1 million remaining for repurchase under its share repurchase authorization.

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Key Q&A

Q:Can you share more detail on the client credit that was not foreseen and weighed on performance?

A:The credit was unexpected and arrived after the last quarter's guidance. It was not related to remediating work but was a procedural matter. Without it, revenue would have been at the bottom of the guidance range, and EPS would have been in the middle of the range. No further details were provided.

Q:Is the demand issue related to pipeline conversion or changes in commercial responsibilities? How have demand trends progressed?

A:The significant impact on revenue was due to the unexpected credit. Pipeline conversion was lower than anticipated, with 50% conversion against the high end and 80% against the low end. This led to a downgrade in revenue guidance from GBP 765 million to GBP 752 million. However, big wins are expected to contribute to revenue in the second half, particularly in Q3 and Q4.

Q:Has there been any unusual client churn this quarter?

A:There has been no growth in client churn. The client associated with the credit remains in an ongoing relationship, and the conservative view is based on non-large deal pipeline conversations.

Q:Can you quantify productivity gains from DavaFlow and its scalability?

A:DavaFlow is achieving significant productivity improvements, with gains in the 5x to 10x range compared to the 20%-30% improvement seen with general AI accelerators. This capability is being used to accelerate transformation and deliver added value to clients, with potential for wider margins. A large payments client deal illustrates this approach.

Q:What is the strategy to navigate challenges associated with the transition in business model and AI acceleration?

A:The company is shifting to being AI-native, moving away from old models faster than peers. This shift has led to 70% of services being AI-related, up from over 50% last quarter. The strategy focuses on outcome-based deals to improve margins and deliver greater client benefits. The transition is causing short-term revenue erosion but is expected to yield long-term benefits.

Q:Can you provide details on the $100 million deal with a leading payments company?

A:The deal is with an existing but small payments client, with 85%-90% of the revenue being net new. It spans 5 years and focuses on new development rather than managed services. The deal involves transformation, new product development, and joint go-to-market initiatives, leveraging the company's AI and payments expertise.

Q:What gives confidence in the fiscal year '26 guidance and the large deals contributing to the second half?

A:The three large deals are signed and involve committed spending with ramp-up in the second half. Additional layering of step-change revenue from previously signed deals also supports the guidance. The guidance range of GBP 735 million to GBP 752 million accounts for pipeline conversion risks.

Q:How is the company balancing investments in AI and share buybacks?

A:The company continues its $150 million share buyback program while investing in technology and onboarding for the AI shift. Near-term profitability is being sacrificed for long-term gains.

Q:What is the outlook for pipeline conversion and macro uncertainty?

A:The nonstrategic deal pipeline conversion is expected to be 79%-81% for the full year, with 93%-95% for Q2. The guidance accounts for fewer working days in December and includes a range to accommodate pipeline conversion risks.

Q:What are the potential margin expansion levers and investments for fiscal year '26?

A:The company has high operational leverage, with margins improving with revenue growth. The strategic pivot to AI-native services is causing short-term margin impacts due to skill shifts and friction but is expected to improve margins in the long term.

Q:What is the headcount strategy in light of AI productivity and macro headwinds?

A:The headcount increase is driven by the Dava.X Academy, which focuses on hiring AI-native leaders and graduates. The company is training and onboarding AI-native talent while phasing out non-AI-native roles. Attrition is higher due to this transition, which is expected to stabilize in a few quarters.

Q:Can you provide more details on the $100 million deal's revenue timing and replicability?

A:The deal spans 5 years, with GBP 10 million incremental revenue per quarter in the second half. About 50% of the ramp comes from this and other large deals, with the rest from pipeline conversion. The deal is replicable, as it aligns with the company's strategic focus on transformation and AI capabilities.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the unexpected client credit, citing it as a procedural matter. They also did not elaborate on the exact nature of the challenges in transitioning to an AI-native model or the specific productivity metrics for DavaFlow beyond general ranges.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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