DAVA — Endava plc

Endava (DAVA) Q3 Fiscal Year 2026 Earnings Call Summary

1. Key Financial Results and Metrics

• Revenue: GBP 178.5 million, an 8.4% decrease year-over-year (GBP 194.8 million in Q3 FY25). In constant currency, revenue decreased by 6.4%.
• Loss Before Tax: GBP 372 million, impacted by a noncash goodwill impairment of GBP 364.6 million, compared to a profit of GBP 13.6 million in the prior year.
• Adjusted Profit Before Tax (PBT): GBP 3.2 million, down from GBP 24.6 million year-over-year, with an adjusted PBT margin of 1.8% compared to 12.6% in Q3 FY25.
• Adjusted Diluted Earnings Per Share: 5p, down from 34p in the prior year.
• Free Cash Flow: Negative GBP 3.1 million, compared to positive GBP 17.5 million in Q3 FY25.
• Cash and Cash Equivalents: GBP 48.4 million at the end of the quarter, down from GBP 68.3 million a year prior.
• Borrowings: Increased to GBP 195.8 million from GBP 136.5 million year-over-year.

2. Strategic Updates and Business Highlights

• AI-Driven Business Growth: AI-driven revenue increased from 5% to 15% of total revenue year-over-year, totaling GBP 27 million.
• Partnerships: Expanded collaborations with Mastercard and Google, focusing on AI integration and next-generation payment solutions.
• Dava.Flow Deployment: Increased from 3 to 12 clients, showcasing a shift towards AI-native delivery models.
• Market Positioning: Emphasis on operationalizing AI for clients, with a focus on enterprise-scale initiatives and outcome-based contracts.

3. Forward Guidance and Outlook

• Q4 Fiscal Year 2026 Guidance: Expected revenue between GBP 181 million to GBP 185 million, reflecting a constant currency decrease of 3.5% to 1.0% year-over-year.
• Full Fiscal Year 2026 Guidance: Revenue forecasted between GBP 721.8 million to GBP 725.8 million, indicating a constant currency decline of 6.0% to 5.0%.
• Adjusted Diluted EPS: Expected to range from 9p to 13p for Q4 and 45p to 49p for the full year.

4. Bad News, Challenges, or Points of Concern

• Revenue Miss: Slower-than-expected pipeline conversion due to geopolitical issues in the Middle East and extended deal cycles.
• Goodwill Impairment: Significant noncash charge reflecting market capitalization decline.
• Client Spending Pressure: Clients are scrutinizing technology budgets more closely, impacting discretionary spending.
• Operational Challenges: Transitioning to AI-driven contracts is taking longer than anticipated, with clients' legal and regulatory concerns causing delays.
• Negative Cash Flow: Increased receivables led to negative free cash flow, although collections are expected to improve in Q4.

5. Notable Q&A Insights

• Customer Decision-Making: Clients are increasingly interested in AI-driven transformations, but decision cycles are lengthening due to budget pressures and regulatory concerns.
• Capital Allocation: Management is focused on reducing leverage and improving cash generation, with plans to address refinancing in FY27.
• Market Dynamics: No significant vendor consolidation pressures noted; however, clients are benefiting from increased productivity, impacting Endava's reinvestment capabilities.
• AI Revenue Definition: AI-driven revenue is defined as projects where AI is central to business transformation, with expectations for this segment to grow significantly.
• Margin Protection Strategies: Transitioning to outcome-based contracts is expected to provide better margins compared to traditional time-and-material contracts, though current margin pressures are linked to the ongoing transition and investment in skills.

Overall, while Endava faces significant challenges in the current macroeconomic environment, it is strategically pivoting towards AI-driven services and partnerships, with a focus on long-term growth despite short-term setbacks.