Endava plc (DAVA) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary indicates declining financial performance with reduced revenue guidance and increased expenses. The Q&A reveals concerns about FX impacts, increased investments weighing on margins, and a lack of specific guidance details. Despite some positive developments, such as AI adoption and large deals, the overall sentiment is negative due to revenue declines, higher borrowings, and cautious guidance. Considering the small-cap nature of the company, the stock is likely to react negatively, with a potential decrease of 2% to 8% over the next two weeks.
Key Financial Performance
Revenue GBP 184.1 million, representing a 5.9% decrease year-on-year and up 3.3% from Q1 FY '26. The decrease was attributed to FX headwinds and the loss of a significant media client.
Loss before tax GBP 7.2 million compared to a profit of GBP 2.5 million in the same period in the prior year. The loss was due to investments in AI-native delivery and next-gen talent.
Adjusted PBT GBP 10.7 million compared to GBP 21.8 million for the same period in the prior year, with a margin of 5.8% compared to 11.2%. The decrease was due to investments in AI-native delivery and next-gen talent, reducing the margin by approximately 3%.
Adjusted diluted earnings per share 16p for the 3 months ended December 31, 2025, compared to 30p for the same period in the prior year. The decrease was due to investments in AI-native delivery and next-gen talent.
Revenue from 10 largest clients Accounted for 35% of revenue, down from 36% in the same period last fiscal year. The average spend per client decreased from GBP 7.1 million to GBP 6.5 million, representing a 7.9% year-over-year decrease, partly due to FX movements.
Regional revenue distribution North America accounted for 40% of revenue, Europe for 23%, the U.K. for 31%, and the Rest of the World for 6%. Revenue from North America decreased by 5.1%, Europe by 8.5%, and the U.K. by 9.1%, while the Rest of the World increased by 21.8%. The decreases were driven by FX headwinds, reclassification of clients, and sector-specific weaknesses.
Adjusted free cash flow GBP 20.1 million for the 3 months ended December 31, 2025, down from GBP 31.6 million during the same period last fiscal year. The decrease was due to increased capital expenditure.
Cash and cash equivalents GBP 68.5 million at December 31, 2025, compared to GBP 59.3 million at June 30, 2025, and GBP 60.1 million at December 31, 2024. The increase was due to borrowings supporting the share repurchase program.
Borrowings GBP 202.7 million at December 31, 2025, up from GBP 180.9 million at June 30, 2025, and GBP 123.7 million at December 31, 2024. The increase was to support the share repurchase program.
Capital expenditure 4.4% of revenue for the 3 months ended December 31, 2025, compared to 0.2% in the same period last fiscal year. The increase was due to a one-time spend on Payments Accelerator.
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Operating Highlights
AI-native engagement life cycle (Dava.Flow): Strong initial interest from clients, faster delivery, tighter control, and full traceability versus legacy models. Early results show higher productivity and better quality.
AI projects: Advanced several enterprise-scale AI projects, including modernizing a global payments network's chargeback dispute system and streamlining pricing for a global specialty insurer.
AWS marketplace offerings: Released two new offerings: cloud application engineering and AWS Landing Zone Accelerator.
Strategic partnerships: Expanded partnerships with OpenAI, AWS, Google Cloud, and Microsoft Azure. Notable wins in financial services in the UK, USA, and Asia Pacific.
Dava.Rise program: Launched a venture acceleration program to convert start-up innovation into enterprise-scale solutions.
Revenue performance: Revenue totaled GBP 184.1 million, a 5.9% decrease year-on-year but a 3.3% increase from Q1 FY '26.
Adjusted PBT margin: Decreased to 5.8% due to investments in AI-native delivery and next-gen talent.
Regional revenue distribution: North America accounted for 40%, Europe 23%, UK 31%, and Rest of the World 6% of revenue.
AI-native transformation: Investments in recruitment, training, and partnerships to establish Endava as an AI leader.
Client wins: Secured contracts with PayNet-NETS, Accor Plus, and a global life sciences company for AI-driven solutions.
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Risk or Challenges
Revenue Decline: Revenue decreased by 5.9% year-on-year and 5.1% in constant currency terms, driven by FX headwinds and the loss of a significant media client.
Profitability Challenges: Loss before tax of GBP 7.2 million compared to a profit of GBP 2.5 million in the prior year. Adjusted PBT margin dropped from 11.2% to 5.8%, impacted by investments in AI-native delivery and next-gen talent.
Client Concentration Risk: Revenue from the 10 largest clients decreased by 7.9% year-over-year, with average spend per client dropping from GBP 7.1 million to GBP 6.5 million.
Geographic Revenue Weakness: Revenue from Europe and the U.K. declined by 8.5% and 9.1%, respectively, due to weakness in Payments, Mobility, and TMT verticals.
Currency Exchange Headwinds: Ongoing weakening of the U.S. dollar against GBP created revenue headwinds, impacting financial performance.
Increased Borrowings: Borrowings increased to GBP 202.7 million, up from GBP 123.7 million in the prior year, partly to fund the share repurchase program.
Capital Expenditure Increase: Capital expenditure rose to 4.4% of revenue compared to 0.2% in the prior year, driven by a one-time spend on Payments Accelerator.
AI Investment Impact: Investments in AI-native delivery and next-gen talent reduced adjusted PBT margin by approximately 3%.
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Guidance & Outlook
Revenue Guidance for Q3 FY 2026: Expected revenue to be in the range of GBP 182 million to GBP 185 million, representing a constant currency revenue decrease of between 4% and 2.5% year-over-year.
Revenue Guidance for Full Year FY 2026: Expected revenue to be in the range of GBP 736 million to GBP 750 million, representing a constant currency revenue decrease of between 3.5% and 1.5% year-over-year.
Adjusted Diluted EPS Guidance for Q3 FY 2026: Expected adjusted diluted EPS to be in the range of 18p to 21p per share.
Adjusted Diluted EPS Guidance for Full Year FY 2026: Expected adjusted diluted EPS to be in the range of 80p to 86p per share.
Impact of AI Investments on Margins: The ongoing investment in AI-native delivery and next-gen talent is expected to continue impacting the adjusted PBT margin, reducing it by approximately 3%.
Currency Exchange Impact: The weakening of the U.S. dollar against GBP is creating revenue headwinds, with growth stronger in constant currency terms by 1% for the full year.
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Shareholder Return Plan
Share Repurchase Program: As of January 31, 2026, we purchased approximately 8 million ADSs for $121.9 million under the share repurchase program, and we had $28.1 million remaining for the repurchase under our Board's share repurchase authorization.
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Key Q&A
Q:What drives the growth in the fourth quarter after a flattish third quarter on an FX-neutral basis?
A:The growth in Q4 is driven by an increase in working days compared to Q3, which adds about 2% growth. Additionally, some large deals that have been secured underpin the growth. The sequential growth appears to be about 8%, but the underlying growth is approximately 6%, compared to 4% in Q3.
Q:Can you share more details about the extensions with the two largest Payment clients and whether sequential growth is expected beyond this year?
A:The extensions with the two largest Payment clients are mostly on the run rate level from Q1 and Q2, with a little incremental work. The work involves switch gateway space, helping clients rationalize costs and enhance value propositions. Sequential growth beyond this year depends on the pipeline and opportunities.
Q:Are the increased investments in the second half higher than expected, and what is the FX impact on margins?
A:Yes, investments in the second half are slightly higher than expected, including partnerships with Miro and Cognition for Dava.Flow. These weigh on margins by about 3%. FX impacts gross margin slightly, with the weakness of the dollar contributing about a 0.5% headwind, mainly affecting revenue growth rather than margins.
Q:What are the trends in OpenAI GPT enterprise adoption and concerns about services and software displacement?
A:OpenAI GPT enterprise adoption is strong, with Endava jointly selling with OpenAI and achieving success in the enterprise market. Concerns about services and software displacement are mitigated by the complexity of enterprise adoption, which requires governance, regulatory frameworks, and modernization of legacy systems. Endava sees opportunities in addressing these challenges and expects growth in demand for AI solutions.
Q:What are the assumptions behind the top-line guidance, including spend around top customers and pipeline/booking assumptions?
A:The top-line guidance assumes stability in the top 10 clients, with Payments clients dominating. A slight slowdown in a large Healthcare client is expected in Q3, resuming in Q4. Pipeline assumptions include 95% contracted and committed for Q3 and 70%-75% for Q4. Sequential growth is modest, with underlying growth of 6% in Q4 compared to 4% in Q3.
Q:How does GenAI engagement pricing compare to core work, and are there transitions from proof-of-concept to production?
A:New business is shifting to outcome-based solutions supported by AI, with Dava.Flow helping to define benefits and functionality early. This offers a wider range of margin outcomes, with strong potential at the top end. Transitions from proof-of-concept to production vary by industry and customer.
Q:Can you provide more details on Dava.Flow adoption, including client numbers, revenue impact, and pricing/margin effects?
A:Dava.Flow is focused on outcome-based deals, where it delivers higher velocity and allows participation in upside benefits. Adoption is limited to larger projects, and while client numbers are low, the scale of projects is significant. It impacts pricing and margins positively in outcome-based engagements.
Q:What are the trends in signings, including large and small deals, and have there been any surprises, delays, or cancellations?
A:The velocity of signings is stable at current levels, with no surprises, delays, or cancellations. Larger deals involve more due diligence due to their scale and multiyear nature. Strength is noted in the financial services sector, particularly in payments and banking.
Q:Review of Unclear Management Responses
A:Management avoided providing specific numbers or detailed metrics for Dava.Flow adoption, citing that client numbers would be misleading due to the focus on larger projects. Additionally, while discussing the broader pricing environment for GenAI engagements, the response lacked detailed numerical data or specific industry trends.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI workflow
AWS
Accor
Boex product
Flow
Global Payments
NETS venture
Nexus Global
Nexus Technical
OpenAI
PayNet NETS
Rise
adoption
agent
capability
delivery
demand
digitization
engagement
governance
hypothesis
insurer
interest
leader
legacy
life
loyalty
measure
network
outcome
partner
partnership
payment
portfolio
program
scale
science
sector
solution
speed
system
technology
work stream
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The earnings call summary indicates declining financial performance with reduced revenue guidance and increased expenses. The Q&A reveals concerns about FX impacts, increased investments weighing on margins, and a lack of specific guidance details. Despite some positive developments, such as AI adoption and large deals, the overall sentiment is negative due to revenue declines, higher borrowings, and cautious guidance. Considering the small-cap nature of the company, the stock is likely to react negatively, with a potential decrease of 2% to 8% over the next two weeks.
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