Endava plc (DAVA) Earnings

Management highlights

### Near-Term Business Context - Demand remains uneven across sectors, client deal cycles are extended, and technology spending is heavily scrutinized. The Q3 revenue miss and lowered guidance stem from slower-than-expected pipeline conversion, driven by three main factors: Middle East client work delayed by the ongoing regional conflict, broad macroeconomic demand slowdown, and large complex outcome-based contracts taking longer to execute than planned. - The £364.6 million goodwill impairment is a non-cash accounting adjustment that does not impact liquidity, delivery capability, client commitments, or the company's ability to invest in future growth. ### AI-Driven Business Transformation - Endava has accelerated its shift to AI-native delivery, moving beyond client experimentation to operationalizing AI in complex enterprise environments. 15% of total Q3 revenue is now AI-driven (transformative projects with AI at the core), up from 5% a year prior, with higher margins than traditional digital transformation work. - DataFlow (Endava's AI-native delivery framework) is now deployed with 12 enterprise clients, up from 3 last quarter. Over 1,000 engineers (more than 10% of direct staff) are currently trained and using DataFlow, with rollout accelerating across the organization. - More than 75% of Endava's employees now use AI in daily work, driving higher delivery productivity, and the company is investing in retraining existing bench staff in AI and DataFlow skills to support future growth. ### Strategic Partnerships - Expanded strategic partnerships with leading hyperscalers and AI providers: Endava was selected for Google's AI Agent Partner Program (traditionally limited to the largest global system integrators) for its Gemini Enterprise and Vertex AI expertise. It also maintains deep partnerships with OpenAI, AWS, and Microsoft, with 10 new marketplace offerings already live, and more than 15 expected to launch by the end of the fiscal year. - Announced a new strategic collaboration with Mastercard to accelerate next-generation payments adoption, with initial focus on high-growth sectors including insurance, healthcare, telco, mobility, and travel. ### Key Client Wins and Progress - PGX, Endava's modular payment transformation accelerator delivered via DataFlow, secured three new wins: a large strategic engagement with NatWest Group's merchant payments arm, a global payments provider, and a pan-European energy retailer. PGX enables clients to cut scaling costs, boost operational efficiency, and add AI-enabled capabilities while meeting strict regulatory compliance requirements for payments. - Notable new/extended client engagements include a 2028 extension of the contract with Slovenia's Ministry of Finance to operate and enhance the national eDAVKI tax portal, a two-year extension and expansion with North Standard Insurance, and deepened engagement with a global vehicle manufacturer to deliver AI-enabled cloud native production systems. - Delivered a Google Cloud-powered AI knowledge unification pilot for a European media and entertainment group that reduced engineer time spent locating information by 60% and cut new hire onboarding time by 30%, validating Endava's agentic AI approach.

Guidance

Management lowered guidance for Q4 FY26 and full-year FY26 due to slower-than-expected pipeline conversion, most pronounced in the banking and capital markets vertical across all regions: - Q4 FY26 revenue guidance is £181 million to £185 million, representing a constant currency year-over-year revenue decrease of 3.5% to 1.0%. Adjusted diluted EPS guidance is 9 pence to 13 pence per share. - Full-year FY26 revenue guidance is £721.8 million to £725.8 million, representing a constant currency year-over-year revenue decrease of 6.0% to 5.0%. Adjusted diluted EPS guidance is 45 pence to 49 pence per share. - The full-year adjusted tax rate is expected to be approximately 25%, with a Q4 adjusted tax rate of 37% following the deferred tax asset derecognition in Q3. - As of the call, contracted and committed revenue covers 97% of the low end of the Q4 guidance range and 95% of the high end, leaving only £5 million to £9 million of pipeline conversion needed to hit the target range, which management describes as a conservative outlook.

Segment performance

Total Q3 FY26 revenue was £178.5 million, an 8.4% year-over-year decrease (6.4% decrease in constant currency), down from £194.8 million in Q3 FY25. AI-driven business: Revenue was £27 million, representing 15% of total revenue, up from 5% of total revenue a year prior, with higher margins than traditional business. By geography: North America accounted for 38% of revenue (5.5% YoY decrease), Europe for 23% (3.6% YoY decrease), UK for 33% (15.4% YoY decrease, driven by a client reclassification), Rest of World for 6% (1.8% YoY decrease). By client concentration: The 10 largest clients accounted for 40% of revenue (compared to 39% in the prior year), with average spend per top 10 client decreasing 5.6% YoY to £7.1 million. Profitability: Reported pre-tax loss was £372 million, including a non-cash £364.6 million goodwill impairment charge and a £23.2 million non-cash deferred tax asset derecognition charge. Adjusted pre-tax profit was £3.2 million, with an adjusted PBT margin of 1.8%, down from £24.6 million and 12.6% in the prior year. Adjusted diluted EPS was 5 pence, down from 34 pence in the prior year. Adjusted free cash flow was negative £3.1 million, down from positive £17.5 million in the prior year, due to late March billings that are expected to be collected by the end of June. Cash and cash equivalents totaled £48.4 million, with borrowings of £195.8 million, up from £180.9 million at the start of the fiscal year, primarily to fund the company's share repurchase program. Capital expenditure as a percentage of revenue was 1.6%, up from 0.6% in the prior year.

Risks & headwinds

- Persistent macroeconomic weakness has extended client deal cycles, increased scrutiny of discretionary technology spending, and led to slower pipeline conversion than management previously forecast. Endava has higher exposure to discretionary client spending than many of its peers, leading to continued downward pressure on traditional digital transformation revenue. - Ongoing conflict in the Middle East has completely halted activity with clients in the region, creating an unanticipated headwind to Q3 and Q4 revenue that was not forecast in prior guidance. - Large, transformative outcome-based AI contracts have longer sales cycles than expected, due in part to client legal and regulatory learning curves that slow contract finalization, creating revenue unpredictability quarter-over-quarter. - The company's ongoing business pivot to AI-driven work has created near-term margin pressure from increased go-to-market investment and lower billability, as the company invests in retraining existing staff for new delivery models. - Leverage has increased following share repurchase activity, and the company has an upcoming refinancing in FY27 that requires deleveraging as a priority. - Goodwill carrying value was impaired in Q3 due to reduced market capitalization and a lowered business outlook, reflecting the impact of extended weak demand on the company's valuation.

Analyst Q&A

• Q: With AI projects moving to production but continued pressure on traditional client budgets, when will AI growth drive meaningful booking improvements? What are the priorities for capital allocation and deleveraging given recent borrowings for share buybacks? /

  A: AI-driven revenue has grown threefold year-over-year to 15% of total revenue (£27 million in Q3), and is now a substantive, growing segment of the business. AI deals are larger, more complex, and outcome-based, so they take longer to close, while traditional discretionary digital transformation revenue continues to decline as part of the intentional pivot. For capital allocation, Q3 cash generation was weak due to late March billing that will be collected by June, and management has identified deleveraging as a key priority ahead of the FY27 refinancing.

• Q: Is revenue weakness driven by transitory timing factors, or by vendor consolidation, competitive gaps, or other structural issues? How does Endava view competition/cooperation with foundational AI model providers that are building their own services? /

  A: Endava is not seeing meaningful vendor consolidation headwinds. AI-driven productivity gains have led clients to harvest more near-term efficiency rather than reinvesting, but this is transitory as clients shift to larger AI transformation projects. Foundational AI model providers need specialized implementation partners like Endava to deliver complex enterprise projects, so this is primarily a collaborative go-to-market opportunity rather than competition, and Endava is already in active conversations for new joint channels.

• Q: Given multiple consecutive quarters of revenue misses, does planning and guidance processes need to change? How is Endava managing internal change and employee concerns about AI and the declining stock price? /

  A: The Middle East conflict was an unforeseen shock that hit near-close deals, and management is increasing focus on pipeline conversion timelines to improve forecasting accuracy. Endava uses a pioneer-and-rollout change management model: small teams test new AI and DataFlow approaches, then scale out across the organization. Over 75% of staff already use AI daily, more than 1,000 are trained on DataFlow, and adoption is growing steadily as the company pivots.

• Q: Why are outcome-based contracts taking longer to execute, and is this a transitory issue or permanent client resistance? What is the outlook for banking and capital markets and healthcare verticals? /

  A: Delays are not from client resistance to outcome-based models: these are large transformative deals, and clients are on a learning curve for contracting AI projects, with legal and regulatory teams taking longer to review agreements, which is expected to improve over time. Banking and capital markets saw a Q3 step down driven by client project completion and delivery lumpiness, with a partial recovery expected in Q4 that is weaker than prior forecasts. The large healthcare client that slowed spending in Q3 is expected to continue slowing into Q4, partially offset by growth from another client, stabilizing the vertical in Q4 in line with the new guidance.