Industry Overview - The IT services demand environment has experienced various cycles over the years, with significant changes influenced by market conditions and technological advancements [1] - The digital transformation wave, which began after the initial downturn in the early 2000s, has been a major driver of growth for the industry over the past two decades [2] Company Insights - Endava has been a key player in the IT services sector, successfully navigating through different market phases since its inception [2] - The company capitalized on increased technology spending that emerged following the COVID-19 pandemic, marking a significant boost in demand for IT services [3]

Core Insights - Endava plc (NYSE:DAVA) is a British tech consultancy that specializes in modernizing IT systems for large corporations, but it has faced significant challenges in the stock market, with shares dropping over 30% and stock value plummeting by more than 80% since early 2024 due to guidance that did not meet investor expectations [1][6] Financial Performance - On September 4, 2025, DAVA reported earnings per share of $0.329, surpassing the estimated $0.32, and achieved revenue of approximately $256.3 million, significantly exceeding the estimated $184 million [2] - Despite the positive earnings surprise, the company's revenue decreased by 4% year over year, and its workforce was reduced by 5%, indicating challenges in maintaining consistent growth [2][6] - The company set its full-year fiscal 2026 revenue and earnings targets below expectations, despite the positive earnings report [3][6] Valuation Metrics - DAVA has a price-to-earnings (P/E) ratio of approximately 24.05, indicating the price investors are willing to pay for each dollar of earnings [4] - The price-to-sales ratio stands at about 0.56, suggesting that the market values the company's sales at just over half of its current market price [4] - The enterprise value to sales ratio is approximately 0.71, reflecting the company's total valuation relative to its sales [4] Financial Stability - DAVA maintains a relatively low level of debt compared to its equity, with a debt-to-equity ratio of about 0.29, indicating financial stability [5][6] - The current ratio is approximately 2.18, suggesting good short-term financial health [5][6]

Summary of Endava (DAVA) Conference Call Company Overview - **Company**: Endava (DAVA) - **Event**: Citi Tech Conference - **Date**: September 05, 2025 Industry Insights - **IT Services Demand**: The IT services industry has experienced cycles of demand, with a significant boost post-COVID leading to increased technology spending. However, there has been a recent shift towards more cautious spending as enterprises seek to control budgets more effectively [5][6] - **Digital Transformation**: The digital transformation wave that began post-COVID is now seeing a pull-forward effect, leading to a hiatus similar to the early 2000s [6][7] - **AI Impact**: The introduction of AI, particularly Generative AI, is creating uncertainty in the market. While some believe it may reduce the need for IT services, Endava sees it as an opportunity for increased demand as clients require deeper integration of AI into their core systems [11][12][15] Financial Performance - **Recent Deals**: Endava closed five large deals in Q3 and eight in Q4, marking the largest order book ever closed, although this momentum is not yet reflected in revenue [17][59] - **Revenue Guidance**: The company anticipates a decline of 5% to 6% in Q1 on a constant currency basis, with a flat outlook for the full year. Approximately 70% of revenues are contracted and committed, up from 60% the previous year [53][54] - **Large Deals Definition**: Large deals are defined as those over $5 million, with some reaching up to $100 million [25] Client Behavior and Market Trends - **Client Spending**: The top 10 clients account for 37% of total revenue, up from 32%, indicating a focus on larger clients [36] - **Geographic Trends**: North America shows good momentum despite a sequential decline due to FX movements. The UK and Europe are experiencing bumpy trends, particularly in payments, which are under pressure [38][39] - **Sector Performance**: The payments sector is facing margin pressure due to new competitors and a shift in traditional players towards M&A rather than technology investment [41][43] Strategic Shifts - **Focus on Larger Clients**: Endava is trimming its long tail of smaller clients to focus on larger, more profitable accounts [35] - **Outcome-Based Pricing**: The company is shifting towards more outcome-based pricing models, moving away from time-and-materials (T&M) structures, with 23% of business now outcome-based, up from 17% a year ago [50][49] - **AI Integration**: Endava is investing in AI to enhance productivity and revenue per head, expecting a gradual increase in headcount as they recruit graduates and specialists in data and AI [52][48] Partnerships and Future Outlook - **Partnership Development**: Endava is focusing on building partnerships with hyperscalers and LLM providers, aiming for these partnerships to contribute 25% to 30% of business in the next five years, up from below 5% currently [72][73] - **Investment in AI**: The company is investing in AI capabilities, which is expected to drive higher revenues and margins over the next two to three years [49][62] Conclusion - Endava is navigating a complex IT services landscape marked by cautious client spending and the transformative potential of AI. The company is strategically focusing on larger clients, shifting pricing models, and enhancing partnerships to position itself for future growth.

Core Viewpoint - Endava's disappointing fourth-quarter 2025 financial results have led to a significant drop in its stock price, despite beating analysts' bottom-line expectations [4][6]. Financial Performance - Endava reported adjusted free cash flow (FCF) of 82.7 million British pounds in fiscal 2021, which increased to 107.2 million British pounds in fiscal 2022 and 111.5 million British pounds in fiscal 2023. However, FCF declined to 58.4 million British pounds in fiscal 2024 and further decreased to 48.7 million British pounds in fiscal 2025 [5]. - The company's revenue for fiscal 2025 was 772.3 million British pounds, but management projects sales to decline to between 750 million British pounds and 765 million British pounds for fiscal 2026 [6]. Market Reaction - Following the release of the financial results, Endava's shares dropped 32.1% from the end of last Friday's trading session through Thursday's market close [2]. - Despite a 14.7% increase in August, the stock has faced a negative start in September due to investor concerns over declining cash flow and the company's guidance for the upcoming fiscal year [1][4]. Management's Outlook - CEO John Cotterell highlighted that the company ended the quarter with its "highest ever quarterly order book," suggesting potential for future growth despite current investor disappointment [7][8].

Core Viewpoint - Endava PLC reported quarterly earnings of $0.31 per share, missing the Zacks Consensus Estimate of $0.32 per share, but showing an increase from $0.28 per share a year ago, indicating a -3.12% earnings surprise [1][2] Financial Performance - The company posted revenues of $239.41 million for the quarter ended June 2025, which was 4.22% below the Zacks Consensus Estimate and a decrease from $245.3 million year-over-year [2] - Over the last four quarters, Endava has surpassed consensus EPS estimates three times, but has only topped consensus revenue estimates once [2] Stock Performance - Endava shares have declined approximately 53.5% since the beginning of the year, contrasting with the S&P 500's gain of 9.6% [3] - The current Zacks Rank for Endava is 4 (Sell), indicating expectations of underperformance in the near future [6] Future Outlook - The consensus EPS estimate for the upcoming quarter is $0.38 on revenues of $252.72 million, and for the current fiscal year, it is $1.56 on revenues of $1.02 billion [7] - The outlook for the Computers - IT Services industry, where Endava operates, is currently in the bottom 39% of Zacks industries, which may negatively impact stock performance [8]

Financial Data and Key Metrics Changes - Endava's revenue for Q4 FY2025 was £186.8 million, a decrease of 3.9% compared to £194.4 million in the same period last year. In constant currency, revenue decreased by 0.7% [30] - Profit before tax for Q4 FY2025 was £3.8 million, compared to a loss of £0.4 million in the same period last year. Adjusted profit before tax (PBT) was £16.4 million, up from £14.9 million [30] - Adjusted PBT margin for Q4 FY2025 was 8.8%, compared to 7.7% in the same period last year [31] - For the fiscal year ended June 30, 2025, revenue totaled £772.3 million, a 4.3% increase from £740.8 million in the previous fiscal year [35] Business Line Data and Key Metrics Changes - Revenue from the 10 largest clients accounted for 37% of total revenue in Q4 FY2025, up from 34% in the same period last year. Average spend per client from these clients increased from £6.7 million to £6.9 million [31] - In FY2025, revenue from North America increased by 21.9%, while Europe decreased by 5.5% due to challenges in the payments and TMT verticals [38] - The healthcare sector saw a significant increase of 103.8% in revenue, primarily due to the Galaxy acquisition [40] Market Data and Key Metrics Changes - North America accounted for 38% of revenue in Q4 FY2025, Europe for 23%, the UK for 33%, and the rest of the world for 6% [31] - Revenue from North America decreased by 5.3% in Q4 FY2025, while revenue from Europe declined by 13.1% [32] - The UK market grew by 5.9%, while the rest of the world saw a decline of 5.8% [32] Company Strategy and Development Direction - The company is transitioning to become AI native, focusing on evolving its delivery model and forming new alliances to enhance its technology offerings [7][8] - Endava is expanding its partnerships, particularly with OpenAI, to strengthen its technical capabilities and drive new client acquisitions [13][15] - The introduction of flexible pricing structures, including transaction-based models, is aimed at aligning with client needs while managing associated risks [21][76] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the short-term operating backdrop, noting that many clients are recalibrating their spending [9] - The company expects revenue for Q1 FY2026 to be between £181 million and £183 million, representing a constant currency decrease of 5% to 6% year-over-year [42] - Management highlighted that the current economic environment is causing delays in client decision-making, impacting growth [99] Other Important Information - Endava's adjusted free cash flow was negative £4 million for Q4 FY2025, impacted by delayed payments due to improved terms for a key client [33] - The company reported a decrease in headcount by 5% year-over-year, with a focus on recruitment in high-demand areas such as data, AI, and cloud [28] Q&A Session Summary Question: How to reconcile 2026 growth guidance with strong order book commentary? - Management indicated that the order book includes both renewal work and new business, with some new projects taking time to ramp up into revenue [45][46] Question: Can you provide details on margin projections? - Management explained that reinstating bonuses and investing in AI will impact adjusted PBT margins, projecting a decrease of about 3% in FY2026 [49][50] Question: What is the impact of client number decline? - The decline in client numbers is attributed to the loss of small clients, while net additions in other segments remain positive [54][56] Question: What are the expectations for sequential growth after Q1? - Management expressed confidence in achieving sequential growth, supported by a higher proportion of contracted and committed revenue compared to the previous year [72][73] Question: How does the shift to flexible pricing structures impact financial outlook? - Management views flexible pricing as an opportunity, with structured contracts that secure minimum volumes while allowing for upside as new products are developed [76][78]

Financial Performance - Endava's revenue for FY25 was £772.3 million[65] - The revenue growth rate at constant currency was 24%[98] - Adjusted profit before tax for FY25 was £82.1 million[71] - Adjusted free cash flow for FY25 was £48.7 million[94] - The top 10 clients accounted for 37% of total revenue in Q4 FY25[78] Client Metrics - Endava had 619 clients in Q4 FY25[75] - The number of clients with revenue greater than £1 million was 133 in Q4 FY25[75] - The average spend from top 10 clients was £6870 thousand in Q4 FY25[82] - The average spend from remaining clients was £265 thousand in Q4 FY25[84] Workforce - Endava had 11,479 global employees as of June 30, 2025, a 50% decrease from Q4 FY24[41]

Financial Performance and Risks - The company's operating results have experienced significant variability, and past results may not be indicative of future performance due to factors such as economic slowdown and inflation [37]. - Profitability could suffer if the company fails to maintain favorable pricing for its services, which are influenced by client demand and competitive pressures [39][41]. - Future growth forecasts are subject to significant uncertainty and may not materialize as expected, impacting the company's market opportunity [43]. - Economic conditions and geopolitical tensions may adversely affect client demand and project timelines, impacting revenue [69]. - The company experienced a slowdown in demand for services from clients in Europe due to a weakened economic outlook, impacting revenue and profitability [171]. - Increased inflation rates in the U.S. and Europe may adversely affect margins and profitability, as rising costs could not be passed on to clients [174]. - The ongoing geopolitical climate has significantly impacted financial results, with currency fluctuations affecting the company's operations [175]. - The company may face difficulties in obtaining debt or equity financing if equity and credit markets deteriorate due to political unrest or war [179]. Cybersecurity and Data Privacy - The company faces risks related to cybersecurity, including potential data breaches and ransomware attacks, which could disrupt operations and result in loss of sensitive information [45][46]. - The transition to a hybrid working model has increased risks to information technology systems and data security, as employees work from various locations [48]. - Security incidents could lead to significant costs, reputational damage, and loss of client trust, impacting revenue and operations [54]. - The company must comply with stringent data privacy laws, such as the EU GDPR, which impose severe penalties for non-compliance, including fines up to €20 million or 4% of annual global revenue [151]. - Data localization laws may hinder the company's ability to transfer personal data across borders, potentially disrupting operations and increasing regulatory exposure [153]. Client Dependency and Market Dynamics - The company is dependent on a limited number of industry verticals, and any decrease in demand for technology services in these verticals could adversely affect results [35]. - Payments clients accounted for 29.2%, 24.1%, and 18.7% of revenue for the fiscal years ended June 30, 2025, 2024, and 2023 respectively [64]. - The company's 10 largest clients represented 36.2%, 32.5%, and 32.8% of revenue for the fiscal years ended June 30, 2025, 2024, and 2023 respectively [66]. - Over the last five fiscal years, 90.7% of annual revenue came from clients who purchased services in the prior fiscal year [66]. - The ability to maintain long-term client relationships is uncertain due to clients' rights to terminate agreements with short notice [119]. Talent Management and Operational Efficiency - The company must attract and retain highly skilled IT professionals to maintain operational efficiency and service quality [35]. - The company has experienced a 15.2% attrition rate at the end of fiscal year 2025, up from 13.1% at the end of fiscal year 2023, exceeding the target of below 15% [92]. - Employee utilization rates are critical for profitability, and factors such as project transitions and demand forecasting significantly affect these rates [86]. - The company is dependent on attracting and retaining skilled IT professionals, particularly in regions with high competition for talent [91]. Regulatory and Compliance Challenges - The company relies on a strong brand and corporate reputation, which could be negatively affected by regulatory scrutiny and evolving ESG demands [36]. - Compliance with new laws and regulations may increase operational costs and litigation risks, impacting the company's financial condition [125]. - The company is subject to various anti-corruption laws, including the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act, which could increase compliance burdens [203]. - Legislative changes in the UK and EU could significantly impact the company's ability to provide outsourced services cost-effectively [123]. Acquisitions and Integration - The company may face challenges in integrating acquisitions, which could disrupt operations and strain resources [36]. - The company plans to continue pursuing acquisitions to enhance capabilities and geographic reach, but integration challenges may arise [102]. - The company may face challenges in integrating acquired businesses, which could delay anticipated benefits and harm financial results [105]. Technology and Innovation - The company uses AI tools in operations, which may present operational challenges and potential liability issues [71]. - The competitive landscape requires continuous innovation; failure to adapt to emerging technologies may result in client loss and reduced revenue [82]. - The adoption of agentic AI introduces significant risks, including potential unauthorized actions and liability exposure due to unanticipated actions taken by AI agents [72]. - The company has observed longer selling cycles for AI-based offerings, impacting financial performance due to clients' need for validation and preparation [84]. Legal and Intellectual Property Risks - The company indemnifies clients against potential intellectual property infringement claims, exposing it to significant financial liabilities [138]. - The company is subject to potential claims regarding intellectual property misappropriation, which could result in costly litigation and loss of rights [135]. - Risks associated with third-party content used in AI training could lead to intellectual property infringement claims against the company [74]. - The company may face challenges regarding the exclusive rights to software developed by current and former employees, which could lead to claims for additional compensation [140]. Financial Structure and Shareholder Rights - The company has an unsecured revolving credit facility amounting to £350.0 million, with £180.9 million outstanding as of June 30, 2025 [111]. - The trading price of the company's American Depositary Shares (ADSs) may be volatile and influenced by factors beyond its control, including market conditions and economic events [208]. - The rights of shareholders differ from those typically offered to U.S. corporation shareholders, governed by English law [223]. - Shareholders of American Depositary Shares (ADSs) have fewer rights than direct shareholders and must act through the depositary to exercise their rights [224].

Revenue Performance - Q4 FY2025 revenue decreased by 3.9% year on year to £186.8 million, with a constant currency decrease of 0.7%[6] - FY2025 revenue increased by 4.3% year on year to £772.3 million, with a constant currency increase of 6.3%[3] - Revenue for the twelve months ended June 30, 2025, increased to £772,255,000, representing a growth of 4.3% compared to £740,756,000 in 2024[34] - Endava expects Q1 FY2026 revenue to be between £181.0 million and £183.0 million, representing a constant currency decrease of 5.0% to 6.0% year on year[15] - For FY2026, revenue is expected to range from £750.0 million to £765.0 million, indicating a constant currency change of between (1.5)% and 0.5% year on year[16] Earnings and Profitability - Diluted EPS for Q4 FY2025 was £0.02, compared to a loss of £(0.03) in the prior year[10] - Adjusted diluted EPS for FY2025 was £1.13, slightly up from £1.12 in the prior year[10] - Operating profit rose significantly to £31,507,000 from £20,140,000, reflecting a 56% increase year-over-year[34] - Adjusted profit before tax for the twelve months ended June 30, 2025, was £82,121,000, slightly down from £82,955,000 in 2024[39] - Basic earnings per share (EPS) improved to £0.36 for the twelve months ended June 30, 2025, compared to £0.29 in 2024[35] Client and Customer Metrics - The number of clients generating over £1 million in revenue decreased to 133 from 146 year on year[13] - Top 10 clients accounted for 37% of Q4 FY2025 revenue, up from 34% in the same period last year[13] - The percentage of revenue from the top 10 customers increased to 36% for the twelve months ended June 30, 2025, compared to 32% in 2024[44] - North America accounted for 38% of total revenue for the twelve months ended June 30, 2025, up from 33% in 2024[44] - Revenue from the Banking and Capital Markets sector increased to 20% in 2025, compared to 15% in 2024[44] Cash and Assets - As of June 30, 2025, cash and cash equivalents were £59.3 million, down from £62.4 million a year earlier[11] - Cash and cash equivalents at the end of the period were £59,345,000, a decrease from £62,358,000 in the previous year[37] - Total assets decreased to £935,771,000 as of June 30, 2025, from £1,008,956,000 in 2024, primarily due to a reduction in goodwill and intangible assets[36] Expenses and Compensation - Total share-based compensation expense for the twelve months ended June 30, 2025, was £32,045,000, a decrease of 7.4% from £34,678,000 in 2024[42] - Selling, general and administrative expenses related to share-based compensation rose to £9,261,000 in 2025, an increase of 5.5% from £8,776,000 in 2024[42] - Depreciation and amortization for the twelve months ended June 30, 2025, totaled £44,941,000, an increase of 15.2% from £38,941,000 in 2024[43] - Direct cost of sales for depreciation and amortization was £20,381,000 for the twelve months ended June 30, 2025, slightly down from £20,532,000 in 2024[43] Employee Metrics - The company had a closing number of total employees of 11,479 as of June 30, 2025, down from 12,085 in 2024, reflecting a reduction of 5.0%[44] - The average operational employees decreased to 10,403 for the twelve months ended June 30, 2025, from 10,587 in 2024[44] Other Financial Metrics - The company reported a net cash from operating activities of £52,773,000 for the twelve months ended June 30, 2025, down from £54,392,000 in 2024[41] - The company reported a total comprehensive expense of £19,164,000 for the year attributable to equity holders, compared to a comprehensive income of £14,081,000 in 2024[34] - The company experienced a foreign exchange impact of 2.0% on revenue growth, leading to a constant currency revenue growth rate of 6.3%[38] - The company repurchased 6,722,491 American Depositary Shares for $111.2 million as of August 29, 2025[19]

Group 1 - Endava (NYSE: DAVA) is a founder-led company in the IT services industry, characterized as a high-quality company with an 80% upside potential from current levels [1] - The current trading valuation of Endava reflects cyclical macroeconomic challenges rather than its long-term growth prospects [1] - The analysis focuses on identifying winners and losers in industries where corporate strategy plays a crucial role, emphasizing market structure, competitive positioning, and strategic catalysts [1]