Endava’s Earnings Call: Growth Amid Challenges

Endava ((DAVA)) has held its Q2 earnings call. Read on for the main highlights of the call.

Endava’s recent earnings call conveyed a balanced sentiment, highlighting substantial growth in North America and the banking and capital markets sector, propelled by AI and core modernization initiatives. However, the company faces profitability challenges, regional softness, and declines in specific verticals, such as Payments and TMT, reflecting both positive strides and notable financial hurdles.

Revenue Growth in North America

Revenue from North America surged by 32.7% for the quarter ending December 31, 2024, compared to the same period last fiscal year. This growth was primarily driven by the integration of the GalaxE business, underscoring Endava’s strategic expansion in this key market.

Strong Performance in Banking and Capital Markets

The banking and capital markets industry vertical demonstrated impressive growth, increasing by 43.6% over the past 12 months. This was fueled by substantial contributions from large core modernization projects, highlighting Endava’s strength in this sector.

Continued Focus on AI and Core Modernization

Endava continues to leverage AI-enabled capabilities, such as Morpheus and Compass, to facilitate client transformations. These initiatives have contributed to a robust pipeline of signed and potential opportunities, positioning the company for future growth.

Share Buyback Program

In a move to optimize capital allocation, Endava announced its first share buyback program totaling $100 million. This initiative reflects the company’s commitment to returning value to shareholders.

Improved Client Satisfaction

Client satisfaction remains high, with survey results showing that 92% of clients are likely to recommend Endava, and 90% are likely to repurchase. This indicates strong client relationships and service satisfaction.

Profit Decline

There was a significant decline in profit before tax, dropping to £2.5 million for the three months ended December 31, 2024, from £10.6 million in the same period the previous year. This highlights financial challenges faced by the company.

Challenges in UK and Rest of World

Endava experienced increased softness in the UK and other regions, attributed to a worsening macroeconomic environment. This has led to increased client caution and unplanned ramp-downs on existing projects.

Revenue Decline in Europe and Rest of World

Revenue from Europe decreased by 0.6%, and from the rest of the world by 43.5%, indicating regional challenges that need to be addressed.

Weakness in Payments and TMT Vertical

The payments vertical continues to face challenges with reduced client spending, and the TMT vertical is weakening, partly due to project shutdowns, putting pressure on these segments.

Restructuring Charges

Endava incurred an exceptional charge of £5.5 million due to headcount reduction, reflecting ongoing cost optimization efforts.

Forward-Looking Guidance

For Q3 FY2025, Endava anticipates revenue between £198 million and £200 million, projecting a 13% to 14% constant currency growth year-over-year. The full fiscal year 2025 is expected to generate revenue of £795 million to £800 million, equating to an 8.5% to 9% year-over-year increase. Adjusted diluted EPS is projected to be between £0.31 and £0.32 for Q3 FY2025 and £1.20 to £1.23 for the full year. The company also emphasizes continued growth in the banking and capital markets vertical and a strategic share buyback program.

In conclusion, Endava’s earnings call presented a mixed outlook, with commendable growth in North America and the banking sector, alongside challenges in profitability and certain global markets. The company’s strategic focus on AI and modernization, coupled with a share buyback program, indicates a forward-thinking approach to navigate the financial landscape.