EPS of $0.11 decreased by 14.3% from previous year
Gross margin of 23.0%
Net income of 6.85M
"Gen AI adoption is becoming a key priority for clients." - John Cotterell
Endava plc (DAVA) QQ2 2025 Results Analysis: AI-led Core Modernization Acceleration Amid Macro Headwinds with GalaxE Integration and a $100m Buyback
Executive Summary
Endava delivered a solid QQ2 2025 performance in GBP terms, with revenue of £195.6m, up 6.6% year over year and 9.1% in constant currency, underpinning a diversified services mix and a growing AI-enabled transformation agenda. However, profitability remained modest in the quarter, with operating income of £1.7m and net income of £6.9m, as the company incurred a £5.5m exceptional restructuring charge related to cost optimization ahead of GalaxE integration. Management signaled that margin improvement will flow from ongoing cost controls and the gradual realization of synergies from GalaxE, with the expectation of a margin recovery into future quarters. Cash generation remained robust, delivering £31.6m of free cash flow and ending the period with £60.1m of cash on hand, while net debt stood at £115.8m on £175.8m of gross debt. The Board approved a $100m share repurchase program, reflecting continued capital allocation discipline. Looking ahead, Endava reaffirmed its guidance for FY2025: Q3 revenue of £198-£200m (cc growth 13-14% YoY) and adjusted diluted EPS of £0.31-£0.32; full-year revenue of £795-£800m (cc growth 8.5-9%), and adjusted diluted EPS of £1.20-£1.23, based on January 31, 2025 FX rates. The near-term backdrop includes macro softness in the UK and rest of world, a softer Payments vertical, and ongoing integration efforts, balanced by strong momentum in Banking & Capital Markets and AI-enabled core modernization opportunities. The combination of AI-driven offerings (Morpheus, Compass, Ray, Dash) and a scalable services platform positions Endava to capitalize on a multi-year AI-enabled transformation cycle, albeit with longer sales cycles and execution risk during integration. Investors should monitor: (1) conversion of large deals and ramp timing into Q4, (2) progress on GalaxE synergies and cost optimization, (3) macro development in UK/rest of world, and (4) utilization and pricing dynamics, including the ongoing shift to higher-value, potentially outcome-based engagements.
Key Performance Indicators
Revenue
195.59M
QoQ: 0.28% | YoY:6.56%
Gross Profit
45.02M
23.02% margin
QoQ: -7.48% | YoY:0.32%
Operating Income
1.67M
QoQ: -64.33% | YoY:-63.77%
Net Income
6.85M
QoQ: 204.90% | YoY:-17.92%
EPS
0.12
QoQ: 211.69% | YoY:-14.29%
Revenue Trend
Margin Analysis
Key Insights
Revenue (Q2 2025): £195.6m, up 6.6% YoY; cc growth 9.1% vs prior year. Revenue per client 10-largest clients averaged £7.1m vs £6.3m YoY (+13%).
Gross margin: 23.0% (gross profit £45.0m) indicating a stable but narrow margin profile; gross margin YoY 0.3% improvement in absolute terms but QoQ dynamics may vary.
Operating income: £1.67m; operating margin 0.86%. Adjusted PBT margin was 11.2% in the latest quarter; this compares with 12.4% in the year-ago quarter and 9.9% in Q1 FY2025, signaling improving cost discipline but still below historical highs.
Net income: £6.85m; net margin 3.50% for the quarter. Diluted EPS: £0.11; basic EPS: £0.12. YoY EPS trend shows a negative headline effect (EPS down mid-single digits) due to one-off charges and margin pressure, offset by one-off items and higher revenue per workday.
Free cash flow: £31.6m in Q2 2025; cash flow from operations £32.0m; capex £0.44m; free cash flow yield elevated relative to net income, supporting deleveraging and buyback capacity.
Financial Highlights
Headline metrics and trend analysis (GBP):
- Revenue (Q2 2025): £195.6m, up 6.6% YoY; cc growth 9.1% vs prior year. Revenue per client 10-largest clients averaged £7.1m vs £6.3m YoY (+13%).
- Gross margin: 23.0% (gross profit £45.0m) indicating a stable but narrow margin profile; gross margin YoY 0.3% improvement in absolute terms but QoQ dynamics may vary.
- Operating income: £1.67m; operating margin 0.86%. Adjusted PBT margin was 11.2% in the latest quarter; this compares with 12.4% in the year-ago quarter and 9.9% in Q1 FY2025, signaling improving cost discipline but still below historical highs.
- Net income: £6.85m; net margin 3.50% for the quarter. Diluted EPS: £0.11; basic EPS: £0.12. YoY EPS trend shows a negative headline effect (EPS down mid-single digits) due to one-off charges and margin pressure, offset by one-off items and higher revenue per workday.
- Free cash flow: £31.6m in Q2 2025; cash flow from operations £32.0m; capex £0.44m; free cash flow yield elevated relative to net income, supporting deleveraging and buyback capacity.
- Cash and liquidity: cash and cash equivalents £60.1m; total debt £175.8m; net debt £115.8m. Net debt uplift reflects GalaxE-related acquisition and integration timing; solid operating cash generation supports deleveraging trajectory.
- Cash conversion and working capital: change in working capital £9.40m; other working capital £9.40m; DSO around 92 days; Day sales outstanding and cash conversion cycle remain in line with historical practice for a services business with high client concentration.
- Client concentration and mix: revenue from the 10 largest clients accounted for 36% of quarterly revenue; North America represented 39% of revenue; UK 32%; Europe 24%; rest of world 5%.
- Growth by verticals: Banking & Capital Markets growth remains the strongest area at scale (industry vertical up 43.6% over the last 12 months), with ongoing core modernization opportunities; Payments shows continued softness; Insurance remains a relative bright spot; TMT and Mobility exhibit softer demand; Healthcare growth supported by GalaxE integration.
- Guidance and FX assumptions: Q3 revenue guidance £198-£200m; full-year revenue guidance £795-£800m; FX assumptions: £1 = US$1.24 and €1 = £1.20 as of Jan 31, 2025.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
195.59M
6.56%
0.28%
Gross Profit
45.02M
0.32%
-7.48%
Operating Income
1.67M
-63.77%
-64.33%
Net Income
6.85M
-17.92%
204.90%
EPS
0.12
-14.29%
211.69%
Key Financial Ratios
currentRatio
1.88
grossProfitMargin
23%
operatingProfitMargin
0.86%
netProfitMargin
3.5%
returnOnAssets
0.7%
returnOnEquity
1.05%
debtEquityRatio
0.27
operatingCashFlowPerShare
$0.54
freeCashFlowPerShare
$0.53
priceToBookRatio
2.24
priceEarningsRatio
53.6
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key takeaways from management call (themes):
- AI-driven demand and strategy: Gen AI adoption is a key priority for clients; Endava positions itself as an AI-native partner with Morpheus, Compass, Ray, and Dash accelerators to support enterprise-scale AI transformation. Quote: We believe AI is the single most defining technological advance of our lifetimes and we are already seeing this impact unfold daily (John Cotterell).
- Large deals and modernization: Management highlighted larger, longer-term modernization engagements in Banking & Capital Markets and healthcare; these deals underpin the growth trajectory but come with longer sales cycles and conversions into production are longer than traditional projects (John Cotterell).
- GalaxE integration and cost optimization: Integration progressing with systems cutover planned; expected future cost optimization opportunities as the two firms align, with initial focus on G&A and longer-term opportunities in delivery models (Mark Thurston).
- Margin trajectory and profitability: An exceptional charge of £5.5m related to headcount reduction occurred in the quarter; adjusted tax rate improved to 18.2% with a guidance of ~18.5% for the rest of FY2025; margin recovery anticipated as GalaxE benefits accrue and optimization actions take hold (Mark Thurston).
- Capital allocation: The company announced a $100m share repurchase program, subject to shareholder approval, signaling confidence in cash flow generation and capital discipline (John Cotterell).
- Geography and demand environment: North America remains the strongest geography; UK and rest of world show softer demand; Payments remains challenged while BCM and Insurance show resilience; macro headwinds in UK/rest of world weighing on near-term outlook (Mark Thurston).
- People and AI enablement: Endava is pivoting to an AI-native workforce; 11,668 Endavans at quarter-end, up 1.1% YoY; emphasis on reskilling and AI adoption across the organization (John Cotterell).
Gen AI adoption is becoming a key priority for clients.
— John Cotterell
North America remains strong for us. Europe is stable with some puts and takes in there, but the UK definitely signed towards the negative side.
— Mark Thurston
Forward Guidance
Outlook assessment and risk factors:
- Q3 FY2025 revenue target: £198m–£200m, CC growth 13–14% YoY; Adj diluted EPS £0.31–£0.32. Full-year FY2025 guidance: revenue £795m–£800m, CC growth 8.5–9%; Adjusted diluted EPS £1.20–£1.23. These targets assume FX of £1 = US$1.24 and €1 = £1.20 as of Jan 31, 2025. The guide reflects an assumed uplift from ongoing efficiency measures and GalaxE synergies, offset by macro softness in UK/rest of world.
- Achievability considerations: The Q3 guide explicitly incorporates macro headwinds in the UK and rest of world; the expectations for Q4 imply continued acceleration driven by large deals and pipeline conversion, albeit with execution risk given longer sales cycles in AI-enabled core modernization.
- Key catalysts and monitoring: (1) Ramp timing and realization of large BCM and healthcare engagements; (2) incremental margin expansion from GalaxE integration; (3) utilization and productivity gains from AI-enabled delivery; (4) stabilization or improvement in UK/rest-of-world demand; (5) sustained pricing power on certain services (pricing improvements observed, with inflation recovery contributing to revenue per workday).
- Investor takeaways: The company is transitioning to higher-value, AI-enabled engagements with a longer road to revenue recognition, supported by a stronger cash generation profile and a disciplined capital allocation plan (including a $100m buyback). Investors should monitor quarterly progression toward Q3 and FY targets, GalaxE integration milestones, and the evolution of the macro environment in Europe and other regions.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
DAVA Focus
23.02%
0.86%
1.05%
53.60%
PAGS
47.30%
31.80%
3.52%
10.40%
DLO
40.80%
17.60%
10.50%
13.01%
GLOB
35.70%
9.15%
2.17%
49.30%
EPAM
27.20%
10.30%
2.90%
27.09%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Medium-to-long-term positive investment thesis anchored in Endava’s AI-native transformation capabilities and scalable modernization platforms. The GalaxE integration adds growth optionality and potential cost synergies, while a disciplined buyback reinforces capital discipline. Near-term risks center on macro headwinds in the UK and rest of world, longer ramp times for large AI-enabled deals, and integration execution risk. The company’s strategic emphasis on AI-driven demand, diversified verticals, and strong pipeline in BCM/Insurance supports a constructive outlook, with potential upside should large deals convert earlier than anticipated and GalaxE synergies materialize as expected.
Key Investment Factors
Growth Potential
AI-native adoption and core modernization demand, particularly in Banking & Capital Markets and Healthcare, supported by Endava accelerators (Morpheus, Compass, Ray, Dash). Expected uplift from GalaxE integration and cross-sell across verticals as operating models converge and data capabilities scale. North America remains the growth engine with 39% of revenue and a strong pipeline of multi-year deals.
Profitability Risk
Near-term macro headwinds in the UK and Rest of World; continued FX and pricing pressures; execution risk associated with integration of GalaxE and realization of expected cost synergies; longer sales cycles for large AI-enabled transformations; concentration risk in a few large clients and verticals; potential volatility in discretionary technology spending.
Financial Position
Solid liquidity profile with £60.1m cash and £115.8m net debt, supported by positive free cash flow (£31.6m) and a scalable cost structure. Balance sheet shows goodwill (£511.6m) and intangible assets (£114.1m); leverage remains modest for an IT services peer, with ongoing focus on optimization and deleveraging through operating cash flow and potential reuse of capital through buybacks.
SWOT Analysis
Strengths
AI-native transformation positioning with Morpheus, Compass, Ray and Dash accelerators.
GalaxE integration progressing, with early cost optimization potential and cross-sell opportunities in core modernization.
Healthy cash flow generation and a disciplined capital allocation stance (share repurchase program).
Strong Banking & Capital Markets vertical growth (>40% over 12 months) and a diversified customer base.
Solid client satisfaction metrics (92% likely to recommend Endava).
Weaknesses
Low operating margin in QQ2 2025 (0.86%); margin pressure from integration costs and macro softness.
High reliance on large, longer-cycle engagements which can delay revenue ramp.
Macro exposure in UK and Rest of World leading to near-term revenue headwinds and ramp-downs.