EPS of $0.14 decreased by 46.2% from previous year
Gross margin of 24.4%
Net income of 8.35M
""The environment continues to be challenging. Our results and guidance reflects headwinds in IT spending, particularly on discretionary projects, and in the payments and banking and capital markets verticals."" - John Cotterell
Endava plc (DAVA) QQ2 2024 Results Analysis — Tech Services Momentum Shifts as Sands of Hesitancy Persist; GalaxE Acquisition and Pods Drive Strategic Positioning for Growth
Executive Summary
- Endava reported Q2 FY2024 revenue of £183.6 million, down 10.6% year over year in reported terms (down 8.1% in constant currency) with a gross margin of 24.4% and an adjusted PBT margin of 12.4%. The result reflects softer discretionary IT spend and slower ramp of large projects, offset by ongoing investments to position for mid-term growth.
- Management signaled a disciplined business optimization program to restore longer-term targets of around 20% constant currency organic revenue growth and 20% adjusted PBT margin, even as near-term margins face pressure from investments in growth, pods, talent, and M&A-related costs. The GalaxE acquisition, announced contemporaneously, is a strategic accelerator that expands Endava’s U.S. healthcare footprint and Indian delivery capabilities, and is expected to contribute around 4% to full-year growth once closed (targeted early April 2024).
- The company is actively pursuing diversification of delivery footprint (India, Southeast Asia, LatAm, Central Europe) to improve competitive pricing, access to talent, and project scalability. A major emphasis on AI, cloud, intelligent automation, cybersecurity, quantum, sustainability, embedded and physical computing pods aims to accelerate future growth across verticals. The outlook remains cautious in the near term due to pipeline conversion delays, but the long-term thesis centers on leveraging the broadened delivery network and accelerators to regain growth momentum.
- Revenue (Q2 FY2024): £183.6m; YoY -10.6% (reported); Constant-currency change -8.1%.
- Gross Profit: £44.87m; gross margin 24.4%.
- EBITDA: £14.86m; EBITDA margin 8.1%.
- Operating Income: £4.62m; operating margin 2.5%.
- Adjusted PBT: £22.7m; adjusted PBT margin 12.4%.
- Net Income: £8.35m; net margin 4.55%.
- Diluted EPS: £0.14.
- 10 largest clients accounted for 34% of revenue; average spend per top-10 client £6.3m.
- Revenue by region (Q2 FY2024): North America 31%, Europe 26%, UK 34%, Rest of World 9%.
- Segment mix: Payments - £m down ~20.8% YoY; Banking & Capital Markets - down ~25.2%; Insurance +10.4%; TMT -5.2%; Mobility -4.1%; Other +3.3%.
- Free Cash Flow (adj): £33.6m; cash and cash equivalents £198.6m; net cash position £139.2m net cash.
- Headcount: 11,539 employees, down 5.3% YoY.
- Capex: 0.8% of revenue; Free Cash Flow to Revenue conversion strong at 18%+.
- Guidance (provided on Q2 call): Q3 revenue £174m–£176m; FY2024 revenue £722m–£735m; adjusted EPS £0.17–£0.19 for Q3; FY2024 adjusted EPS £1.09–£1.22. GalaxE not included in current guidance; close anticipated early April 2024.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
183.55M
-10.57%
-2.58%
Gross Profit
44.87M
-38.11%
-17.62%
Operating Income
4.62M
-92.61%
-71.33%
Net Income
8.35M
-44.42%
-32.50%
EPS
0.14
-46.15%
-33.33%
Key Financial Ratios
currentRatio
3.33
grossProfitMargin
24.4%
operatingProfitMargin
2.52%
netProfitMargin
4.55%
returnOnAssets
1.05%
returnOnEquity
1.35%
debtEquityRatio
0.1
operatingCashFlowPerShare
$0.6
freeCashFlowPerShare
$0.58
priceToBookRatio
5.76
priceEarningsRatio
106.89
Net Income vs. Revenue
Expense Breakdown
Management Commentary
- Strategy and portfolio evolution: John Cotterell highlights three market trends driving Endava’s strategy—(1) higher budgets but cautious spend, (2) stronger demand for vertical/domain expertise, and (3) the importance of a diversified delivery footprint. He emphasizes organic and inorganic investments to diversify revenue, attract talent, and accelerate growth, acknowledging near-term margin pressure from investments.
- Pods and technology focus: A key management theme is the creation of pods (AI, cloud, intelligent automation, cybersecurity, quantum, sustainability, embedded and physical computing) to accelerate adoption of new technologies and establish differentiated propositions across industry verticals.
- GalaxE acquisition: John announces the acquisition of GalaxE Solutions to strengthen healthcare delivery in the US and expand India delivery capabilities. Mark Thurston notes GalaxE’s ~1,200 employees with a similar profitability profile and expects modest near-term earnings impact but meaningful long-term revenue growth, and that GalaxE will push toward a 4% uplift to the current full-year growth guide when completed.
- Equiniti expansion: Endava expands its strategic partnership with Equiniti (£75m over five years), highlighting net-new revenue and continued diversification in capital markets.
- Near-term demand and guidance: Mark Thurston reiterates that larger deals have grown in number and value but are slow to convert into production work. The Q3 guide excludes GalaxE and reflects a conservative view on pipeline conversion. He notes the conversion rate (win-to-contracted) remains around historical norms, but the time to contract has stretched due to client hesitancy.
- Margin trajectory and cost optimization: Management signals a two-phase cost optimization plan: Phase 1 targeted SG&A overlap reductions with an expected annual savings of ~£23m and c.450 job reductions; Phase 2 focuses on reducing duplication and improving utilization via organizational realignment and the pods strategy. They expect a near-term trough in margins but target a return to double-digit adjusted PBT margins as the program takes effect.
"The environment continues to be challenging. Our results and guidance reflects headwinds in IT spending, particularly on discretionary projects, and in the payments and banking and capital markets verticals."
— John Cotterell
"This acquisition significantly expands our presence in the fast growing and exciting healthcare sector in the US. With GalaxE, our global delivery footprint now expands to India, the deepest IT talent pool in the world."
— John Cotterell
Forward Guidance
- Short-term: Revenue in Q3 FY2024 guided to £174m–£176m in constant-currency terms, representing a year-over-year decline of 11%–12%. Adj diluted EPS guidance for Q3: £0.17–£0.19. The top end of the Q4 guidance is set with a potential 7% sequential growth, bottom end near flat to 0.5% sequential growth, reflecting pipeline conversion uncertainty.
- Full-year guidance: FY2024 revenue guided to £722m–£735m in constant currency, representing a 5%–7% YoY decline. Adj diluted EPS guidance: £1.09–£1.22. FX assumptions used for the guide are as of Jan 31, 2024 (GBP 1 = USD 1.27; EUR 1 = GBP 0.85 approximately, per company disclosures).
- GalaxE impact: GalaxE is not included in current guidance; close expected in early April 2024 and is anticipated to add roughly 4% to full-year growth upon consolidation. Management views this acquisition as strategically important for healthcare scale in the US and access to India talent.
- Outlook assessment: The company remains confident in mid-term growth, relying on a broader delivery footprint, automation, and the pods construct to rebuild margins and drive higher utilization. Investors should monitor: (i) speed of pipeline conversion into bookings, (ii) success of the cost optimization program (SG&A reductions and org simplifications), (iii) integration progress and synergies from GalaxE, (iv) contributions from new verticals and pods, and (v) macro demand environment in Payments and Banking/Capital Markets.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
DAVA Focus
24.45%
2.52%
1.35%
106.89%
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
Bottom-up and top-down synthesis supports a cautious constructive view for Endava. The QQ2 year shows the company navigating a soft demand environment with meaningful strategic investments. The GalaxE acquisition, once closed, is expected to contribute to US healthcare scale and provide India delivery capability, expanding Endava’s addressable market and improving cost flexibility through diversified delivery footprints. The pods initiative and stronger senior GTM leadership are designed to accelerate revenue growth and improve utilization. Near-term profitability will remain pressured as the company executes its optimization program and funds integration, but the medium-term target of 20% constant-currency organic revenue growth and 20% adjusted PBT margin remains the anchor of the plan. Key drivers to monitor include: pipeline conversion speed, GalaxE integration and synergies, utilization trends (targeting mid-to-high 60s percent), and the execution of the headcount optimization without compromising delivery quality. Investors should also watch macro indicators for IT budgets, regulatory activity in banking/capital markets, and the cadence of large deals converting to production workloads. Overall, the stock-market implications hinge on execution of the optimization program, successful integration of GalaxE, and a sustained recovery in enterprise IT spend.
Key Investment Factors
Growth Potential
- GalaxE acquisition expands US healthcare presence and India delivery capabilities, with projected cross-sell opportunities into Endava’s verticals.
- Pods focused on AI, cloud, intelligent automation, cybersecurity, quantum, sustainability, embedded and physical computing position Endava to capture high-momentum tech opportunities and accelerators that can lift project delivery speed and margins.
- Healthcare vertical growth in the US and diversified geographic delivery (Nearshore plus India) broaden Endava’s revenue mix and reduce geographic concentration risk.
- Potential uplift from synergies with Equiniti and expanded capital markets work; pipeline growth in larger deals supports long-term revenue trajectory.
Profitability Risk
- Near-term margin pressure from growth investments, SG&A expansion, and M&A-related costs; execution risk of integrating GalaxE and scaling its offshore capabilities within Endava’s operating model.
- Pipeline conversion risk remains elevated; management cites hesitancy in IT budgets and regulatory priorities suppressing production ramp of large deals, particularly in payments and banking/capital markets.
- Currency and macroeconomic uncertainty could delay discretionary spend and client commitments, impacting revenue recovery pace.
- Customer concentration with top 10 clients (34% of revenue) implies exposure to large customer win/loss events and vertical concentration risk (Payments and Banking/Capital Markets headwinds).
- Integration of GalaxE requires building finance and back-office capabilities to public company speed; SG&A reductions must be achieved without disrupting delivery quality.
- Competitive intensity among diversified tech services providers with comparable scale and margins; Endava must realize value from its transformational platforms to stay competitive.
Financial Position
- Strong liquidity and cash position: cash and cash equivalents of £198.6m; net cash position of approximately £139.2m.
- Balance sheet health: total assets £794.6m; total liabilities £174.6m; total stockholders’ equity £620.0m, indicating a solid equity base to support strategic M&A and investments.
- Return metrics: net margin 4.55%, ROE 1.35%, ROCE 0.68%; margins compressed versus historical highs due to the current investment phase but with potential for improvement as the optimization program takes hold.
- Cash flow generation: operating cash flow £35.0m; free cash flow £33.6m, with capex at 0.8% of revenue; healthy FCF generation supports deleveraging/neutral net debt profile and capability to fund GalaxE-related investments.
Strong cash position and high liquidity supports strategic M&A and investments.
Strategic GalaxE acquisition expands US healthcare delivery and India capability; nearshore/India mix enhances cost efficiency and capacity.
Pods framework (AI, cloud, intelligent automation, cybersecurity, quantum, sustainability, embedded computing) to accelerate adoption of high-momentum technologies and differentiation across verticals.
Weaknesses
Significant near-term margin pressure due to growth investments, M&A integration costs, and senior leadership hiring.
High exposure to large clients (top 10 representing ~34% of revenue) amplifies revenue concentration risk in few accounts.
Mixed quarterly execution risk in pipeline conversion; reliance on project ramp for large engagements which are taking longer to convert to production.
Opportunities
Healthcare market expansion via GalaxE and cross-sell into Endava’s existing verticals.
Embedded payments and open banking workstreams showing green shoots as clients continue to fund open platforms and differentiated solutions.
Geographic diversification (India/SE Asia/ LATAM) enabling competitive pricing and access to larger talent pools.
Scaling pods and accelerators to accelerate go-to-market and win rate on large enterprise programs.
Threats
Macroeconomic headwinds delaying IT budgets and discretionary CapEx across verticals.
Regulatory environment and market timing risks, particularly in payments and capital markets.
Integration risks and potential execution delays from GalaxE that could affect near-term profitability.