Endava's Reckoning: A Pivot to AI-Driven Outcomes Amid a Harsh Macro
Q3 FY26 miss and goodwill impairment mask a strategic AI pivot that has yet to pay off in a discretionary IT spending downturn.
DAVA · Earnings Call · 2026-05-21
One step forward, two steps back
Endava's fiscal third quarter was a stark study in transition. The company's AI-driven business more than tripled as a share of revenue to 15%, with outcome-based contracts gaining traction at NatWest, Mastercard, and Google. Yet reported revenue fell 8.4% year on year to £178.5M, and the company took a £364.6M goodwill impairment. The primary culprit, according to John Cotterell, was “clients located in the Middle East, delaying work due to the ongoing conflict” — John Cotterell, Chief Executive Officer · 2026-05-21 — a ongoing conflict that also pressured overall client demand and the conversion of a large pipeline of outcome-based deals. The late-March revenue miss forced a downward revision to Q4 guidance, with constant-currency revenue now expected to decline 1–3.5%.The AI pivot is real — but costly
Endava's deliberate shift toward AI-native delivery is visible in the numbers. Dava.Flow deployments jumped from 3 to 12 clients in a single quarter, and the AI-driven business is now £27M in quarterly revenue. John Cotterell said on the call: “This shows the scale of the pivot Endava has undertaken during the past 12 months and now gives us an AI-driven base that we believe will continue to expand.” — John Cotterell, Chief Executive Officer · 2026-05-21 But the pivot is not free. The company is investing in bench skills, retraining over 1,000 engineers, and absorbing the costs of moving to a more outcome-based model. As Mark Thurston explained, the company's “costs increased in the quarter due to higher go-to-market investments and an increase in the bench as we are training staff in AI and Dava.Flow skills.” — Mark Thurston, Chief Financial Officer · 2026-05-21 That investment is weighing on margins, with adjusted PBT margin collapsing from 12.6% a year ago to 1.8%.A macro backdrop that punishes transformation
The larger problem is that Endava's transformation is happening into a discretionary IT spending downturn. In prior quarters, management had flagged an "air pocket" in deal conversion. This quarter it became a chasm. The company reported that pipeline conversion fell short of expectations, with a lower-than-anticipated conversion in banking and capital markets across all regions. John Cotterell, in the Q&A, detailed the issue: “It's just these are, by nature, very large transformative engagements in the tens of millions type category and nailing down... we're using AI to help give clarity on what it is that we're going to be delivering and getting that much earlier in the cycle and expecting that we would see a 3- or 4-month sales cycle from having shaped what it is that we're going to be delivering and how AI is going to be making an impact. But seeing that turn into 5, 6 months to get the deals closed.” — John Cotterell, Chief Executive Officer · 2026-05-21 The traditional digital transformation business — still roughly 85% of revenue — is shrinking as clients harvest productivity gains without reinvesting them. This is not just a macro story; it is a structural one, as Endava concedes it is "more exposed to discretionary spend than many of our peers."Balance-sheet hits compound the pain
The impairment, combined with the derecognition of a deferred tax asset, means the company is taking a hard reset on its financials. Mark Thurston noted: “The market capitalization of the company and the reduced outlook has required us to assess the carrying value of goodwill and the deferred tax asset for U.K. tax losses. As a consequence, we have taken an exceptional charge of GBP 364.6 million in relation to the impairment of goodwill and GBP 23.2 million regarding the derecognition of the deferred tax asset.” — Mark Thurston, Chief Financial Officer · 2026-05-21 These one-off, noncash charges do not affect liquidity, but they do signal that the market has lost confidence in the company's growth trajectory. Meanwhile, borrowings have risen to £195.8M, partly to fund buybacks, and leverage is now a focus. Mark Thurston: “leverage is something we want to focus on reducing. We do have a refinancing coming up during the course of FY '27.” — Mark Thurston, Chief Financial Officer · 2026-05-21Same themes, louder alarm
This quarter echoes prior calls in some respects, but the tone has shifted. In November, John Cotterell described the pivot as a deliberate trade-off: “We are pushing through it very fast and we're probably carrying more pain in the short term.” — John Cotterell, Chief Executive Officer · 2025-11-11 That pain is now manifesting in the numbers. In February, Mark Thurston was bullish on the OpenAI relationship: “I mean, OpenAI, our relationship with them is very strong. We have adopted Enterprise ChatGPT across the business.” — Mark Thurston, Chief Financial Officer · 2026-02-19 But the strategic partnership has so far not translated into enough incremental revenue to offset the declining legacy business. The company now carries a market cap of just over $200M — arguably pricing in further deterioration or, at best, a long-duration, low-conviction turnaround.The market will be watching whether the AI-driven outcome-based pipeline converts into revenue in Q4 and beyond. The company's guide of 9p–13p adjusted EPS for Q4 is a low bar, and the risk of further misses is high. Endava is betting that its AI-native delivery model, Dava.Flow, and hyperscaler partnerships will eventually separate it from the pack. But in the meantime, it is burning cash and goodwill at a rate that makes the "short-term pain" a much longer term than investors had hoped."This has been one of the more challenging periods Endava has faced in recent years. Demand conditions remain uneven across several sectors, deal cycles continue to be extended and clients are scrutinizing technology spending more carefully than at any point since the [macro] slowdown began." — John Cotterell