Endava (DAVA) Q2 2026 earnings review
Stabilization, Not Recovery: Margins Reset Lower
Endava arrested its sequential revenue slide in Q2, posting £184.1M (+3.3% QoQ), but the year-over-year picture remains one of contraction (-5.9%). The company is in the midst of a painful 'AI-native' pivot that has structurally reset profitability. Adjusted PBT margin collapsed to 5.8% from 11.2% a year ago, driven by the costs of the 'Dava.Flow' rollout and lower utilization. While management touts large deal wins, guidance for Q3 (£182-185M) implies revenue will stagnate sequentially rather than ramp, suggesting the recovery is fragile and pushed further out.
🐂 Bull Case
After a sharp drop in Q1 (£178.2M), revenue stabilized and grew 3.3% sequentially to £184.1M in Q2. This suggests the worst of the 'air pocket' caused by project ramp-downs may be in the rearview mirror.
The PayNet-NETS joint venture selection for a cloud-native payment switch validates Endava's ability to win complex, modernization mandates. The pipeline is shifting toward these larger, 'AI-native' transformation deals.
🐻 Bear Case
The margin profile has deteriorated significantly. Adjusted PBT margin of 5.8% is nearly half of what it was a year ago (11.2%). The company swung to an IFRS Loss Before Tax of £(7.2)M, indicating that real costs (restructuring, share-based comp) exceed adjusted profits.
Despite talk of new deal ramps, Q3 guidance (£182-185M) suggests zero sequential growth at the midpoint vs Q2. The full-year guidance range was narrowed but implies the heavy lifting for recovery is pushed into FY27.
⚖️ Verdict: 🔴
Bearish. While the revenue bleed has stopped, the cost of the 'AI pivot' is bleeding the bottom line. With margins in mid-single digits and Q3 guidance implying a stall in momentum, the stock remains in the 'show me' penalty box.
Key Themes
Margin Structure Collapse
The most alarming trend is the structural reset in profitability. Adjusted PBT margin hovered between 11-20% historically but has now spent two quarters below 6% (Q1: 5.5%, Q2: 5.8%). Management attributes this to investments in AI and 'Dava.Flow', but it also reflects negative operating leverage on lower volumes. The inability to scale margins back up despite sequential revenue growth is a major red flag.
North America Resiliency
North America is proving to be the stabilizer, now accounting for 40% of revenue (up from 39% YoY) and showing relative strength compared to the UK (-1% share) and Europe (-1% share). The strategic shift of gravity toward US-based large enterprise deals appears to be the only engine currently firing.
Payments Vertical Stagnation
Payments, historically Endava's crown jewel, remains stuck at 19% of revenue with no mix expansion YoY. Given the new PayNet-NETS win, investors should monitor if this vertical can return to being a growth accelerant or if it merely offsets churn elsewhere.
Operational Headcount Shrinkage
Average operational employees fell to 10,326 from 10,456 a year ago. This aligns with the 'efficiency' narrative of AI, but also signals a lack of volume demand. The company is managing costs by letting attrition run, but they cannot cut their way to growth.
Dava.Flow & AI-Native Pivot
Management is betting the house on 'Dava.Flow'—an AI-native engagement lifecycle. They claim strong initial interest and are positioning it as a differentiator. However, this transition is currently a net drag on financials (investment costs > revenue lift) and carries execution risk if clients refuse to pay premium rates for AI-assisted delivery.
Other KPIs
Decelerating. Down from £31.6M in the prior year period. While positive, the decline reflects lower profitability. Cash balance rose to £68.5M, providing a buffer, but capital allocation is constrained compared to prior years.
Stable (vs 36% YoY). The company is not losing its largest patrons, but it isn't successfully diversifying the base either. Reliance on the top cohort remains high during a period of volatility.
Reversing. A swing to loss from a £2.5M profit a year ago. The gap between Adjusted PBT (£10.7M) and IFRS Loss is widening, driven by £6.5M in share-based comp and £5.1M in amortization. The 'real' GAAP profitability is non-existent.
Guidance
Stable/Stagnant. The midpoint (£183.5M) is slightly below Q2 actuals (£184.1M). This contradicts the narrative of a 'second half ramp' driven by new deal signings. Implies YoY decline of roughly 3-4% in constant currency.
Decelerating. Represents a constant currency decline of 1.5% to 3.5%. To hit the midpoint (£743M), Endava needs H2 to average ~£185M per quarter. Since Q2 was £184M and Q3 guide is £183.5M, the recovery is essentially flat-lining for the rest of the year.
Decelerating. Midpoint of £0.83 represents a ~27% decline from FY25's £1.13. However, it implies a stronger H2 EPS performance (H1 was only ~£0.21 total), suggesting management expects some margin relief or cost-cutting benefits to kick in during Q3/Q4.
Key Questions
Where is the Second Half Ramp?
Q3 revenue guidance implies zero sequential growth despite the supposed ramping of large strategic deals signed in Q1/Q2. What is delaying the revenue recognition of the $100M payments deal?
Margin Floor Sustainability
Adjusted PBT margins are stuck in the mid-single digits (5.8%). With the AI transition costs ongoing, is this the new structural reality, or is there a concrete path back to double digits in FY27?
AI Cannibalization Risks
Is the decline in T&M revenue purely macro-driven, or is 'Dava.Flow' and AI productivity actively cannibalizing billable hours before outcome-based pricing models can compensate?