20-F: Endava Navigates Macro Headwinds with AI Focus, Profit Declines

Endava plc reported a 4.3% revenue increase to £772.3 million in fiscal year 2025, but profit before tax significantly declined to £24.1 million amidst macroeconomic challenges and strategic shifts towards AI.

Summary

• Revenue for fiscal year 2025 increased by 4.3% to £772.3 million, or 6.3% at constant currency, compared to £740.8 million in fiscal year 2024.
• Profit before tax decreased significantly to £24.1 million in fiscal year 2025, down from £27.0 million in 2024 and £114.2 million in 2023.
• Adjusted PBT Margin declined to 10.6% in fiscal year 2025, from 11.2% in 2024 and 20.7% in 2023.
• Net cash generated from operating activities was £52.8 million in fiscal year 2025, a slight decrease from £54.4 million in 2024.
• The company repurchased 4,836,738 Class A ordinary shares for $85.4 million (£64.9 million) under a $150 million share repurchase program in fiscal year 2025, with $64.6 million remaining.
• Operational headcount decreased by 1.7% to 10,403 in fiscal year 2025, and the attrition rate increased to 15.2% from 13.1% in 2024.
• Revenue from Payments vertical decreased by 19.0% to £144.7 million, and TMT vertical decreased by 13.2% to £146.9 million.
• Healthcare vertical revenue increased by 103.8% to £91.5 million, primarily due to the GalaxE acquisition.
• R&D tax credit income decreased by £7.3 million in fiscal year 2025, with no UK R&D credit income recognized due to legislative changes.
• The company finalized acquisition accounting for GalaxE, resulting in a fair value gain of £5.6 million from contingent consideration due to earn-out targets not being met.
• A deferred tax liability related to Romanian unremitted earnings of £3.8 million was released due to a new Double Tax Treaty between the U.K. and Romania.
• A £1.4 million deferred tax asset in respect of US losses was written off, increasing the effective tax rate by 5.9%.

Sentiment

Score: 4

Explanation: The company shows resilience in revenue growth at constant currency and strategic acquisitions, but significant declines in profitability metrics, increased attrition, and ongoing macroeconomic and legal challenges indicate a cautious outlook.

Positives

• Revenue increased by 4.3% to £772.3 million in fiscal year 2025, demonstrating continued top-line growth.
• Revenue growth at constant currency was 6.3%, indicating underlying business expansion despite foreign exchange fluctuations.
• Strong growth in the Healthcare vertical (103.8%) and BCM vertical (37.4%), partly driven by strategic acquisitions.
• The company initiated and executed a share repurchase program, buying back $85.4 million (£64.9 million) of Class A ordinary shares, signaling confidence and returning value to shareholders.
• Finalization of GalaxE acquisition accounting resulted in a fair value gain of £5.6 million from contingent consideration, as earn-out targets were not met.
• Release of a £3.8 million deferred tax liability related to Romanian withholding tax due to a new Double Tax Treaty, positively impacting the effective tax rate.

Negatives

• Profit before tax decreased significantly to £24.1 million in fiscal year 2025, a substantial drop from £114.2 million in 2023.
• Adjusted PBT Margin declined to 10.6% in fiscal year 2025, indicating reduced profitability.
• Net finance expense shifted to (£7.4) million in 2025 from a net finance income of £6.8 million in 2024, primarily due to increased interest on borrowings and higher foreign exchange losses.
• Revenue from the Payments vertical decreased by 19.0% and TMT vertical by 13.2%, reflecting cautious client spending and project delays.
• Average operational headcount decreased by 1.7% and the employee attrition rate increased to 15.2%, potentially impacting future capacity and stability.
• Research and development tax credit income decreased by £7.3 million, impacting cost of sales, due to changes in UK legislation.
• A £1.4 million deferred tax asset in respect of US losses was written off, negatively impacting the effective tax rate.
• The company is named in a putative class action lawsuit alleging federal securities law violations, which could result in substantial costs and reputational damage.

Risks

• Operating results may continue to experience significant variability due to factors like project timing, staffing delays, pricing pressures, and client spending decisions.
• Profitability could suffer if favorable pricing cannot be maintained, especially with increased inflation and the inability to pass on costs to clients.
• Failure to meet publicly announced guidance or accurately forecast market opportunity could adversely affect operating results and ADS price.
• Compromised IT systems or data, including those of third parties, could lead to security incidents, operational disruptions, loss of sensitive information, regulatory actions, and reputational harm.
• Inadequate service or disruptions in client businesses could result in significant costs, client loss, and damage to corporate reputation.
• Contracts could be unprofitable due to inaccurate cost estimates, unexpected increases in employee costs, or failure to realize projected efficiencies from AI technologies.
• Dependence on a limited number of industry verticals (Payments, BCM, TMT) makes the company vulnerable to decreased demand in these sectors or failure to penetrate new verticals.
• Use of generative and agentic AI tools may result in operational challenges, liability (including intellectual property infringement claims), and reputational harm due to flawed outputs or data privacy concerns.
• Failure to innovate and remain at the forefront of emerging technologies could lead to loss of clients and reduced competitiveness.
• Long selling and implementation cycles for certain projects, particularly AI-based offerings, may delay revenue recognition and require significant resource commitments.
• Inability to attract, retain, and motivate highly skilled IT professionals, especially in emerging technologies like AI, could adversely affect business operations and project delivery.
• Intense competition from next-generation digital IT service providers, digital agencies, global consulting firms, and in-house development could lead to price reductions and reduced operating margins.
• Dependence on senior management and other key employees, with potential disruption if they leave or join competitors.
• Difficulties in identifying, acquiring, and integrating acquisition targets, leading to business disruption, dilution of shareholder value, or strain on resources.
• Terms of the revolving credit facility and future debt may limit operational flexibility or ability to secure additional financing.
• Damage to brand and corporate reputation from negative publicity, actions by current/former clients or employees, or challenges in rebranding acquired businesses.
• Lack of long-term commitments from clients, allowing them to terminate engagements or choose not to renew, leading to uncertain future revenue.
• Significant fixed costs related to leased facilities and potential additional expenses from adapting to a hybrid working model.
• Failure to secure sufficient intellectual property rights from employees/contractors or prevent unauthorized use of intellectual property.
• Reliance on third-party software, hardware, and SaaS technologies, which may be difficult to replace or cause errors/defects in services.
• Failure to comply with open source software licenses could adversely impact clients and create potential liability.
• Exposure to litigation and shareholder activism, including securities class actions, which can incur substantial costs and divert management attention.
• Stringent and evolving data privacy and security laws (e.g., GDPR, CCPA, EU AI Act) could lead to regulatory investigations, fines, litigation, and reputational harm.
• Increased focus on ESG issues and evolving regulatory standards may affect performance and reputation, potentially leading to criticism or penalties.
• Enforceability of U.S. civil liabilities against the company may be limited due to its English incorporation and non-U.S. based assets/management.
• Worsening general economic conditions in Europe, the United States, or globally could materially and adversely affect revenue, margins, and financial condition.
• Increased inflation rates in operating regions may reduce margins and profitability if costs cannot be passed on to clients.
• Fluctuations in currency exchange rates, particularly between the British Pound, Euro, and U.S. dollar, could materially and adversely affect financial condition and results of operations.
• Risks associated with international operations, including conflicting legal/tax requirements, difficulties in enforcing contractual rights, and managing diverse workforces.
• Challenges to independent contractor status or additional requirements on their engagement could lead to adverse business, financial, tax, and legal consequences.
• Tax authorities may disagree with tax positions, leading to unanticipated costs, taxes, or non-realization of expected benefits (e.g., HMRC inquiry into RDEC claims).
• Potential classification as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, leading to adverse U.S. tax consequences for certain U.S. holders.
• Potential classification as a Controlled Foreign Corporation (CFC) for U.S. federal income tax purposes, leading to adverse U.S. tax consequences for certain U.S. holders.
• Emerging markets are subject to greater legal, economic, and political risks, which could disrupt business operations.
• Wage inflation and other compensation expenses for IT professionals could adversely affect financial results if not offset by increased efficiency or pricing.
• Natural disasters, catastrophic events, public health crises, or other similar events may have serious adverse consequences on business, operating results, and financial condition.
• Loss of foreign private issuer status could require compliance with more extensive U.S. domestic reporting requirements, increasing legal and financial compliance costs.

Future Outlook

The company anticipates capital expenditures to increase in absolute terms in fiscal year 2026, financed from cash generated from operations and existing cash and cash equivalents. Management expects to continue selectively pursuing acquisitions to augment core capabilities and expand geographic reach. The company is evolving its delivery model towards an end-to-end agent-enabled delivery model, Endava Flow, to leverage AI and drive efficiencies. The EU AI Act will impose onerous obligations in a phased manner, requiring adaptation of software development approaches. The EU's Equal Pay and Pay Transparency Directive, effective June 1, 2026, may lead to wage pressure in certain locations. The U.K. City Code on Takeovers and Mergers will cease to apply after February 2027.

Management Comments

• "The increase [in revenue] was primarily attributable to the contribution from GalaxE, as well as organic growth in the BCM and Insurance verticals. This growth was partially offset by declines in other verticals, reflecting the impact of an uncertain macroeconomic environment and the rapid evolution of the technology landscape, particularly the emergence of AI, which continues to cause delays in client decision-making."
• "Although our overall attrition rate presently exceeds the 15% target, we are comfortable that we can replace skills needed in our locations. The departures over the last year are largely concentrated in roles that are becoming obsolete as we expand our use of AI."
• "The market risk is reflected in the discount rate used through its components, cost of equity and cost of debt. The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) and its formula includes the market return and the sensitivity of the Company to that market return. The WACC also includes the risk-free rate both in the calculation of the cost of equity and the cost of debt. If the market uncertainty increases, the risk-free rate would also increase to reflect this."
• "Management's impairment assessment for 2025, based on the base case scenario, shows that the value in use exceeds the carrying amount of goodwill."
• "The Group considers there to be no critical accounting judgments included the consolidated financial statements."

Industry Context

The technology services industry is experiencing a new wave of AI-driven transformation, requiring organizations to modernize core systems and leverage data. This shift is causing delays in client decision-making as they prepare for implementation. The market remains intensely competitive, with rapid technological developments and evolving industry standards. Companies like Endava are focusing on AI-native approaches, distributed agile delivery, and core modernization to stay competitive and meet changing client expectations. Regulatory landscapes, particularly in data privacy (e.g., EU AI Act, GDPR) and employment (e.g., EU Equal Pay Directive), are becoming more stringent, impacting operational costs and compliance efforts globally.

Comparison to Industry Standards

• The company competes with next-generation digital IT service providers such as Globant S.A., EPAM Systems, Grid Dynamics, and Thoughtworks.
• It also competes with digital agencies and consulting companies like Ideo, McKinsey & Company, and Publicis Sapient.
• Global consulting and traditional IT services companies, including Accenture PLC, Capgemini SE, Cognizant Technology Solutions Corporation, and Tata Consultancy Services Limited, are also competitors.
• The company's attrition rate of 15.2% at the end of fiscal year 2025 is above its target of being lower than 15% on a rolling 12-month basis, indicating a challenge in talent retention compared to its internal benchmark.
• The sector peer group for relative Total Shareholder Return (TSR) assessment includes Accenture, Booz Allen Hamilton, Capgemini, CGI, CI&T, Cognizant Technology Solutions, EPAM Systems, Exponent, FTI Consulting, Globant S.A., Grid Dynamics, HCL Technologies, Huron Consulting Group, Infosys Limited, Kainos Group, Mindtree Limited, Perficient, Tata Consultancy Services Limited, Thoughtworks Holding and Wipro Limited.

Management Changes

Corporate Governance

Legal Proceedings

• On August 26, 2024, the company and certain directors/officers were named in a putative class action lawsuit in the U.S. District Court for the Southern District of New York, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, based on allegedly false or misleading statements about business, operations, and prospects. The defendants intend to defend vigorously against this action.

Related Party Transactions

• Executive officers and directors owned 9,337,816 ordinary shares and held awards over 373,059 ordinary shares as of June 30, 2025.
• The company has entered into deeds of indemnity with each director and executive officer.
• Since August 2025, the company has employed the brother-in-law of Alastair Lukies (Chief Engagement Officer) as a Partnerships & Alliances Executive on standard terms and remuneration.

Stakeholder Impact

• **Shareholders:** Experience dilution from equity consideration in acquisitions, but benefit from the share repurchase program. Face risks from declining profitability, potential litigation costs, and concentrated voting control by Class B shareholders. No dividends are expected in the foreseeable future.
• **Employees:** Face increased attrition rates and potential job obsolescence due to AI adoption. Benefit from equity incentive plans, training programs (Endava University, Junior Programmes), and a hybrid working model. New management roles aim to enhance people development and engagement.
• **Customers:** Benefit from the company's focus on AI-native solutions, digital transformation, and deep industry expertise. May experience delays in project decision-making due to macroeconomic uncertainty and AI adoption complexities. Face potential risks from security incidents or intellectual property claims related to AI-generated content.
• **Creditors:** The company maintains compliance with revolving credit facility covenants, indicating sound financial management of debt obligations.
• **Regulatory Authorities:** The company is subject to stringent and evolving laws related to data privacy (GDPR, EU AI Act), employment (EU Equal Pay Directive), and tax (HMRC inquiry, Pillar Two rules), requiring significant compliance efforts and potentially leading to investigations or penalties.

Next Steps

• Continue to grow business and revenue, potentially through renegotiating existing leases or early termination, which could be costly.
• Expand teams at existing delivery locations and establish new delivery locations in areas with abundant technical talent.
• Focus on growth marketing to increase net new users, activate dormant leads, improve conversions, and engage churned audiences.
• Selectively pursue acquisitions to augment core capabilities, enhance expertise in new technologies and verticals, and increase geographic reach.
• Adapt software development approach to comply with the EU AI Act, which imposes onerous obligations in a phased manner.
• Prepare for the implementation of the EU's Equal Pay and Pay Transparency Directive by June 1, 2026, which may require wage adjustments in certain EU locations.
• Defend vigorously against the putative class action lawsuit alleging federal securities law violations.

Key Dates

Recommendation

The company is undergoing a significant strategic transformation towards AI-native services and has actively pursued acquisitions to expand its capabilities and market reach. While revenue growth at constant currency is positive, the substantial decline in profit before tax and Adjusted PBT margin, coupled with increased employee attrition and a pending class action lawsuit, introduces considerable uncertainty. The share repurchase program offers some support to the stock price. However, the current financial performance and the inherent risks associated with rapid technological shifts and legal challenges warrant a cautious stance. A 'hold' recommendation allows investors to monitor the effectiveness of the AI strategy, the resolution of legal matters, and the company's ability to improve profitability amidst macroeconomic pressures before making further investment decisions.

Keywords

Technology Services, Digital Transformation, AI-Native, Software Development, IT Consulting, SEC Filing, Financial Results, Corporate Governance, Risk Management, Share Repurchase, Acquisitions, Payments Industry, Banking & Capital Markets, Healthcare Technology, Employee Attrition, Cybersecurity, Data Privacy, ESG, International Operations, UK Taxation, US Taxation, SEC Class Action