Endava's Q3 FY2025 Earnings: Navigating Growth Amid Margin Pressures

Endava plc (LON:ENDY) is set to release its Q3 FY2025 financial results on May 14, 2025, a critical moment for investors assessing the software services firm’s ability to balance growth with profitability. With revenue guidance of £198–200 million and adjusted diluted EPS of £0.31–£0.32, the quarter will test Endava’s execution in high-potential sectors like AI-driven banking solutions while navigating headwinds such as client concentration and margin pressures.

Financial Guidance: Revenue Growth vs. Profitability Challenges

Endava’s Q3 FY2025 revenue guidance of £198–200 million reflects a 13%–14% constant currency growth year-over-year, driven by its North American operations and Banking and Capital Markets (BCM) vertical. The company’s Q2 FY2025 results, however, highlighted a tension between top-line expansion and bottom-line pressures:
- Revenue rose 6.6% YoY to £195.6 million but fell short of consensus estimates by £50.4 million.
- Adjusted profit before tax declined 4% YoY to £21.8 million, signaling margin erosion due to rising operational costs and currency impacts.

Analysts project £0.31 EPS for Q3 FY2025, slightly below management’s upper guidance of £0.32, suggesting skepticism about Endava’s ability to stabilize margins amid macroeconomic uncertainty.

Analyst Expectations: Cautious Optimism

The consensus estimate for Q3 revenue (£197.9 million) aligns closely with management’s guidance, but analysts remain cautious. Key trends include:
- Revenue Growth: Analysts expect 13.5% YoY growth in Q3, supported by North America’s 32.7% YoY revenue surge in Q2 and BCM’s 43.6% 12-month growth.
- Margin Concerns: Adjusted profit before tax fell to 11.2% of revenue in Q2 from 12.4% a year earlier, prompting questions about cost management.
- Share Repurchase Program: A $100 million buyback, pending shareholder approval, could boost investor confidence if executed.

Key Drivers of Growth

Endava’s strategic focus on AI integration and global expansion underpins its growth narrative:
1. AI and Client Priorities: CEO John Cotterell emphasized AI adoption as a client priority, with tools like Morpheus and Compass targeting core modernization projects in banking and healthcare.
2. Geographic Diversification: North America now accounts for 39% of revenue, up from 31% in Q2 FY2024, reducing reliance on the UK (32%) and Europe (24%).
3. Sector Strength: The BCM vertical grew to 19% of revenue in Q2, fueled by demand for digital transformation in financial services.

Risks and Challenges

Despite strong sectoral tailwinds, Endava faces hurdles that could limit its upside:
- Client Concentration: Top 10 clients now account for 36% of revenue, up from 34% in Q2 FY2024, raising dependency risks.
- Margin Pressures: Rising headcount (11,668 employees as of Q2) and investments in AI infrastructure may strain profitability.
- Currency Volatility: Guidance assumes £1 = $1.24 USD and £1 = €1.20, but exchange rate fluctuations could skew reported results.

Strategic Initiatives to Watch

• Share Repurchase: The $100 million buyback, if approved, signals confidence in cash flow stability.
• ESG Commitments: Endava’s SBTi-approved emissions targets may attract ESG-focused investors.
• GalaxE Business: The North America-focused unit, which grew revenue 32.7% YoY in Q2, could drive further geographic diversification.

Conclusion: A Growth Story with Strings Attached

Endava’s Q3 FY2025 results will hinge on whether its revenue growth outpaces margin erosion. The 13.5% YoY revenue growth expected by analysts aligns with management’s guidance, but the EPS estimate of £0.31 falls short of the upper end of Endava’s range, underscoring lingering concerns about cost management.

Investors should watch for two key metrics:
1. Adjusted Profit Before Tax Margin: A rebound to Q2 FY2024’s 12.4% from 11.2% would signal margin stability.
2. Client Concentration Trends: A reduction in top-10 client dependency below 35% would alleviate risk.

While Endava’s AI-driven pipeline and geographic diversification position it well for long-term growth, short-term profitability remains a hurdle. The May 14 results will determine whether the stock’s £40 average price target (as of February 2025) is achievable or if investors demand further margin improvement. For now, the path to success is clear: execute on AI opportunities, manage costs, and diversify client portfolios. The market will be watching closely.

Endava’s journey underscores the tech sector’s dual narrative: innovation-driven growth versus the need for disciplined margin management. Investors must weigh its strategic advantages against execution risks as the Q3 results unfold.