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Endava's Q3 FY2025 Earnings: A Catalyst for a Valuation Rebound in AI-Driven Tech

Clyde MorganTuesday, May 13, 2025 2:58 pm ET

6min read

Investors in Endava (NYSE: DAVA) stand at a pivotal moment. The software services firm’s Q3 FY2025 earnings report, due on May 14, could mark a critical inflection point for the stock. With strong growth in AI-driven verticals like banking and healthcare, execution of its £198m-£200m revenue guidance, and the potential approval of its $100M share buyback program, Endava is positioned to address lingering concerns over margin pressures and regional softness. A beat on the consensus EPS estimate of $0.41—alongside bullish forward guidance—could unlock a valuation rebound. This is a buy now, act before earnings opportunity.

AI-Driven Verticals: The Growth Engine Ignites

Endava’s pivot to AI-centric solutions in banking and healthcare is delivering outsized results. In Q2 FY2025, these verticals contributed 19% of revenue (up from 14% in Q2 FY2024) and 12% (up from 4% in the prior year), respectively. These sectors are now 31% of total revenue combined, up from just 18% in 2024. The CEO’s emphasis on “cutting through AI hype to deliver real value” is resonating with clients.

The banking and capital markets (BCM) vertical, in particular, has become a cash flow powerhouse, leveraging Endava’s expertise in Gen AI integration for fraud detection, customer analytics, and regulatory compliance. In healthcare, the firm’s AI-driven solutions for digital transformation—such as predictive diagnostics and telemedicine platforms—are scaling rapidly.

Why this matters: These high-margin, high-growth verticals are diversifying Endava’s revenue mix away from commoditized IT services. With AI adoption still in its early stages, this represents a multiyear tailwind.

Revenue Guidance: Execution Delivers Credibility

Endava’s Q3 FY2025 revenue guidance of £198m-£200m implies 13-14% constant currency growth—a strong beat to consensus expectations. The firm’s track record of meeting guidance is stellar, with zero revenue misses over the past five quarters.

The Q3 results will reinforce its ability to navigate macroeconomic uncertainty. Even as European markets face softness, North America (39% of revenue) and healthcare/banking sectors are offsetting risks. Management’s focus on retaining top clients—top 10 clients now represent 36% of revenue, up from 34%—signals sticky relationships with high-value partners.

The $100M Buyback: A Game-Changing Catalyst (If Approved)

The share repurchase program, pending shareholder approval since March 14, could be the final piece to unlock DAVA’s valuation. The program’s execution hinges on the March 14 vote, which the Board unanimously supported. Given the concentrated voting power of Class B shareholders (75.59% of votes), the resolution is likely to pass.

With £31.6M in adjusted free cash flow in Q2 FY2025, Endava has ample liquidity to fund buybacks. Reducing the share count by up to $100M would boost EPS accretion by ~2-3% annually, directly addressing investor concerns about dilution from equity compensation.

Margin Pressures: A Temporary Cloud

Skeptics point to adjusted free cash flow dipping to £31.6M in Q2 FY2025 from £33.6M in Q2 FY2024, but this is a paper issue, not a cash crisis. The drop stems from higher reinvestment in AI talent and infrastructure, not operational inefficiencies.

The firm’s gross margin held steady at 42% in Q2, and management has guided for full-year FY2025 margins to remain stable. Once AI verticals scale further, margins could expand as AI projects typically carry higher bill rates.

EPS Beat Potential: The Final Piece of the Puzzle

The consensus EPS estimate of $0.41 exceeds Endava’s own guidance of £0.31-£0.32 (approx. $0.39-$0.40 at current exchange rates). However, a currency tailwind (sterling weakness) and operational leverage from AI projects could bridge the gap.

Even a small beat—say $0.415—would shock the Street, given the stock’s 25% underperformance versus peers like EPAM and Cognizant over the past year. A post-earnings rally could push DAVA’s valuation back toward its 52-week high of $46.

Why Buy Now?

Catalyst-driven: The Q3 report and buyback approval are binary events with high upside asymmetry.
Valuation reset: DAVA trades at just 15x FY2025 consensus EPS, below its historical average of 18x. A beat and bullish guidance could push this to 18-20x, unlocking 25-40% upside.
AI tailwinds: The $100B+ AI services market is in its infancy, and Endava’s early mover advantage is underappreciated.

Investment Thesis: Buy Ahead of the Report

Endava is at a sweet spot: execution in its high-growth AI verticals is accelerating, macro risks are mitigated, and the buyback program is nearing completion. With the stock down 15% from its peak, the risk/reward is skewed toward the bulls. Initiate a position now—the May 14 earnings report could be the spark for a sustained rally.

Target price: $48-52 (20-25% upside) by Q4 FY2025.

JR Research’s call: Buy DAVA ahead of Q3 results. The stars are aligning for a valuation re-rating.

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