Endava's Execution Falters, AI Pivot Fails to Offset Legacy Weakness

What happened

Endava's Q3 FY2026 results missed expectations with revenue declining 8.4% year-over-year and adjusted profit before tax margin collapsing to 1.8% from 12.6%, indicating the anticipated H2 recovery has not materialized and execution remains challenged. The AI-driven business, now 15% of revenue with higher margins, is growing rapidly but is not yet sufficient to offset the weakness in the legacy business, which continues to drag overall profitability. The company's guidance credibility is undermined by persistent pipeline conversion issues and a reliance on unvalidated AI efficiencies in pricing, as highlighted in the latest DeepValue report. Despite low valuation multiples (EV/EBITDA 5.9x, P/B 0.3x), the stock offers no margin of safety given the ongoing margin compression and net debt of $168.7 million with interest coverage of only 2.2x. The AI pivot (Dava.Flow) remains unproven at scale, with only two live engagements disclosed, and management's optimistic projections for AI-based productivity gains are not yet evident in financial results.

Implication

For existing holders, maintain a wait-and-see approach with a re-assessment window of 3-6 months, as the next one or two earnings prints will be critical to validate whether the AI pivot can reverse the margin decline. Key proof points include Q4 FY2026 revenue stabilizing above £182 million and adjusted EBITDA margin recovering above 10%. The stock is cheap but could become cheaper if execution continues to falter; the attractive entry price of $3.75 per the DeepValue report provides a potential 17% downside from current levels. Management's continued buybacks ($28.1 million remaining) offer some support, but the balance sheet is strained with net debt/EBITDA at 2.5x, limiting strategic flexibility. For new investors, wait for evidence of margin stabilization and improved pipeline conversion before considering a position.

Thesis delta

The core thesis of a recovery in H2 FY2026 has been invalidated by Q3 results, shifting the burden of proof onto the AI pivot to demonstrate tangible margin and revenue improvements. The DeepValue 'WAIT' rating is increasingly justified as the bear case (30% probability, implied value $3.00) gains credibility due to sustained margin compression and licensing costs. Investors should now require observable progress: Dava.Flow scaling beyond two engagements and adjusted EBITDA margins trending toward 12% within two quarters, or reduce exposure.