Endava (DAVA, Financial), a U.K.-based IT consulting services provider, saw its stock drop by 4% today. The company encountered issues in Q4 (June), leading to softer-than-expected revenue growth. Additionally, DAVA's Q1 (September) and FY25 sales projections fell short of expectations. The midpoint of its FY25 revenue guidance indicates only an 8.8% year-over-year increase, following a 6.8% decline. Despite the buzz around AI, DAVA's guidance remains disappointing.
- DAVA's Q4 performance and bearish guidance were somewhat anticipated. Earlier this week, Accenture (ACN, Financial) announced it would delay promotions due to a sluggish IT consultancy industry. Despite ongoing headwinds, investors had hoped for signs of improvement in Q4.
- AI is central to digital transformation plans. DAVA expressed excitement about AI's opportunities but noted that clients face challenges in integrating the technology. This uncertainty has led businesses to hesitate on spending until they better understand AI's role in their operations.
- Growth could still materialize over time. Accenture (ACN) mentioned in June that the benefits of Gen AI are becoming clearer, but clients are not yet ready to invest. A potential loosening of Federal Reserve monetary policy might encourage businesses to allocate more resources toward AI implementation.
- In the short term, DAVA will continue to face macroeconomic headwinds impacting IT spending. To navigate this, DAVA is diversifying its geographical presence, with 17% of its Q4 clients based in the APAC region, up from 9% a year ago. The company is also investing in efficiency-enhancing tools to shift toward revenue-generating efforts, aiming for margin expansion over time.
DAVA's Q4 report was bleak, and its FY25 guidance was underwhelming. However, increased IT spending seems inevitable, and the timing may be near. During its conference call, DAVA emphasized that clients are exploring how to integrate AI into their operations, which could lead to significant projects and a healthier pipeline. This positive trend might result in a notable rebound in DAVA's quarterly performance, potentially lifting its stock.
