Story Stocks^®

Endava (DAVA -4%), a U.K.-based IT consulting services provider, heads lower today after running into similar obstacles that have weighed on growth throughout the past year in Q4 (Jun), leading to softer-than-expected revenue growth. Meanwhile, DAVA's Q1 (Sep) and FY25 sales projections were below expectations. In fact, the midpoint of its FY25 revenue guidance translates to a meager 8.8% lift yr/yr despite lapping a 6.8% drop. While this forecast implies sequential improvements over the next few quarters, given the buzz surrounding AI and the fact that the technology is being discussed across nearly every vertical, DAVA's guidance is disappointing.

• DAVA's Q4 performance and subsequent bearish guidance did not come as a total shock. Bloomberg ran a story earlier this week about how U.S.-based peer Accenture (ACN) would delay promotions by six months due to a sluggish IT consultancy industry. Still, given the length of DAVA's headwinds and the comments made over the past few months, including CEO John Cotterell noting in May that the company is seeing pent-up demand, investors were hoping for signs of improvement in Q4.
• AI has also been at the forefront of organizations' digital transformation plans. DAVA remarked today that it remains excited about the outsized opportunities AI presents. However, shifting toward AI is not straightforward. DAVA mentioned that its clients are encountering challenges in the process, including understanding how the technology can mesh with operations. As a result, businesses are hesitant to spend until the path regarding AI becomes clearer.
• However, this does not mean that growth cannot manifest over time. For instance, ACN stated in June that the benefits of Gen AI are becoming more apparent, and clients understand that it is a critical technology but are not ready to spend on it yet. Perhaps with the Federal Reserve loosening its monetary policy, businesses will be more willing to allocate additional resources toward implementing AI on a larger scale.
• Nevertheless, in the interim, DAVA will continue dealing with macroeconomic headwinds that are driving dampened IT spending. To contend with this climate, DAVA is diversifying its geographical presence. As of Q4, 17% of its clients were based in the APAC region compared to 9% in the year-ago period. DAVA has also invested in efficiency-enhancing tools that it believes will shift toward revenue-generating efforts, paving the way for margin expansion over time.

DAVA's Q4 report was gloomy, and its FY25 guidance left much to be desired. However, reenergized IT spending is becoming much more a matter of when than if, and following over a year of heightened budget scrutiny and a loss of appetite to spend, the "when" may finally be right around the corner. During its conference call, DAVA stressed that clients are constantly looking at how they can plug AI into their businesses, which will be relatively massive projects supporting healthy pipeline activity. This encouraging development could result in a meaningful rebound in DAVA's quarterly performance over the near term, helping pull its stock out of the doldrums.