Endava (DAVA) Q1 2026: Outcome-Based Contracts Rise to 24% as AI Shift Drives Margin Realignment
Endava’s accelerated pivot to AI-native delivery is reshaping its revenue model, with outcome-based contracts now 24% of the mix and over 70% of services involving AI. Management’s willingness to absorb near-term pain for long-term margin expansion is clear, but the transition is compressing revenue and margins as legacy time-and-materials volumes decline. The second half hinges on ramping large signed deals and converting pipeline, with execution risk heightened by ongoing business model friction.
Summary
- AI-Driven Delivery Transition: Over 70% of services now AI-enabled, accelerating Endava’s business model shift.
- Outcome-Based Contracts Expand: Outcome-based deals reach 24%, but legacy T&M volumes erode near-term revenue.
- Second-Half Recovery Hinges on Execution: Large signed deals must ramp and pipeline convertibility remains a key risk.
Performance Analysis
Endava’s Q1 topline fell below guidance, reflecting both an unexpected client credit in the US and slower conversion of non-strategic pipeline opportunities. Revenue declined 8.6% year-over-year, with a larger drop in the UK due to client reclassification and European softness, particularly in technology, media, and telecom (TMT) and mobility verticals. North America, now 42% of revenue, was flat in constant currency, and the rest of world delivered modest growth. Adjusted profit before tax margin compressed to 5.5% from 9.9% as a result of lower volumes and ongoing investment in AI capabilities.
Cash flow improved modestly but borrowings climbed, reflecting continued investment in talent and technology. The average spend per top-10 client dropped nearly 10%, echoing the broader volume challenges. Despite the near-term headwinds, Endava’s share repurchase program remains active, with $34.1 million left under the current authorization.
- Revenue Mix Shift: Outcome-based contracts rose to 24% of revenue, while time-and-materials (T&M) still account for 76%, pressuring top-line as AI productivity rises.
- AI Penetration: Over 70% of service delivery now involves AI, up from just over half last quarter, underscoring the rapid operational transition.
- Margin Compression: Investments in AI talent, friction from workforce transition, and lower legacy volumes combined to reduce profitability.
Management’s guidance reset reflects a more prudent view on pipeline conversion, particularly for non-large strategic deals, while signed multi-year contracts are expected to drive a step-change in second-half revenue. Execution on these new models and deals will be critical to regaining growth and margin expansion.
Executive Commentary
"We believe the partnerships with major technology giants and the decisions we took three years ago, which led to the development of our AI-native change delivery lifecycle, now branded DAVA Flow, see us well-placed for the coming years. However, we continue to navigate the challenges associated with this transition in business models, delivery approach, and acceleration of the new AI-driven digital wave."
John Cotterill, Chief Executive Officer
"Our guidance for Q2 fiscal 2026 is as follows. Endava expects revenue to be in a range of 179 million pounds to 182 million pounds, representing constant currency revenue decrease of between 8% and 7% on a year-over-year basis... Our guidance for full fiscal year 2026 is as follows. Endava expects revenue to be in the range of £735 million to £752 million, representing constant currency revenue decrease of between 4.5% and 2.5% on a year-over-year basis."
Mark Thurston, Chief Financial Officer
Strategic Positioning
1. Accelerated AI-Native Transformation
Endava’s core strategy is to move aggressively toward AI-native delivery, embedding autonomous software agents and human-in-the-loop governance into every phase of its DAVA Flow lifecycle. This approach not only differentiates Endava from slower-moving peers but also positions the company to capture larger, more complex transformation mandates. The transition is being reinforced by upskilling through the DavaX Academy and selective hiring of AI-native talent, while legacy roles are being trimmed.
2. Outcome-Based Commercial Models
The company is rapidly shifting away from traditional time-and-materials billing, with outcome-based contracts now at 24% of revenue and rising. These contracts tie compensation to client results, allowing Endava to capture a share of the productivity gains generated by AI. However, the legacy T&M base is shrinking faster than new models ramp, creating a near-term drag on revenue and margins.
3. Large Strategic Wins and Ecosystem Leverage
Securing multi-year, $100 million-plus deals—such as the new payments partnership—demonstrates Endava’s ability to win at scale and validates its strategy. The company’s ecosystem investments, especially with OpenAI, Google Cloud, and Salesforce, are yielding incremental pipeline and deeper client engagement. These alliances are critical for credibility, capability development, and go-to-market leverage in AI-driven transformation.
4. Operational Realignment and Talent Strategy
Headcount management is being used as an active lever, with AI-native hires up and attrition among non-adaptive staff running higher than historic levels. The DavaX Academy and internal events like TechFest are designed to accelerate the transition, but the friction of workforce change is contributing to short-term margin pressure.
5. Margin and Cash Flow Focus Amid Investment
Disciplined cost management and capital allocation (including ongoing share repurchases) are balancing the need for investment in AI and delivery innovation. Management is explicit that short-term margin sacrifice is intentional to secure long-term profitability expansion as AI-native models scale.
Key Considerations
Endava’s Q1 marks an inflection in its business model, with the speed of AI adoption outpacing legacy volume retention. The company’s willingness to endure near-term pain for long-term gain is clear, but execution risk is heightened as the transition compresses both revenue and margin in the interim.
Key Considerations:
- AI-Driven Productivity Uplift: Endava Flow and agentic automation are delivering 20–35% productivity gains, with some client projects showing 5–10x improvements in specific workflows.
- Pipeline Conversion Volatility: Guidance reflects more conservative assumptions for non-strategic deal conversion, with large signed deals underpinning second-half optimism but requiring flawless execution.
- Talent and Delivery Realignment: Workforce reshaping is ongoing, with AI-native hires up and attrition among legacy roles elevated, contributing to short-term margin friction.
- Capital Allocation Discipline: Continued investment in AI and talent is balanced by active share buybacks and prudent cost controls.
Risks
Execution risk is elevated as Endava transitions to AI-native delivery, with pipeline conversion and ramp of large deals critical to second-half recovery. Friction from workforce realignment, client procedural issues (such as the US credit note), and ongoing margin compression add uncertainty. Macro headwinds in Europe and TMT/mobility verticals, as well as legacy volume declines, remain material challenges.
Forward Outlook
For Q2 2026, Endava guided to:
- Revenue of £179–182 million, down 8–7% YoY in constant currency
- Adjusted diluted EPS of 15–17 pence per share
For full-year 2026, management lowered guidance to:
- Revenue of £735–752 million, down 4.5–2.5% YoY in constant currency
- Adjusted diluted EPS of 80–88 pence per share
Management emphasized that large signed deals are contracted and expected to ramp in H2, with roughly half of the projected second-half revenue uplift dependent on these deals and the remainder on improved pipeline conversion. Guidance reflects more conservative conversion assumptions and incorporates ongoing macro and operational headwinds.
Takeaways
Endava’s accelerated AI-native pivot is compressing legacy revenue and margins, but positions the company for long-term profitability expansion as outcome-based contracts scale. The next two quarters will test management’s ability to ramp large deals and convert pipeline amid ongoing operational friction.
- Business Model Shift: Over 70% of services now AI-enabled, with outcome-based contracts rising, but legacy T&M erosion is a near-term drag.
- Margin Rebound Hinges on Execution: Second-half recovery depends on timely ramp of large deals and improved pipeline conversion, with operational leverage amplifying both upside and downside.
- Investor Focus: Watch for evidence of margin expansion from outcome-based deals, continued AI-native talent integration, and stabilization of pipeline conversion rates in coming quarters.
Conclusion
Endava is executing a bold, high-velocity pivot to AI-native delivery, accepting short-term financial pain for the promise of scalable, higher-margin growth. The second half of the year is a critical proving ground for both the new business model and management’s ability to deliver on its strategic commitments.
Industry Read-Through
Endava’s rapid move to embed AI into every phase of delivery is a leading indicator for IT services and digital transformation peers. The company’s willingness to absorb near-term margin pain for long-term model evolution signals that legacy time-and-materials models are under structural pressure as clients demand measurable productivity gains. Outcome-based, AI-enabled contracts are likely to become the new norm, with operational leverage and talent realignment as key battlegrounds. Investors in the sector should expect similar transition friction and margin volatility as other players attempt to follow Endava’s lead.