Amdocs Limited (DOX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Ashwin Shirvaikar. I'm Citi's payments processors and IT services analyst. And today, it's my pleasure to start off the day hosting Amdocs. And from Amdocs, we have Shuky Sheffer, who is the President and CEO of the company. Shuky, thank you for doing this with us.

Thank you. Good morning, Ashwin.

Yes. Yes. One quick logistical note. If during the course of this session, if you have any questions that you would like me to ask, just email me. You'll see my email on your screen. And if you don't, it is ashwin.shirvaikar@citi.com. Okay. With that, we have a lot of ground to cover. So let's just get started.

Shuky, again, thank you very much for doing this. I was thinking maybe we can start off because there are always a few new people in the audience, maybe 2, 3 very high level points on what Amdocs does, how it differentiates from others in the telecom solutions market, a couple of minutes, and then we will jump right in.

Okay. Thank you, Ashwin. Good to see you. I think if I need the -- obviously, Amdocs, we are 35 years old. We are focusing on the service provider market, which is mainly all the telecom -- used to be called telecommunication. I think what differentiated Amdocs is that we are behind all the activities of our customer or the service provider. So from -- whenever you do, you touch Amdocs from the -- obviously, on the online channels, web channels, retail store, to all the commerce system, catalog, billing system, provisioning system, a charging system, end-to-end activities of all the commerce activity of our customers. We are working with the service provider industry. I think that we are, by far, the market leader, working with the biggest companies of the world. North America, obviously, it's AT&T, Sprint, T-Mobile, Verizon. In Canada, it's Bell Canada, Rogers, TELUS. In Europe, the big group of -- the largest group of Vodafone, Orange, British Telecom, 3. And definitely, by far, the market leader in APAC from all the big groups in APAC. What differentiates -- so this is very, what I call, the most mission-critical system of our customer. Every commerce activity is going through Amdocs systems, billions of transactions daily around the world. What it features Amdocs, I think, is 2 or 3 things. The first one is a very unique business model. Unlike other companies, which are further companies and other companies, which are system integrators, we are what we call product-led services, meaning that we do everything around our products. We are doing the product, implementation, the services and operation. This is a very unique model. And the other one is that we are unlike other people that have solution for different domains. We have end-to-end solution. We are covering all the domain in the business, OSS domains or end-to-end suite. And I think this is a main differentiator from this perspective, which other companies, usually our competitors, can bring only part of the ecosystem of the -- I think that right now, the biggest growth engine for Amdocs, and I'll stop here, Ashwin, is definitely the overall adoption in 5G and everything which is 5G related. All the digital or digitization of the industry. And lastly, and maybe the most important is the journey to the cloud, which is accelerating significantly, and we believe that we can play the main -- the leader in taking the industry to the cloud.

Okay. Actually, that's a very good segue into the next 3 sets of questions that I wanted to ask because having known Amdocs for a long time, it has always evolved with the times with the latest products for its clients. And from a growth area perspective, I just wanted to get first into 5G, then the journey to the cloud. And then want to go back, something you've been doing for 2, 3 years now, is signing very large transformational deals, so I want to talk about that. But let's start with 5G. And 5G, of course, covers a lot of ground. But if you can start maybe by describing Amdocs' 5G solution set and where it fits in the context of the wider 5G market. And of course, you have done, over the last 12, 15 months, 2 acquisitions, Openet and TTS. What do they bring to the table in addition to internal expertise?

Okay. Thank you, Ashwin. Just one comment for the first question, I think this unique business from Amdocs that we are doing the operation is very important for us because I think we reported it about 59% of our revenue is what we call managed services revenue, which is recurring revenue, long time agreements of 5 to 7 years, which creates a lot of stability in our revenue stream. We have 3 angles to 5G. The first one is the 5G capabilities going to create different and new monetization opportunities for our customers. So all the angle of monetization from the commerce engine, the right catalog, the ability to create the new type of offering to 5G, this is the first angle. The second angle is charging. Charging and policy, 5G is completing new protocols. So every organization will have to upgrade their charging engines to be able to create actually the charging engine. This is the engine to take all the events from the network. The network is completely changing, the core network. So there is a need to update the charging engine. We had a very good charging and leading solution, but we decided also to accelerate and to double down on the charging. This is why -- and it's also connected to the taking businesses to the cloud. This is why we decided to acquire Openet, which has the leading charging engine, which is completely cloud native, including policy. And between the technology and the customer that we got from this acquisition, we believe that now, we have probably the leading position in the charging solution for the industry that, as I said, if you want to move to 5G, you need to upgrade your charging. The third element and then this is back to the TTS acquisition that is the deployment of 5G. Probably North America is leading the world in laying down 5G. Europe is following. APAC a little bit behind. But definitely, deployment of 5G with all the RF engineers and the ability to deploy and to set up the 5G network, everyone is doing it today, all our customers in North America. And actually, TTS accelerate our capabilities to support our customers to deploy 5G. We are not talking about putting the towers. We are talking about the software and the optimization of the network. We are not putting towers and the radio equipment. This is not what we do. So this is the third angle. Also, we like the fact that the biggest customer of TTS is T-Mobile, and we know that T-Mobile is leading in deploying 5G. So these are the 3 angles of Amdocs on top of, obviously, all our traditional services to support the industry in the move to 5G.

Got it. Got it. So that's a good overall description. Now one question I do get from investors is with regards to, will telcos have to revisit their core billing systems because of 5G, which one would think that they might want to do that. And that creates an opportunity for Amdocs. Then the second part of that is, of course, there is the core billing system, the charging and all that stuff. But 5G creates new monetization opportunities for telcos and how can Amdocs participate in that?

Okay. So for the first question, I know that there is a big -- when you -- I think not everyone understands what does it mean billing. Billing is one part, not maybe the biggest part in our overall suite. I think that sometimes, there is a confusion between demarcation on billing and all the commerce and ordering capabilities. The ordering capabilities, this is the heavy lifting activity of our, what you call, BSS system, and this is from the order capture, handling and catalog. This is domain that the majority of customers are going to upgrade over time to support 5G. And by the way, this is not only because 5G. This is the right thing to do to digitize yourself to support 5G, to enjoy the ecosystem of OTTs, to move to subscription billings. So this is -- you're doing this for a lot of reason, also 5G. So the current billing environment that we have, we believe it's efficient. But I said, the more focus is in the ordering in the commerce engines, which is the most important one when you move to 5G because this is related to your second question, what is the new opportunities that 5G creates. And you need to remember that 5G, it's not just 5G network. It's edge computing that it comes. So the models that, in the future, you will be able, as a consumer to get -- because of network slicing, you'll be able to get a guaranteed service, guaranteed speed. Today, you don't get guaranteed speed. Today, AT&T and Verizon or T-Mobile, they tell you can get up to this, and either it's happening or not. And with 5G, you're going to have quality of service. So they can guarantee speed and you can buy compute and storage on the edge from edge computing capabilities that we know Amazon and Microsoft and everyone is developing. So the monetization models are going to be completely different. We believe it will move gradually from the -- or you can make the $60 per month. So much more different. And this is exactly where our new solution, for example, open end solution, the charging solution, it's not just a standard charging solution that can run off of normal network event. It can also charge in the edge, compute, storage and other new models of charging that we believe will emerge with the rollout of 5G. And this is where we have a really nice, I would say, infrastructure to support different models that -- or use cases that actually are being developed these days.

Got it. Got it. Understood. And what do you think of the timing when this opportunity materializes? Is it -- I guess, timing and also size of the opportunity? Is it something that you think of as maybe adding 1 or 2 percentage points to Amdocs' growth rate for the next few years? How should investors think of this?

First of all, the timing is now. We are having -- we see a pickup in, for example, in charging RFPs, comparing to what we used to hear. This is why the acquisition of Openet was very timely because not just that we got new customers that we -- on top of what we have, I believe we have the best charging solution in the market. So everyone is doing 5G activities, modernizing the commerce engine, deploying 5G and upgrading the charging system. So the timing is now. Now to color on 5G, what is -- how it -- it's more complex for me because, as I told you, when we have a -- when we added in Bell Canada the real-time billing, for example, that we announced last quarter, so it also support 5G, but it also supports broadband and many other activities of our customers, a new monetization model, subscription, billing, et cetera, so it's difficult for me. We don't have any project, which is only 5G. Most of the cases is modernization that supports all the trends on the market, which one of the biggest one is 5G. This is why it's difficult for me to color. But definitely, we see a lot of pickup in a lot of -- and funnel of new opportunities, which is 5G related.

Right. So this sort of connects to the previous answer you gave in some sense because it says that 5G is not the only thing going on, of course, but it is perhaps the catalyst.

It's very -- you're right. It's very connected. It's very connected to the move on the industry to the cloud. When we move industry to the cloud, all the new systems that we deploy today are cloud native by nature. So -- and all of them supports 5G. So this is why I say everything is coming together because we want to have a nice solution, virtual solution on the cloud with a very strong commerce solution, which also on the cloud, this is where everything comes together.

Okay. Understood. Understood. So let's talk about the journey to the cloud then. Now that cloud, of course, not something new. I mean, we've been talking about cloud for 12 to 15 years. So why is Amdocs highlighting journey to the cloud as a growth area now. Is it that maybe -- is the telco, cable services industry in general, are they just behind? What's going on here in terms of timing?

Okay. First of all, you are right, we used to do 2 things. First of all, the cloud is happening for the last several -- I don't know, 10 years. And you are also right that the industry is a bit behind. But moving to the cloud, when we say taking the industry to the cloud, it's not just -- and this is where I think I need to explain a little bit. It's not just take on-premise data center, okay, and to replace it with a cloud consumption of workloads, of capacity, of storage and compute in the cloud. Moving to the cloud is also a shift in mindset, meaning you are moving to new technologies. You are moving to a new way of development, of dev ops. You are moving to be a much more agile company. So development cycle that used to take a year might take 2 weeks. So to move into the cloud is changing the role, the way of thinking of company. Suddenly, everything become always on. Everything become deployment of new products that you used to take you 6 months, now take you 2 weeks. So it's a much more -- I think that when people say taking to the cloud, it's like people think it's only just I'm going to use compute resources from the cloud. It's the whole -- it's changing the organization. And this is what's happening right now. So when we say taking this to the cloud, it is moving all this shift of mindset to be agile, to work in dev ops, to do things much faster, simplification. So this is a much greater journey that the industry is actually taking now to be more competitive and to leverage the new ecosystem of OTTs, leverage all the 5G capabilities. So I think this -- the industry is doing that to be able to compete better with all the newcomers to this industry. And this is why it's much more significant than it used to be.

Yes, yes. Okay. So then maybe a better question is to ask what the specific cloud services are that you help telcos with. Is it consulting? Is it IT modernization? Is it the contact center solutions? Probably all of the above. But can you talk a little bit about that?

We have a very holistic, I would say, proposition for the cloud. It starts from our products. All our new products are cloud-native and they can be deployed on the cloud. So if you want to use our cloud platform, our new D1 and C1, our latest and greatest platform, everything is cloud native. This is the first one. The second one, we are building a cloud journey for every Amdocs customer, regardless which version is working right now, and we cannot do like smart refactoring to the existing systems and take it to the cloud. So we have a cloud journey for every Amdocs customer. On top of it, we are building a holistic view, what will be the new next generation of operation in the cloud. And next generation of operation in the cloud is something very comprehensive. Obviously, it's the cloud consumption. It's the FinOps. It's the operation -- the cloud operation. It's an ongoing support on the cloud for all the open sources we are using. Security. Security becomes a major item in our next-generation offerings. So we are the one which are responsible to patch everything, to test everything in this environment, to do the regular development in the most advanced way, to do the [ application ] of the product automatically. So the new -- the next-generation operation on the cloud, this is like the next generation of our current managed services is something very robust. And this is -- when we are talking about our offering, it's all the items that I mentioned to you coming together. It's a very robust proposition from this perspective.

Understood. Understood. Now one concern that investors sometimes have when we speak of cloud journeys is on the other side of the journey is your opportunity or your pricing going to change. Often we believe the purpose of cloud partly is to simplify the delivery of services. So are you -- how reliant are you on the complexity versus what's simplicity going to do? Any thoughts on that?