Amdocs Limited (DOX) Earnings Call Transcript & Summary

Well, totally, that was going to be my next question. I mean, we kind of, in the cloud world, call that a PaaS service, platform as a service in a multi-cloud world that I think you hit on 2 key points. I think carriers are going to have to use multi-clouds by definition. They also have all these legacy data silos. I talked to someone yesterday, said an average enterprise is very different from the carriers, have 10 different data silos. The carrier is probably 100 different, right? But what you kind of want at the end of the day is to integrate those data silos and start using artificial intelligence to do proactive customer care or proactive network maintenance instead of reactive, right?

Yes.

And that was going to come along if we can break down these data silos over a platform. Have you started thinking about building out a platform like that and that would entail it?

Yes, yes, absolutely. I mean when we -- 3.5 years ago, when we replatformed, one of the key things was we looked at data over a single plane of glass, right. So the data that you get from policy and charging and the data you get from your app comes to one place because the way we built it out was we do not know what the use case is going to be in 6 months from now or the data insight that you need to gain from 12 months from now. So we need to build it at using a concept that, in the past, we've got very specific instructions on what the use case was, right. Today, we're building stuff without knowing what the product and offering and kind of the future use case is. So back again to this data. All our data is consistent. It's using the same technology. You can access it via APIs. In some customers, for example, they've asked us, "Can you expose the data as an API?" We call it network as a service, right. So you think of 5G. 5G is the first programmable network that was available, that's software-driven, right. We've never had a network like this. None of the Gs have been like that, right. What that means is via an API, I can provide you faster access, better latency like our call right now, right. Like potentially, Zoom can have a button here where you click it. And whoever my provider is, right, will give me better access of faster connectivity just by me clicking a button, which accesses to the API, which comes to a single plane of data in terms of the glass. So absolutely, that's kind of how we're thinking. And I think, look, the future is going to be driven by a partner-driven economy, right? It's not just going to be the telco. So it's going to be these partnerships with companies like Zoom or companies like Microsoft Teams or Slack or whoever, right. You're going to have all these kind of creative partnerships.

That platform will enable that, right? And you just gave a great example because I've been on Zoom the last couple of days. I'm on a couple of gigabit connection here at the corporate office. But for whatever reason, my voice doesn't work, so I'm dialing in. It works, but not great. I cut out every once in a while, but you're a million percent right. I mean, Salesforce is going to want some functionality that they can't get anywhere else. But the platform by definition, allows APIs and also to different partners to tie in. And even the networks, I mean, the networks have never been open really. They've been totally closed, right? Cloud network you can customize a lot more, you get a lot more access since exactly what you need. We have never had that capability with networks, to your point, now 5G for the first time, we will. But I mean that entails, in your part, a herculean effort to build a path, right. I mean it's a skill set that -- well, not too many people build passes before. So we'll have to do this in the first time. Have you kind of started building one? Have you started thinking about...

Yes. So we have a product called iPaaS, which is a platform, and many of our customers have taken it, have started using it. The great thing about it, by the way, is once you start using it, once you start connecting your network to it, you keep on using it, right. So this connects to all our products. And all of our products are built in such a way that we provide either APIs or the interface, right. What do I mean by that? So I can provide the app so that you can just go in and use it. So you may be a small provider. And you just -- like you said before, you come to Amdocs and say, "Hey, like give me the whole enchilada from app to everything, right?" But the bigger guys are like, "Hey, give me a set of APIs that does all of this because I may want to use it internally, but I also may want to expose it externally to some of my enterprise customers to use, right." So this is kind of our thinking, and we kind of thought about this several years ago when we built it out. And this is exactly how it's built out, how you explained it. The good thing about this, and this is not just like Amdocs worked up 1 day and thought this is what we should do. This is the part that the cloud guys have been on for several years, right. So if you look at the services that Amazon exposes, whatever the number they're up to now, 175, 176 different cloud services are exposed via APIs, so you can call it, you can restrict it, you can do anything. And in the same way, I think of Telco as a service or network as a service is going to be added on to kind of like this ever-expanding list of exposures that we give to either enterprises or other customers.

So Anthony, this isn't a fair question for you. So I'm going to ask maybe Matt to think about it, but -- and it might not be fair for him either. I think your -- what's your revenue, $4 billion? I know it's growing a pretty good clip, a little over $4 billion. When you look at -- when I look at what's the carrier spend on -- just on towers and backhaul, globally, it's getting up to close to $100 billion. When you look at what they spend on CapEx, it's $100 billion globally, and you guys are $4 billion of revenue. And I would think like the OSS/BSS is just as important as 2 of those 2 other buckets. I know these are just giant round numbers. But Matt, do you ever think about what the total addressable market is when you kind of really analyze it and what -- and how that can kind of transform over time?

Sure. I mean I think the total addressable market is measured in the many tens of billions, right? I think it's hard to actually quantify. And particularly as probably half of the market that we serve is still the in-house IT department, right, of the target customer base. So I think it's a large market, certainly, I don't know, $30 billion, $40 billion around that. We're probably the largest of the players, but I think it's still quite fragmented outside of the internal IT. Over time, of course, there's a trend towards outsourcing, as we've discussed, and we're in the ideal position to try and capture more and more of that. But certainly, it's a big opportunity, and it's growing all the time. And Anthony, do you have anything that you'd add to that?

Yes. Look, I would just add some color to that. I would say one of the things that we're constantly doing is trying to think of how do we expand the SAM, right, the serviceable market, right. Like so that includes expanding the offering, right. So when we went and acquired Openet last year, Openet, combined with the assets we had, we pretty much took over the entire -- dominated the charging market for 5G, right. Also, it gives us a huge foothold in the policy market, right. So suddenly, we had a serviceable market that we didn't have exposure to before. So we're constantly thinking about how to expand it. The other thing I would say, and I kind of call it the -- a little bit of the x factor because it's hugely early days at the moment. It's around private enterprise networks or PEN as we say, right. So as you look at unlicensed spectrum, as you look at private enterprises building their own network, our relationship with the webscale guys, so we have a very strategic agreement with AWS, and a year later, we created one with Azure. And on the AWS one, Shuky worked very closely with Andy Jassy at the time to put it together. We sit together with R&D teams. We exchange ideas. But suddenly, we see that potentially, there could also be an opportunity to serve some enterprise customers in different ways as they roll out private enterprise network, right. So whether it be subscription or policy or charging or service design and creation around 5G networks, as that market starts to mature that could also be an interesting opportunity for us not just to be contained in the telco space.

That's for sure. So what do you think -- what are your biggest challenges right now? Like what are the pain points you're solving for?

Yes. Look, if you ask me what keeps me up at night, I think it's a talent crunch. I think globally, we're having a massive talent crunch. And by the way, it's not just tech, right. I mean I was at the Apple Store last night, and they were apologizing to me because they were short-staffed, and they've been -- I was talking to the guy and they've been short staffed. We've got so many jobs, and we can't fill it. That's the Apple Store, like that's the coolest place to work at if you're a kid, right, and they can't get people. All the way from there, to technology, I mean, every company needs tech people. So I think that the talent crunch and the brain drain, I think I would say that's the #1 thing right now that keeps us awake as I look towards the growth trajectory, right, like we are increasing growth. You saw our numbers in the last quarter. We have a very strong backlog. We have a lot of work to do in the next 12 to 18 months to deliver stuff. And so I think people making sure our employees are happy, making sure our employees are safe, right. We're implementing all sorts of things. Obviously, we had the breakout in India, and we did a lot of things for our employees, trying to manage this hybrid work environment. We thought we were going to come back to work. Now Delta has come back, back in, everyone's back out again. I think around kind of human resources capital management, really, I think, is going to be like our biggest challenge for the next 12 months. I think from a market perspective, there are just very, very good positives. We see our customers who are maybe -- I don't want to say that word depressed, but kind of flat several years ago. We see new customer subscriptions increase. We see some of them post very good numbers in new ads. Like I said before, we see more consumers getting more devices. There's only going to be more 5G devices that are coming out, and you see all of them are giving out incentives, people to get new phones because they want them on 5G plans. So from that perspective, and then you add the fiber rollout that's starting to happen again in North America, and we were -- I mean, you know this team, we were quiet for a very long time in terms of fiber rollout. We really dipped. It's come back again. Asia Pacific is starting to roll fiber out, and that's really interesting, right. Places like the Philippines is starting to roll fiber because they realize, "We roll out a few fiber points to Manila, put some 5G cell towers out there. And suddenly, we've lit up the place with broadband, right." So we see this change in mindset. And I always thought APAC kind of jumped cycles, right. So they kind of like went 2G to kind of 4G. And then they're like, well, didn't really go to LTE, but they're jumping on the bandwagon of 5G, right. So they always do this skip of like half a step, and they're definitely on the bandwagon of 5G. And Europe starting to see it again. So -- and I think the good thing is it's not -- historically, sometimes when Amdocs had success, it's been coming out of one area, but we see good signs in kind of across the globe.

And you -- and correct me or just remind me, do you have much business in China at this point? And is -- did you compete against Huawei much?

No. No, nothing. We used to compete against Huawei in the BSS space, but they withdrew. They kind of got out of that space. So don't really see them.

And do you -- I'm assuming you partner with a lot of the larger systems integrators and very large consultants out there that work with the carriers globally. Do you partner with those guys? Or are they important for you?

Yes. Look, we're a unique model in terms of -- I was giving you the example before. It's like, look, if you go and buy a high-end car like a BMW or something, like are you going to take it to the garage down the shop to get it serviced? No, you will take it to a BMW dealer to get it serviced, right. In the same way, you can think about in Amdocs. So we believe that we build the best product set in the telecommunications industry. So who do you want servicing and installing and deploying is Amdocs. So this is why sometimes externally, people have problems understanding Amdocs because the model is very unique. It's very hard to say, "Who do I compare these guys to? Like are these guys a service company? Are these guys a product company?" And we kind of do both in our space, and we will continue to do both. So I don't necessarily see direct competition. And we don't necessarily work very closely in terms of we don't go and say, "Hey, Accenture, here is our stuff, go and install it," for one very good reason. We believe in a model of accountability, right. So when we install something, we're not one of these companies that say, "Oh, like, if I can add 600 more seats, then I'm on time and materials rate cards, so I get paid more money and I'll grow, right." Like to me, that's kind of bad money, right. Like we come and say, "Look, we will give you the system that we invested $1 billion building. We will put it in, make sure it's running and migrate your customers to it." So that's kind of a very kind of unique model that I think we'll continue to maintain. Now on our -- some of our peripheral systems, such as like we have a MarketONE platform that do subscription, and we serve over 200 customers in the enterprise space. Adobe was one we announced. There are system integrators that deploy it and use it. We have no issue with it. But around our core BSS systems, we're very kind of -- I would say, we want to make sure that no one is screwing it up. Because there are many -- look, there are -- transformation projects are hard. I mean they're bloody, they're hard, they're not everyone can do it. And we want to make sure they're done right and delivered and the business benefits are seen.

So when you went back 10 years ago, the carriers just use to gripe a little bit about working with companies like yourself, a lot of heavy lifting, really hard work. I've heard less griping, but how is the relationship with the carriers now compared to what it was 5 years ago?

Yes. Look, I mean if I can -- I don't know if we can use humor on investor calls, but if I can use a little bit of humor, like I used to say like sometimes it's like going to the dentist. It's like nobody really wants to go to the dentist. But if you don't go to the dentist, bad things happen to your teeth, okay? So you have a choice. But I was told by our marketing guy, I shouldn't use that analogy, right. So I won't use that analogy. But I think where we were 10 years ago to where we are now, we've spent a lot more on our products. We spend a lot more on them being able to touch and feel what they see, whereas 10 years ago, we would build stuff maybe a la carte sometimes. Today, we have a product that we go and install in their labs. So that's changed some of the interaction a lot more. We're doing a lab deployment tomorrow with a huge carrier. So they get to test and see our system and touch 5G on our system. They never used to be able to do that with an Amdocs system before. So as we pivot to be more of a product company running on the cloud, I think a little bit of that angst goes away. And I think the proof is probably the best example, right. So if you look at the last 18 months, again, AT&T has chosen us, T-Mobile, Verizon is using us. We have a couple of others, we haven't announced in North America. In Korea, in South Korea, we have a couple of companies rolling out 5G, using us. Vodafone, the biggest OpCo, is doing their 5G transformation on us. So I think these are like the proof points if they really -- like there are other choices, okay? I mean, not good choices, but there are other choices. And if you have the top 5 in the world using us, that kind of answers the question a little bit, right.

So I have one last question. It's for Matt. Thank you, Anthony. So Matt, I have you trading at like an 8%, 9% free cash flow yield. The tower has traded like a 4% yield. I think you're going to be growing like 50% faster than the towers. And I think you have ability to kind of grow faster than them for a very long period of time. You're now producing a lot of free cash flow. You're relatively underlevered. So your stock seems really, really cheap to me. Why not accelerate stock buybacks at this point or maybe even leverage up to do so given the opportunity?

Yes. I think it's a great question and a fair one. And actually, this year, we have somewhat accelerated our share repurchases, right, because we have the proceeds from the sale of OpenMarket, which we completed couple of quarters ago. We've returned the vast majority of those proceeds to shareholders. And we're well on track to return the vast majority of our free cash flow this year, and that's been the pattern for the last, I don't know, 6 or 7 years, actually. We're committed to growing the dividend each year and returning the balance really in the form of share repurchases. You're right, we are sitting with a very strong balance sheet and plenty of cash. But I think the other side of that is that we want to maintain flexibility for growth, right, retain the ability to make these bolt-on acquisitions as and when we see fit and the right opportunities come along, we don't want to lose that flexibility. We want to maintain the confidence of our customers also, right? I mean we're providing mission-critical systems to a very important sector of the economy. So I think there's a -- it's about balance. It's about striking the right balance between the proactive and disciplined return of cash to shareholders and at the same time, maintaining the flexibility to execute strategically. And every year, we go through the process of looking and evaluating what we're going to do and -- but I don't think right now, you should anticipate any major changes in the way that we've thought about the business historically.

And the only other comment I would add to that is -- and I'll add a self-serving comment here, but we accelerated R&D, and I think we're at a crossroads in terms of whether it be 5G or mobile edge computing or eSIM or IoT or any of these new technologies, decisions are being made now. So now is the time to accelerate in R&D invested. So once those platforms gets chosen, this is an ongoing recurring revenue stream for the company.

Great color, guys. Anthony, a pleasure, as usual. Matt, thanks for your help. Have a great day, guys. Thank you, everybody.

Thank you. Thanks, Anthony. Thanks.