Amdocs Limited (DOX) Earnings Call Transcript & Summary

Okay. So I'll actually start with the disclaimer. So for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So I'm Dafna Kantor from Morgan Stanley, and I will be hosting today Tamar Rapaport-Dagim. Tamar is the Senior Vice President, CFO and CEO of Amdocs. She joined Amdocs in 2004, appointed Senior VP and CFO in 2007, and COO in 2019. Thank you very much for joining us. And so we'll cover topics about the company, about the markets. And as yesterday was International Women's Day will also talk about diversity and inclusion. And I know those are topics that are near to your heart. So thank you very much for taking the time.

So on a backdrop of very volatile earnings season Amdocs has managed to stand out with a very strong quarter, providing guidance for 2022 to 2024 with the 6% to 10% growth, which is more than double than what you had at the pre-2021 level. So that's very impressive. Congrats and would love to hear from you what gives you that confidence with the longer-term horizon? What are you seeing in the markets?

Thank you, Dafna. So it's been actually a very exciting period for all of us. I think one of us are consumers. So we all understand the great importance of connectivity that is intersecting these days with the digital transformation that is happening around the world, including in telecommunication industry. And we are coming with a lot of capabilities and enabling that digital transformation and improved connectivity, monetization around the communication market. So it's been very exciting for us to see that a lot of the investment drivers that we predicted in the industry around cloud, 5G, digital transformation, everything that we see in terms of network automation, we are very well-positioned to reap the benefits of this investment cycle. Those are megatrends in the world these days. We believe those are multiyear large investment cycles that we are just in the first innings of -- and we are seeing, as you mentioned, a significant inflection in the growth rate we can generate. We've been growing at 2% to 4% in the last several years and beginning of 2021, we raised significantly the growth and ended '21 with 7% pro forma growth rate and guided for 6% to 10% for '22 to '24. And that is coming with a strong demand from multiple regions in the world, actually all the regions we serve, North America, Europe, rest of the world. And we are seeing both existing customers going through a major investment size of building their next-gen stack and selecting Amdocs to be their partner for these journeys, names like AT&T, T-Mobile Comcast in North America; Vodafone, 3 Hutchison Group, et cetera, in Europe and many other groups in the world. So definitely, that momentum we're seeing both in existing customers as well as continuing to expand into new names is very significant driver of this growth. And the visibility we have in our business model is very high. So thinking about providing a free route look, obviously, we want to have the confidence level that we can meet those numbers. And we have been growing our 12 months backlog at 9% to 10% rate for the last several quarters. So we're coming very strongly into this -- continuing to see growth in the pipeline while we are signing a lot of great rewards. So the visibility and the confidence we have in this outlook is pretty well.

Perhaps you could touch a little bit more on how do you differentiate yourself among your competitors in terms of those solutions? Are you talking about things in the industry? How does the Amdocs differentiate itself within the?

So we are coming with advanced technology, but I think the main differentiation beyond the innovation and technology is the business model we've come with, which includes in terms of the value proposition to our customers, the full accountability to take that great technology, deploy it for them into their production environment, into their real-life environment. And then if they desire to, we can support that over multiyear engagement that is running the IT operations of our customers. So that's creating the longevity of the relationship with the customers and a major value proposition that is extending beyond just a onetime project, but into multiyear engagements. And we are continuing to bring new innovation into the table. So it's not just that we get into a customer, provide a certain value with new technology and then just run it for years. Every year, we come out with new offerings in many of our existing customers that adopted what we had 5 years ago, 4 years ago, 3 years ago continue to invest with the new innovation we bring to the table and the expansion, therefore, that we have in terms of opportunity to increase the wallet share even within our more longer-term relationship. And when we are coming into our customers with this great technology and this accountability model is very unique because that's compared with such strong -- we are coming with a strong execution rate, 96% of our deployments are successful. We have 100% renewal rate. So you compare that to what's happening with our competitors in the industry where you can see a much, much lower track record in terms of ability to execute as much as half, I would say, than ours. So it's a big differentiator.

So when you think about the serviceable addressable market, how do you define it for yourself and perhaps with the kind of coupling this with the growth that you're talking about, are you seeing yourself growing together with the industry? Are you predicting market share capture?

So I would say we are growing both from the addressable market that is growing as well as taking the market share. We have a very high win rate and we are a market leader in the domains which we serve. But at the same time, those mega investment cycles that I mentioned and our ability to identify the areas in which those investments are going to increase significantly are actually rising the full addressable market that we serve from around $30-something-billion to $57 billion in 2025. So we do believe we're going to ride both the investment cycles that are happening as well as our ability to take market share. And we continue to expand also to new geographies and new logos. When you look historically on Amdocs, let's take a decade ago, probably 8 of the 10 top customers of Amdocs for North America and today, it's 5 and we haven't lost anyone. We maintained all our top customers just that we have more and more new international customers coming in. So with this kind of ability to expand our offering, expand addressable market and also grow geographically, we are able to accelerate the growth.

And within -- a few years ago, you mentioned 4 growth pillars. So talking about cloud, about network automation, about digital transformation and monetization; within the growth, what -- which are the kind of burning topic that you're seeing further acceleration within your customers in terms of the?

It's a great topic, and we're actually getting this question quite a lot, but it's not necessarily that each one of them is discrete investment because if you think about when T-Mobile is building its next-generation stack to serve both the consumer and the business segment, you can categorize it as digital. You can categorize it as cloud because everything is going to be cloud native, and we are building all our technology in recent years to be cloud native. And it's 5G because, obviously, they want to be 5G ready. So in many of those large programs, investment that we are enjoying in terms of awards so we can probably tick the box on a few of these topics. And in some, it's very specific. So I'll give you an example. When we won in AT&T to help them actually migrate a lot of legacy applications into the cloud, this is a service offering provide that is helping the industry actually move to the cloud also with some incumbent applications that they have. And okay, this one can categorize [indiscernible] being a cloud-related investment. But we see many of their [indiscernible]. And to us, as long as we're already in position to come with our offering to leverage any one of these investment cycles, obviously, that's the reason that we can move forward. And I would add to that, what we continuously invest heavily in R&D while improving operating margins. If you look on our numbers for fiscal '21, we improved the operating margin by 20 basis points, while actually the R&D as a percentage of revenue was going up. So you can understand from that as we are very bullish about the future and our opportunity to continue to grab share. But at the same time, we are very focused on performing well on our emerging -- I'm sorry, on our mature operating engines and continue to bring all kinds of ideas, tools, automation, methodologies, you name it in terms of continuously improving the margin.

We'll talk further about margin because I think that is a very strong message that you deliver to the market, your conviction in the margins even in a very high growth environment. But -- perhaps further on the use cases, you've given great examples. Is there a difference between kind of 5G use cases to what you've seen in 4G and LTE and so is there with customers?

Yes, absolutely. In the way 5G is the wrong name, as it indicates that just another -- just another generation, 3G to 4G as 4G to 5G is the same, but it's absolutely very different. In the 5G world, you can actually come to the market with very specific use cases that take into consideration also the quality of service. You can actually allocate and commit to quality of service. It's not just about bigger bandwidth. It's about different kind of monetization and service models that can evolve, both in the consumer world and in the business world. So when we are coming with our offering, including all the engines that will enable this monetization, we are actually equipping our customers with the flexibility they will need in order to go-to-market with new services that leverage the 5G networks. And this is a very important point because nobody needs necessarily to make a bet today, what kind of service will be the winning one. And we are coming with a platform that is providing them the capabilities to do everything possible. So for example, when we won last year, a deal with Verizon on the catalog, catalog is at the heart of the ecosystem of the architecture that enables actually offering new services to the market, from a market definition all the way to launch in the market. So when Verizon has adopted and selected Amdocs catalog, they're actually preparing to sell for this kind of flexibility. They don't need to know today what kind of services they are going to launch. Having the strongest engine capabilities that will help them to launch and also move fast. It's about time to market, right? It's about being ready and moving fast from those marketing ideas into the market, understanding what's working, what's not and adjusting very quickly.

Thank you. So you've given an AT&T example of Verizon, perhaps let's talk a little bit about T-Mobile and your recent announcement with them, Data One and kind of a multiyear contract. Maybe you can give a little bit more detail on the use case here.

So we've been serving for many years separately, T-Mobile and Sprint in different ways. And for us, obviously, we're very happy to be selected by T-Mobile for building for the merged new T-Mobile, the next-generation capabilities. And that's a very big and important award that we announced last year, both for the adoption of technology, the modernization. And later on, we've also been selected by them to run all of this IT operation on the cloud, what we call the Cloud Ops. So a very large program, very important relationship that is evolving. And beyond that, we see many other opportunities to expand in T-Mobile with more capabilities we bring to the table into additional buying centers. And the Data One deal is a great example how we are coming with the technology that will enable them leverage and monetize better in a lot of the data lakes that they have, a lot of the capabilities they have in terms of data intelligence. And actually go through a new buying center in T-Mobile that has met that kind of selection. And we've seen that kind of opportunity actually in, again, long-term customers like T-Mobile as well as newer customers in which we evolve our relationship with selling more and more of our technology and capabilities. We're very happy about the relationship with T-Mobile. Obviously, we are sitting at the heart of their strategy and continue to see that relationship growing as we speak.

May I ask, do you see T-Mobile becoming as key of a customer as your famous relationship with AT&T?

No, it's fine because internally, obviously, we have like an internal competition between the guys who [indiscernible] AT&T account and the T-Mobile account, both being significant customers. So we want to grow both. So it's all about one catching over the other. And we continue to enable a lot of the players in the industry. Again, the North American market is a big market for us. It's about 2/3 of our revenue. So we continue to provide very strong capabilities to all the players in the market, including the more of the broadband guys used to be called cable companies, but clearly, their main business is connectivity in the broadband. And also moving to mobility, I'm talking about guys like Comcast, like Altice, like Rogers up in Canada. So we are continuing to provide, obviously, strong capabilities to all of them.

Let's talk a little bit about life outside of North America. So you have new logo wins that you've announced in Europe, in Africa; perhaps talk to us about kind of what do you see in emerging markets and generally outside of North America?

Yes. So we're very happy with the progress we've made in the last decade internationally, and we continue to make such progress with a lot of new wins and new logos. So looking on the momentum we've seen many times when we look internationally, we see groups that have multi-affiliates in different countries. Think about Vodafone, for example, a very known name. They have operations in many countries. So while we've been working for many years with Vodafone in Netherlands and in other places, we actually continue to expand within the Vodafone Group announcing, for example, 2 years ago, a mega transformation in Germany. Germany is a very meaningful part of the Vodafone Group. And more recently, we expanded within Vodafone to Turkey, another country. And we have many other countries that we serve in the Vodafone. And the recent win that you -- one of them you mentioned in Africa is Vodacom. Vodacom is an African group controlled by Vodafone that we won a 5G charging and policy deal in 2 of their affiliates in Africa, so very exciting for us. We continue to expand also within the 3 Hutchison Group, very important momentum for us. Another example where probably several years ago, we had close to zero business with that group and now after doing a very strong transformation in Ireland, more of the -- one of the more smaller affiliates in the group. Obviously, they've taken notice, then we expanded to the UK market with the Hutchison Group, which is much bigger for them originally with the transformation of the business segment and later won another deal there for the consumer segment. And we are continuing to expand also in APAC and Latin America. So more recent examples in APAC have been expanding, for example, with our media offering to XL, an Indonesian customer where we are selling them MarketONE, a platform that enables easy onboarding and settlement with every third -party. Their initial use cases are going to be around OTT partners that are going to onboard. And again, those are more examples how we continue to expand internationally with new offering we bring to the market as well as new logos. And we are very happy because we are seeing that over time, while we have such a great success in North America, our largest market we are continuing to see that growth and the growth is spread very, very nicely across regions.

Yes. You've given excellent examples also across kind of products, I wanted to ask you [indiscernible] kind of your media vertical and kind of how are you seeing that growing within kind of the share of the rest of to?

So we are continuing to see that building a partnership ecosystem is something that is very important when you think about providing the relation between entertainment and connectivity. Our key customers, their main business is about providing that kind of connectivity. And obviously, they want to expand their monetization and their access to the market. So they come with different kind of ideas how to enhance both the retention rates of their consumers by providing more and more value-added services as well as create additional revenue for themselves. And we come with a lot of capabilities that actually help them do that. So we continue to see that as well as the subscription monetization model is evolving and where we have a SaaS model that can enable our customers to do that.

So going back to margins. Can you talk a little bit more about kind of your guidance for the next 3 years growth versus kind of margins and cash flow? What are you?

So we are very focused on continuing to be consistently, I would say, over time, improving the margin and continuing to see that acceleration in growth that is significant, while actually looking at the margin as an important metric. And if you look, we've actually narrowed and increased the margin range that we are talking about, we used to talk about 16.5% to 17% and over time, improved to be at the higher end of that range and revise the margin range to be 17.3% to 17.8%, and we are tracking right in the middle of that right now at 17.5%. So we are continuing to invest and increase the R&D as well as take opportunity of the market momentum we are seeing and focusing a lot on the improvement in operating margin through multiple activities that we do. We invest also a lot in automation and tools that will enable us to do in a much more effective and efficient way what we do already. So I think, for example, when you're thinking about the IT operations that we support our customers, building more automation so things will be fully automated without any human interaction, what we call zero touch. So you can think about many opportunities to identify anomalies in the systems or even after there is some kind of a defect in the center is a defect automatically and go for fixing it and putting the fix into production all the way through with what we call the self-healing process. So we are investing more and more in these kind of tools and capabilities that help us improve the margin and also reduce dependency just on -- for the labor that is involved in many of the activities that we are doing. And I'm very proud to say that we are doing it while investing in the ramp-up in many new countries, new logos. So I think the balancing act is very important. And we didn't talk about converting all of that to bottom line cash. But obviously, that's part of the story as well.

Perhaps let's talk a little bit about the challenge with talent and whether you're seeing any pressure on the wage. So again, staying within margins and the current challenges of the market, one of the topics that executives are talking about is really kind of the challenge with labor.

So I think when everybody is talking about labor in the context, of course, of the war for talent and the wage increases. I think when you talk about labor, it's not just obviously the people as a resource, it's the people. So it starts with the fact we are very people-centric in how we are designing what we do and how we are thinking about our business and operations. And it has to do with how you provide the right career opportunity to people, how you provide them the right culture and value when we talked about diversity in the context of the Women International Day. This is very important, of course. We are multinational, operating in 85 countries. It means many cultures. It means a lot of opportunities to embrace diversely and also, of course, gender but not only gender, I have to mention that is, again, very contextual in the sense of the international women they we are very passionate about that in the company and pushing that vector very strongly, leading in terms of successful representation of fueling the company and in all levels. We are continuously pushing also in terms of the people aspect on the right re-skilling and development for people. As a company looking all the time to be at the cutting edge of technologies and pushing to the market a lot of these capabilities, obviously, we need to enable our existing employees as well as new ones to be part of that. And the last thing I would say is that unique business model and unique operational model that I mentioned before that includes both developing products, deploying it with customers and operating it. It enables a lot of career opportunities to people. One year you can be developing the high-end technology product. And next year, you can actually be relocated to a customer site and be involved with a large transformation serving one of the important Tier 1 names in the industry. So there is a lot of variety of opportunities for people. And yes, there's, of course, the spread, the global spread in terms of how we're thinking about access to talent, the fact we do have a global delivery model helps a lot and being very sensitive to where we have the access to talent, how we build our employer brand in those different locations and how we can allocate in terms of the decision where we are going to fulfill the demand that is growing all the time in terms of the capacity of people that we have. And our engagement trait in terms of different touch points, different sensing service that we have are very high. People are proud to work at the company, yes, like everyone else. We've seen increase in nutrition post-COVID back relative to benchmark, we are doing well. So I think we are on top of that. And as a company, also, I have to mention these days being obviously facing the humanitarian situation we are seeing with Russia and Ukraine, it's also about caring for people. The region of Russia-Ukraine is immaterial to Amdocs, it's just 2%. So it's not about the financials. It's about how we are showing that you care for the people, so we launched different kind of activities on the humanitarian level to assist people to have people show their care and do whatever we can, our little contribution to what's going on there that is very, of course, very sad from a humanitarian point of view.

Perhaps it's amazing how everything is weaved together, the talent and the kind of the other topics. Perhaps let's talk a little bit about your new campus and how you're seeing kind of the workforce environment in kind of after a work from home and into the new campus and please bring it all the way home, also to what that means for your cash flow in terms of the expense on?

So in general, just to put it into context for those less familiar with that -- as many tech companies, we usually lease our own facilities, but we realized several years ago that in our main R&D hub in Israel, it actually makes sense financially to be the owner of our facilities. We're not going to all the details by right now. But the main aspect of why we actually build a new campus, it's about having a work environment that is very relevant to today's needs and how you develop in scrum teams and open layout, having the energy of the team actually being best utilized in terms of the work environment. And we are investing in this campus for the past 4 years, expecting to enter that later this year in the summer. And that has been probably the one item in terms of capital investment that has been standing out relative to our regular run rate, which is pretty, pretty low. While doing that, we continue to generate very significant cash flow from our business. And we've been tracking at a very high rate in terms of conversion of earnings to cash. So if you look on our -- the adjusted cash flow, adjusted for this investment in the campus, we've been tracking at 140% earnings to cash conversion last year and targeting 100% this year. So you can see that the business model indeed generates the healthy earnings and conversion to cash. And we've been returning. If you look at the last decade, we've been returning roughly 100% of our cash to shareholders through the dividend. That is the smaller part of the return of cash, have been growing year-over-year, including the [indiscernible] years, we've enhance the dividend every year and the share repurchases have been going on quite consistently. So with the campus ending this year, next year, we're not going to have any material capital investment anymore. And we'll continue to enjoy this great conversion of earnings to cash.

And are you adjusting your indication on kind of what is your dividend and buyback policy?

We didn't change the guiding principles, and we adjust this from time-to-time, given what's going on in terms of the capital allocation that goes into the M&A side. But while doing M&A and those are usually small- to medium-sized M&As. We've been returning the majority of cash to shareholders. So it's not about changing the principles, it's about adjusting it from time-to-time in terms of the activity that does gone and also the share price. Frankly speaking, we've seen the share price lagging significantly last quarter. We increased the share repurchases. We felt it's the right thing to do.

I guess last question on what are kind of if you think of your challenges for -- what is top of mind for you for the next 1, 2, 3 years in terms of what do you think is the most significant challenge?

So we are very focused in terms of the opportunity to take share in the market. We really feel we nailed it in terms of coming with the right offering to the right market needs. And we'd like to take that opportunity to strengthen the company definitely to capture the controlling yields of the industry. Usually, in every market there are 2, 3, 4 leading customers. We want to take those controlling deals because our relationship then extends for many, many years, assuming we do a good job, and we do. So we bring that value and extend this relationship. And at the same time, take that strength to see how we expand our addressable market. We think this is the kind of momentum that should enable us to continue and invest in expanding into adjusted markets and see how we are growing also from that.

Thank you very much.

Thank you, Dafna.

Wasn't so much the topics are and glad we will continue conversing also offline. So thank you.

Thank you, Dafna. Bye-bye.