Amdocs Limited (DOX) Earnings Call Transcript & Summary

So welcome, everybody. We're happy to have Amdocs here with us today. I'm going to read a brief research disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Delighted to have Amdocs here today. Tamar Rapaport -- and I'm going to screw up. But anyway, we have the CFO and COO of Amdocs here with us today. Thanks so much.

So the Amdocs story has become a very interesting one. You guys have seen acceleration in the past couple of years, looking to maintain a 6% to 10% CAGR over the next couple of years. Just what drove this acceleration? And why do you think it's sustainable?

Great, Hi, Meta. good to see you. And hi, everyone. So maybe just give some words of context on who we are and what industry we are addressing. And then obviously, I'll take it to the acceleration of growth point. Now I was waking up really early suffering from a bit of jet lag, and the first thing I did was reaching out of this thing, right, looking at what happened overnight. And of course, I expected that to be fully connected. And then I went on data organized and connected with my laptop and again, of course it will be connected. And I think we all took connectivity and the underlying industry that is called the communication industry is something that is very obvious to all of us. But when you think about it, it's the foundation of society today, whether we work in the same connected family of friends. And our part in that, in that ecosystem as Amdocs is to provide all these enablers of connectivities, AT&Ts of the world, T-Mobile, Comcast, SingTel, Vodafone, we operate over 90 countries. You can imagine that they have a lot of names to share with you as our customers. We enable the application layer that enables them to run their business, whether it's understanding who is the end customer, whether it's about taking a new order for service and activating that new order, monetizing for those services, making sure they actually put the right way of monetizing and getting the right, of course, the ability to get the money. And they're backing out eventually for all these beautiful services they're providing. And then over the years, we expanded also to other domains that help them run effectively their network. And going back to the point of acceleration of growth, we are riding today several mega trends, billion dollars each, of investment cycles that are happening in the cloud, in 5G, digital transformation, the network automation, all of these together actually more than doubled our addressable market. So we are a company generating a bit short of $5 billion revenue, targeting an addressable market that is expected to be nearly $60 billion. So you can understand that's why we are a market leader, we have a huge room to grow. And riding on those mega investment cycles, we have generated a very healthy growth, starting in 2021, we've seen that acceleration. And no, it's not a post-COVID catch up. It's a significant and fundamental change we are seeing. And that's why we guided for a 3-year outlook of 6% to 10%, ended last year at the high end of that. When we talk about 6% to 10% to be clear, it's constant currency. Ended last year at 10%, guiding for this year at 8%. And all of that is generating also a very healthy margin expansion that is lending itself to an earnings per share growth at double digit. We expect actually this year to be again sort of the third consecutive year in a double-digit earnings per share growth. So definitely, we can talk more about those drivers, as I'm sure.

I mean, definitely, I was at Mobile World Congress last week. Met with you guys and met with a lot of people and network modernization is happening, and Amdocs is one of the keys to enabling that. So why do you feel like it's happening today versus 4G when a lot of people thought it was going to happen?

I think it's a combination of the fact that with 5G, this is a truly software-defined network. When we talked about the virtualization of the network, with 5G comes kind of embedded in everything that is happening. And then the combination of also the ability in 5G to really provide a committed quality of service, enables very new use cases and how to monetize for these use cases. Whether those are industrialized, the vertical-specific ones or consumer related, let's say, gamers that can actually enjoy a much better service. And with that comes a lot of innovation in terms of how to go about it. And in terms of the ability to actually manage the network, once it's software defined, you can actually orchestrate that and manage the network in a very different way, in a very different speed, flexibility in terms of how you allocate resources of the network versus the services that you want to provide and the type of customers that you want to serve based on that network.

I mean service providers by their nature, are not fast-moving creatures. But how much of it is -- there's all of these monetization opportunities. They've built these big networks. And how much of it is just a new competitor comes along and figures it out and so you need to figure it out?

I think it's both. In general, I think healthy competition is driving innovation, right? I mean, so when you look -- even just looking on our traditional markets used to be when we talked about those guys, it used to be the pure cable guys, the pure wireless, wire line and now it's all merging together, thinking about who's the end customer? Is it the consumer? Is it a small business? Is it a large-scale enterprise? And all of them are starting to compete with each other, right? Thinking about the cable guys launching a mobile service through MVNOs typically or the T-Mobile, talking about fixed wireless and going to the home. So we are seeing that kind of competitive environment, definitely generating change. Of course, this is beneficial because -- we think both for the end customers, this is driving the innovation of progress. And for us, as a provider of that ecosystem, obviously, we like that kind of competitive environment because people need to invest in creating a different proposition to the market. They need better tools, they need advanced technology. And this is where we come into the story, both in providing the most advanced software that enables them the applications to run their business. But in our unique model, we also provide the deployment of that software. So we also come with the projects and the capabilities to actually take accountability to deploy that software in their environment. And on top of that, if they desire, we can also run it for them through our, what we call managed services model, that is including multiyear managed services engagements in which we actually run the IT systems for them. About 60% of our revenue to date is actually already through these managed services engagement.

And I think the question we get from investors sometimes as well, is just -- you just spoke to this big services business. Why do people most often come to you to kind of offload that service piece? Or what is that kind of build by conversations that investors have with you as to whether they can do it themselves or whether they need you guys to help them?

So it's an excellent point because if you think about the industry and where it's shifted over time, slowly but truly more the money goes out from the in-house IT organizations to external vendors and we enjoy that trend. But still half of the global spend in our domains is done by the in-house IT organization. So it's a vector that is happening, but it's moving slow, because it's a big decision. For any service providers to decide to outsource its IT operations, it's a big decision. And therefore, it's a long sales cycle. But once we manage to convince the customer to move that way, we have 100% renewal rate, because we provide them both the technology and we continue to invest in innovation. So we bring them the future applications that they need. We're not standing still, we're investing all the time in R&D. We are coming with a very unique proposition that includes how we leverage technology and automation into how we run their operations. So it's about committing to them to an outcome-based model. We take certain scope of activities, and we tell them we will run it for you based on a predefined service level, obviously, predefined cost structure, which they cannot necessarily get with the in-house IT. It's much more flexible there. So when we come to this, and of course we need to deliver on our commitment, which we have done for many years, our responsibility is great. So when they look around and asking the industry who can actually deliver to that promise, we come with a very strong value proposition, a very unique one and our responsibility that we can actually deliver.

Got it. I mean speaking to your point where some people think like, "Oh, this is a COVID beneficiary or we see this acceleration, but then we'll kind of go back". Where do you think we are on kind of 5G or carriers taking advantage of 5G and like the answer kind of informed why you guys are thinking of a long growth window?

Yes. So the way we think about it is when you lay out 5G, first of all, you need to invest in the network. But where we come in is actually monetization, in making sure they can actually make returns from the billions of dollars they invest in the network, and that comes usually later. So what we're seeing it depends on geographically where we're talking about in the world. So of course, here in the U.S., you're seeing more of the rollout of the 5G progressing, but still to date, most of the, what's called stand-alone 5G is not finished yet. Meaning a lot of the monetization use cases can play in once the rollout is completed, and we do see customers starting to invest in those applications that we sell, and that's the success we're seeing with guys like AT&T and T-Mobile and another for which we are selling those kinds of solutions. In Europe coming later, we're starting to see RFPs. We're starting to see a lot of interest. Same in Canada. And then in APAC, depending where -- South Korea, Singapore, very advanced, actually the first movers globally in terms of the 5G rollout. The rest of APAC coming later. And LatAm probably will come up later. So we see this as a multiyear cycle where the U.S. market is more of the advanced ones and then comes the rest. And that's why we are so excited about this opportunity. Because if you lay out 5G plus this transition of the mission-critical applications that we serve to the cloud that is just beginning, plus network automation, et cetera, we feel there's a lot of mega investment cycles happening that are just beginning, and we can enjoy them for many, many years.

Got it. So you laid out 5G monetization, network automation, cloud, digital transformation as those categories that will drive growth. But what are the biggest of those drivers today? And is that going to be the same answer in 3 to 5 years?

So I don't think it's necessarily one versus the other. And for the same reason when we're asked, okay, how do you quantify the impact of each one of them? It's not necessarily discrete. Because oftentimes, when a service provider is going through a full cycle of organization, they will think about how do we become 5G-ready? How do we improve the customer experience and create a digital touch point that is much more simple and easy to operate? How do we be ready for leveraging the network? So you can tick the box, sometimes it's about the sale of 1 module and so I can categorize it and say, okay, charging for 5G. Clearly, it's a 5G category. But in many of the big deals that we sell, we can actually tick the box on few of this. And frankly, it doesn't really matter if the main driver of their decision was being 5G resi or creating a much better experience for the enterprise segment. By the way, one of the interesting things we're seeing, going back to the managed services point, is the most of the cloud is some kind of an inflection point in the decision making, how we're going to run as a service provider or IT operations of the future? Because we saw that, okay, they had the classical model of having their own data center, of making sure they run the infrastructure. And often times, this was done in-house, as I said before. And now that they moved to the cloud, it's actually an opportunity for us to come and pitch the idea of moving through the full managed services, being CloudOps, and making sure that they take the full benefits of us, of Amdocs. So when we come and have those kinds of discussions, it's actually a great opportunity to come again with the idea of the managed transformation that includes both modernization piece as well as taking it to the next generation managed services, which is the CloudOps.

Okay. That's really interesting as far as like what that trigger point is. Another kind of question we get from investors is just kind of the growth initiatives that have been around better penetrating Tier 1s. And so what are some of the initiatives that have been successful here? You guys service a lot of the Tier 1s, but kind of expand expanding your relationships with.

So definitely, one of the important drivers of growth for us was making sure that the customers with whom we have long-term relationships, making a decision to build their future with us. So guys like T-Mobile and AT&T and others as they go about building their next future, being 5G resi, being everything we talked about, trusting Amdocs to be their partner to do that. So that's great and we've had an amazing success in making that happen, making sure, of course, on top of that, that we have a 100% renewal rate on our managed services engagement to continue this recurring revenue basis. On top of that, we've made a lot of focus to expand geographically and penetrate new logos. So when you look on the map of the world and the customers we serve, just to give you a couple of indications, about a decade ago, if you looked on our top 10 customer list, 8 were in North America, 2 international names. If you look today, 6 international names and 4 North America. We haven't lost any customer. And all the customers that used to be in our top 10 list from North America, our customers growing nicely, et cetera, just as we added big names like Telefonica, SingTel and Vodafone group that is growing for us and in América Móvil and others. So the geographical expansion is definitely important. And on top of that, having many new logos. So the number of clients today that make meaningful recurring revenue streams for us more than doubled in the last decade. So we continued to add new names. When we talk about new names, could be big guys in North America, which is a strong region for us, like Charter, like Verizon. Those are recently added customers for us in the last couple of years. And it could be other names from all over the world, like SES in Europe, like the Hutchinson Group that we penetrated very nicely now and expanded in Europe and many other names around the world.

So just increasing that global footprint as where you see kind of the biggest new logo opportunity? Is that some of these new carriers? Or is it really just about geographic expansion?

I think it's both. Because if you think about it, North America has been our largest and longest time region as a company. And still, we added the relationship with Charter. We have penetrated into Verizon recently. So I don't think the new logo story is just about geographical expansion. But it's definitely correlating also to new geographies. So for example, if we entered Italy as a country, and now we're adding more customers in Italy. So we serve Vodafone Italy and Sky Italy and [indiscernible]. So there is a correlation to the geographical expansion, but we definitely continue to see opportunity also to grow our business in North America. And also when we have a customer, it doesn't mean game over. Because within any given customer, even our largest customers like T-Mobile, et cetera, we continue to expand into additional buying centers. So relationship with someone like AT&T or T-Mobile, it's not one engagement. It could be multiple parts of the business with whom we engage. So for example, when you talk about AT&T, we have Cricket, we have consumer mobility, we have AT&T Mexico, we have the data domain. There are many, many, many engagements within an AT&T as a name essentially, we look at as a customer.

Okay, okay. Sometimes kind of the contract renewal theme kind of comes through. I guess just are there any contract renewals that we need to be mindful of kind of similar to in the past?

So I think, first of all, in terms of understanding our thinking around those contract renewals, our typical managed services engagement runs between 5 to 7 years. And usually, we don't get to the endpoint because of the innovation pace we have. We bring to the customer all the time new capabilities, that typically, there will be some kind of opening of the agreement even before it ends in terms of redefining the scope, adjusting it and then we extend the agreement. So it's very rare we will actually get to the last point and get into a renewal discussion. We actually extended all of our material agreements in the recent years. We don't have anything significant coming up for renewal soon. But as I said before, we will keep pushing that innovation, so there may be a situation where a customer end point of the agreement is 2026. And still, because we are pushing now for a new modernization, there will be a re-discussion of scope. And typically, we will leverage that also for an extension discussion.

Got it. Okay. Understanding the growth is still kind of healthy this year. Can you just give us a sense of what macro impacts you're seeing? And just why Amdocs may be more resilient kind of in a tougher macro environment?

I think it's a combination of the fact that -- what we're seeing is that, first of all, we're serving our customers with mission-critical applications. It's not a discretionary decision to have the BSS systems or operating support system. It's something that they must have in order to run their business. And in order to create a much better competitive position, they need to continue and modernize those systems. On top of that is the fact that we have a very long-term relationship with our customers. And typically, when we get in and sell the first project, it's just the beginning of a long-term relationship. So it's about having that kind of partnership. And then it's about the fact that a lot of what we do for them, as I mentioned before, is actually running their IT operations. So it's a day-to-day thing that -- if they stop doing that, they're still having a business. Now it doesn't mean we are fully resilient no matter what, but if you look on very tough situations like go back to 2008, '09 financial crisis of the world, our revenue hardly moved. We didn't get the same pace of new deals coming in, but we didn't lose anything. Same goes when COVID situation evolved and happened to us between March and May 2020, everybody was busy with business continuity, et cetera. But we didn't see any project stop, we didn't see any project cancellations. It was a couple of months where people were not as busy signing on new deals, okay? So maybe the sales process was a bit on a hole. But then a couple of months later, it came back again and that's it. So I don't think we can say we are fully resilient, but relatively resilient for sure.

Certainly more resilient than any other people we have talked about in this conference. So you've noted areas of continued operating efficiency. Just -- how do you maintain kind of the multiple areas of investment in all these different growth drivers with the ability to kind of find some of these efficiencies?

So I think one of the important parts about being a technology-driven company is that we can leverage technology and our ability to actually influence the core product in order to make the deployment and the operations of the IT environment much more automated. And we continue to invest all the time in creating pools. A lot of them are based on AI, our experience, our knowledge in terms of how to push the boundaries where the north star is zero touch operations. Again, I don't think we're there tomorrow, but we are seeing more and more processes becoming fully automated without human intervention, all the way to ideally identifying an issue before it even happens. So instead of waiting for the defects and then fixing it, actually identifying anomalies that are in patterns, that are actually indicating that something may go wrong and then obviously dealing it -- with it before. So we are continuously investing in our R&D, not just in the features and functions of the products, but also interoperability and how to make the operations more automated. On top of that, we are still obviously heavily dependent on labor. And making sure we have a very sophisticated global delivery model, making sure we're investing the abilities to bring people on board faster in terms of identifying the gap between the skills they come with, and what we need, how to deploy them and be productive as fast as possible in parallel to actually dealing, of course, with a people-centric organization, we need to make sure we are taking care of what they are looking for. Personal development, career development, for example, we are very proud in terms of how we engage our employees into our ESG activities. How do we make sure that our employees can develop their career within the company in terms of internal mobility between the different dimensions of the company. So there are many parts to this equation, but I think that all of that is contributing to margin expansion from year to year. This is not a kind of company or the kind of model where you see suddenly margin jumping from 18% to 23%. But definitely, you will see over the years, tens of basis points improvement as we make all of these improvements all the time.

Got it. You've noted targets of 100% free cash flow conversion. Just -- how can you outline how you achieve that and what your capital allocation strategy is?

So I think it starts with a very strong focus on this mindset that when we bring value to our customers, we expect them to pay, a very simple equation. Sounds simple, but of course, it can mean that we need to make sure that we are building the right mechanisms into the contract in terms of, what are the milestones in which we invoice our customers, making sure the credit worthiness of our customers is strong. We're talking about a very strong industry, relatively speaking. And the fact we serve them with mission-critical systems means that usually they pay, okay? Otherwise, of course, the implications will be very difficult for them as well. And having said that, it's about making sure all the time that you plan right in terms of how you structure the deals, how you actually make sure that we connect between the deliverables that we provide to our customers and between ability to invoice and collect the money. The expense side is relatively predictable. And that's why we believe that -- this is the kind of model that you don't believe, it's proof, would lend itself to 100% conversion of cash from earnings. In some specific years, we had some working capital investments. Some specific years we're 140% cash above earnings, in fact, but over time should be about 100%.

At Mobile World Congress, you guys announced kind of a partnership or a new product with Microsoft and when meeting with you guys there, you guys are very excited about it. I mean maybe just can you kind of outline for investors what that was -- been busy couple of weeks in my sense?

Yes. So first of all, Mobile World Conference was very active and very exciting event for us with lots of C-level meetings and great feedback from customers. And it's always very important because eventually, you measure the success of our offering to the market through POs, but a good indicator would be the strong feedback we're hearing from the C-level to this kind of investment. We announced a very strategic relationship with Microsoft last week, where we are actually taking the strength of more Microsoft around the customer-facing applications and Microsoft Dynamics, AI-driven application. And with our strong capabilities in the -- specifically in the telecommunications vertical and going to create an integrated layer between the 2 products to go to market together. So we feel it's very complementary, very happy about this relationship and already got a very good feedback from our customers last week about this relationship.

Got it. I mean another area that's been a lot of importance to you guys, and you guys highlighted a lot is just your ESG initiatives. What would you highlight here? And do you see kind of -- have you been able to attract kind of the ESG focused investors?

So I think, first of all, it's a very important part of the company DNA and culture, has always been and something we feel very proud about and connect our employees too. Many of the great ideas we end up doing is actually coming from our employee based around the world. As a company busy, as our day-to-day job in providing the communication service providers with the right tools, we feel that digital inclusion is a major driver we should be focused on. So we're helping communities around the world. Whether it's teaching teachers how to provide pool lessons through digital tools, all the way to elderly people that have more of a challenge accessing the digital applications and many, many, many other things. On top of that, it's clear around the gender and other kinds of diversity and inclusion. As a company that is driving a lot of communities around the world, we believe that it's our job to create this kind of opportunity. So whether it's just by way of example, we have a large R&D center in Israel, so the inclusion of the Arab community, through different boot camps, different initiatives and programs. We are the #1 tech employer of Arabs in Israel. We are continuing to push on the gender front where they, I would say, much more advanced in terms of inclusion of female in our workforce and the average in the industry, but we're not -- we are not satisfied with where we are because it should be 50-50 eventually. And while we are over 30, we think this is still a place that we need to change. So we are very focused on many of these initiatives. And talking about ESG investors, we feel we have a great story to tell. We have been much more engaging with many of the rating agencies that provide an objective credit -- sorry, an objective ESG rating. So for example, we've been included again in the Dow Jones Sustainability Index as the top companies in North America. We've been included in Bloomberg Gender Diversity Index for the first time, we feel very proud about that. We continue to show clear evidence of our progress. We've actually had -- for those that are interested, a dedicated ESG webinar that you can access to our Investors section on the website. And we continue to provide every year a full ESG and CSR report about all of our activities around the world. And I think it's something that is very important that we continue to focus. No disrespect to our investors. First of all, because it's the right thing to do and we care about that and then because investors should care about that, too.

Great. With that we're basically out of time. So I appreciate you guys being here so much today, and it's a great story that's developed over the last couple of years.

Thank you, Meta, and thank you, everyone, for coming.

Thanks.