Amdocs Limited (DOX) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Stifel's Cross Sector Insight Conference 2024. I want to welcome you all for being here. My name is Shlomo Rosenbaum. I'm the business services analyst here at Stifel, and I want to welcome Shuky Sheffer, who is the CEO of Amdocs and open it up. I just want to start, Shuky, with just a very, very basic, give us the 1-minute elevator pitch of what Amdocs does and then we're going to jump into Q&A.

One minute. This will be challenging. Amdocs is doing all the platform and systems for the -- what we call the service providers, the telcos, the AT&Ts, the T-Mobiles of the world. And if you need to think about this from the touch point that you engage with the service provider, could be website, mobile application, retail store, then to all the ordering systems, how you order the service. I mean, it could be simple service, it could be complex service. If you want to bundle fiber, broadband and mobile. So all the ordering systems. Then after we are doing all this ordering system, then we should go south, then obviously, all the systems that support all the financials, all billing, general ledger, all the financial system. And then if you go deeper, then there is all the provisioning system. Eventually, if you buy a certain broadband service with a certain speed, someone needs to provision this service to the network. And then all the systems actually is actually activating and doing the orchestration in the network. So from the channels, all the way to the network. I think that we are a very unique company from the perspective that there are software companies, Salesforce, ServiceNow, and there is services companies like Accentures of the world. We are doing something very unique because what we are, what we say, product-led services company. So we develop the products. By the way, we are working for the most part, only the telco market in the service provider market. So we are developing all the software to support this company, and we are doing all the services. So we are implementing our products and we are operating our products, which created very, very unique accountability model. Usually, when you buy the social 1 company and a systematic way to implementing it, something goes wrong, the systematic, it will say, the product work, the product the systems to reimplement this. So it's a very unique business model. We are a market leader in our domain. Roughly close to 3 billion people are touching Amdocs on a daily basis. It will be very difficult for you to go to in the U.S., Europe, APAC, Latin America without opening your phone, without touching Amdocs. And as I said, it's a very unique business model. We are focusing on the telco industry. And I think that we are, by far, the market leader in this moment.

Okay. Great. And can you touch a little bit on the 2 largest clients that you have, you do with T-Mobile, AT&T. Can you talk about how those contracts have evolved over time, the expansions of those contracts? And you really had -- recently had an expansion of the AT&T contract and that involved, I think, some of the unique capabilities that you did with the recent acquisition. Maybe you could talk about how you're operating there and what you're able to do across the communications industry that others cannot do.

If you talk about specifically on AT&T and T-Mobile, you are talking about tens and tens of years of partnership. I mean, we actually started with AT&T when it was in the '90s, it was SBC and we help actually AT&T to -- when they start this acquisition trend, and they bought many, many companies until they become AT&T. By the way, we can talk a little bit about better, but we are usually in a very good position in situation of merger and acquisition, and then talk about this. We are supporting AT&T in probably 40 years. It's our largest customer. And we obviously, we evolve within AT&T. We're very connected, and this is, I think, also related to Amdocs, how we evolve our product and services. So if you look about probably in the '90s, we're a billing company. Then we added CRM, then we added network and ordering many, many. So if you look at the portfolio of Amdocs today, pretty much covers end-to-end. Back to the definition of Amdocs is usually in an RFP situation, it will be Amdocs that have the whole suite of products pre-integrated. And usually, we will compete with the consortium of a system integrator that try to stitch different products together because we have the whole portfolio of the products. And so we grew up in AT&T. So obviously, today, all the consumer mobile or consumer in general, in AT&T it's running on Amdocs system, both mobile, port, et cetera. And we have -- if you -- it's not just the AT&T brand. It's the Cricket brand, it's AT&T Mexico. We are doing a lot of data activities for AT&T. So if you look today, we are working with many buying towers in AT&T, by the way, many of our activities are non-Amdocs system, within the [indiscernible] systems. So even if it could be a different legacy system or other systems that are touching our platform or our domain, we are running them also. Another is something that we evolved in AT&T definitely to many other customers is our managed services business. If you look at the Amdocs revenue today, roughly 60% of our revenue come from net services, which is more like long-term agreements. And we have roughly 80% visibility when we go into start of the year, our financial year. So we're doing a lot of managed services for AT&T. On the deal that you touched, this is when we talked, I guess, more on the strategic growth domain of Amdocs, definitely the journey to the cloud is 1 of them. By the way, just to give you today, probably -- if you look at all Amdocs customers and we are the market leader, less than 10% of the workloads move to the cloud. So the industry as a whole is in the process but really, really not early adopter, let's put it this way, and we are working with all our customers to move to the cloud, but this takes time. The deal that we have signed with AT&T have 2 components. One of them is we extended all our agreements that we have with AT&T until 2029. Consumer agreements and other agreements, which is I'm not -- I don't think that someone in AT&T wants to replace us, but it's good always to extend your agreement in the consumer domain and all the other domains. And the other thing is that when we took -- giving our position ourselves to make sure that we help the industry to move to the cloud. So there are certain elements in moving to the cloud. Some of them is our platform or our platform today obviously, cloud native. So we allow our customers to go to the cloud. But at the same time, we are moving -- we have the capability with our partnership with Microsoft and WS to move other application to the cloud, which are in our domain, but not necessarily Amdocs application also to move to the cloud. And another thing that we found out that there is a certain, I would say, domain which is a mainframe. So many of our customers, if you guys have really, really old mentioned application -- and in last November, we've done an acquisition of a company called Astadia, we're looking how to automate this. So there we looked around and found that there's the best tools in the market of converting 40, 50 years old global application to Java running on the cloud. So we acquired this company and actually we're using this technology and we signed a 5-year agreement with AT&T which actually we're taking all the AT&T management application. And during the next 5 years, we are going to move all of them to the cloud using this technology. So this is an example of how we are helping our customers through the cloud. Generally, if you look at the cloud today to represent a little bit more than 20% of our business, and it's growing double digit. So this is going very well for us. You mentioned T-Mobile. T-Mobile is a great customer. It's a good success story for Amdocs. If you look today in T-Mobile, this is actually 3 Amdocs customer. It used to be the T-Mobile brand and then which we are doing many, many modernization activities to T-Mobile. It's also Metro PCS, which used to be customer of Amdocs, which was acquired by T-Mobile and Sprint, which was also a large customer of Amdocs. And we have T-Mobile with all these up to the merger to do this, I would say, a great -- I think it's a great success story in bringing Sprint to the T-Mobile system, et cetera. And now it looks to be that there's going to be additional opportunity for us, given that it was announced, I think, a week ago that T-Mobile is planning to acquire the U.S. cellular which is another Amdocs customer, so it gives us a lot of opportunity to support them in doing this. Usually, it's come with a very large consolidation project. And I think that, as I said, we are a strategic partner with T-Mobile, we were supporting them on the back end with all the un-carrier, amazing story and supporting them today.

Okay. Can you talk a little bit about how the macro environment impacts Amdocs? And you talked about you have managed services is a large component of the business. You're mission-critical. So obviously, there's a lot that there's a lot of the business that's just repeatable. But there is a part that we -- you talked about last year that the macro downturn, clients are a little more hesitant to invest in their legacy applications. Maybe you could just talk a little bit about how that works and how we should think about that going forward?

So you're very right that what we do for our customers, it's a mission-critical system. This is not discretionary. God forbid for some reason, Amdocs platform are not working, everything is shutting down. This is why we don't sleep at night. Usually when other people enjoy the -- we say in Amdocs, the holiday season like Black Friday, this is the largest -- this is the largest, I would say, operational activity for us. So back to the -- so you said you're right, we're running mission-critical systems. And this is not something you can turn on and off. This is -- so discretionary spending on this, it's something that you cannot say, okay, I'm stopping development. The phenomena that we've seen probably in the last -- we started to see it probably remember, our fiscal year is October to September. So we started to see it in mid 2023 fiscal year is that because of all the macro environment, and I will say, what does it mean macro environment for us, we saw customers starting to prioritize their investment. So if you look at the Amdocs business, the 60% minute services is pretty much solid and untouched. When we talk about discretionary spending, they put the breaks a little bit in what we call the legacy investment. By the way, legacy, if you think in most of our customers, we have an environment that we are running for them imminent services, the current platform. By the way, the current platform are the same platform they are competing with. I mean, it's not that this is -- if they want to go now with some new device, if AT&T wants to go with a new device financing option for Apple Lounge in September. This is -- all this changes and implementations coming on what we call legacy or current system, while at the same time, we build for them the next-generation platform, which is obviously our 5G-related on the cloud and everything that generative AI capabilities, we can talk about generative AI in a second. So this is happening in parallel. So when the macro obviously puts some pressure on everyone, including our customers. And they put some of the breaks on CapEx, but we are less impacted by CapEx. CapEx is small mainly -- mostly we are more OpEx. So when they look to cut costs, to make sure that they meet their free cash flow and all the parameters or financial parameters, then they say, okay, in the IT domain, we don't want to touch the future because all these platforms that we build right now, this is going to be our future. So they put breaks on the current platform. By the way, it can never go to 0 because this is how they compete today. I mean but they can -- the way they do it, by the way, say before -- they wanted a 9 months online, not the same one, 6 months online. So immediately, some of the changes are falling. We've seen -- sorry, when we guided to 2024, we said we see roughly 3% headwind. And this is pretty much stabilized. So we don't see it happening again next year, but this is where they started to do some prioritization. At the same time, they are doubling down on investment in the new platforms. As I said, cloud and other generative AI capabilities and et cetera. So this is the environment that we see right now in the market. We don't see -- it's pretty stable. We don't see it growing worse, but we don't -- other hand, we like MS, we are waiting to things to ease up a little bit when macro will change.

So help me out a little bit just when I think about this. So we had this and you had tough comps going on that will end up happening through say I guess the summer, right, Where you started to notice that in the middle of last year and it kind of flowed through the June quarter. Once you get past that, and we're at a steady state, do you end up with a naturally better growth rate because you've already come on that? Or is it that things are just so there and you kind of sell it in a kind of a little bit...

What we said when we gave the guidance for the year is that when the customer slowed down investment in legacy, the impact on us is almost immediate. Because you are doing this and they say, we want to stop it. We've done this quarter this and so this is why the headwind is almost -- now the revenue which replaces this is all the new projects that we are winning, and we are seeing that we had a loss in our domain. So all the new projects that we are winning. By the way, remember, we're talking about the part which is not managed services. The new project we are winning, it takes us some time to ramp up to cover for this headwind, which is almost immediate. And this is why we said that we were going to see relatively flattish half 1, which we finish, and we are going to see -- starting to see acceleration maybe in Q3, Q4. This is when -- now the headwind is not happening again. It's already in our numbers. So it's not -- so now actually, it's how we are going to ramping up all the project award that we are winning and starting to ramp up revenue and starting to. So we did say half 1 is going to be flattish half 2, we are going to see some acceleration in revenue.

And are the new business coming through that -- I understand the legacy kind of took a step down. Is the new business coming through at the pace that you were expecting? Or is there any change in the new business as...

Almost, probably not exactly try to plan. I can give you an example that the AT&T deal, which is extremely important and strategic in nature because these are larger customers give us visibility and it gives us a very, very significant incremental revenue in domain that what is new for us. This is not in our backlog, and we thought that we planned that to be closing in Q2, eventually, it was close -- and so it's not even in our backlog that we announced. So things are a bit slower. We don't lose anything. But the trajectory is the right one, but they may be a little bit moderate comparing that were -- another thing that I don't think I spend enough time is how we -- it's also connected to the business model of Amdocs is generative AI.

That's going to be my next lead-in. Maybe let me ask that question. We'll take that friction I was just going to ask you, where have you made or investments in generative AI? And talk about the part that's revenue-generating or client-facing and what you're doing both internally? And just give us a broad base and maybe a couple of examples.

So we started to be very active in generative AI actually more than a year ago. We have several strong partnerships among them is Microsoft and very strong margin with NVIDIA. And we look about -- I think the best way is to explain Amdocs role in generative AI is through couple of examples. So let's talk about product catalog. Our product catalog is the most, I would say, by far the most advanced catalog today. catalog is where you define all the offerings of the company. This is the heart of all the system of the company. So today, it's a very advanced catalog. We can come in and say, I want to build this offering, you drag a drop, different trying to estimate what will be the uptick of the new offer, et cetera. So now in the new catalog of Amdocs, actually, you talk, I mean to say, "I want to build a new offering for Dallas area for millennial in this age that are likely the students that are likely to change the phone and this and this. And immediately, we create for you like these 4 different options to pick from. So it's within this -- every -- almost every product of Amdocs is coming with the copilot. This is more within our products. The next example is what we see -- and I know that it's not that sexy, but we are doing all the plumbing that you need in order to leverage generative AI. A good example is when you look about call center efficiency. So we've done with 1 of our customers, we took 50,000 calls from the call center, we ran them through speech to text. And we found out, not that we were surprised that the most common and complex question is why my bill this month is higher than last month. Now even for a very experienced call center rep, it might take maybe 7 or 10 minutes to answer because you need to look -- it can come from 10 different reasons. It can come because a month before you're pi*sed off and you call the call center and they give you $20 billing adjustment and you run out of a promotion. We have many things. So the way we are -- the customer then says we can do it ourselves, they took the PDFs send them to OpenAI. It took like 40 seconds to get a reply. It was very expensive because OpenAI challenging by text, and the accuracy was 60%. Now because we understand the fundamental of this question, we actually, with our platform, we can bring all the relevant information in real time for example, which did he change the offer, did he get a bit adjustment? Did he have a promotional run out. We are bringing all the information, by the way, using in this way, using mainly NVIDIA and the capabilities. And eventually, when -- by the way, we publish a PR with a video, when we are sending this to OpenAI, which is the best. We -- our accuracy is in the high 90s, we reduced the latency to almost anything, and the cost is very affordable because we are probably sending 90% less text that you need to -- because when you say open everything. And so when we are building this, we can create huge efficiencies in the call center. Now when you do this, it has to be a mission critical system because if someone -- our customers take a decision based on this copilot to reduce 10%, 20% of its call center employees, these have to work because it suddenly -- so how you're building all the plumbing, taking the data and making it a mission-critical system co-pilot that can change the call center fundamentally. This is something that we do. And we are -- we have -- right now, you asked about this is, first of all, it's something that we have to do. As the market leader in this moment. Second, we see also revenue growth opportunity. We are running, as we speak, probably 10 different proof of concepts from -- with customer, and we got already a couple of awards. This is a major data play because the whole idea is how you bring the data at the right time to answer the question in the most effective way. So this is something that we are very bullish about. Another aspect of generative AI is related to our internal. And we are now in the process of taking this -- if you look about our margin expansion, while we -- the gross rate slow down in fiscal '24, the margin expansion was huge. This is why because we're starting to see how we can implement this technology in our software development life cycle in our operation. Now I think it's important because at the end of the day, everyone wants to say who is the winner or losers in generative AI. And if you look at our -- in our domain, we have a very different relationship in the managed services comparing to our competitors. Our relationships are outcome-based. So when we have a managed service agreement, it's not -- they're not buying for us -- it's not a rate card relationship. They're not buying from us 100 people in certain rate count. They are buying outcomes. The systems have to be app. It has to be all the time line with [indiscernible] I mean, it's mainly operational parameter, which are outcome-based. So in a way, obviously, we always need to share efficiency with our customer, but I think which we are much more protected given that all our agreements are outcome-based comparing the traditional IT services company which most of the agreements are mainly rate-card based and so it's going to impact everything that we do internally. Software development life cycle, augmented services and finance, we are taking the -- which also help us in our margin expansion is resource management is like you can take it to new heights. I mean, how we can bring the right people, with the right skills, in the right offshore, nearshore, onshore capabilities in the right center -- this is something that obviously taking us to the next level of resource management, which at the end of the day, we are a people company and most of our expenses on people.

And what about the investment from you guys? How much -- is there any step-up that we're going to have to expect in terms of all these efforts in AI now? Or is that...

It's not -- we don't expect any -- this has been on our current R&D budget. I mean it's more like priorities with the same budget. At the same time, you know that maybe we are funneling more money to this -- we are using this technology to do other things in the R&D in a much, much more efficient way. So if you look about our spend, it's not just in our delivery operational people, but how we can do. So our R&D machine can produce much more using this technology. So we are balancing this. And I think that we also have a very good agreement with our partners like NVIDIA and others that's supporting us in this -- for example, NVIDIA, I think that the reason we have such a good partnership because they understand that if you want to double down on the telco industry, which is I think only second to the financial services industry, giving the cloud and everything, the amount of data. So I think that, obviously, we wanted to leverage our technology. They want to leverage our position in the telco market. So it's a good partnership. And again, with Microsoft, we have an amazing partnership, I mean, in different domains.

Just want to make sure if anyone wants to ask any questions, I give them a chance to see someone in the audience who might know something about the company who's a great.

[indiscernible] I kind of wanted to marry one of your comments earlier with only 10% of your workloads in telcos will be up in the cloud. I think you guys are around 60% services, tell us the drive to AI that drive to push more and more of this data up into the cloud and telco has a ton of it, how does that force their hand in modernizing their systems or networks maybe even pushing more of their ratio...

You move to the cloud because of different reasons. By the way, it's not always -- in TCO, we don't go down because of the cloud. And when you move to the cloud, you'll get to a much more secure environment. Time to market is better and you can do many, many things that you cannot do on the on-premise environment. So it's not just because of -- and you get obviously access to our latest and greatest, which was bill, obviously, on the cloud and not on the legacy platform. So there is many reasons to move to the cloud. I think that if you look about what -- when we work with our customer to move to the cloud we build for them like some of them wants to go like rip and replace. So you can -- some of them to do more gradual journey. So -- we support them in -- but again, what was the question, I'm sure, I forgot.

Well, just in terms of...

So the telcos -- there is no question, everyone will move to the cloud. When I say 10% move to the cloud. I can tell you that half of our large customers are already engaging with us through the journey. So the question should be, what it will be 2 years from now, probably it will be accelerate in moving to the cloud. From our perspective, it's also -- it present also some type of growth opportunity because in the current environment, you talk about the on-premise environment, we usually will do the operation and the customer who's doing the database operation -- sorry, the data center operation. It's mainly most of our agreements, the customer was owning data center and was actually managing the data center operation, while we're doing the system operation, which you do -- when you move to the cloud, actually, we are taking responsibility also for the cloud ops, which actually replaces the traditional on-premise operations. So it's -- actually, the scope of our managed services on the cloud is broader because we are also responsible for the infrastructure. When it was on-premise, we were not doing infrastructure.

You've laid out a bunch of growth factors. If you had to sort of prioritize #1, 2, 3 in terms of how you want investors to think about what's going to drive growth the next 2 years? How would you rank out of them 1, 2, 3, whether it's network modernization, 5G, international expansion kind of lay out for...

It's -- I get this question a lot. Sometimes it's very difficult to answer because when we are doing a modernization project for a huge work for AT&T consumer. They're doing it to move to the cloud. They're doing it to get 5G capabilities, and they are doing it to uplift their consumer experience. So I cannot color exactly. Is it the cloud because actually, it's the same very significant project that answer all of this. I think probably cloud is maybe the #1. And as we said, we said that it's already 20% of our revenue growing double digit. But at the same time, there was a lot of, I would say, projects which were 5G related. By the way, we expect to see some acceleration later next year because when -- all our customers will start to have what we call a full 5G or stand-alone 5G network. Today, the radio is 5G and the core network is 4G. So all the new use cases of service latency of this -- you can hardly get it in a very, very small portion of the market. But I think when everything will be deployed 5G stand-alone, then you can buy. And I'm sure there are people that will pay the premium to get a guarantee quality of service, guarantee quality of latency. So all these -- so 5G, I think we're starting to -- we're going to see uplift later on the seal when all of them will be able to deploy 5G stand alone. Most of the AT&T, Verizon, T-Mobile having a very, I would say, a small percent of their markets, they have 5G stand-alone. So this is the holy grail of 5G. We are not there yet. We see a little bit faster speed, but we don't see yet the -- so I think that cloud, 5G, fiber rollout, which is support and network automation. I'm not sure that probably cloud is a bit behind everything. And I think that generative AI will join when we start to see more and more because generative AI project is not just at the end of the day, what it's the all the plumbing, creating the data, preparing it. This is -- by the way, for us, this is most of the money. I mean although we gave a very holistic value proposition because when we do a project with generative AI, we are the prime for calling Microsoft OpenAI for NVIDIA, for everything. We are the priming and we are doing it more like a transaction-based type of -- but -- so I cannot color it because in many cases, when customers are doing, there are many reasons. I don't think -- sometimes yes, we have some projects or say, okay, for example, AT&T mainframe deal that we mentioned, this is really on the cloud. The idea is to take 45, 50 years old legacy program moved to the cloud. Before all this mainframe is going away, and there's no way to support mainframe anymore. You can find people in a [indiscernible] anymore, but this is fuel cloud. But smart of our projects tick the box on some of these.

Thank you very much. I want to thank everyone for coming. I want to thank Shuky, good to see you like always.

Thank you.