Amdocs Limited (DOX) Earnings Call Transcript & Summary

Thank you. Thanks very much for coming, Anthony. I hosted you many times.

This time, I have a long list of questions. And what we want to address, we want to -- what we want to target this discussion is less about the near them. It's less about the quarter or what happened or what's going to happen next quarter, less interesting for me. For this -- the purpose of this discussion. What's more interesting for me is the understanding of your positioning, meaning -- and I'll ask it in a very broad manner. What are the initiatives that could drive growth over the next 3 years? That's basically the framework of the discussion. Where are you? What are you targeting? How are you positioned? And what needs to be done on your end to address these opportunities? So maybe I'll start just by asking you about the next 3 years, meaning 3 years from now, if everything goes right, what are the opportunities in the market that you think you could address successfully?

Yes. Look, I think a few things. I think there is still no doubt that connectivity is still at the heart of everything, right? I mean, it's not a discretionary spend. I think the fact that we just depend more and more on it means there's a core base that's not going away. So the question becomes, okay, so how much of that market share of the core base can you get versus how much do you have now? And there are -- recently, due to acquisitions we've done, due to offering increases, we've expand our serviceable market. We're, I think, sitting just under $60 billion, right, Matt, something like that, $57 billion, $60 billion. So we've expanded that, and so it gives us an opportunity to address it. When we look at the next 3 years, we think there are a couple of interesting things. First of all is this notion of what I call ubiquitous connectivity or pervasive connectivity, and that just means whether it's 5G, whether it's fiber, give me fast broadband. And we have this expectation. I think the U.S. government also changed their regulation or their classifications recently to say that broadband is now not just 30 megabits. It's 100 megabits and above, right, increasing that bar, if you say. So there's a lot of work to be done to make sure we get broadband into the hands of people, get fast connectivity and a lot of people working on it. That's, I would say, one. The second for a company like us is there is still a lot of moving to the cloud left to do. Cloud has always been a central theme of Amdocs, a core theme of Amdocs. Very recently, we spoke about the whole H&D cloud migration deal for mainframe to the cloud, but this can be replicated in many of our customers. There's still many legacy systems that can move to the cloud, and we feel like that, coupled with our cloud-native portfolio, gives us a multiyear opportunity to continue to grow, to continue to expand, to continue to get areas that are even not core to Amdocs, but around the peripheral that we can help migrate to the cloud. And of course, once we're at the cloud, we want to help them operate it on the cloud and run their systems on the cloud. So that, I think, is a very interesting opportunity for us. I would say the third thing is fiber. There is a -- definitely, a fiber renaissance in the last couple of years. It's going to keep on accelerating. Look, it doesn't matter who you are. I was speaking to someone just before and I said there's 2 key ingredients that -- whether you're AT&T, T-Mobile or Verizon, that you're always looking for. It's fiber, and it's spectrum, right? This is the currency that helps you propagate. So you start to look at the products like fixed wireless or broadband access or MVNOs on top. All of these sit on those 2 things. So these are things that are being consumed, that are being demanded from users. And you see like with fixed wireless, when there's a good product at a right price point, the consumers will come, like the people will come and people will embrace it. So it's about finding these right niches. And now, for example, we see a very interesting phenomena that wasn't in the U.S. markets around MVNOs, for example, but MVNOs target at specific niches. So it's not just saying, hey, here's MVNO brand, and I'm going to sell it to the entire market. But it may be an MVNO brand that's very focused on the Dallas Mavericks population or this population, and they will bundle in all sorts of things, right? Like it may be Taylor Swift might launch -- if she's listening, Taylor Swift might launch an MVNO, right? I guarantee you if she launches an MVNO brand, right, I mean, there's going to be a plethora of people that are going to jump on it. So there's all sorts of contextual products linked to connectivity. And the interesting thing for us is with the advent of technologies, such as eSIM, by the way, all of a sudden, everything is being connected, right? Today, I talk about this experience of 10 years ago, I had a wireless phone with a carrier. Today, I have my Apple Watch. I have my iPad. I have my phone. I have my laptop. I have my home alarm. I have my car. Everything has a eSIM, which is connected to my provider. So these are multiple relationships with a single consumer, and this is where I feel like we have a lot of opportunities to continue and expand. And of course, our customer base, it's not like we have 10,000 customers, right? So we have a fixed set of customers. But they're blue chip golden customers that we feel we still have room to expand within the customer base. And over the years, you've been with us for a while, we expand our offering, bring new products to market. One of the key acquisitions we did last year was a company called Astadia. This was a company that had a bunch of technology that helped you accelerate the migration to the cloud. They were pivotal in us winning the AT&T deal, for example, right, to help it migrate to the cloud. So 2 years ago, we didn't have that offering. So we continue to expand that offering and continue to get areas that we don't play in.

Got it. You said that I've been covering you for many years. I started covering Amdocs in 1995.

Yellow Pages.

We used to talk about yellow pages.

Let's talk about yellow pages. It's still around.

So okay, let's talk -- let's speak first about telecom carriers, Tier 1 carriers in North America. The question is -- forget for a second the new opportunities in completely new markets like migration to the cloud, et cetera, I see that they're going -- or maybe it's related. You know what? Forget what I just said. I'm going to ask the question a general way. I'm sure they have big transformational projects. What are they doing in their network? And how come you're announcing AT&T, a major contract, in times when spending is going down, when their revenues are not growing? So what drives them to invest while it's not attached to their revenue growth?

Yes. Look, there's a couple of things, I think. If you classify it and you say, look, this is the IT spend. Let's say the IT spend is $100. Then you go, okay, this is my budget. Now I need to figure out where I spend that $100 to get my ROI. Your ROI can come in a couple of different ways, right? Your ROI can come in efficiency. Your ROI can come in revenue acceleration. Your ROI can come in revenue growth. So it doesn't have to be necessarily in one of those. Any of those help -- at the end of the day, help shareholder return, which is the end goal, I presume, for all these public companies, right? So a big deal like migration to the cloud, obviously, and I'm talking generically now, takes a lot of spend away from data centers, from mainframe, from risk mitigation perspective and things like that. Like think about it, right? You have a mainframe system that is 30 years old, 40 years old. You think of talking about cybersecurity before, right, think of the cybersecurity aspects you have, think about replacement of hardware. These are all risk mitigation events you have to deal with, right? It's compulsory. It's not an optional item. So these types of things open up the opportunity for transformation projects. You have to invest, right? There's no notion of, well, I'm not going to invest. I'm just going to keep my business as is and the world will be fine because there's bigger demand for connectivity, there's bigger demand for security, there's demands for driving cost efficiency, moving out of data centers to the cloud and there's demands for revenue acceleration. One of the examples I was talking about before in North America, an enterprise service roughly, give or take, takes about 44 days from order to installation, right? In this day and age, that's not acceptable, right? That 44 days -- like if I'm a business and I'm running it, I'm not going to wait for 44 days, right? So yes, that's an average, I'm sure, the numbers on both sides, depending on what it is, but like we're working on projects to accelerate that, to shrink that time down, right? So we're using generative AI, for example, to accelerate that revenue rate. And that becomes a revenue recognition acceleration for our customers, which, again, is a positive thing. Rather than waiting 44 days to see the revenue, now they're starting to see revenue within a month, for example. So those are the types of investments, I think, that they do. So obviously, we're privy to some discussions. So when these business cases are created, you go, okay, does it help accelerate my revenue? Fantastic. Does it drive efficiency? Fantastic. Does it grow revenue? Fantastic. Versus, oh, it's a good technological thing to do, it's the right architectural thing to do or we should do this because fill in the blank, right, ex reason. But I think really, these decisions are driven by one of those 3 pillars.

So we don't need to talk about specific names, but I want to talk in general.

Sure.

Taking an example of a Tier 1 carrier, without talking about which one it is, but what have you done for them? What are the components of the projects that you have with them that will give us an example of what actually carriers are going through? And what drives -- basically, what drives your growth?

Yes. So I can tell you there's some key components that are driving or initiating some of these discussion. So definitely, even though maybe some of the 5G rollout has slowed down, the thinking, the long term -- like you said when you started, well, what is the long-term thinking? The long-term thinking is that this is still, from a longer-term perspective, a very positive influx on the business, right, so the investment in 5G, when it comes to rating, when it comes to network slices, when it comes to how do I structure the network in a virtualized manner. Like what's the big deal about virtualizing the network? Here's the big deal. You don't have to do anything physically, which means you can automate it and do it instantaneously, right? That's the result of not having a physical network and having a virtualized network. That's the reason to do it because you now build a foundation for the future to be able to deliver services faster to deliver innovative services and to deliver it quickly, right? So definitely, these types of things, I think, is what we do for our customers. The other thing is still also the simplification of the experience. If you think of -- some people always kind of go, well, what's the big deal? Like if I'm ordering a bottle of water or some shoes from Amazon, I go in, I go here's a set of shoes, I put in my basket, I order it, is delivered the next thing. Fantastic. What about the telco? If you're ordering a phone, you need to pick a plan, you need to make sure it's activated, you need to have an eSIM that's connected to you specifically and also connected to the back end on who it is. If you're roaming, you need to have an international plan. If the device is subsidized, you need to have some type of payment mechanism. So it's not just like buying a pair of shoes. In the back end to make this seamless, there is so much that needs to be done, right? And of course, in a way, that kind of -- it's -- I'm making a self-serving comment because the more work that needs to be done in the back end to make things seamless in the front end is good for Amdocs, right? So all of these things -- and then, by the way, magically, you order a phone, it needs to be delivered to you tomorrow and it needs to be activated and running. So today, we automate about 99% of the consumer services end-to-end in our customers. You take a big Tier 1 carrier, you order a phone, it can be delivered the next day, provision, automated, on the network with an eSIM, no issue, right? But those are the types of things when it comes to transformation projects and kind of why they choose us and what we get to do. And of course, the other side of it is also kind of the operational managed services aspect of it where they're trying to drive efficiencies and cost out because of our scale.

Yes. Got it. As much as you can talk about it, you announced that the night before you reported results, you signed on a big contract with AT&T. So as much as you can provide details, if you can speak about what kind of projects are you doing for AT&T.

Yes. So the -- of course, as you know, we do many, many things for AT&T, but this specific one is a very interesting one. So they want to take some cost out of all of their mainframe, not just that, but also, clearly, there's lots of other reasons that they want to do it from a hardware perspective, security, lots of issues, generally talking about in terms of mainframe. And they want to be able to move it to the cloud and leverage the scalability, the security, the capacity on the cloud. And so this is a multiyear project, and Amdocs will basically help them migrate, transform, move it, run it on the cloud. And then hopefully be able to retire the hardware, be able to retire data centers and drive cost out of the business. We also see that as it's a very strategic thing for us. This is why we did the acquisition last year. And we've done many POCs with different customers who are in the process. But another interesting thing, it also could be very applicable to industries outside telecommunications. Because you think of like financial services and some other areas that still have this huge legacy mainframe, so that's also something we're gently kind of looking at to see if there's potential there with the asset that we acquired. And so the announcement -- and this kind of goes back a little bit to some of the discussions we've had in the last years. This was a long discussion we've been having with AT&T for quite a while about how you do it, running POCs, showing the proof of concept. So it's always nice like people like, oh, they announced this deal. It's like fantastic. But all the legwork of teams of people behind it to show a proof of concept, to show that you can do it, to work with Microsoft and other vendors to make sure it all sticks together, so sometimes these things take a lot of time to put together versus you see the end result and like, oh, that's a fantastic deal.

Yes. Got it. I wanted to ask you about U.S. wireless market, and I want to ask about European market. Let's start with U.S. wireless. You -- it's disclosed that who are your big customers, and T-Mobile is one of them. Talk about the competitive landscape, not your competition. Competitive landscape of your customers. How does it impact -- what kind of projects do you see in wireless? What kind of impact does the competition is driving a need for your solutions, et cetera? So when we're looking at AT&T Wireless, so we're looking at Verizon, which is less of a customer, they only buy certain things from you, and we're looking at T-Mobile, et cetera, how are the dynamics of the fact that, on one hand, the competition level is going up, on the other hand, 5G investment is going down, how does it impact the demand for your solutions?

Yes. Firstly, I think there's definitely a place for the 3 carriers to be in the market, right? I think there is a need for it for multiple aspects. So I don't think there's necessarily a problem. But to give you a little bit of an anecdote to illustrate this, I will take our enterprise product catalog, which is a core foundational cloud-native component in our portfolio, which resides in all 3 carriers, right? It's used very differently right, the way they market it, the way they're utilizing it. So we also learned over the years to be able to build it to give the optionality to the customer, essentially, on how they use it. So I think -- I always use this example of think of it as LEGO blocks and you put it together and go, okay. But the final design of it on how you want to implement it and use it can be up to you. So I feel like it's our job to continually invest in R&D and come and deliver innovative products and solutions. And then it's their job from their marketing perspective to kind of reimagine what the future looks like, and they will have the tools from Amdocs to be able to implement it. Another product of ours is our MarketONE platform that brings together all -- it's a cloud-native SaaS platform that brings together all these digital providers to be able to build an ecosystem at the telco space, right? So we have people like Virgin Media, Sky, T-Mobile, a whole bunch of people kind of using our MarketONE platform. And they use it very differently, right? So with Sky, they use it with Sky Glass with their TV, right. In T-Mobile, they use it to sell their digital goods. So I feel like we build and invest in products, but we have enough optionality for them to differentiate themselves in their own market on how they need to compete, because also how they competed 2 years ago isn't necessarily how they compete today, right? So they may compete in fixed wireless today. That -- maybe that's where the battle is, right? Tomorrow, the battle may be absolutely in fiber to the home, right? The next day, it may be on the edge and what they do on the edge and what they deploy in the edge, for example, on the enterprise B2B space. And the other space, I think, that's interesting when you look at the landscape is also the cable space, right? Because the cable guys have a huge pedigree of investment in fiber and infrastructure, and so these 2 roads are like converging a little bit at the end of the day, right? Because you want to roll out 5G, you need fiber, right? People want faster broadband connections. The cable guys, all of them have launched MVNOs. By the way, all the MVNOs are launched on our platform, Altice, Comcast, Charter. And so I feel like in order to think about competition and think about the future, you almost need to go not just look at the 3 carriers, but also look at the cable guys and say, how will this landscape evolve because I think there's some really interesting scenarios that can happen there.

Yes. Now you mentioned cable. Cable companies, their revenues are not growing. Their spending is not growing. Same question that I asked you before, why are they -- why will they invest more on your services?

Look, I think if you look at the cable stocks versus the telco stocks -- I think I saw some slides that the telco stocks are doing a little bit better. The cable guys have been struggling in the last year. But again, at the end of the day, they're delivering a mission-critical infrastructure, infrastructure service to every consumer, right? So they have to -- there is a certain amount of spend that you have to spend, it's nondiscretionary, right? It's a compulsory spend. Now the question becomes where you spend it and if Amdocs can align themselves with what that spend is. So I can tell you on the cable guys, many discussions we'd have with our customers is how they grow their revenue and how they grow their revenue on the enterprise in the B2B and the SMB space, right? So that's a lot of the discussions we're having with the cable guys. Two years ago, a lot of them was about MVNO brand, right? And we helped them launch all the MVNO brands, and that's been a great growth. If you look at all the wireless growth, I think the MVNOs have grown the most, like percentage-wise, even though they started with nothing. Percentage-wise, they've had the biggest growth across the entire landscape. So in our space, we are not necessarily focused on are they going to spend money or not, aren't they going to spend money, because we know they're going to spend money. Our focus is just to make sure that where they're spending that we are aligned, we're relevant in order to deliver value there.

Got it. I want to ask about international markets. So we spoke a lot about the U.S., whether it's cable or wireless. Are the same drivers -- do the same drivers exist in Europe or Latin America or Asia? Like how do you -- what's the difference? Because last quarter, we have seen the U.S. didn't grow, but actually Europe grew. So what are the drivers there and how they differ from the drivers here?

Yes, Europe has been good for -- I think the last short while, at least for Amdocs, has been pretty good whereas, historically, maybe it's been a little bit more stagnant. I think Europe is going through this transformational aspect of they are -- the U.S., I would say, did this like progression or continual transformation whereas Europe didn't. So there's a lot of mergers happening with legacy systems where they're bringing together -- there's a lot of digital transformations happening. There's a lot of regulatory stuff where they're trying to take maybe like Huawei equipment out and do transformation. So we see a lot of activity happening in Europe right now. A lot of transformations in Eastern Europe that we've announced. So that has been like a very good ground for us. And also, I would say, our intentional focus. So if you like go back 5, 7 years ago, we didn't have much business in Italy. Now we have good-sized business in Italy. Germany was another one. We have a good-sized business in Germany. And these are great countries, very forward-thinking. So us being able to penetrate those in the last several years has helped us start to move that. If I think about APAC, APAC is very interesting. So I always feel like -- it's not like I have any scientific data to back this up. But qualitatively, I always feel like they jump a version of technology. So they went to 3G. They didn't necessarily go to LTE and 4G, but they jump into 5G and they jump into fiber, right? So for example, in the Philippines, there's an acceleration in fiber rollout, right? Singapore has the best fiber coverage, right? So depending on the area, we also feel like APAC is also -- there's some activity happening there. So those areas have been good. And we know the U.S. is cyclical, and we know it'll come back. And we know there's a lot of stuff happening in the U.S. So as long as we are focused on the area and have the right offering, we feel that, that will just pick up. And having -- at the end of the day, we have 75% reoccurring revenue, right? So as long as we can maintain this base and keep continuing that and then make sure we're relevant when it comes to the new projects, we feel that we align ourselves well.

When I spoke with your CEO, with Shuky, this past quarter, he highlighted AI opportunities and projects that could materialize over the next few years -- over the next few quarters. Talk about AI, but I need the 101. I mean, I need to first know how you participate or what is AI for you. Sorry, I misspoke. I spoke about the cloud -- so I'm going to talk about cloud. How you participate in cloud? What does it mean cloud for you? I mean, where are the opportunities in cloud build-outs and how are participate -- Who are the target customers? So kind of the basics of the opportunities in the cloud.

In the cloud. Yes. So our job, which we kind of came out with a very clear strategy several years ago, as I said, our job is to help accelerate our customer's journey to the cloud. As part of that, we went and did -- built some very strategic partnerships with Microsoft with AWS, of course, working with GCP to help move our customers and also Oracle, by the way, with OCI, help accelerate our customers to a cloud based on our customer's strategy, right? So in addition to that, we also went and built and bought some assets. So we replatformed our entire portfolio to be cloud-native. So today, you can come and buy soup to nuts except for the hardware from Amdocs and then you can choose your cloud, right? So you can say, I want to run on AWS or I want to run Azure, no problem. So you can do that with Amdocs. That's one. And the second, we acquired a couple of great companies like the Sourced Group and Kenzan that just bought like very high-end premium experience on cloud migration and understanding the cloud to help them migrate the ecosystem. So it's not just taking Amdocs product and running on the cloud. That's like -- that's BAU for us, right, like we can do that with our eyes shut. But when you migrate a BSS system, there's an ecosystem you need to migrate. So we can help them with that. Then last year, we went and bought Astadia that helped migrate mainframe to the cloud, right? So as you can see, like I can -- it's like breadcrumbs, you can put it together. We're building more and more assets to help migrate stuff to the cloud. Right now, we're working with NVIDIA on, for example, how to work directly with the GPUs and allocate workloads at a very infrastructure-granular level. I think there was a press release maybe that came out very recently on like their NIMs infrastructure. This also helps on the cloud because that can help allocate where your workload runs, how it runs, how it utilizes GPUs. So everything we do today, we're very focused on saying, okay, is this strategic, can this be an enabler to help accelerate their cloud journey. So those are the types of things we do to the cloud. And then we can come to a customer and it's like a -- I would say it's like a menu. It's like, hey, we feel like we're the best partner to help migrate you to the cloud. Here are all the things we can do. Now you can take all of it from us, and we can help you do a full transformation, like we've done with a couple of our APAC customers, or you can pick and choose from a modular perspective.

Got it. And are cloud contracts significant in size or they start small? Can you characterize it?

Yes. Look, a bit of both, right? I mean, clearly, the last one we announced was large in size and -- but there are smaller consulting contracts, right? Sometimes we will come in and help you design the architecture and help you design the systems and say, let us help you and then, oh, by the way, we can also implement it for you, right? So it can start small. But of course, our end goal is always to end up with the implementation and the operations and running it on the cloud. And with our partnership, we can kind of bring the whole -- maybe sometimes with the bigger guys like the AT&T and T-Mobile, of course, they have direct relationships with the cloud guys as well. But some of our smaller partners, they love this idea of kind of one throat to choke, where we bring everything to the table.

Yes. So I hope you're good in gymnastics because last time I spoke to you, we spoke for 45 minutes about AI. Now I'm giving you 58 seconds. What does AI mean for you?

Look, AI means 3 things for us. First of all, we love it. We don't do BPO. We don't do commodity services. We don't do low-end stuff. All that is going to be disrupted and disrupted materially, right? And so for us, there's no downside on it. Internally, we use it, and this is what's helping drive some of our margin increments that you saw and seen, 60 basis points year-on-year, 30 sequentially. Externally, we empower all of our products that are rolling out now with generative AI. So we can help revenue acceleration. We can help drive efficiency. The second, we have what we call smart agents where people can use it in their call centers or people can use it with billing inquiries, where we believe we can take transactions that are taking 12 to 14 minutes, reduce it down to 1 minute, right? So this is a material saving that our customers can enjoy, and we have several pilots running with customers. Hopefully, we can announce some of them very shortly. And the third one is around what I call the infrastructure and the plumbing because we sit on all the data, right? So giving access to all this, bringing all of these together, normalizing it,to help ingest it into generative AI. So this is kind of like the 50-second version of the ABC of a generative AI strategy. And for us, it's just upside there, both internally and externally, right? Did I do it? I did it.

You did it. It doesn't show how much we're -- thank you. Thank you very much.

No worries. Thank you, Tal.

Thanks.