Amdocs Limited (DOX) Earnings Call Transcript & Summary

Okay. We'll go ahead and get started. Hi, everybody. My name is George Notter. I work here at Jefferies and Equity Research side covering the communications technology sector. And very pleased to have the Amdocs folks with us -- the CFO of Amdocs. Tamar Rapaport-Dagim. She is the in fact, COO and CFO. So I don't want to shortchange you there tomorrow. But thank you very much for coming to our conference, participating in the session today. We look forward to having a good session here.

So maybe just to start out, kind of an easy one for you for maybe people at the conference or not as familiar with Amdocs. Could you just give us a quick overview of what is the Amdocs? What do you guys do? How do you play in the marketplace?

Sure. Thank you, George, and thanks for having me here. So hi, everyone. Amdocs has been a software technology player serving the telecommunication and media market for many years. And we've been actually enabling in a very simple description, enabling the communication service providers, media companies to actually provide service to you, the consumers and different enterprises around the world. We are enabling through our software stack and deployment services, the customers to actually automate and digitize many of their key business processes, whether it's from a taking of a new order all the way to monetizing for that new service, whether it's to optimize the network in providing the service capabilities of doing that. And there are many, many examples along the years of things we've expanded into doing. And whatever that connectivity underlying that service, whether it's wireless, whether it's cable, whether it's fiber, whether it's Internet to the home, whether you're roaming through an international trip or whether you're just sitting and consuming entertainment or indication from your house, we are the one enabling a lot of the digitization and capabilities behind the scenes. We are about a $5 billion revenue company, very proudly serving the top-tier customers around the world, ranging from here in the U.K. If you think about Vodafone, BT, the Hutchison Group, Virgin Media to [Audio Gap] and I can go on around the world in the tour to big players, whether it's APAC, SingTel, Telefonica and America Movil Latin America. And I think the interesting thing about our international expansion story is that if you look on our geographical sprint over the years, you can see about 2/3 in North America and the rest internationally, but we've been growing both significantly in terms of the number of countries, the number of customers that we are serving. You can look at it in different ways. For example, top 10 customers, historically, it used to be primarily North American names. Today, we have 6 out of 10 international names, not because we lost any customer just because we added more meaningful engagements over the years. And we are doing that by putting the best technology ahead all the time investing in being innovative in the marketplace. If you look on the Gartner and Ovum of the world and how they are rating the different providers of solutions in the markets we serve. We are definitely playing as a market leader in all of these categories, and we are continuing to invest heavily in innovation, both helping the customers to move into the cloud, which is a big thing in the mission-critical systems that we are serving as well as the ability now to leverage the capabilities of generative AI. Maybe last point I will mention is that we are coming with a unique accountability model. When we are thinking about typically how software companies are working, they are providing their software and technology and someone helps tell the responsibility to get it ready to go live, to deploy, to implement it. We are actually taking that full responsibility, which is very important in terms of making sure those transformation projects in those complex and mission-critical systems actually go live successfully against the track record of transformations in the IT industry that is not that favorable. With that, the success rate is close to 100%, which is a very unique attribute. And then if the customer would like us to, we will continue to support our systems under a multiyear engagement model that we call managed services. We can talk more about that probably in...

I was thinking about -- we picked up coverage of the stock back in December. We were doing homework on the business. The thing that just sort of dawned on me is like literally everything that happens in the telecom network is in software. There are so many categories of software here. There are 75 odd software modules spread across the OSS and BSS sectors. It was just kind of while to see all those domains. And you guys play in nearly every one of those domains. So is there sort of a network effect or benefit that you guys get by having a breadth of the product portfolio? Is that part of the competitive advantage for Amdocs?

Absolutely, George. I think what we are seeing over the years is that the ability as someone who is coming with such a breadth of the software and enabling our customers to really think about what is the need to have, what is the priority they want to bring. So we are coming with a very rich portfolio that includes many products. But at the same time, it's a modular and open portfolio. So they can really take the pace that they want in terms of how to grow about it. But the notion that they know they have a partner like Amdocs that if in the future, they want to move and adopt more of our product capabilities. They can do that with the pre-integration already built in. That's definitely big power. But what I would like to add to that is that over the years, we've expanded more and more into new domains. So what you're seeing now is not just an overnight success kind of -- it just happened. It's an evolution that happened over the years. For example, the expansion of our capabilities around network automation as [Audio Gap] monetization to the next level, helping our customers identify the connection between what's happening on the network side and how you provision the network quality of service with potentially taking it in the future to new monetization model that can guarantee quality of service. Those are the kind of things we can do because we really see end-to-end a different needs that are there and enable our customers to actually go about it with the richness of the software product we have.

You talked about sort of the combination of the software components and then sort of the integration side, the services side. Have you guys talked about how much of the business is in software? How much of it is in services? Is that something you guys have kind of spelled out for folks?

It's really another way we look at it because we never just sell the software.

It's project-oriented.

It's more about taking that full accountability. And the way we are looking at it is what is the problem to be solved from the customer point of view and what are the right products from a software point of view that are relevant for that? And also how they want to go about it from the program and the pace of changing things. So I'll give you an example. The move to the cloud is definitely a big thing that is happening in the industry. And when we are thinking about the mission-critical systems and applications that serve the communication industry, that journey is probably 10% in, so a head is yet to happen. And we are definitely, as a market leader, the one who want to take the industry to the cloud. So when we thought about how to do that, we realized we need to cater to different kind of appetites across our customer base. There are those who are very aggressive and they want to invest in building a new stack based on our current portfolio, the latest and greatest capabilities will be ready, the old systems or the current system of record that they have will be taken out. Those want to move our gradual. We are offering an upgrade path. We first will be able to take their existing product version and make it cloud enabled and later on, they will move to the full cloud native software stack. So we are giving different capabilities including migrating from really old applications to the -- by giving that end-to-end story to our customers and by telling them we Amdocs can help you all the way, both we're installing the new stack like we do, for example, in the case of AT&T, T-Mobile, Vodafone Germany, which are running those large-scale transformations, all the way to doing a more gradual approach. A recent example is Optus in Australia, where they're taking an existing version that we have installed there and upgrading a cloud version. We can do all of the bond. And I think that shows to the example why it's not just about the [Audio Gap] customers. We will run those systems for you under those [indiscernible]. Also there, we are coming with a notion that we are committing for value. We are committing for the outcome, a service level for certain scope of applications either a predefined price. And also there oftentimes it can be that if historically, someone just used the software and just paid maintenance, now we are coming with a full managed services engagement that maintenance is kind of embedded in, right? It's not separately priced. It's part of that engagement model that we are selling. So to us, from the monetization point of view, what's the optimized revenue we can have from a customer. And over time, we have very long-term relationship, and we want to see expansion of business with existing customers as well as many new logos. I mean some of the names, I can mention today is top 10 customers like SingTel that I talked about; The Vodafone, those are the evolution of relationships that happened over the years.

You guys started breaking out the cloud revenue for the first time a few quarters ago, roughly 20% of sales. I think you mentioned the 10% number a few moments ago. And I think what you're referencing is 10% of customers are now on the CES 23, 24, the cloud-native versions of the platform?

Just to be clear, when I said 10%, I meant globally moving to the cloud in our industry and our kind of applications. But if I look on our customers, many of them are still in the journey. So when you look on workloads moving to the cloud, even if someone started to build a cloud-native stack based on Amdocs, not necessarily they're moving overnight, everything to be on that new system. Usually, it's more gradual, so if you think about AT&T consumer, for example, which we serve, we serve for many years based on our existing systems, but we also build now for AT&T, their new stack to serve their consumer business in the future. So far, the launch on the new stack, fixed wireless. In the future, I'm sure many more use cases will be [indiscernible] virtually all of the subscribers [indiscernible], but those things will take years. And the meanwhile, we are helping them build those capabilities.

Got it. Okay. Why do you think -- what do you think customers by and large are so early in their journeys, right, in terms of the move to the cloud? Is there -- can you talk about sort of the inertia in the market space, the customers? And maybe talk about what Amdocs can do to sort of kind of control some of these customers and kind of move them down the path maybe a bit more quickly?

So when you look at -- and the move to the cloud, I mean, we are not talking here about regular applications like e-mail or ERP, for sake of example. We are talking about the most mission-critical systems that they have. They invested in many years as the industry was being built in creating those capabilities, running it on their own data centers. By the way, we don't do any of the data center business. So it's not that we have anything to be cannibalized from that point of view. But from that point of view, they made massive investments both in the application layer, the infrastructure layer, the data centers themselves. So for them to move into the cloud, there needs to be a significant benefit in doing so. And I think that over time, based on different references and examples as well as our ability to show them the way and to have different ways of getting to the endpoint, I think we can really lead the industry in this move in those mission-critical systems to the cloud. And that's a big opportunity for us, a, to help them in doing so; and b, to really gain the benefit of being the one supporting them in doing that all the way, again, here, when I'm thinking about the next-generation cloud native application layer, we can also [indiscernible]. Think about now they need to run their workloads on the cloud, how to optimize from the application point of view, how to optimize from the FinOps point of view, and you can take the full responsibility in the new model of managed services that we provide also for those applications that are already running on the cloud. And we've established strategic partnerships with the big hyperscalers like AWS, Microsoft Azure, et cetera, in order to make sure that we are ready for whatever choice they make our customers in terms of how they go about it.

You guys just announced a deal or expansion of your relationship with AT&T. I understand that was driven by an acquisition in the Astadia deal which I think is about moving applications off of mainframes, real traditional models into the cloud. But can you talk a bit about that? Is there any more insight you can give us under that transaction? Can you give us a sense of how big it is or how many years it is. Can you give us a sense if that's leverageable on to other customer relationships that you have? Like what can you tell us there?

Yes, absolutely. So I think that the opportunity of the telecom industry to move to the cloud. First, it's about new applications being cloudative with the speed and time to market and better -- much better security and additional functionality, but it's also about how do we deal as an industry with many applications that are running on all kind of legacy infrastructure layers, mainframe probably the oldest and it's a real issue. And one of the things we realize that we need to help in finding strong technology and know-how to do it in a low-risk responsible way and still in a way that obviously benefits our customer, in terms of the predictability in which they can do it in terms of the cost to achieve that, et cetera. And we've actually built with AT&T I think, a very meaningful win-win in that new deal. It's a significant deal. We haven't declared the size of that. It was signed in early May. And in that deal, we are taking responsibility to help them move through technology know-how we have in Amdocs as well as from the acquired company, Astadia that we acquired in November '23 to take those hundreds of applications from legacy infrastructure layer including mainframe all the way to the cloud. It's part of, again, this accountability that we're bringing to the table. We are going to take responsibility for preparing the environment on the cloud for doing the migration work itself for running under this 5-year agreement also the existing applications once they move to the cloud to run it on the cloud. So it's really taking this full responsibility. As part of this deal, we've also extended additional managed services engagements we have in AT&T in the consumer domain through 2029. So that's an additional benefit of that deal. So yes we deal in it. And I think this is an opportunity that exists naturally in other customers around the world, mainframe hard to believe, but it's still predominantly used in different parts of the industry. If you think about wireline, for example, that was created many years. So definitely, we see that as an opportunity to take to other customers and we are developing the pipeline as we speak, we did this great preference in AT&T, I think it will open the way too many additional deals.

Got it. Fantastic. Okay. Can you talk a little bit about sort of -- I think the narrative in the stock right now is the stock has been soft and late, of course, I think it's sort of an interesting environment, right, because you have a lot of people who are pretty down on telecom operators, the companies, I think the perception is maybe they're less relevant than they have been historically. The world seems to revolve around cloud providers right now. If you go to trade shows and walk around this conference. What do you think just generally about your customer set? And how healthy are they -- is it -- are the financial results and capital budgets of those operators? Does that create a cap to your business or your opportunity to grow? Or like -- how do you think about kind of those customers and the outlook there and kind of your role there?

So I think it's really interesting. If you just look and analyze different IT spend of different verticals around the world, telecom is probably still the #2 after financial services and if you think about it, all the connectivity, all the consumption of communication services and the dynamics that are happening around the world of how we actually consume communication and for what is evolving very, very fast, which means that the communication industry needs to continue to invest. Now the big thing for us over the years and still the case today is to identify what do they need to invest in and we then want to provide them the solutions for that. And this is why we defined our strategy to focus naturally on the multibillion dollar growth domains that they are going to invest in, like the move to the cloud, like getting ready for new monetization models around different kind of connectivity, whether connectivity is coming from 5G, fixed wireless fiber. We don't care. We want to be ready to be the ones providing them the flexibility to create those right, automated and digitized business processes with the kind of the mega flexibility to do all of the above across different lines of business. Think about how we used to think of the world. We used to think about a wireless company, a cable company, and Internet connectivity. This is no longer the relevant way to think about it. The relevant way to think about it is who is the end customer? Is it a teenager? Is it a businessperson? Is it a family? Is it a small, medium business? What are the kind of services they consume? And this is how we are thinking about how we are actually designing our offering, giving the fullest flexibility to our customers to use the same stack for all of those needs, which is a big ROI from their point of view, so they don't need to invest once for this thing and once for this thing. So the way we're thinking about it is, okay, now given the telecom industry is huge. And when we look on the relevant domains that we are relevant for those growth domains, this is $60 billion -- that's a huge amount. We have a $5 billion revenue company. So why being the market leader? Yes, within that addressable market, there is still of oil to pump from that well. So I think that the issue is the pace in which decisions are being made. Those are tough decisions, mission-critical systems. It takes time until some customers decides to move into a transformation. It means that when they make this decision, we need to have a very high win rate and we do. It means that once we are in, we need to deliver the greatest value which we do, talking again about this high success rate in deploying those products successfully. Once we are in, we need to have a very high renewal rate. And we have closed close to 100% renewal rate. So that, in addition to the fact we continue to generate new offerings, new logos, expand internationally, et cetera, means we can grow faster than the end market. Of course, all of that needs to translate to healthy margins, cash flow, et cetera. I assume there are more questions coming up on that, and we'll get to address those points. But I do believe that even in slow growth of an end market, i.e., the telecom industry, we can grow faster by targeting the right things and having such a meaningful win rate against a significant addressable market. One last thing to say about that, about half of the global spend in our domains is still done with the in-house organizations of our customers. So that's an amazing pool of money that if we bring a different value proposition where we can take the full accountability to really help them modernize, reduce overall cost structure and get better and predictable value of outcomes. Think about the pool of money that is there to take to external supply chain by having a high win rate. Hopefully, a lot of that pool will be going our way.

Can the company get back to 6%, 7%, 8% types of growth rates you guys put up those growth rates in the last couple of years. I think even if I look back to 2021, if I kind of account for the divestiture of open market, I think you were still growing at or above that.

Above 7%.

Yes. I mean, it's been phenomenal growth. Now we're stepping down. We've got issues with customers trading off kind of legacy systems against network transformation projects. You've got, as you mentioned earlier, some slower decision making. But do you see kind of a path towards some of those issues kind of working themselves out? Or -- is it just the company has got to sort of buckle down and like through those things and gain share? Like how do you think about the growth...

So I think, you're right. I mean specifically this year after 3 years of growing between 7% and 10%, we've been tracking lower in our expectations. Primarily, the #1 reason we've seen is some pressure from lower investments in enhancing existing systems as the same large customers are building their next-generation stack with us. So that kind of legacy revenue drop happened. There is a stabilization since, and we are seeing now in the second half of the year. The return to growth as we expected. So we started the year in more of a plateau and then we're accelerating sequentially in Q3 and Q4. I think what's important is that while we are seeing some years in which we can grow faster and in some years, maybe like this one where it's been more challenging to keep the same growth. We are continuing to support existing customers with 100%. So we're not losing any business. We are continuing to have a very high win. So we are adding new capabilities and new wins. So more new things are coming in. One of the leading indicators in our business for growth and progress is a metric of 12 months backlog. It's the backlog in our hands already to serve the next 12 months' revenue. And that has been continuing to grow. We are continuing to -- and that's, by the way, before the last -- the recent AT&T win that happened after March 31. But from looking at the March 31 number, continue to grow year-over-year. So I continue to see good indications of progress and growth. So we're not in a position right now to guide to a specific number of next year, but I feel that there is good progress out there. Very importantly, while we are seeing years of 7% to 10% growth a year like this year were 3% growth, we are very focused on converting debt to a double-digit shareholders' return as defined by earnings per share growth plus the dividend yield of over 2% that we have and if you look on the last 3 years, we've delivered above 10% of the shareholders' return and we are targeting this year to repeat the same. So -- all of the elements that we have, the different levers that we have, top line growth, margin expansion, definitely a big part of our ability to grow the earnings per share, capital allocation, where we returned the vast majority of our cash to shareholders. All of these levers together and, of course, continue to invest in innovation to be relevant for the future needs of our customers is bringing it all together to that double-digit basis.

I think it's so interesting. I mean the stock trades, historical forward multiples like 14, stock trades at 10, 11 right now. The beta in your business is dramatically lower than the beta in the stock, right? And so is there -- is there something you can do right now to take advantage of this? Can you buy the stock back more aggressively? Is that something you guys have looked at? I realize there's a lot of free cash flow already going into the share repurchases. But is that -- is there an opportunity to get more aggressive?

So the way we're thinking about our capital allocation, first of all, of course, converting into cash so we'll have liquidity from the business. So we're very focused on that. If you look in the last several years, we are converting roughly 100% of our earnings to cash. And then it's about the capital allocation. We've been less acquisitive recently, but we do think of M&A as part of the growth strategy, and we want to have the capacity to do it. We've been returning about 100% of our free cash flow to shareholders through dividend being about 30% of free cash flow and the rest of buyback. Yes, buyback tends to change a bit from quarter-to-quarter, but I think the consistency is something that matters the lot. So we're not trying to time the buyback in the sense that, okay, this year we will do low; next year we will do 3x of that number. But yes, we are positioning our decisions also to take advantage of the weakness in the share price. But I don't think you should think about that as okay. So tomorrow, Amdocs is going to lever up the balance sheet and do a massive bad. It's more of a I would say, fine-tuned decisions around how much we buy back. And we do want to keep the liquidity ready for the right strategic growth initiatives. We are investing in R&D in a consistent manner. I would say roughly 7% of revenue goes to R&D, which means a significant amount, which I feel we are deploying in the right way in terms of the strategic areas we are focusing on. But M&A can definitely accelerate offering and we are looking on things. We are disciplined by, I know you may hear it from every company, but I truly believe that we are looking in the right manner on M&A in terms of really what is the strategic fit? What do we see something that can move the needle, not necessarily in a big way because if you look on the deals, the added capabilities, none of them on their own kind of, okay, create a new -- totally new market. But in the aggregate, the things we are making -- in terms of the M&A, I'll definitely supporting the strategy that we do and we want to continue to look at it.

Super. That's terrific. We'll leave it right there. Tamar, thank you very much. We appreciate it. Thank you for your time today. Have a great day.

Thank you, George. Thank you very much.

Thanks everybody.

Thank you everyone.