Amdocs Limited (DOX) Earnings Call Transcript & Summary

[Audio Gap] I cover networking and cybersecurity here at Morgan Stanley. For any research disclosure, see morganstanley.com/researchdisclosures. We're delighted to have Amdocs here with us today. I have Shuky Sheffer, CEO of Amdocs. Maybe just as an overview, for those of -- who don't know Amdocs, can you just kind of talk about the company, what does Amdocs do? And just kind of what is the role of Amdocs within the telco industry?

Okay. So as you mentioned, we are supporting the telco industry, the large telco companies of the world, our customer, AT&T, T-Mobile, Vodafone and others are 3 our customers. And I think that if you look about the telco environment, there are 2 areas. Obviously, there is the network domain, when you create all the network infrastructure. And there is the IT domain. Amdocs is in the IT domain mainly. And we support, I would say, all the monetization activities of our customers. So if you think about environment of a customer, you are familiar, there is the mobile application and the website in the retail store. And then the commerce engine, all the ordering engines, catalog, obviously, all the billing activities, general ledger, invoicing, AR and then all the touching of the network system from policy system to service fulfillment to rating charging. So we are doing the end-to-end activities that support all the infrastructure, what we call BSS, OSS system. All everything that our customer needs to monetize the network. Amdocs is unique in, I think, in this domain, 2 different aspects. The first one is -- usually, there is a typical split between product companies like Salesforce, ServiceNow, and there is like the system integrators like Accenture, TCS. Amdocs is unique because we do develop the products. And we are ranked by far, the #1 -- is the #1 product in this industry to support our customer, and we do all the services too. So we are doing both product and services. We are what we call product-led services company. So we have all the products. We implement our products and we operate our products in managed services, which is very different. It create a very unique accountability model because usually, in this very complex environment or projects where something goes wrong, the product guy will say the system integrator doesn't know how to operate the product, the system integrator will say, the product doesn't work. So you can never have a real accountability. In our model, we do both the product on the services, you can get real accountability. So this is, I think, one big differentiator. And the other one, we are the only one that have all the portfolio. As I mentioned, that there is a list of application that supports and we have end-to-end. Usually in a typical RFP, it will be Amdocs versus a system integrator that try to integrate several platforms to accommodate what -- and we are, I think, by far, the market leader in our domain. If you look at our blue-chip customer in the world, I mean, starting here in the U.K., so 3, Vodafone, British Telecom, everything everywhere, everyone is our customer. And also America, obviously, T-Mobile, AT&T, Bell Canada, Comcast Charter, Rogers, TELUS, in Latin America the large groups are Telefonica and America Movil. In Europe, definitely Vodafone is our largest customer, and we have many, many presence in APAC all over. So I think that we are, by far, the market leader in our domain.

Okay. So I mean in addition to kind of having a unique portfolio and value proposition, you guys have tech lead and kind of outcomes-based business model. Just talk about this and the way it kind of differentiates you versus the competition?

Definitely in the new world of Gen AI. So we -- the majority of our business is we don't have what we call rate card relationship. The vast majority of our business is outcome-based. Rate card relationship is -- if you want to do something, you come to Accenture or TCS or whatever and say, "I want to buy 100 people from you," and then you pay by role, by location. And definitely, in today's world of Gen AI, suddenly, you can do the tasks, not with 100 people for -- and it's a time and material based with 70 people, immediately, it's impact your margin and revenue, et cetera. Amdocs is selling value proposition, which is outcome-based, meaning if we operate in environment by managed services, we are committed to service level and KPIs. And this is how we monetize. As long as we are meeting this -- so the idea is not, we are not selling people, we are selling value. And the monetization model is outcome-based. As long as meeting and we have a great reputation of meeting the service level, then the whole monetization model is based on outcome-based. And now we can see that mainly all the system integrators are starting to talk in this language of outcome-based, which has been our monetization model for probably from many, many years.

Everybody is coming around to you.

Yes.

All right. Can you just talk about maybe some of the transformation that has taken place in the business over the last year? You've been phasing out some of the lower margin noncore businesses and pivoting more towards AI and cloud and modernization focus initiatives?

So I think that they're definitely main trends that we follow and support in the last year. This phasing out of $600 million of noncore, low-margin business, this is we identify. We are doing some activities that we don't believe are strategic and very low margin and very low visibility. So it makes sense to phase them out. It's one time, and that's it. But from the main trends that the company is supporting, I think the #1 that is, we are doing for several years, it's become a significant growth engine for us. It's roughly already 30% of the business. It's growing double digit is the journey to the cloud. We actually probably 6 years ago, we decided we want to take the industry to the cloud. And we created a platform for every Amdocs customer to move to the cloud. It doesn't matter if he's doing it in a way of rip-and-replace, pretty much like taking the legacy on-premise system and to do like a full migration to the latest and greatest cloud native system or taking an existing system and actually moving into the cloud version of this specific system. So we created, obviously, journey for every customer this journey is still -- while we have many, many customers that are doing this journey, it's still early days. If you look at the industry as a whole, the mass majority of the industry is still on-premise. And these are a very complex project. It takes some time, huge migration, a lot of data. But I think that most of our customers already started the journey with us, with eventually move to the cloud or our customers. This is one thing that we created a foundation probably 4 or 5 years ago, and we are deploying it across the world. The other one is definitely the Gen AI transformation. And here, we see what we call Horizon 1 and Horizon 2. Horizon 1 is we built a foundation called the amAIz. And in this foundation, actually, we help our customer to create what we call different use cases or different agencies or copilot. So -- and in this type of infrastructure, we are leveraging the fact that we are the system of record. We know the data and we understand the domain, in order to help our customers to insert and it could be in the call center, in the retail store, in many -- so to create these agents, agent could support care, agent could support upsell or agent assist or copilot. So this is something that we are doing for a while and quite successfully. But when you look what we call Horizon 2, we are in the process of actually bringing to market what we call cognitive core. Cognitive Core is a Gen AI layer that we can put over every Amdocs platform. It doesn't matter if it was implemented a year ago or 10 years old. And actually, the whole dialogue with the core system will be done through the agents. This is something we are going to announce next year, first quarter, probably in Mobile Congress in Barcelona, but it's going to completely transform the way our customer is going to talk, operate, enhance their main core system, and this is something that probably we believe it will be another growth engine for Amdocs like the cloud.

Okay. Got it. You've talked about kind of a $60 billion TAM. Just how do you go about increasing your share of that opportunity with existing customers and penetrating new logos? You just listed off a list of very -- the largest customers there are. Talk about kind of recent strong sales momentum across your strategic domains and operating regions?

So I think that -- when we look at our -- obviously, the telecom market is the same market. I mean there are not going to be additional AT&Ts. So our strategy is to -- when we deliver value to customers, is we are constantly increasing our portfolio. So if you look at the portfolio of Amdocs, what used to be 10 years ago, what is today, we expand the portfolio. Some of it is in our current domain, like in what we call more the billing, BSS, monetization, some of them in the network domain. So if you can see, we are expanding and adding more and more products to our portfolio. Now this is one. On the other hand, we're adding to our service portfolio, which is pretty big. I can give a couple of examples for each. So in the product portfolio, we added the platform around -- from fiber rollout, which is obviously happening all over to e-sim platform to marketplace platform. Today, it's very common that our customers are selling OTTs like Netflix and Amazon Prime and Disney+, et cetera. So we actually came with a platform that enables us to do it very simply. So we are adding platform all the time. So we expand with our customers by adding more and more products. And the other one is a service portfolio. So for example, cloud migration. This is a competency that we've added, not just for Amdocs system but also for non-Amdocs system. For example, we signed a very large deal with AT&T a year ago. Actually, we are going to take all the mainframe application of AT&T and move them to the cloud over time in a complete managed service environment. So this is, for example, domain within AT&T that we have 0 presence before, and now we are expanding. So expanding in customers in both portfolio of product and services. The other one is getting new logos. I mean we are getting several new logos every year in addition and also expand geographically in where we can. I mean, we don't operate in China, for example, but definitely in Europe, we are the market leader by far in APAC. And so getting new customers and expanding to new geographies. So between getting new -- expanding within existing customers by adding more portfolio of product and services, getting to new customer and new geographies, we had 0 presence in Japan. Now we are starting to develop presence in Japan. So this is how we expand within our addressable market.

Great. Gen AI, major focus of everybody, but also kind of the telco industry. Why are you well positioned to help here? And where is the momentum? You guys noted a success with kind of a UAE telco. Just how long did it take to implement a solution here? And how quickly were they able to see results?

I think that the differentiation of Amdocs in Gen AI will be based on things that I think help us before. We see -- and by the way, it's pretty common right now to see that if you take a multi-vertical platform, agent force, Salesforce or others. And you try to implement it in a very complex environment like telco, it's not successful because -- and when we build our platform, we understand the taxonomy. We are understanding the ontology. We are the system of record. We create an environment which we call 0 data copy. So we don't need to create additional data environment because we own or we understand the data. We are doing the orchestration. So when we build our solution, by the way, we don't pretend that you can take dissolution to other verticals. But if you take our solution, that I said, understand the ontology, the taxonomy, the orchestration, we understand the data. This solution can be very successful. So when we talk about, for example, our next-generation offering, that we're going to come to the market is what we call Cognitive Core. What is Cognitive Core? It's a layer -- by the way, we're still looking for the name for this. But you are going to put this layer on top of every Amdocs platform. It doesn't matter if it's something that was implemented 5 years ago or 1 year ago. And the whole dialogue and interaction with the core system, with the system of record, we've done through agents. Now you can say there are other platforms there that pretend to do the same, but in reality, it doesn't work. And the fact that the platform that we build and understand, as I said, understand the domain, understand how it works, all the connection, understand the data, you don't need to copy the data, help us to do this much more effectively and successfully. And we are going to announce in first quarter, as I mentioned, this new product, and actually, and the reason we believe is it's going to be successful because we understand the domain. So this differentiation, understanding the data on the orchestration help us a lot to do it in the right way. So the future is that everything will be done through agents on top of this Cognitive Core layer. All the -- so if you want to -- I will give some tangible example, there's going to be a marketing agent. Today, when you want to come, for example, before Black Friday or iPhone launch and creating new offering to the market to certain population segment, you want to do something for students under 25 that are likely to do -- to upgrade their device and you want to plan device financing. So the marketing is dreaming about this offering and then we need to meet with the IT, and it takes a lot of time. You need to implement and to test it. You need to think that in the future, it's going to be an agent, it will talk to other agents that will say, okay, this is the new offering that we want to do. And the other agents, we implement this in the catalog and all the system to make it work. So this is the next generation of way that we believe we will operate. And I think that coming from really deep understanding of the domain, help us to do it successfully comparing to other options, which are more like general purpose type of engines that you find it very difficult to operate in the telco environment.

Okay. Cognitive Core in the terms of AI names, it's pretty good. There's some pretty bad ones out there. So all right. So we've often seen telcos as kind of laggards and technology adoption. You noted a lot are still on-premise. Many of them are still heavily reliant on internal IT. Just how are you seeing that change? And how do we see them start to catch up by relying more on partners like Amdocs?

I think that we have done a pretty good job in expanding. We do obviously, work with our IT partners. On the other hand, our partners. On the other hand, our biggest competitor is IT. I mean if you ask me what is the biggest competitor of Amdocs, it's not Salesforce, it's not Netcracker, it's not Oracle, it's the internal IT. But I think that there is a way of coexistence in a way that Amdocs is bringing all the -- and another way, we are spending hundreds of million dollar every year in technology. We are enjoying the fact that we see innovation from APAC and from Europe. So if you look our products actually represent all the trends that we see around the world. And we continue to invest in R&D. So we are -- I think we are better positioned to come all the time with better tooling capabilities. And I think that in a way, the move to agent environment help us because then we can obviously collaborate with the IT in a way they say, okay, we are going to build this environment and the IT, you can build on top of it, any agent you would dream of to get the value from our core system. And so I think -- I mean it was always there. It was always tension between our partners and competitors. But I think that the more everything is based on IP and technology, I think this is what we do. I think it's positioning us better.

Okay. You've had a strong relationship over time with Microsoft and some of the other clouds. Just how are those relationships evolving? And how do you see those partnerships as tailwinds to the business?

For the most part, it's a partnership. It's not a competition. And obviously, we -- our platform are cloud native. So you can run any type of Azure on AWS, on GCP. I think that in Microsoft collaboration was a bit different because beyond the -- obviously, leveraging the cloud infrastructure. In Microsoft, we expanded it also to come with what we call the customer experience layer, that it's more using their platform beyond just the cloud infrastructure. And we are using their infrastructure, obviously, a very strong relationship with AWS, with Microsoft, deploying this across the world. All the -- we have a lot of activities of cloud migration. Even for non-Amdocs definitely, it includes partnership with these guys. As I said, for the most part, it's partnership and not -- there are some areas there of overlap that we compete. For the most part, it's a great partnership. But we have an ecosystem. Our biggest partner today, by far in Gen AI is NVIDIA. I mean, we're working very closely with NVIDIA, when we develop our platform and they are our biggest partner in this domain. But there is an ecosystem of obviously, this part of what we do today of coming with the right solution to our customers.

Got it. You've always had this mix of project base versus kind of recurring managed services revenue. Just how do you see that mix evolving within the business? And just how does that change the visibility you have?

I mean if you look at the fundamentals of the company, and this is the fact that I think -- when we ask the Sky Amdocs, so I forgot to mention that we are dealing with mission-critical systems. Even if you look at stress tests, like I don't know, COVID or financial crisis in 2009, you cannot stop Amdocs, what we do. I mean this is the lifeline of the companies that -- of our customer. So back to your question, I think that over time, the monetization model of Amdocs, if you look at 65% of our revenue is managed services, 75% of our revenue is recurring. We have 90% visibility within our 12 months backlog, which is pretty nice. I think that we'll see probably over time, more like more subscription-like models that will evolve over time. But the fundamentals of the company that the majority of the revenue of the company is recurring and very large full-managed services like [indiscernible] that are not going to change. I think we'll see more like a subscription model type of monetization model in the future.

Got it. You noted some pressure on the business heading into fiscal '26 with kind of headwinds from T-Mobile. Just what are some of the trends with your largest customers? And just how does macro tend to influence the business?

I think that we see the same macro impact like anyone else, I think, a little bit longer sales cycle. Everyone is -- now Gen AI is a little bit mixing everything. And I mean, we have a long-term relationship with all our biggest customers, very proud from AT&T to T-Mobile to Bell. To all the big, we have very long, I would say, relationship. We are supporting most of them or not all of them in full managed services, long-term agreements. I mean we have a cycle within customer. Customers have different priorities. It's not new. We used to have it in AT&T. Now we mentioned a little bit about T-Mobile. But over time, I think things are -- it's up and down. But I think we are strategic partners for all our big customers. We are supporting the core business for many years, and we enjoy a very strong relationship with all of them.

Got it. And then I'll end with some more CFO questions, I ask you to put your CFO hat on. You've seen improving margins over the last year. Just how has AI helped with that? And just how are you kind of sustaining some of that margin expansion potential while investing in Cognitive Core and -- yes.

At the end of the day, we are an engineering company. So when we look about Gen AI, there is the internal stuff and there is the external. So far, I talked mainly about the external. What will be our offering in the future that we are going to give our customer, Cognitive Core, different use cases, copilots, agent assist, all of this, I think the Cognitive Core is what we call the Horizon 2 of our offering. It's much bigger in scale and it can grow to be over time a growth engine to Amdocs like the cloud. But this is our -- what we offer our customer. Definitely, Amdocs is growing right now through internal transformation of Gen AI as we have engineering and R&D company. So we are implementing Gen AI in everything we do. It's everything around the software development life cycle in the way we do R&D, the way we test and the way we document. So we are leveraging across the board in marketing, in legal, in HR all over. So today, we are implementing engine that doing the best risk allocation for employees based on location, skill, whatever. So this is definitely -- and it means eventually that we do more with less people. And over time, we believe that implementation of Gen AI, which is strategic for the company. Internally, it will help us to expand our margin. Now this year '26, we said that we are going to double down and invest more in AI capabilities, Cognitive Core. It's not just in R&D, in sales, marketing, everything, all the ecosystem that support it. But still, we are able to expand margin by 20 basis points because we are getting all the time and, I would say, a lot of value from doing things much faster and better and cheaper, using this technology, and we assume this will continue even maybe accelerate in the future. So we see a future that we continue to expand our margin over time. Obviously, we share with our customer. Some of it, but also, I think we can continue to expand our margin.

Great. Well, Shuky, it was great having you here today and telling us more about Amdocs.

Thank you.