Amdocs Limited (DOX) Earnings Call Transcript & Summary

Good morning, everybody. Tim Horan, the communications, digital infrastructure and satellite analyst now here at Oppenheimer. My pleasure to be hosting Amdocs again, I think, for maybe the fifth year. And I've hosted probably Anthony, the Group President of Amdocs, much, much more often than that actually. Anthony, I will always mess up your last name, but we're good with Anthony for now. Yes. And Matt Smith, Head of IR is here also.

It's just really, I think fascinating times in technology and networks and compute. And clearly, in the economy, we just think we're in the precipice of incredible changes to the economy with this [Technical Difficulty]

[Audio Gap] which is really focusing on telecommunications, our BSS, OSS really coming to the market with the next-generation Agentic platform, keep doubling down on that. We have a North Star or we believe that eventually, it is really going to be business to machines, right? Meaning this kind of massive layer of doing a lot of IT and doing a lot of change requests and things like that is kind of going to disappear as software starts to kind of auto heal and evolve and be more Agentic and be able to give you all of these capabilities. And we're starting to push some of those boundaries. And that is really pillar 1, just taking our customers to the next evolution of software, which is natively, Agentically built. The second pillar is we believe that we have this DNA of going deep vertically, right? We are not a company that serves 17 horizontally inch deep mile wide. And we have some DNA in that, right? We build mission-critical software that needs to run 24/7. We work and build software that works in a highly regulatory industry. We are super, super focused on things like PII and privacy. And obviously, with quantum just around the corner with security, we're already working on that stuff. So there are some DNA and characteristics of Amdocs going very deep in these complex verticals that we think can be replicated to another vertical. And so even though we haven't shared specific information on that in terms of the vertical, we think that our next play is to go to another vertical that has similar characteristics and bring to bear kind of this core competency from the Agentic side of telco to another vertical. And the third pillar is really something that I'm super, super excited about. And I think there are a lot of very interesting emerging markets, not geographically, but emerging markets from a kind of landscape perspective where there are a lot of things that we're building that could be viable for. So just we were talking just before this, right? I spent the day over here at NVIDIA, and we spent a lot of time talking about the edge and talking about edge, mesh grid and how that can work and how workloads can balance tokenization, how do you kind of measure that, balancing all of that together because that could be the next frontier as we start to go to all sorts of -- by the way, it's not just that you need lower latency and better capabilities on the edge, and there's a great opportunity for telcos to create this mesh grid on the edge. But there is also available compute power, right? Like if you look at the need for the next 3 to 5 years, although there is this massive data center build-out being done, they're still behind the curve in terms of the need for many of the enterprises. And here, you have fully air conditioned, power supplied, fiber running, all of these edge points close to enterprises and consumers that can be utilized. But that also comes with a burden of how do you manage the workloads, how do you monetize it? How do you treat it differently? How do you treat security on it? How do you partition it? How do you virtualize it. So there's a very interesting stack of software complexities, and that's kind of some of the big items we've been sitting here talking with NVIDIA in the last day or 2. So that third pillar is very, very interesting and exciting for us. And we're building some of this stuff for us, right? Like you take something like quantum security, like we have already been working on this for the last 6 months for our enterprise applications, right? They need to be PQC compliant and things like that. And then you just wake up and you go hang on a second, like we're doing this, and it's so valid for so many others. So this third pillar is really to look at like are there any of these opportunities. Now we're not going to wake up tomorrow and say, like we're going to go into pharmaceuticals or anything like that. But are there some of these opportunities like on the adjacencies that could be very viable to take to market as well. That's the kind of the third pillar. And the fourth, I would say, the horizontal layer is really a focus on real internal transformation. And I think Shimie has taken over the CEO role, this is something he really embraced soup to nuts and said, "Hey, like we need to be customer zero here. How do we transform completely internally to be fully Agentic, right? And we've seen the tweets and things like that of companies like Uber just waking up and going, "Oh, my gosh, like -- so we are -- and that's another good example of something that we've built internally, right, like having these dashboards per employee, what are they using, routing to cheaper LLMs. All of these is internal infrastructure we've built. We're like, hang on a second. This is like super valid outside, right? So back to that kind of how all of these pillars connect, that's back to pillar #3. So that -- in a nutshell, that's our strategy. Absolutely Pillar 1, we're doubling down on that. We think there's an amazing opportunity. Amazing opportunity like this LLA deal that we signed or announced last quarter. It's an Agentic transformation journey. And we are starting to see, and I know you and I have had a lot of conversations about the many POCs we're doing. We're starting to see these like our customers go, okay, it's not about can I launch an agent to production because, yes, you can launch an agent to production. How do I transform my company? How do I have [indiscernible] W.ho are the 2 to 3 partners that I want to partner with that will take me down this journey. And this is where we think there's a sweet spot for Amdocs to really play and make an impact and really set the stage for the next 5 years.

Anthony, I mean, the opportunity is obviously huge, right? The telcos are still very, very, very inefficient in many ways. I mean AI seems like made to order to massively improve the quality of service, customer care, right? And frankly, their own cost structure. I mean they can automate and agentize their entire business over time. And you guys are in an incredibly strong position to do so. I guess the multibillion-dollar question is, are you going to -- can you execute? Or are you going to lose these customers to new competitors, right? That's -- I think that's a really, really important point. Like why do you retain the customers? And what gives you confidence that you can execute?

Yes. Without being flippant, I would say like we are the adult in the room in a way, okay? And what I mean by that is you have a mission-critical in some cases, with our big customers, $100-plus billion business, and you are not going to wake up tomorrow and someone that great and amazing to see these amazing valuations. The company [indiscernible] getting $1 billion valuation, I also want that, right? But on the other hand, like do you trust your entire business here to something like that, right? And so if you can get both, meaning if you can get the responsible adult in the room who knows how to build mission-critical software, right? I'll give you just a very, very simple anecdote just to illustrate something like this, right? So you have, let's say, you pick this great platform that has a great agent and he's amazing and there's all the fantastic things and fantastic, I'm going to get it. For whatever reason, let's say, Claude is not available or OpenAI is not available or Ozone is going down. Like I mean, are you going to tell your customers, oh, like come back in 3 days. What happened if a model gets taken offline? What happened if you start to scale it and sudden, you realize that every one of your inbound calls are using 20,000 tokens for each call. I mean there are a lot of complexities that needs to be managed in a complex organization. And we are thinking through every element of it because we understand the business. And that, combined with knowing the workflows and the business processes and how you take a product from, a, all the way to provisioning on the network, right? It's one thing to say, hey, like I can answer a customer care and do an upsell. It's another thing to know if you can provision it on the network and make sure it gets delivered in 24 hours. And so when we come to the table, we're taking all of this into account. We're taking your entire gamut of security into account. We're taking your regulatory concerns into account. So I think when we come to the table, it's not like, hey, like look at this nice shiny little thing here, like do you want to use AI? It's really deeply thinking through your business. And one thing we found, by the way, in this kind of new strategy that we're rolling out is we don't have 10,000 customers in telco. There are like 50, 70 customers that carry 75% of the revenue globally. And many of these customers need a very contextualized path versus here's a box, take it, make sure it fits into your ecosystem. So I think all of those with kind of the deep understanding of where our customers are at puts us in a very, very good position. Also, like the relationship we have with NVIDIA and AWS, it's not like we're just saying, hey, like Amdocs can do everything. We're bringing the strategic partners to the table. We're working very, very deeply with them. It wasn't just me here at NVIDIA. It was our R&D teams that flew in here. Today, it's actually an R&D Day. They're sitting together with the R&D teams. We are giving feedback on what works, what doesn't work on some of the Nemotron models, right? So it's like a to and fro. And so I think bringing all of these to the table -- it's tough to find someone out there that does all of this for telecommunications.

I completely agree. It was just partially -- we get asked by investors, why should you guys win in this, right? I mean, obviously, you got to execute. You need a lot of AI skill sets that are very, very new. But it's like your game to lose at this point, right, as long as you can execute. And I guess on that, I was just interviewing -- I just had a fireside chat with Verizon's Head of Business unit right before this, Kyle Malady. And he basically said a bunch of the same things you're saying what they need to develop. They need like an AI platform that will help customers manage their token utilization, token costs, model utilization, which models to use, integrated with data and everything you're talking about, right? And they would love to have, for lack of a better word, like an AI platform in a box. And it would seem like you have obviously 1,000 customers around the world. They're not all going to develop this on their own. You seem like perfectly well positioned to develop exactly this product that they want. And I guess at that point, do you have a product like that?

Yes. And so one is the product, and we are continuing to push the boundaries on our kind of our BSS/OSS stack around AOS and making it fully Agentic. The second is also the harness. Think about the harness, right? Like -- and this becomes, in a way, it's even like a bigger focus today. So you just spoke about all of the different models, right? I guarantee you, if you're a company like Verizon or Amdocs or whoever and you allow your employees all the tools to do dev and stuff like that, everyone is going to default to fable. You don't need to, okay? So how do you manage this? So now you have an LLM router that analyzes tasks and says, here are the tasks that can go to SONET or something like that or maybe even an open source model, right? And then balance it across the organization. And we haven't even gotten to -- we're working on a bunch of kind of open weight models, right? Because this is -- by the way, this is the next big issue that's going to hit us, right? When you're an enterprise -- and people mix the words open source and open weight and the...

Yes, I use open source just because I'm lazy, I guess, yes.

Yes, yes. But it's 2 -- by the way, 2 very, very important paradigms, right? But they're not necessarily exactly the same, right? You can have an open source model that's not open weight, right? And you can have a proprietary model that's open weight, meaning -- let's talk about open weights for a second, right? If you are using a model and you are an enterprise and you have all these nondeterministic software that's driving your business, you want to know where it's driving, how it's driving, you need the transparency, you need the observability. You are a regulated industry here, right? And so that's why open weights really, really matter in decision criteria. The open source element is much more driven, I would say, by the cost factor of tokenization or token economics, if you like, as you start to scale and our industry is -- I mean, the volumes -- I mean, you know this, Tim, the volumes in our industry is like second to none. And this is only increasing, right? And now you need to deal with not just employees coming in, but agents coming in, right? So if you thought you had 50 customers, tomorrow, you may have 140 customers because 70 of them or 80 of them or 90 of them will be an agent coming in, trying to negotiate a deal and connect to your e-commerce server, right, and connecting via MCP and buying something and looking around. So like who is thinking about that? We are, right? Like we are building stuff to have agent negotiations on the front end because this is just around the corner. It's already happening today. And so you really...

And Anthony, my question was, I know you kind of -- you built like this AI platform internally to kind of manage all the AI assets, right? And you're going to -- and the telcos need to do that internally, but the telcos also want something for their enterprise customers, right? Because the enterprise customers are getting -- and they think based on everything you're saying, you got to tie together networking clearly, right, with the AI compute, data centers, the actual GPUs, the models, the applications, the agents, it's all incredibly complicated, right? And then most importantly, you need privacy, security, data on and on. And it seems like you guys -- you're developing it internally and you know how to deal with the telcos. I mean, do you think you can develop a product that the telcos can go to enterprises with and say, look, this will help manage all your AI assets.

Yes. This is where I think kind of connecting a little bit to Pillar 3, I think there is a great opportunity because what we're building is kind of agnostic in a way, right? I mean you can easily white label, sell it to enterprises, and there is no issue with some of these because the enterprise are grappling with exactly the same problem. Talking about that model router, for example, right, talking about security, talking about harness, governance, all of these things, enterprises. So I think it's a great opportunity that our customers can take some of these components, white label it and just expose it to their customers. And that's in kind of Pillar 1, that's another, I would say, now it requires 2 to tango, right, meaning it requires a customer to think bigger than just connectivity. right? So like you're going to see future customers start to have bundles of -- we already have customers talking to us about this, right? Bundles of like here's my phone, here's my iPad and your -- you can have 10,000 tokens you can use a month, for example, right? It could be across frontier models. It could be their own hosted open source model. You can get like your own AI, personal AI agents. So here's kind of where the industry, I believe, is going to morph to on the consumer and even on the enterprise side. That niche of SMB to mid-market, I think, is one of the biggest opportunities that telecommunications providers have right now.

And I hadn't heard of that until just now bundling tokens in and it makes a lot of sense, right, Anthony, and you can bundle in many other products. But the telcos had this -- they were in a good position 15 years ago in cloud, right? They could have been the cloud providers for enterprise customers, and they just didn't execute. I mean, I guess the question is, can they execute on this AI? Is there something different about AI that unlike cloud where they can actually potentially execute a bit better?

Yes. And that's the -- like the pessimistic view is they were first to cloud, right? They were -- the whole OTT kind of thing that happened where the monetization really didn't flow as much under the telco side and things like that. But at the end of the day, I think the most important thing to understand is none of those technologies could have come to bear without the pipes, without the connectivity. So I think at least that element is there, and that's not going to go away anytime soon. I think it is going to require some bravery from C-level within our customers, within CEOs, just going, hey, like here's where I want to go, right? Not just kind of stay with the status quo and say, "Hey, I'm going to sell the next iPhone. Yes, you should sell the next iPhone. But like what does that look like? And going back to the initial point where we started from, this is where I'm also excited about the opportunity around the mesh grid around the edge because you think of the number of POPs that telcos have, right, we're not talking hundreds, we're talking tens of thousands in a city. And it's not just about the proximity to the enterprises or the consumers. It's just about the fact that you have all these kilowatts of power sitting in these things that are unused, that are AC, that are powered, that already has the space secured...

Yes. No, Anthony, that's exactly what Verizon was talking about. I mean everything you and I are talking about, we just had this entire conversation. And they were also talking about maybe selling or leasing GPUs as a service. Maybe they own it, maybe the enterprise owns it. But with cloud, the -- one of the reasons I think enterprises outsource compute to cloud was the utilization internally of CPUs is fairly relatively low. I mean if you're looking at AI, and you would know better than me because you're spending a ton of money on AI yourself, but you're running those things 24/7, I think, almost, right? Because -- and so why would you share that compute with somebody else when you -- there's no economic rationale behind that. So -- and also enterprises, they want to control their data, right? They want to control their intellectual property. Privacy and security is absolutely paramount to everything we're doing here. So I mean, I think there is a whole lot of reasons why the telcos can be very successful here and why you guys can enable them to be successful. But to your point, though, you need some brave leadership, right? And they got to really step up to the plate [ to me ]. Verizon now has a CEO that came from Silicon Valley, right? So -- and he's already had his career in many ways. So in a lot of ways, he's doing a lot of brave things because it's -- he doesn't have a lot of personal downside.

It's an opportunity. Look, yes, it's definitely an opportunity. The only thing I would say just to the initial comment you made was I think there is a bigger play than selling GPU as a service, right? GPU as a service at the end of the day is going to be a -- I don't want to say commodity because we're not there yet. But some type of commodity play, it's a cost-plus exercise. But now if you can start to go northbound and start to provide services, inferencing services, all sorts of things above it, that's really where the margin play and the opportunity is. It's not just saying, hey, I have a GPU, do you want to buy it?

No, you need the whole platform for everything we're talking about. The whole service is one piece.

Yes, it's one piece. So that's why I think if you look at all the SMBs and the mid-market companies around the plate, these guys don't have a seat at the table with the NVIDIA, right? I mean they are the ones that are needing to -- there is absolutely no doubt that every company out there in some shape or form is either embracing AI or wants to know how to do it. And so I think as a telco, you are the first to the table, right? When a business opens, right, think of the order, if I'm an SMB, I go and start a business tomorrow, think of the order of what I would do, right? I would register my LLC, I would find a physical premise, I would connect the electricity and I will get connectivity. Like that's literally the order of what I would do. And then every -- all the other 10,000 things I need to do, okay? So I think you're the first at the table. So when you are the first at the table, you have the most amazing opportunity to go, hey, like have you thought about this? Like we have the harness, very secured privacy and you're coming to the table with the most amazing name in the industry because people may say everything about telcos and write bad comments on social media or whatever, but they trust the telco at the end of the day. They're like, I know you're not going to wake up in the morning and decide to screw me, right? Like this is not the brand that telcos have necessarily, right?

That's a great, great point. And then Anthony, just maybe you can switch gears a little bit. Great deal with Liberty Latin America. They gave a number out, and I don't follow the company of savings. But can you put -- not just focused on them, but if I was to entirely adopt AI, what kind of cost savings should a typical telco be able to see? Do you think -- I mean, all in, if I just went completely Agentic, and I'm not holding it to this number, but I mean...

Yes. Look, I think there are 2 streams you need to look at in parallel. The first stream is if I was going to wake up tomorrow and create a completely new telco, I would do it AI native from the ground up. And in a way, that's easier to do because you don't have a legacy of systems and things that you need to bring along the journey, right? But most of our customers on Track 2, meaning they are an existing company, they have an existing business, all of that stuff. So the ones that can push the needle in terms of savings are coming horizontally and going, look, let me completely reimagine how I'm going to do care. Let me completely reimagine how I'm going to do service in terms of truck rollouts. And those layers or even if you look at the network layers horizontally, if you start to kind of slice those out and you -- we are going from the perspective of selling -- if I go even 3, 4 years and I look at the customer discussions, they were like, hey, we need like this functionality, this feature, we need charging to do this, things like that. The discussions we're having with customers now is let's look at your business workflow end-to-end versus bits and bites and feature functionality. Let's look at your -- let's map out your customer workflow end-to-end. How do you now change this customer workflow. We have one customer, I'm not sure if we released the name, but we had one customer that came to us with a problem on the network side. And like we were able to save -- in that particular space, we were able to save like 60% of their annual cost. right? And this is something that they did and they have to do on a daily basis, right? And this was taken straight out of their annual operational costs.

I believe it. And you guys had a big push 2 years ago like trying to automate the contact centers a little bit more. Have you had much progress there? Are the telcos seeing results there?

Yes. I think the -- so I think the contact center space, I think, is jumping in leaps, right? So I think, yes, you will have potentially a contact center and things like that. But I think what we are starting to see now is the customer care agent and most of the inquiries coming in, which is like 40-odd percent billing related, right? I mean you can take not a haircut like, you can completely slice this by a magnitude because most of these agentically, very contextually driving high NPS can be solved purely in an Agentic manner.

And so you've implemented that and had a lot of success, it sounds like?

Yes. We're starting to see -- now customers are doing it by -- so they're taking -- instead of going, hey, we're doing all of care. They're like, hey, like let's do it on a -- like we have one customer that started on a WhatsApp channel. So on the WhatsApp channel, all of the inbounds, and this is a customer in Europe, all of the inbounds coming in the WhatsApp channel, and you know in Europe, they use WhatsApp a lot. So that's a very important channel for them. There were only 3% that needed human intervention. So 97% were being solved without any intervention or escalation. And that's, to me -- like I was -- I went back to my team and like, hey, just double check this, like is this right?

We've been clear about that, sorry. So said another way, they were able to cut like 97% of their live human handling of problems.

Yes. And having it solved by just people chatting to an agent in the back end connected to WhatsApp, connected back to the system.

And were those humans running those chats or agents running those chats?

So it was a combination. It was a hybrid. So there was like originally on WhatsApp, they had like a standard chatbot that were doing it. But when the chatbot was doing it, like 60%, 70% of the calls were like, I need to talk to a person, like give me a human, like this is not the answer that I wanted versus now you're getting 96%, 97% of those completely handled and people happy and moving on.