Amdocs Limited (DOX) Earnings Call Transcript & Summary

Good morning, everybody. It's Tim Horan, the Cloud and Communications Analyst here at Oppenheimer. Thank you all for joining me for our 25th tech conference. I've been involved with, I think, 24 of the 25. I think Amdocs has been involved with many, many, many of them going back years and years, and we really appreciate their participation. Amdocs has been our top pick this year. Luckily, it's worked out pretty well. Mostly because -- well, we think the stock is incredibly inexpensive, is well positioned and is executing really, really well for reasons that we're going to get into here. So we have Tamar Rapaport, the long-standing CFO from Amdocs. And with that, I just want to say, Tamar, if you wanted any opening statements or any lawyer language or anything or we can fire right away?

Maybe a few words about who we are for those that are not familiar with us, we are a technology and services provider for the communications and media industry, enabling our customers, provide great experience for their customers, whether those are consumers or businesses. We have been in business for many decades, of which, more than 20 years as a public company in the states. Revenue of about $4 billion, 75% of our revenue is recurring. So a pretty consistent business model in which we have both the software and technology, the deployment services and the IT operations that follow later, hence the high level of recurring revenue. And we've been enjoying intentionally an accelerated growth in the past couple of years and guided also for the years '22 to '24 for revenue growth of 6% to 10%, and we are targeting to finish this year at a 10% growth of the top line, 12% EPS. And if you add to that a 2% dividend yield, that gets you to 14% shareholders' return, which is the second year running in which we're providing the double-digit returns. And we are here to provide the additional context theme for those who want to know more. So let's shoot ahead with the questions.

Well, and I forgot to mention you have an impeccable balance sheet and great free cash flow, yes. So there's a lot of reasons to like the company. But probably the most important reason is just the fundamentals, the whole -- our whole economy is going through a digital transformation and communications and media are right in the middle of that themselves. And I think you're a really, really key company in enabling that digital transformation to 5G and the cloud. And no one wants to hear from me, Tamar, but can you maybe talk about how you fit into that digital transformation why it's so important?

Absolutely. So I think that all of us feel, as consumers, why the digital transformation is meaningful in the sense of providing us the personal and contextual touch point that we would like to have with our service providers, whether it's through the mobile phone, through the desktop, walking into the store or let's say, we are elderly consumers that don't like digital interaction, even if we call the call center, you want to have a very good customer experience that is based on the same digital tools in the background that will enable the agent representative to provide us a great service. So when we think about all of that, we are enabling the service providers actually to provide this great experience and monetize for that in a smart way. It means that also the flexibility of how to move and how -- in which place to move or marketing ideas to launch to market of new services, how to refine the time it takes to deal with any issues that the customer may have. How do we deal with the same service provider environment with every consumer, whether this consumer is living in a big city or in a rural area, all the way to a small, medium business, all the way to the big enterprises or government customers. Enabling all of that based on a very advanced technology and software stack, that's Amdocs. So we go to customers such as AT&T or Vodafone in Europe or SingTel in APAC and actually provide them the next-generation software stack that they need in order to provide effectively these kind of services. And then we take responsibility to take them to the next-generation architecture that they need in order to do that. Because when we think about the digital experience, often time, again as the consumers, what we see is like the front end that is touching us. The design of the screen, the agent talking to us, the person of the store coming to us with an iPad to provide us the answers to our questions or maybe take a new order. But in the background of all of that, there are significant business processes that have to be automated in order to make all of this a seamless and fast experience for the end customer. And we do all of that. And when you think about the new architecture that has to deal with cloud, that has to deal with 5G networks, all of that are things that we enable. So when service providers are moving today to a cloud environment or if T-Mobile is launching a 5G network, we are making them future-ready to be able to do all of that based on these new networks, based on this new architecture on the cloud et cetera. It's not just about making them ready. We actually enable the shift. We plan and help them to move from their existing environment, whatever that environment is, oftentimes on premise data center, prior generations of networks into the future that they are going to. And we enable to do that both in a rip -- what we call the rip and replace, meaning they take out all the legacy, they put in a new stack altogether all in a gradual and modular manner, where they want to do it in a phased approach, and our software stack will enable to do that as well. So it's a very flexible, I would say, set of options that we provide the service providers in terms of how they want to reach that end state. Maybe I'll stop here and see what is the follow-up question.

And what is your core competency that allows you to do this? Like why are you guys better at this than almost anybody and better at this than the carriers themselves doing this?

So I want to define better because I think this distinction is important. When we look on deploying this kind of software stack into production, in a complex environment of the service providers, the industry success rate is roughly 50%, which is very bad, as you can imagine. Our success rate is over 95%. The way we do it is by providing, first of all, a very strong technology and software. Secondly, we are taking full accountability to deploy that software into the customer environment so there is no finger pointing. We take that accountability. We take our software stack and we deploy it at the customer environment until it goes live in production, providing service to their end customers. And if the customer desires, we are also taking the responsibility to run it under a multiyear agreement we call Managed Services and we will run the IT operations of that system, including ongoing enhancements and taking responsibility for predefined success criteria, a predefined service level. So the customer can enjoy all of that from us as well. The way we do it is by having continuous innovation, investing year after year significant amounts of money into R&D, roughly, to give you a quantification, of 7%. Now we're actually in an accelerated R&D level of 7.5%. We are training and skilling our employees to be focused on the needs of the communication service providers. So it's not just a generic software that is sold to many, many verticals. We are very focused on how to solve the challenges and the needs of the communication and media service providers. And then we are continuing to operate the IT systems. And by having the experience of actually operating the software we ourselves deployed, we have a continuous learning loop that feeds back the R&D guys and the people who are building the automation to create the continuous improvement, not only on the functionality of the systems but also how to run it in a best operational excellence that is possible. And by doing that for many years and continuing to invest in that, mainly organically, but also for acquisitions that augment our capabilities. We are continuing to improve and expand both geographically into additional countries, additional logos and also to upsell in our existing customer base. Again and again, as some of the examples we just announced last week, for example, renewing and expanding our services and the technology we will deploy with Cricket in the U.S. market, with PLDT in the Filipino market, which is a leading carrier in the Philippines. Vodafone Germany, another example, we just expanded our engagement with an existing important customer. So there are many examples in which we upsell to our existing customers and renew the relationships with them. And by the way, our renewal rate on the Managed Services engagement is close to 100%. And in addition to that, we continue to expand into many new countries. So just to give you some context for that, if a decade ago, 5 out of the 10 top customers were in the U.S. market, now it's already 50-50. Sorry, 8 years ago, 8 out of the 10, now it's 50-50. So we continue to expand geographically and create meaningful relationship also with international customers to expand our business outside of the North American business, while generating a lot of revenue. Actually, we just had another record revenue in North America as we're experiencing a very good momentum of continuing to sell into our existing customer base also in North America.

That's great color. And the communications industry, too, has a lot of unique characteristics in terms of needing to be incredibly secure. You have billions of customers. You have to work with law enforcement agencies and you have to interact with your competitors oftentimes. I mean there's a lot of unique things about the industry that I would assume you -- helps kind of create more barriers to entry for you guys also because it seems like a lot of your competitors sort of many other industries where you're much more focused. Can you add a little bit more context on some of the barriers to entry -- yes.

I think it's a great point, Tim. The industry has certain characteristics. First of all, it's a national infrastructure, right, in every country that you can think about. The connectivity has always been and definitely in the pandemic, we felt it more even than before, how connectivity is becoming the basic of society. Whether it's for work, for entertainment, for education, you cannot run life without this kind of connectivity. So it's a critical infrastructure in every country. It means that when we deal with the mission-critical systems of the service providers, it has to be -- there's a term called carrier grade, excellent, it needs to run smoothly. There needs to be high reliability level of the service provider on us to run the systems for them in the best way possible and to provide them with the technology and the resilience of the technology to run their operations in the best way. It also means that by this focus, we understand very well, not only the mission-critical nature of the systems we need to provide, but also the business processes of that industry. Understanding very well the different nuances of what does it mean to intake an order, fulfill that order. What does it mean to interact between the layer that is supporting the end customer and between the network, what needs to happen in terms of the fulfillment of these services in the network side. So it's quite a complex environment that we know very well. And I think the last point that is critical is our unique business model. You don't see many companies that do both the software itself, and great software, and take the accountability on deploying and providing the services on that software. Oftentimes, you're either a software company or you're a system integrator. Or sometimes it's the in-house IT guys that take the software from a third party and deploy it themselves and run it themselves. We actually provide a business model that provides all of that together and take the accountability against providing successful outcomes in a very challenging environment, which is creating a major barrier of entry to others. Yes, we are competing with many people. By the way, we ourselves expanded the addressable markets in the domains we go after so we also created new type of competitors. For example, we went strategically into the whole domain of network automation. As networks are becoming more software-based and cloud-based, we feel we have a great opportunity to expand our solutions, to expand our relevance for the network automation where maybe 20 years ago, we were focusing more on the -- just the business -- the business services aspect, the business processes, addressing the monetization and the e-commerce. So now we are going also into network automation. By going into network automation, we are facing more different kind of competitors like the Ericssons of the world, the Nokia, et cetera. So it's true that we have quite, I would say, robust competitive environment in the sense that we are competing both with the software vendors, we are competing with the system integrators. Now we're competing with the network guys, although, again, we do not provide any network equipment. We do not provide any switches or radio access, we are providing just software to run the network effectively. But still, this is a domain that historically was reserved for the network operators, for the networks themselves. So I think that when we look on all these competitors in aggregate, we have a very high win rate. And frankly speaking, when I think about addressable market, and where is the biggest share to grab, it's still with the in-house IT organizations of our customers. Still about half of the spend in our domains is done by the in-house organizations of our customers. And over the years, we believe that by showing them the value proposition of Amdocs, we are managing to take a bigger share of that pie and move it to our directions with -- the very important attribute that once we do, we do a great job. We show the value and then we get into a close to 100% renewal rates. So it's not going backwards into the in-house IT.

And you think -- well, I have about 10 questions for you. But I think you said about half the spend is still done in-house. Is that global? Or is that the United States? I thought it was still larger than that globally.

It's global. It's global, but over in the U.S., we are still seeing big pieces of work done in-house. And again, it's different from carrier to carrier, the different approaches in the U.S. market between different service providers. But the data point is global.

And are you -- it would seem to me it's going to get more and more difficult for the systems integrators, for the Ericssons in the world to compete with you guys because of what you said that you do the software, and it's not just billing or business processes, it's also network processes integrated. I don't think too many other people are doing that and it's also running at an ongoing basis. I guess, is anyone else doing this complete suite of services like you are?

We don't believe there is any one name in particular that does what we do in the way we do. Obviously, there are very strong competitors, and we are considering ourselves paranoid against some of the big names that are competing with pieces of what we do. Whether it's large software companies or largest size, but each one of them is doing a certain piece of what we do. So oftentimes when we compete, for example, in the transformation project, it's against some kind of combination of several names that will bring the value proposition that we do. So it will be, for example, a net style like Accenture working with a couple of software vendors trying to stitch all of that together as a solution that is trying to be comparable to what we bring under one name called Amdocs with a full accountability model, the best product, the best deployment services. So it's a very different proposition indeed, Tim. And obviously, we are continuing to invest in order to stay ahead. So we are not standing still. We're continuing to invest significantly. We believe we have strong strategic domains identified for the growth, and we believe that by continuing to invest in being ready to capture this opportunity, we will keep the gap vis-a-vis the competitors.

And you think over time, the communications industry is still incredibly fragmented in many ways and very vertically integrated and extremely inefficient. Do you think there's a way for you guys to kind of create more of a platform strategy where customers can customize themselves around many, many different products but everyone kind of takes a little bit more advantage of the scale at this point and scope. Are you starting to do that with certain products, a more of a platform strategy?

The whole one notion of who we are is doing that in the sense that we are capturing needs from all over the world, working in APAC, in Europe, in North America, in Latin America, in Africa, capturing needs of all over the world and trying to optimize all of that into a generic product. The software product that we deliver is trying to give the answers to all those needs and the learning from different parts in the world. So for example, we have experience now working with 5G deployments in South Korea, the most advanced market in the world in terms of 5G. Obviously, we are taking this learning and taking that into the rest of the world, and the same goes with many other things that we are doing. Then it's about creating an open architecture that will enable our customers to use the core product and actually build on top of that different things that they need. And then it's about taking the automation that we are continuously improving in terms of how to run these systems in order to provide our customers the best tools and the best outcome in terms of the service level and different KPIs, et cetera, in terms of how to effectively run this in order to address what they measure as the success criteria. So we continuously do that. It's not as simple. If I'm taking the extreme of like one platform that is SaaS-based, the people will just plug in and operate, not fitting the service providers' ecosystem and complexity. In some, I would say, niche cases, it does, but that's relatively -- imagine for example, market -- a platform to enable OTT onboarding, settlement and monetization. That's more of a SaaS platform. But it's a very specific use case that fits the SaaS platform characteristics. The vast majority of what we do is not fitting such a simple platform where you can just plug it in and start running. It requires more adjustments and deployment with some integration points to the existing environment of the service provider with some customization to their needs. So we are trying to create a software product that is modular and open, but still, it's not a plug-and-play kind of solution.

And where are you in that process of creating a software platform?

I believe -- when you say platform, I just want to be accurate. If you're talking about having one generic software code to be deployed all over the world, whether the service provider is wireless or fixed wireless or cable or satellite or whatever, that exists already. That's our product, that's CES, our product suite, the customer experience solutions that we provide to the market today fit that description. Whether you are a carrier in Malaysia or Vodafone in Europe or AT&T in the U.S. market, it's the same code that will be deployed with you. Now how you decide to use it, it's up to the customer. One of the big advantages that we have is with services providers that -- let's say you're a service provider that is wireless only today. And you want the strategic optionality to launch with 5G fixed wireless, you want to launch maybe or maybe acquire a cable company. If you deploy Amdocs, you deploy once and then you just activate those kind of capabilities later on. So this kind of platform exists today. This is what we sell, Tim.