Amdocs Limited
Q1 2021 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q1, 2021 Amdocs Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Smith, Head of Investor Relations. Please go ahead.

[Matt Smith:]

Thank you, operator. Before we begin, I would like to point out that during this call we will discuss certain financial information that is not prepared in accordance with GAAP. The Company's management uses this financial information in its internal analysis in order to exclude the effects of acquisitions and other significant items that may have a disproportionate effect in a particular period.

[Shuky Sheffer:]

Thank you, Matt, and good afternoon to everyone joining us on today's call. I'd like to preface today's remarks by referring to the previously announced divestiture of OpenMarket, which we successfully completed on December 31. My comments on this call will therefore refer to certain financial metrics on a pro forma basis where applicable in order to provide you with a sense of the underlying business trends excluding the financial impacts of OpenMarket. I am pleased to report a strong quarter to start our fiscal year 2021. Among the highlights; we delivered a record-high revenue, which was up 4.3% year-over-year as reported and above the midpoint of our guidance even without the benefit of foreign currency movements; we had our best-ever quarter in North America and Europe; we maintained a high win rate, including significant new multi-year strategic partnership agreement with T-Mobile USA; and we generated robust normalized free cash flow of $385 million for the quarter.

[Tamar Rapaport-Dagim:]

Thank you, Shuky. Since we completed the divestiture of OpenMarket on December 31, 2020, our reported numbers for income statement and cash flow in the first quarter fiscal 2021 still include OpenMarket, but the reported balance sheet as of December 31, 2020 and the 12 months backlog metric already excludes OpenMarket. In order to provide you with a sense of the underlying business trends, my comments today will refer to certain financial metrics on a pro forma basis, which exclude the financial impact of OpenMarket from the current fiscal year and comparable fiscal year period. First fiscal quarter revenue of $1.086 billion was above the midpoint of our guidance range of $1.055 billion to $1.095 billion, both on a reported and constant currency basis. Revenue includes a positive impact from foreign currency fluctuations of approximately $5 million relative to the fourth fiscal quarter of 2020 and $6 million relative to guidance. On a year-over-year basis, our first quarter revenue grew by 4.3% as reported and 3.7% on constant currency. Our first fiscal quarter non-GAAP operating margin was 17.3%, above the midpoint of our long-term target range of 16.5% to 17.5% and slightly better on a sequential and year-ago basis. Non-GAAP operating margin was consistent with our guidance that we will protect profitability despite the COVID-19 related challenges.

[Operator:]

Thank you. Our first question comes from Ashwin Shirvaikar with Citi. You may proceed with your question.

[Ashwin Shirvaikar:]

Hi, Shuky. Hi, Tamar. Good quarter, congratulations. And I wanted to start off maybe with a question on T-Mobile. First, it's great that we step beyond any contractual uncertainty that might have existed there due to the merger. But does the new contract supersede the separate contracts that you had before, is it basically incremental functionality, is there a move to eventually convert the full relationship to a managed services deal just like on the Sprint side, any thoughts on the evolution of this relationship?

[Shuky Sheffer:]

Hi, Ashwin. The contract covers many activities. As you mentioned, actually , managed services in Sprint, we have managed services in metro and of the T-Mobile and we have other managed services activities also on the Magenta brand, but the overall contract or agreement is comprised of transformation to the new Amdocs platform, both consumer and business. It also includes managed services in the new form of cloud operation and a lot of activities that should support the complex integration that T-Mobile and Sprint are going to execute. So overall, I believe that you can see some pickup in activity during probably in the next couple of years and we believe that there was a lot of activities for us to support T-Mobile in many activities we do. So overall, we are very positive of this agreement and we believe definitely we can protect our activity and actually enhance of activity with strategic relationship that we formed which is translated to this new agreement.

[Ashwin Shirvaikar:]

Got it, got it. And then the other question, actually couple of clarifications. You had good cash flow in the quarter. I did not fully understand why this should be a benefit from the T-Mobile contract signing. Did they pre-pay you for services. And if so, can you size that impact? And then the clarification is on the net proceeds from OpenMarket for buyback. I know you don't normally put buyback in your forward expectation, but since you explicitly said in this case that you will use it for buyback, are you putting that in your EPS?

[Tamar Rapaport-Dagim:]

So, Ashwin, on the first point, the collection this quarter has been very strong in general and the T-Mobile agreement also contributed by the fact that there was some payment related already to this new agreement given some initial milestone in this multi-agreement, but I have to say I was pleased with collections in general, not just related to T-Mobile. As for the second question on the buyback, you're absolutely right that we are expecting to take the majority of the net consideration for the OpenMarket sale and put it into play in the next several months in buyback. We just don't want to get into the technicality of including this already in the Q2 EPS guidance, but within the overall year guidance of earnings per share, it is expected. And actually you know just given how it works and in the fact that any buyback is impacting EPS through weighted average share count anyway and also the impact of this activity will be in play in the second fiscal half of the year.

[Ashwin Shirvaikar:]

Understood. Thank you. Congratulations again.

[Shuky Sheffer:]

Thank you.

[Tamar Rapaport-Dagim:]

Thank you.

[Operator:]

And your next question comes from Tom Roderick with Stifel. You may proceed with your question.

[Tom Roderick:]

There we go, let's try that again. So, hi Shuky, hi Tamar, thanks for taking my question. Congratulations on a nice start to the year. So I'd love to kind of go a little step further just on -- not just on T-Mobile, but more broadly on what you're seeing with 5G adoption of net new services and how carriers are thinking about that. So you have a little bit of visibility into it in the North American market and what your customers are thinking, talking about, how is that translating into demand for Amdocs, demand for net new services. And then Shuky, can you kind of give a little bit of an offset in terms of how that impacts the historical NFV vision. I would love to hear if that's eating into that at all or if it's purely complementary. Thanks.

[Shuky Sheffer:]

Okay. So, NFV, actually in order term, I mean it's evolved today to next generation networks which we have a lot of activity and we are pretty much in line with our next generation OSS offerings. But back to your 5G question, all our customers, North America, are now building the next generation 5G products, both for consumers and both for business, B2B. Our offering actually addresses the whole variety of system that needs to support this from -- obviously from the ordering system, from catalog, from a challenging in rating and all the monetization activity and also in the network domain. So I think that -- and everything but basically is on the cloud. So I think that if you look at our strategy, it's actually to support the 5G offering on the cloud. It's very much in line with ongoing in North America, which is leading the world in their 5G adoption. So I think that we are with the right time, with the right offering and every one of our customers right now in North America investing in 5G.

[Tamar Rapaport-Dagim:]

Let me just add another point on that, in the other markets, in the other side of the world which is South Korea, definitely leading the way on 5G as well. We've also been very successful both with Korea Telecom and a more recent win with LG Uplus, gaining a lot of experience and good references from these wins as well.

[Shuky Sheffer:]

And back to your NFV comment, so now we see a lot of demand for our network offering. As I said today, it's called next-generation OSS, is orchestration, services on integration, everything cloud native, and as I think that now the 5G network offers so much capabilities for monetization, the integration between now BSS and OSS system is very relevant.

[Tom Roderick:]

Wonderful, really helpful. And Tamar, this is probably still a little bit early an influx given the world is changing so much right now. But as you put together, as you complete a new campus, a beautiful new campus and in the middle of all that the world is changing with respect to where employees can sit in the advancements of virtual and work from home environment. Does any of what we've seen in the last year changed the way you think about the long-term margin structure and where your employee sit or do you expect that everyone will sort of be back in the office by the end of this year whenever the -- when the time is right?

[Tamar Rapaport-Dagim:]

So in general we believe that working from the office provides a lot of advantages that are missing when everybody is at home, but naturally we believe and felt the same before COVID, the some kind of flexibility of an hybrid environment is advisable and good for employees in creating the good balance. Remind you, in January of 2020 before we, also you, COVID is coming up, we actually moved to work, one day a week from home globally and we now with all the learnings and experiences, of course with this recent year, it forced on us the pandemic, we realize that there is an opportunity to build an hybrid model where we give flexibility to employees to work some days from home but naturally want them to come back to the office. Now, relative to timing, that depends in each country and each region, sometimes even specifically to a city what's the overall situation because of course we are keeping the first priority the health and safety of our employees. So I cannot commit relative to timing when we are going back to this new normal situation. Connecting it back to your point about the capital, we built a lot of flexibility in the design of thinking in this campus in terms of seating layout, in terms of how much we can establish to others because naturally we built a campus that is there to stay for decades, not just for the next year or two. And so we talked about all those things. And given the different learnings in the last year, we've added of course different points of consideration to how we are thinking about seating layouts and things like that, but I think the fact that we are actually going to own the campus gives us much more flexibility to decide how much space we use versus sublease vis-a-vis the current situation where we are a tenant ourselves.

[Tom Roderick:]

Fantastic. Really good. I appreciate it. Thank you, guys.

[Tamar Rapaport-Dagim:]

Thanks, Tom.

[Operator:]

Thank you. Our next question comes from Shaul Eyal with Oppenheimer. You may proceed with your question.

[Shaul Eyal:]

Thank you. Good afternoon, Shuky, Tamar and Matt. Congrats on the ongoing healthy execution. My first question is on T-Mobile from that expansion. When you look at the number of subscribers that you've address several years ago when you compare that, maybe even contrast that with the recent expansion, is there a significant number of subscribers addition under the currently expanded engagement?

[Tamar Rapaport-Dagim:]

Shaul, I don't think the thing here is the number of subscribers, it's more the debt of the adoption of -- from NextGen product portfolio and the fact that we are going to support a wider footprint in cloud, managed services rather than counting subscribers and the agreement is taking us to the next level, both in terms of this footprint as well as positioning us for further growth given the strategic relationship that is now enforcing this agreement.

[Shaul Eyal:]

Got it, got it. That is fair enough. And I have an additional question. So now that OpenMarket is fully divested, can you talk to us about the OpenMarket contribution that you've had during fiscal '20. I know you might have a little bit to it being about one-time revenue give or take, but wanted to see if you could provide us with slightly more color about it now that you have it in the rearview mirror.

[Tamar Rapaport-Dagim:]

Yes, so certainly we were expecting roughly $300 million, which is 1x of the consideration that we received in 2021 and it was moving more or less like the rest of the company. So if you take it back to 2020 number, roughly $280 million. So when we look now and carving it our, I think it's very of course kind of natural that we were trying to get more color about what the pro forma numbers look like. So people can understand the underlying business and direction which is very positive. And every quarter during 2021, since the reported numbers will be apples and oranges, we will continue to give pro forma color just for people to understand the rate trends that's going on. So I hope that's going to be helpful.

[Shaul Eyal:]

Got it, got it. Awesome. Thank you so much. Congrats again.

[Shuky Sheffer:]

Thank you.

[Tamar Rapaport-Dagim:]

Thank you, Shaul.

[Operator:]

Thank you. Our next question comes from Jackson Ader with JPMorgan. You may proceed with your question.

[Jackson Ader:]

Excellent, thanks for taking my questions guys. The first one is on Openet. Few charging 5 or I'm sorry, charging 5G wins announced in the last couple of quarters and I'm just curious were these deals in the Openet's pipeline prior to the acquisition announcement are being closed or these are actually brand new deals that Amdocs has kind of sourced alongside Openet?

[Shuky Sheffer:]

I think it's pretty much, almost half and half, half of the deals were actually started -- the sales cycle started when Openet still was a stand-alone company. But many deals were added when they were joined Amdocs and we are able to take them to a lot of customers worldwide and I can tell you that now they -- actually the pick up that we see all over this quarter and for the rest of the year is coming from the new pipeline, it does not exist in the Openet stand-alone pipeline.

[Jackson Ader:]

Okay. And then, just another follow-up on the T-Mobile announcement, you guys have talked a lot in the past about kind of the idea that Amdocs and the amdocsONE platform and different things that you can do being layered on top of maybe some legacy systems and then ripping and replacing those legacy systems is kind of on to come in the next quarters or years down the pipe. Is that a similar way that we should be thinking about this particular partnership?

[Shuky Sheffer:]

No, this is more like -- the idea is to take the full amdocsONE platform, build it and then slowly migrate all the consumer and B2B customer of T-Mobile to this new platform.

[Jackson Ader:]

Okay. I like it. Thank you.

[Operator:]

Thank you. Our next question comes from Will Power with Baird. You may proceed with your question.

[Will Power:]

Okay, great. Thanks, yes. Congratulations on the results. I guess first question pertains principally to AT&T, I guess maybe to a degree to T-Mobile, but we just had a very big spectrum auction in the U.S. and I'd love to get kind of your perspective on how you assess any potential risks from slower spending as that comes together and the carriers particularly AT&T figures out how it went to deploy that spectrum versus the medium and longer-term opportunities for you all around network planning with that spectrum, 5G opportunities, et cetera. Any kind of early thoughts as to how that could impact the AT&T opportunity?

[Shuky Sheffer:]

Actually, I think it is the opposite. It means that our customers all of them are fully focused on 5G deployment. In order to deploy 5G, definitely you need spectrum to be the network, but the mass upgrades, older BSS system, they'll charging a policy system. So I think it's another evidence that all the North America carriers are committed to the 5G journey and I think it's actually good news for us because it made a deal while there are others in the network, we must also upgrade the IT systems, the BSS systems policy charging and everything that touches 5G.

[Will Power:]

Okay. Yes, that makes sense. All right. I also just wanted to ask, Tamar, really nice growth in backlog, any other color you're able to share that, how much of that perhaps was related to T-Mobile versus other factors you might call out.

[Tamar Rapaport-Dagim:]

T-Mobile was a significant number, but definitely if you look on just even the wins we could announce, not to mention many others that we were not able to mention by name, and it was a very stronger signing quarter. So I'm very pleased with many first of all new logos. We mentioned, for example, Wind Tre, they are one of the largest operators in Italy. And we've been speaking for a while about the success in Italy, a country, just several years ago we didn't have any business in and that we signed Vodafone Italy and then Telecom Italia and Sky, Italy, and now Wind Tre. So we are very happy about the momentum. North America, we gave a couple of examples, Charter and we gave an indication that we signed another important deal in North America with a Pay TV player that is moving to 5G. We signed another prepaid customer with 5G policy. So really it's been a great quarter. Yes, T-Mobile contributed definitely but there are many other deals.

[Will Power:]

Okay, thank you.

[Tamar Rapaport-Dagim:]

Thanks.

[Operator:]

Thank you. Our next question comes from Tavy Rosner with Barclays. You may proceed with your question.

[Unidentified Analyst:]

Hi, this is Chris Reimer on for Tavy. Thank you for taking my question. Just looking at managed services and last year being a record year and the strong performance this quarter, what would you say with the driving forces behind customers who choose the managed services.

[Shuky Sheffer:]

I think the driving force is that, actually managed services is evolving, the new name is cloud operation or cloud managed services operation, and that in all the new deals and T-Mobile is a good example, it's -- the deal many aspects, many pillars, one of them is the deployment of a new transformation to our new amdocsONE platform but to operate the new cloud environment in the cloud with the services operation. So I think that the same value that we are able to prove in the managed services, which was on premise, we can even have a bigger value in the cloud operation. And I think giving the full accountability that we have, that's always was the main differentiator for us in the managed services, we see the same phenomenon or the same differentiation in the cloud managed service operation, and this is why we expect this to continue to grow.

[Unidentified Analyst:]

Okay. And can you talk about the traction you're seeing for Amdocs media and some of the content services that you provide?

[Tamar Rapaport-Dagim:]

When we look on the media space, to remind you, when we entered these adjacent markets we saw a three-pronged strategy. One was to take the media business we acquired and broaden it internationally. The beachhead at the time in our acquisition strategy was Vubiquity, we mainly focused back then in North America and we've had the major success in taking into many new logos, a new off in Latin America, in APAC et cetera. The second layer was the convergence that is happening between the connectivity and entertainment. We've seen many communication service providers are being entertainment services was of through M&A or launching over the top brands and we've seen there, the success-driven. The strong layer which is the slower to evolve, from our point of view is to penetrate the media companies as they go directly to consumers. We are seeing this phenomenon today, it is happening with the big guys, but we're also targeting a mid-size media companies as they are moving forward and providing the right customer experience as they're launching their brand to consumers, and we are hoping to see that third-party evolving as well from our point of view. Now, COVID has put obviously some challenges on everyone's producing content business given there is more difficult in launching new productions and new content into the market, but we believe that this will be obviously overcome as soon as the pandemic is over and also new -- and more new content will be launched into the market, which is always positive for the media business.

[Unidentified Analyst:]

Okay, thank you. That's very helpful.

[Tamar Rapaport-Dagim:]

Thank you.

[Operator:]

Thank you. And I'm not showing any further questions at this time, I would now like to turn the call back over to Matthew Smith for any further remarks.

[Matt Smith:]

Yes, thank you very much everyone for joining our call this evening and for your interest in Amdocs. We look forward to hearing from you in the coming days. If you do have any additional questions, please call us in the Investor Relations group. And with that, have a great evening and we will finish the call. Thanks.

[Operator:]

Thank you ladies and gentlemen. This concludes today’s conference call. Thank you for participating. You may now disconnect.