Amdocs Limited
Q2 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Second Quarter 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. . Also please be advised that today's conference is being recorded. . I would now like to hand the conference over to your speaker today, Mr. Matt Smith, Head of Investor Relations. Thank you. 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 the call today. I'm pleased to report another strong financial performance in our second fiscal quarter. My comments today will refer to certain financial metrics on a pro forma bases, we're applicable to provide with the sense of the underlying business trends excluding the financial impact of OpenMarket which we divested December 31 as previously announced. Revenue in fiscal Q2 was well above the midpoint of our guidance and up 5.7% for a year ago on a pro forma constant currency basis. Operating profitability exceeded the high end of target range as we balance absolute R&D as a percent of revenue with continued focus and operational excellence.

[Tamar Rapaport-Dagim:]

Thank you, Shuky. Let me start with a quick housekeeping item with respect to OpenMarket which was included in our reported numbers for the income statement and cash flow in the first fiscal quarter of fiscal 2021, but is excluded for the second fiscal quarter of fiscal 2021, following they completed divestiture of these assets on December 31, 2020. To provide you with a sense of the underlying business trends, my comments today will refer to certain financial metrics on our pro forma basis which exclude the financial impact of OpenMarkets from the current fiscal year and comparable fiscal year period. Second fiscal quarter revenue of $1,049 million, significantly exceeded the midpoint of our guidance range of $1,015 million to $1,055 million, revenue include the positive impact on foreign currency fluctuation of approximately $3 million relative to the first fiscal quarter of 2021 and a negative impact of 1 million relative to guidance.

[Operator:]

Understood. Your first question comes from the line of Ashwin Shirvaikar from Citi. Your line is open.

[Ashwin Shirvaikar:]

Thank you. Hi, Shuky. Hi, Tamar. Congratulations.

[Tamar Rapaport-Dagim:]

Hi.

[Shuky Sheffer:]

Hi.

[Ashwin Shirvaikar:]

Hi. Congratulations. It's a very solid quarter, a healthy outlook. And that's actually my first question is, with regard to the outlook, I get the half of the improvement is because of acquisition. But the other part, the inorganic piece. In which areas has sort of the velocity of client demand results? Are you seeing bigger project sizes or the speed of assigned work coming in faster. What's been the important change that you've observed?

[Tamar Rapaport-Dagim:]

So, Ashwin, it's a combination of all of those pillars none of them in particular, but that's actually very exciting because in general, we are seeing very positive momentum across 5G cloud, digital transformation. So we are continuing to see that momentum building up. We tried to give some color to the prepared remarks. On the momentum we're seeing in North America a very broad base, including key existing customers like AT&T and T-Mobile, all the way to new logos such as Verizon. Very happy also, with the fact that Europe is continuing to play well for us. Starting to see policy and charging awards happening in Europe in conjunction with continued digital transformations. And also rest of the world that is grown for the third quarter in a row and sequentially and back to year-over-year growth. That's very important. Then with some even encouraging size and color, which has been more of the slower part of the regions in the recent pandemic here. So it's very encouraging both from regional point of view as well as the growth pillars that we're seeing.

[Ashwin Shirvaikar:]

Got it. Understood. And then with regards to Sourced and the other two smaller acquisitions, they have non telecom clients, including, say financial services, for example. Is the intent to keep those clients grow the non telecom piece, incrementally any thoughts on that?

[Shuky Sheffer:]

So, you're right. Both sourced and the other acquisition bode some major financial services customer. And definitely the main reason that we acquire the companies will support our strategy source to support our strategy for the journey to the cloud. They are really top notch consultant. We got a lot of knowledge, top knowledge consultancy capabilities in AWS, Azure and Google, that definitely we are going to leverage in our taking the industry to the cloud of the comps and media industry. Having said that, they bought us some financial services customer. We are going to continue to support this financial services customer. And at the same time we are evaluating if we can obviously push this domain and actually, this customer can get some other additional service from Amdocs. At this point is more opportunistic rather strategic, but we're evaluating this opportunity.

[Ashwin Shirvaikar:]

Understood. Thank you.

[Tamar Rapaport-Dagim:]

Thanks.

[Operator:]

Your next question comes from the line of Tal Liani from Bank of America. Your line is open.

[Tal Liani:]

Hey, guys. Hope everyone is okay there, given what we're seeing in the news. I wanted to ask you about -- first of all, just a general question. Is there any disruption to your business given what's happening in the country? Number one. And number two. I want to ask about the spending environment and your participation in 5G. I'm asking this question every quarter because I know you should be getting some upside from it. And I wanted to know if you start to see any movement on carriers, spending on 5G, spending with Amdocs on 5G and what kind of projects you're seeing? Thank you.

[Shuky Sheffer:]

So for your first question, there is no impact. I mean, there is some people are working from home a little bit, but it's, here in the last 12 months, the majority of the vast majority of the company because of the pandemic work from home. So I can tell you clearly there is no impact. Regarding the second question, we are definitely enjoying the 5G trend. All in the cloud, which are very much tightly connected. All our new projects in North America, all the big ones are related to 5G. This is the consumer mobility, a modernization AT&T. This is all the modernization that we do in T-Mobile, which is pushing 5G. And definitely Verizon selected our catalog mainly to support a new 5G offering. This is true also for Europe and develop APAC. So we see a lot of activity. And I think we said before that actually 5G initiated the new modernization cycle in the in motivation systems. And we feel that they have the right products and services to support this a new wave of investment in the 5G. This is true not just for -- obviously we have ordering solution and billing solution. This is also for our network solution. As we mentioned, we are doing in 5g project with Verizon and other customers. Because if we discussed before, in order to be able to deploy 5G services in the best way you need all the monetization systems, obviously, you need a very sophisticated catalog. And you need to make sure that all the provisioning of the services on the network is smoothly from the ordering system down to the network. So we are very happy with this trend. And I would say that definitely North America, the vast majority of our projects are related to 5G.

[Tal Liani:]

Great. Thank you.

[Shuky Sheffer:]

Thank you.

[Operator:]

Your next question comes from the line of Tim Horan from Oppenheimer. Your line is open.

[Tim Horan:]

Thanks, guys. The bookings look really strong. Can you give us a sense of maybe just how that's trending and any expectations? And does this suggest a pretty good correlation to revenue growth for next fiscal year on kind of what we're seeing with bookings now? And then maybe just secondly, I know you touched on Verizon. Any more color on the reports here for more outsourcing? Thanks.

[Shuky Sheffer:]

I didn't understand the second question. But I think I'll start with the first one. We are very happy with the momentum. And this is why we were excited to raise the guidance for revenue for this year. So we see accelerated growth. And this is accelerated growth is because the spending trends that we see and the fact that we came very well prepared with our products and services and we see a very, very good alignment from the market trends of a journey to the cloud, 5G convergence, B2B in other domains. So there is a very good alignment which support our growth. And this is why we see a very strong second half of accelerated growth and we were able to raise the guidance. We are not giving at this point any guidance for next fiscal year. But you can see here from our tone that we are very excited about the momentum.

[Tamar Rapaport-Dagim:]

Two points to add here are 12 months backlog with definition covers the next 12 months. So it is an important leading indicator for what we see ahead of us. Again, it cannot translate that one for one with expected revenue growth, but it's a good indicator. The other point.

[Shuky Sheffer:]

And its 9.3.

[Tamar Rapaport-Dagim:]

Yes. And its 9.3% year-over-year on pro forma basis. And the other point I would say is that we'll continue to see a strong momentum in our managed services revenue, which is kind of the underlying recurring revenue base of our relationship with customers on top of which we bring the new deals. So, I think it's very important that this growth from the new pillars is coming on top of a very robust and strong base of business that we're continuing to shift into a more lengthy, I would say and robust managed services engagements with our customers.

[Tim Horan:]

Thanks. My second question was just around Verizon, their propensity to outsource more do you think. And how we -- how do you think your position with ability to kind of gain more that outsourcing if they do so?

[Shuky Sheffer:]

It's still early stages. I can say you that we are enjoying a very good relationship with Verizon. I think there's a lot of appreciation in Verizon for our products and services. And as I mentioned in my opening remarks, they're leveraging a next generation. Catalog one is our cloud native platform to support all the offering. This is going to be the master product catalog of Verizon. We have a lot of activity in the network, in the service designing, creating services around it. So where are we now? I still think so far it's moving very well ahead. I believe that it will continue to show very to Verizon. We can even expand the relationship.

[Tim Horan:]

Thank you.

[Operator:]

Your next question comes from the line of Tom Roderick from Stifel. Your lines open.

[Tom Roderick:]

Hi, Shuky. Hi, Tamar. Hi, Matt, great to hear from you. Thank you for taking my questions. So Shuky and Tamar, I really appreciated the mid quarter call, you're getting a lot of questions from clients, and there was some skepticism that I appreciated you taking some time to answer some of those questions. One of the themes that sort of seemed to be up for question, when we did that last call was the durability of your relationship with some big tier ones, particularly AT&T at the heart of it. When I listened to your remarks today Shuky, it seems very, very clear that not only is North America growing, but AT&T as a particular customer seems to be on very solid footing. So I'd love to hear just your perspective on the durability and sustainability of the projects that you're working on. As you look at these type of projects, are they recurring revenue in nature and long standing that'll extend beyond just 2021? Tell us about the strategic nature of what you're doing there and getting tied into their future as opposed to catch up projects and band aid fixes that might only be for, say, 2021? Thank you.

[Shuky Sheffer:]

Okay. So, as I mentioned, there are certain pillars to our relationship with AT&T, besides the fact that we have strong partnership with AT&T, probably more than 20 years. So, there is the first pillar of a very significant managed services that we announced in late 2019, that we signed for four years. And this is managed services for many, many system of AT&T. Some of them are Amdocs system and by the way, some of them are not Amdocs systems. On top of it, we discussed about the fact that we have started the modernization journey of AT&T consumer mobility. Now, if you look at AT&T, AT&T is doing very well definitely in the mobility domain. A consumer mobility is in the heart of AT&T strategy. And the fact that we were selected to do this project with AT&T, it means, that this is a very strategic project for us and AT&T. And definitely this is not a cluster or something like. This is a very long term activity that we do for AT&T and this will be the next-generation cloud native system for AT&T for the years to come. Additionally, we are very involved with AT&T journey to the cloud. We are working together with my Microsoft and they are taking different application to the cloud, not the vast majority of them are not even Amdocs. And this is a very significant activity that we do with AT&T. On top of it, as you might know, we are pretty much running the AT&T cricket, AT&T Mexico. We are doing a lot of data related activity and security activity. So I would say that our partnership with AT&T is strategic than ever. And we are working with AT&T in the most strategic domains of AT&T. I hope this is clear enough.

[Tom Roderick:]

Really helpful. Thank you, Shuky. Tamar, now that we have some of the numbers on the balance sheet Tomorrow, now that we have some of the numbers on the balance sheet behind the quarter and ability to kind of comment a little bit further on some of the questions around liquidity. Can you kind of take us through a little bit more on your philosophy on your strategy regarding liquidity. Any recent needs to draw on the revolve? Right now, that's a question you've been getting from some investors. But maybe bigger picture. If I look at this share buyback of $360 million in the quarter, that'd be a pretty tough thing to do if you're having liquidity issues. So again, if you can kind of highlight some of those strategies, and then repeat what you what you talked about with respect to where this share buyback goes from here? Thank you.

[Tamar Rapaport-Dagim:]

Sure. Thanks, Tom. So, I think we need to start with the fact that the business model is one that generates consistent and healthy margins then converged into cash flow. So as we always say that our business model should generate on par, the earnings to cash conversion over time. Some years, slightly less, some years more. Specifically 2021, we are at 130% earnings to cash conversion. So while this is not necessarily sustainable for many years, obviously, it's a good place to be at. Now, taking that in terms of the use of cash, we've always been looking on the balanced approach where we can do both, we can have cash to shareholders, and I believe we've been very consistent about that. But the majority of our free cash flow over the years have been returned to shareholders, with the dividends that have been introduced already six to seven years ago, increased every year in double digit growth. And share repurchase program that has been running for many years and again, authorized again and upload of additional $1 billion to that program. So we've been consistently returning cash, while continuing to fund the M&A strategy of the company. Looking specifically into the question of the recent drawn facility during the peak of the pandemic, beginning period where liquidity stress was all over the markets, we decided as a short term move to draw some money in the facility, which has been returned pretty quickly. And then as the more strategic move, we enjoyed the historically low interest rates in the market, probably the lowest I've seen the last 14 or 15 years, and issued the public bond for 10 years at $650 million. That's adding to our capacity, something that is good to have. We declare, we're continuing to maintain an investment grade rating. And we're going to use this cash if and when the right strategic opportunities present themselves. In terms of return of cash to shareholders, we've been returning over the last five years, about $0.5 billion every year to shareholders. This year, obviously, it's going to be much more. Just this quarter, we returned over $400 million. And over the overall fiscal year 2021, we indicated we're going to return the majority of the $800 generated as normalized free cash flow. So clearly, we're returning a lot of cash to shareholders, both specifically in 2021 and in a consistent manner over the last five years.

[Tom Roderick:]

Really helpful. Thank you, Tamar. Appreciate it.

[Tamar Rapaport-Dagim:]

Thanks, Tom.

[Operator:]

Your next question comes from the line of Jackson Ader from JPMorgan. Your line is open.

[Jackson Ader:]

Great. Thank you. So Shuky, on the sourced acquisition, I think and lot of us think of DOX has being able to handle complex digital transformations are moves to the cloud. So just curious, what expertise does the Sourced Group have that maybe -- would be complimentary to DOX?

[Shuky Sheffer:]

Hi Jackson. Sourced Group have over 150 top professionals that understand the cloud environment extremely well, developed their own tools, landing zone other capabilities. When you search in the market today for cloud capabilities, it's not easy to get talent. What we were able to get a really top notch talent with the Sourced Group that actually we have obviously at the same time, we are re-skilling our employees, we have thousands of thousands of employees, which cloud certified, AWS, Azure and more. And this is a great addition, but more from the consultancy perspective that we added to our capabilities. So it complements our cloud native system implementation capabilities, Operation capabilities. Now we have also a very strong consultancy with topnotch experts.

[Jackson Ader:]

Okay, great. And then Tamar, just a quick clarification, for my follow up. The acquisitions in the quarter, any commentary you can give on how much they contributed to the backlog number, the ones that were actually closed before quarter end. And then any margin color you can give on those?

[Tamar Rapaport-Dagim:]

It was very little. Usually what happens when we acquire those more of a consulting and development arms, their visibility of the business -- the way they used to run it is pretty low. So we have very, of course, conservative as we acquired them in terms of how much we add to the backlog, basing that just signed an very high a visibility business. So most of the $50 million sequential increase has nothing to do with those acquisitions. I believe that what you're seeing in terms of the pattern of the backlog, we've seen two very strong quarters before Q2, where we've had 140 sequentially, and then 150 sequential addition to a 12 months backlog. As we said before, this is not sustainable, unfortunately, in this stage and certainly every quarter. But definitely with 50, I feel very good. If you remember our past track record that it used to be mainly quarters of $20 million, $30 million sequential increases in 12 months backlog. So having another strong quarter with a $50 million sequential addition is definitely an indication of the strong business momentum we're seeing.

[Jackson Ader:]

Great. Thank you.

[Tamar Rapaport-Dagim:]

Thanks.

[Operator:]

Your next question comes from the line of Will Power from Baird. Your line is open.

[Will Power:]

Okay. Great. Thanks. Yes, I guess first clarification then I have a second question. I guess in the press release, you indicated the revenue is down, I think $37 million sequentially. It sounds like that was principally OpenMarket. But I just to be clear, I think open market by itself would have been a fair amount more than that, right?. And so that would imply some offsets. So I guess just maybe just a little clarification on that first?

[Tamar Rapaport-Dagim:]

Yes, absolutely. OpenMarket, as we've indicated, was expected to generate around $300 million in fiscal 2021. So if we assume for simplicity, linearity, let's say 75 a quarter. So absolutely, we've seen positive momentum. And that's why when we are indicating the pro forma performance, we are talking about 5.7% year over year growth in Q2, pro forma constant currency. So the momentum is strong in real terms.

[Will Power:]

Okay. All right. And then my second question, I think, Shuky has said that North America pro forma revenue was a new record. I don't know if we got an update on the other two geographies, but I guess it just be curious, pro forma without OpenMarket. If you look to Europe, rest of the world, how are those two trending? What are some of the puts and takes year over year there?

[Tamar Rapaport-Dagim:]

So as we said, about a quarter of the OpenMarket revenue was coming from Europe. So you can see that also if we take Europe, the performance has been strong on a pro forma basis. Some of that -- a little piece of that has to do with currency. But even if I take out the currency impact, it's been a strong quarter for Europe year-over-year as well. And just to clarify, the rest of the world numbers, there was no impact of OpenMarket. So the open market revenue was about three quarters going into North America and a quarter going into Europe.

[Shuky Sheffer:]

And again, its like the third sequential growth in…

[Tamar Rapaport-Dagim:]

In the rest of the world, yes. Third quarter in the row in which we're going, yes.

[Will Power:]

Okay. All right. Thank you.

[Tamar Rapaport-Dagim:]

Thanks, Will.

[Operator:]

There are no more questions at this time. Turning the call back to Mr. Matt Smith for closing remarks.

[Matt Smith:]

Thank you everyone for joining the call today and you're interested in Amdocs. We look forward to hearing from you in the next few days. And if you have any additional questions, please call the investor relations group. And with that, have a great evening. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.