Amdocs : Q2 2023 Earnings Call Transcript

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EDITED TRANSCRIPT

Q2 2023 Amdocs Ltd Earnings Call

EVENT DATE/TIME: MAY 10, 2023 / 9:00PM GMT

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MAY 10, 2023 / 9:00PM GMT, Q2 2023 Amdocs Ltd Earnings Call

CORPORATE PARTICIPANTS

Joshua Sheffer Amdocs Limited - President, CEO & Director

Matthew E. Smith Amdocs Limited - Secretary & Head of IR

Tamar Rapaport-Dagim Amdocs Limited - CFO & COO

CONFERENCE CALL PARTICIPANTS

Ashwin Vassant Shirvaikar Citigroup Inc., Research Division - MD & Lead Analyst

Hoonshik Yang Oppenheimer & Co. Inc., Research Division - Research Analyst

PRESENTATION

Operator

Good day and thank you for standing by. Welcome to the 2023 Amdocs Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Matt Smith, Head of Investor Relations for Amdocs. Please go ahead.

Matthew E. Smith Amdocs Limited - Secretary & Head of IR

Thank you, operator. Before we begin, I need to call your attention to our disclaimer statement on Slide 2 of the presentation. We note that some of our comments today may be forward-looking statements and are subject to risks and uncertainties, including as described in Amdocs' SEC filings and that we will discuss certain financial information that is not prepared in accordance with GAAP. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's earnings release, which will also be furnished with the SEC on Form 6-K.

Participating on the call with me today are Shuky Sheffer, President and Chief Executive Officer of Amdocs Management Limited; and Tamar Rapaport-Dagim, Chief Financial and Operating Officer.

To support today's earnings call, we are providing a presentation, which can be found on the Investor Relations section of our website. And as always, a copy of today's prepared remarks will also be posted immediately following the conclusion of this call.

On today's agenda, Shuky will recap our business and financial achievements for the second quarter of fiscal 2023 and will also update you on the continued progress we have made executing against our strategic growth framework. Shuky will finish by commenting on our financial outlook for the full fiscal year 2023, after which Tamar will provide additional details on our second quarter financial performance and forward guidance.

And with that, I'll turn it over to Shuky.

Joshua Sheffer Amdocs Limited - President, CEO & Director

Thanks, Matt, and good afternoon to everyone joining us on the call today. I'm pleased with our second fiscal quarter performance as we progress on our strategy to deliver the next-generationcloud-based software and services as global communication service providers needs to unlock the potential of 5G and broadband networks, data-driven intelligence and improve customer experience for the consumer and B2B. This quarter, we had deepened our relationship and expanded our footprint with existing customers, added 4 new customer logos, sustained a high rate of successful project deployment, delivered a record quarter in Managed Services, expand our strategic partnership with Microsoft, signed an M&A agreement to enhance the execution of our network strategy and launched CES23, our most advanced Customer Experience Suite yet, bringing fresh innovation across BSS, OSS and network while sharpening our focus on the B2B domain.

This achievement will not be possible without the amazing passion, agility and collaborative spirit of all our talented employees, people to whom I would like to say thanks for their consistent quarterly execution while also demonstrating the strategic vision necessary to drive Amdocs forward over the long term.

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MAY 10, 2023 / 9:00PM GMT, Q2 2023 Amdocs Ltd Earnings Call

Reviewing the financial highlights on Slide 7. Record revenue of $1.22 billion was above the midpoint of our guidance and up 8.2% year-over-year in constant currency. On the bottom line, non-GAAP diluted earnings per share of $1.47 was consistent with the midpoint of guidance as we delivered ongoing margin improvement and strong free cash flow generation in the quarter. 12-month backlog was a record high of $4.11 billion, up roughly 7% from a year ago in constant currency.

Turning to our operational highlights on Slide 8. We delivered continued sales momentum in Q2, which included a significant new digital modernization award at T-Mobile USA. Deal activity was strong in Europe, which, as we have said before, is a region of significant growth potential for Amdocs. Our multiyear investment to diversify and increase market share in Europe are bearing fruit and is reflected by record revenue in the world of several significant deals, including digital modernization programs at 2 new logos this quarter.

Similarly, Rest of the World continues to present attractive opportunities for Amdocs, such as the new cloud engagement announced today with PLDT in the Philippines.

Managed Services also had a great second quarter, which includes record revenue and newly expanded agreements with Globe, also in the Philippines, and a major operator in Western Europe.

In Media, Amdocs mobility demonstrated continued growth as the traffic provider to the world's leading streaming services, signing a new agreement which expanded its decade-long relationship with Virgin Media UK. Additionally, Hispasat, a Spanish satellite communication operator and new logo, chose Vubiquity to bring digital content with customer in Argentina and both in Latin America, while Juice, which is part of Vubiquity, was selected as the preferred fulfillment vendor under Amazon Prime Video for premium vendor program.

From an execution perspective, we maintained a high rate of successful project deployment in Q2, achieving major milestone in many of the world's largest service providers. For instance, Amdocs played an important role in the recent launch of AT&T's fixed wireless access offering, Internet Air, in selected markets which is running on the new cloud-native digital platform we are delivering under the B2C technology modernization and simplification program with this customer.

This quarter, we also took several strategic steps to strengthen our market-leading position and long-term growth profile. First, we expanded our strategic partnership with Microsoft to bring a new AI-powered customer engagement platform, which combine Amdocs' market-leading Commerce & Care Suite with Microsoft cloud portfolio to create what we believe is the most compelling telco-specific offering in the market. Amdocs and Microsoft already began to execute a joint go-to-market strategy to bring this platform to service providers worldwide, and we can already report encouraging sign of customer interest and expanding pipeline opportunity in both consumer and B2B.

Second, we sharpened our focus on the growth potential of B2B with the launch of CES23, which includes enhanced capabilities specifically developed to help service providers meet an increasingly complex demand of our B2B customers.

Third, we are today delighted to announce our intention to acquire the service assurance business of TEOCO for approximately $90 million in cash. Amdocs and TEOCO already partner on some opportunities, and we expect this move to enhance the execution of our network automation strategy by providing service provider with a unique end-to-end service orchestration offering, ensuring the quality of service and enabling the delivery of next-generation customer experience.

Now let me [overview] the strategic progress -- our strategic progress as we continue to deliver a market-leading innovation designed to help service providers. Accelerated the journey to the cloud, create seamless digital experience by transforming IT operation for consumer and B2B, launch and monetize new 5G services and deliver dynamic connected experiences with real-time automated networks.

Starting with cloud on Slide 9. Service providers are still in the early stage of maximizing the value of potential of the cloud. And for the most, it will be a gradual journey over several years before they fully realize expected benefits such as improved service agility, scalability, innovation, security and customer experience. I'm happy to share that more and more Amdocs new deals are cloud-related, and the

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MAY 10, 2023 / 9:00PM GMT, Q2 2023 Amdocs Ltd Earnings Call

growing number of operators see Amdocs as the primary technology partner to support their core system cloud strategies.

The value of Amdocs (inaudible) product suite is already proven in the cloud, and we have the capability to support the optionality of hybrid environment for customers. Amdocs also removes complexity for operators by delivering end-to-end fully accountable migration paths, which begin with strategic planning and stretches to cloud-native product deployment and cloud managed services while leveraging our intimate partnership with Azure, AWS and Google Cloud.

I'm delighted to report that PLDT in the Philippines and its wireless subsidiary, Smart, are developing a multi-strategic partnership with Amdocs to accelerate their cloud journey. By bringing our comprehensive suite of cloud services, Amdocs will leverage cloud infrastructure to efficiently migrate business critical system and application to the cloud while also integrating cloud-based application with the rest of PLDT and Smart hybrid (inaudible).

Among the recent cloud wins, Amdocs was selected by a Tier 1 Central European operator to support and enable its journey to the cloud for critical BSS application for [operating] in multiple countries, and we expanded our managed services relationship with a major Western European provider to migrate and operate non-Amdocs application on the cloud. We believe such deal momentum reflects the market's growing recognition of our unique cloud domain expertise, and we look forward to supporting this and other customers as they continue their multiyear cloud journey in respect to their core systems.

Moving to Slide 10. Service providers continued down the path of digital modernization to grow revenue, reduce costs and improve experience for consumer and B2B customers. I'm delighted to report that we expanded our role in digital transformation in T-Mobile, where Amdocs Commerce & Care Suite, together with Amdocs migration suite, will power insightful and transparent experience across all channels for T-Mobile consumer and B2B subscribers.

Amdocs was also selected by a major Eastern European operator to create and deploy new customer engagement platform designed to drive customer loyalty and retention and bolster its social media presence, while the second Eastern European service provider choose Amdocs to modernize the IT infrastructure in a strategic wide-ranging digital transformation project that will enable a harmonized, frictionless customer experience across multiple channels and touch points.

We are also collaborating with YES Network, the exclusive regional television home of the New York Yankees and Brooklyn Nets, to provide a premium customer experience for YES' direct-to-consumer streaming platform.

The shift from physical to software-based SIM card is another digital thing creating opportunities for Amdocs. Our cloud-based Amdocs eSIM orchestration platform was recently ranked as #1 in the market by independent analyst firm, Counterpoint Research, recognize our growing list of eSIM customers [for introducing a world] with ICE Norway and Drei Australia.

Turning to Slide 11. Global service providers continue to invest in 5G monetization, including next-generation charging, policy solution to unlock future market potential of 5G stand-alone networks. One of North American leading service provider recently deployed Amdocs network policy solution on AWS to support millions of prepaid subscribers.

Another recent product example is WINDTRE, a large Italian mobile operator for which Amdocs just completed a modernization project to provide a future-proof,5G-ready, monetization stack deployed on the cloud.

This quarter also was selected by Magyar Telekom in Hungary to provide the policy control function in the operated 5G stand-alone program. And we successfully completed digital transformation project with Melita Limited that enabled the Malta-based operator to further monetize innovative new 5G and IoT-based services for both consumer and enterprise customer.

Turning to network automation on Slide 12. Amdocs is helping operators to prioritize 5G network slicing, which is needed to enable the rapid introduction of differentiated mobile services tailored for individual consumer or B2B customers. Amdocs recently helped Bell Canada to successfully deploy its first use case with an automated 5G network slicing solution.

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MAY 10, 2023 / 9:00PM GMT, Q2 2023 Amdocs Ltd Earnings Call

Amdocs also is bringing fresh innovation to help a service provider rethink the way in which they manage and maintain network towers, which is also reducing their carbon footprint. Working with our partner, vHive, Amdocs has developed a solution, which powers autonomous drone flies to automatically create a digital [3D tree] of network towers much more quickly and safely than deploying trucks with tower climbing teams when they need to survey a site.

Demonstrating early market demand, we are excited to announce today that Verizon has selected our solution to inspect its wireless networking (inaudible).

Now moving to our fiscal '13 (sic) ['23] outlook as presented on Slide 13. As we repeatedly said over the last few quarters, Amdocs and our customers globally are not immune to economic uncertainty, and we are closely monitoring the overall operating environment during the current period of rapidly shifting market dynamics. As the key technology enabler and a trusted partner for the global communication industry, we believe Amdocs is positioned at the heart of a multiyear technology-driven investment cycle centered around the major long-term trends of 5G, network automation, digital modernization cloud. We also believe in our unique business model, which produces visible highly-returning revenue stream from the mission-critical systems we support under long-term customer engagements.

Taking everything into consideration, we are reiterating our full year fiscal 2023 revenue growth outlook within a tighter range of 7% to 9% in constant currency, the midpoint of which is unchanged as compared with our previous outlook.

On the bottom line, we are reiterating our outlook for non-GAAP diluted earnings per share growth of roughly 9% to 13% in fiscal 2023, which, as you may recall, we already raised in the prior quarter from our initial full year growth target of 8% to 12%. Accordingly, we are well on track to deliver double-digit expected total shareholder return for the third year running, including our dividend yield.

With that, let me turn the call over to Tamar for her remarks.

Tamar Rapaport-Dagim Amdocs Limited - CFO & COO

Thank you, Shuky. Hello, everyone. Thank you for joining us. I am happy to report solid financial results for the second fiscal quarter, the highlights of which you can see on Slide 15.

Record Q2 revenue of approximately $1.223 billion was up 8.2% year-over-year in constant currency. On a reported basis, revenue increased 6.8% and was slightly above the midpoint of guidance, including a positive impact on foreign currency movement of roughly $3 million compared to our guidance assumptions.

On a regional basis, we delivered another record quarter in North America where we are continuing to execute on multiple transformation projects for customers across the broader region. In Europe, I'm also delighted to report our best-ever quarter where, as anticipated, we are seeing double-digit growth as new projects awarded over the last several quarters continue to ramp up. Similarly, Rest of the World accelerated on a sequential basis in Q2, driven by the positive impact of customer project activity.

Moving down the income statement. Our non-GAAP operating margin was 17.8% in Q2, up 20 basis points from a year ago and up 10 basis points sequentially as we continue to realize the benefits of automation and other sophisticated tools implemented to manage costs and drive efficiency gains in our business. On the bottom line, non-GAAP diluted EPS of $1.47 was consistent with the midpoint of our guidance range and included a non-GAAP effective tax rate of 16.5%, which was, as anticipated, within our annual target range of 13% to 17%. We look at GAAP EPS of $1.23 for the second fiscal quarter, which was above the midpoint of our guidance range of $1.18 to $1.26.

For your modeling purposes, beginning this fiscal year, our quarterly GAAP and non-GAAP net income includes a new line item for net income attributable to noncontrolling interest. This reflects the earnings attributable to our joint venture partner in respect to the land we acquired in 2017 as the site for the new Amdocs park and will amount to roughly $0.7 million per quarter now that the campus is complete and operational.

Moving to Slide 16. 12-month backlog was a record high at $4.11 billion, up 5.7% year-over-year as reported and up roughly 7% in

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