Q4 2021 Earnings Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

DOX.OQ - Q4 2021 Amdocs Ltd Earnings Call

EVENT DATE/TIME: NOVEMBER 02, 2021 / 9:00PM GMT

OVERVIEW:

Co. reported 4Q21 revenue of $1.09b and diluted GAAP EPS of $0.97. Expects FY22 YoverY reported revenue growth to be 3.7-7.7% and YoverY pro forma constant-currency revenue growth to be approx. 6-10%. Expects 1Q22 revenue to be $1.08-1.12b.

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NOVEMBER 02, 2021 / 9:00PM, DOX.OQ - Q4 2021 Amdocs Ltd Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Joshua Sheffer Amdocs Limited - President, CEO & Director

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

Tamar Rapaport-Dagim Amdocs Limited - CFO & COO

C O N F E R E N C E C A L L P A R T I C I P A N T S

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

Jackson Edmund Ader JPMorgan Chase & Co, Research Division - Analyst

Maxwell Osnowitz Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

Tal Liani BofA Securities, Research Division - MD and Head of Technology Supersector

P R E S E N T A T I O N

Operator

Good day, and thank you for standing by. Welcome to the Q4 2021 Amdocs Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the conference over to your host, Mr. Matthew Smith, Head of Investor Relations for Amdocs. Mr. Smith, you may now begin.

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

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 information in its internal analysis in order to exclude the effect of acquisitions and other significant items that may have a disproportionate effect in a particular period. Accordingly, management believes that isolating the effects of such events enables management and investors to consistently analyze the critical components and results of operations of the company's business and to have a meaningful comparison to prior periods. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's earnings release and all also be furnished with the SEC on Form 6-K.

Also, this call includes information that constitutes forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future results to differ from those anticipated.

These risks include, but are not limited to, the effects of general economic conditions, the duration and severity of O19 pandemic and its impact on the global economy and such other risks as discussed in our earnings release today and at greater length in the company's filings with the Securities and Exchange Commission, including in our annual report on Form 20-F for the fiscal year ended September 30, 2020, filed on December 14, 2020, and our Form 6-K furnished for the first quarter of fiscal '21 on February 16, '21 and for the second quarter of fiscal 2021 on May 24, '21 and for the third quarter of fiscal 2021 and August 16, 2021.

Amdocs may elect to update these forward-looking statements at some point in the future. However, the company specifically disclaims any obligation to do so.

Participating on the call with me today are Shuky Sheffer, President and Chief Executive Officer of Amdocs Management Limited; and Tamar Rapaport-Dagim, Joint Chief Financial and Operating Officer. To support our earnings call today and in the future, we are providing a presentation,

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NOVEMBER 02, 2021 / 9:00PM, DOX.OQ - Q4 2021 Amdocs Ltd Earnings Call

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 provide an update on our recent strategic process, progress and business performance. And Tamar will review our financial results and outlook for fiscal year 2022. And finally, we invite you to join us for our fiscal 2022 Analyst and Investor business update, which will be a virtual event, webcast live on Friday, November 5 at 9:30 Eastern Time. Please visit the Investor Relations section of our website for more information.

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. As Matt mentioned, today, we are going -- today and going forward, we are providing an earnings presentation alongside our remarks. We hope you find this additional information helpful in understanding our company as investment opportunity.

I will start today's call by recapping our business and financial achievements for the full fiscal year 2021. Second, I will add it to you on the main pillar of strategic growth framework and the significant progress we've made with key others from the past quarter. Finally, I will wrap up by summarizing our expectation for another year of accelerated growth in fiscal 2022. After which, Tamar will provide the detail on our financial performance and outlook as well as perspective on the overall environment, 12-month backlog and capital deployment.

As a reminder, our comments today will refer to certain financial metrics on a pro forma basis where applicable to provide you with a sense of the underlying business trends, excluding the financial impact of the open market, which we divested on December 31, 2020.

I'm on Slide 7. Let me begin by saying that I could not be prouder of our achievement in fiscal 2021. This was a pivotal year in which we began to see the results of our strategy to drive accelerated revenue growth and much credit belongs to a global base of talented employees and experienced leadership team. Operating hybrid model amid the global pandemic, our people execute exceptionally well this year to meet the mission-critical requirements of our customers. And it is so while embracing our culture of continuous learning and upskilling.

I'm also proud we constantly found ways to demonstrate our corporate purpose and values, such as by providing support for the communities in which we live and work. As an example, in the Philippines, we recently ran a project to improve digital access and skill in peripheral communities, which included employees volunteering hundreds of hours to develop career planning, technology and upskilling webinar tailor-made to the needs of the thousands of students from more then 25 schools. This is just 1 inspiring story among the many others. I would like to take this opportunity to acknowledge and to take all our people and the commitment -- for the commitment, interactivity and dedication they've shown working together to serve our customers, partners, communities and one another over the last year. And I'm confident we have the talent, experience and values to achieve even more in the future.

Moving to Slide 8. Let me address the operational and financial highlights for fiscal year 2021. I believe Amdocs in an exciting inflation point of accelerated revenue growth and it's worth taking a moment to quickly recap some of the key factors which have led us to this point. First, we accelerated investment in research and development by more than 10% in fiscal year 2021 to further position us as the market leader with the best technology and most relevant offering to support our customer investments in industry mega trends, including digital modernization, journey to the cloud and 5G. Second, we divested a noncore asset, OpenMarket and execute on strategic acquisition of Openet in August 2020 and Sourced Group in March 2021 in further -- to further accelerate our technology capabilities and services particularly on 5G and the cloud.

Finally, we start our competitive advantage and established ourselves as the industry-leading transformation partner to build their next-gen platforms, greater (inaudible) reach include multiple project awards at AT&T, recent modernization wins at Three UK, and the bigger transformation win with nex-gen hybrid cloud operation, we are accelerating for T-Mobile under a multiyear managed service agreement. All in all, we finished the year 2021 in a strong business and financial position, you can see from the highlights on Slide 9.

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NOVEMBER 02, 2021 / 9:00PM, DOX.OQ - Q4 2021 Amdocs Ltd Earnings Call

We delivered excellent pro forma revenue growth of 7% in constant currency in fiscal year 2021, driven by healthy customer activity across North America, Europe and rest of the world. Our sales momentum continued through the fourth quarter which ended up with a record 12-month backlog of $3.7 billion, up 10.5% from a year ago on a pro forma basis. We improved non-GAAP operation margin by 30 basis points and achieved our highest ever number of customer milestone which we're converting to record cash collections and record normalized free cash flow generation of $869 million for the full year.

Moreover, we delivered on our target for double-digit total shareholder return in fiscal 2021, including accelerated pro forma non-GAAP earnings per share growth of nearly 10% plus our dividend yield.

Now turning to Slide 10. Let me update you on the recent progress against our strategic imperatives. As a reminder, we have a simple and clear growth strategy to bring market-leading innovation to support our customers' critical business needs and to provide an amazing experience to consumer and enterprises in, one, Journey to the Cloud to accelerate cloud adoption across all platforms of our customer base; two, 5G monetization to support exciting new 5G use cases; three, digital modernization to enhance customer experience and transform operation; four, network automation to the leader and automate dynamic real-timenetwork-based services.

During Q4, we made significant progress across each of these pillars. In cloud, we are thrilled that AT&T has selected us for next-gen cloud operations of its business support system evolution, BSSe, under the long-term agreement. BSSe is a technology modernization and certification program focused on increasing speed-to-market, improve customer experience and long-term cost efficiency effectiveness. As previously announced, Amdocs is already in the process of modernizing AT&T Consumer Mobility domain. And this newer world expands its activity. Under the new BSSe agreement, Amdocs will provide its lead set of cloud-native products and next-gen cloud operation under a long-term agreement.

Moreover, the project will be run on a Microsoft Azure starting with AT&T's consumer basis units, which includes Mobility, broadband and IoT. Additionally, I am pleased to share that AT&T has extended through 2026, the managed services agreement signed in 2019 for the consumer domain.

Moving to 5G monetization. Amdocs remains at the forefront of the industry working with leading service providers to enable new and exciting 5G experiences. During Q4, we were selected by Orange to provide business support system for Europe's first 5G Stand Alone experimental cloud network, launched in July in France. In 2021, Amdocs engaged in dozens of new 5G operational and modernization projects, across multiple countries and customers, including AT&T, T-Mobile, to U.K., Verizon, Korea Telecom operation, LG Uplus and others. A small 5G standalone are launched around the globe, we expect a growing number of service providers receive the benefit of Amdocs expertise for unlocking the monetization potential of 5G by curating new capabilities, unique business model and game-changing opportunities.

Turning to digital modernization. We continue to see strong business momentum with several new wins this quarter. We expanded our relationship with VM to ramp up new digital services for its consumers and customers in Uzbekistan and Kazakhstan under a 7-year agreement. We expanded our strategic collaboration with Globe Telecom in the Philippines to provide the Amdocs catalog and Commerce Suite to improve digital experience for its mobile and fixed line customers.

Finally, this quarter, we continue to build the growth momentum of our network automation offering by successfully providing an end-to-end service orchestration solution for SES, the world's leading global satellite operator that enable SES to support customer with service innovation and delivery agility for its satellite-based hybrid and open cloud network. In the further expansion of the industry-leading collaboration between the 2 companies, Amdocs has also been engaged by SES to provide the network service assurance solution. We have extended our strategic partnership with Globe Telecom to include Amdocs service and network automation suite to power Globe's cloud and digital to network automation journeys quickly and easily.

With that backdrop, let me turn to Slide 11 and our fiscal year 2022 outlook. We believe we are in the early innings of a multiyear 5G and cloud-driven investment and transformation cycle. We see a rich pipeline of opportunities across the communication industry to enable our customers to create amazing experiences for consumers and enterprises. We are laser focused on converting these opportunities to backlog growth in the coming quarters, leveraging our cutting-edge technology, which supports the future road map of our customers and further extends our competitive lead in the market.

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NOVEMBER 02, 2021 / 9:00PM, DOX.OQ - Q4 2021 Amdocs Ltd Earnings Call

Our execution track record and the highly skilled customer-centric talent base delivering value to our customers around the world. Tying everything together, we expect to deliver accreted revenue growth of roughly 8% assuming the midpoint of our guidance on a pro forma process with constant currency basis in fiscal 2022. Moreover, we are positioned to deliver a double-digit expected total shareholder return for the second year running in fiscal '22, including pro forma non-GAAP diluted earnings per share growth of 10%, assuming the midpoint of our guidance range, and our dividend yield of 2% based on the new quarterly rate of $0.395 per share, which proposed for the shareholder approval at our upcoming annual meeting in January.

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

Tamar Rapaport-Dagim - Amdocs Limited - CFO & COO

Thank you, Shuky, and hello, everyone. Thank you for joining us. As a reminder, my comments today will refer to certain financial metrics on a pro forma basis, which excludes the financial impact of OpenMarket, which we divested on December 31, 2020.

Turning to Slide 13. I would like to echo Shuky's comments that we are very proud of our financial performance for the fourth quarter and fiscal year 2021. Let me start with our fiscal fourth quarter performance. Q4 revenue of $1.09 billion was up 10.2% year-over-year on a pro forma constant currency basis and was led by our best-ever quarter in North America. Revenue was above the midpoint of guidance despite an unfavorable impact from foreign currency fluctuations of $5 million relative to guidance.

Moving down the income statement. Our Q4 non-GAAP operating margin of 17.5% was in line with the high end of our long-term target range and improved by 30 basis points from a year ago as accelerated R&D investments were more than offset by a focus on operational excellence and a divestiture of OpenMarket. On the bottom line, diluted non-GAAP EPS was $1.16 in Q4, which was consistent with the midpoint of our guidance range. As we have said in the past, our non-GAAP effective tax rate may fluctuate throughout the course of the fiscal year. In the fourth fiscal quarter, our non-GAAP effective tax rate was 20.2%, above the high end of our annual target range of 13% to 17%, but consistent with our expectations.

For the full fiscal year 2021, we reported an effective tax rate of 15.4%, which was within our annual target range. Diluted GAAP EPS was $0.97 for the fourth fiscal quarter above the midpoint of the guidance range of $0.91 to $0.99.

Summarizing fiscal year 2021, we delivered accelerated revenue growth of 7% on a pro forma constant currency basis, which was ahead of our original guidance for the year. This outperformance was primarily due to a stronger-than-expected performance in our core business as well as a small contribution from the acquisitions of Sourced, ADK and Clearbridge, which we executed during the year.

On the bottom line, non-GAAP diluted earnings per share growth accelerated to 9.8% on a pro forma basis in fiscal year 2021, driven by the faster pace of revenue growth and improved non-GAAP operating margin and the benefit of our share repurchase activity during the year.

Moving to Slide 14. The strong sales momentum of the last several quarters continued in Q4, resulting in record high 12-month backlog of $3.69 billion, which was up 7.5% from a year ago on a pro forma basis. On a sequential basis, 12 months backlog rose by $100 million as compared to June 30. 12-month backlog has traditionally serves as a good leading indicator of our business, having consistently averaged around 80% of forward-looking 12 months revenue over the years.

Q4 was also a healthy quarter for Managed Services, where revenue grew from a year ago, equating to roughly 59% of total revenue. Our multiyear managed services engagements underpin the resiliency of our business with recurring revenue streams, high renewal rates and expanded activities with existing customers, including into next-gen cloud operations.

For instance, in addition to the AT&T deal that Shuky discussed, this quarter, BT Group has renewed its relationship with Amdocs for a further 3 years to maintain, develop and enhance the BSS platform for BT's EE brand.

Turning to the balance sheet and cash flow. As you can see on Slide 15, we are pleased to say that our great progress in achieving product milestones for our customers is translating to invoicing and strong cash collections. This is reflected in DSO 73 days, which decreased by 2 days year-over-year

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