Amdocs : Q3 2023 Earnings Call Transcript

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EDITED TRANSCRIPT

Q3 2023 Amdocs Ltd Earnings Call

EVENT DATE/TIME: AUGUST 02, 2023 / 9:00PM GMT

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AUGUST 02, 2023 / 9:00PM GMT, Q3 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

Tavy Rosner Barclays Bank PLC, Research Division - Head of Israel Equities Research

Timothy Kelly Horan Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

PRESENTATION

Operator

Good day, and thank you for standing by. Welcome to the Third Quarter 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. Please go ahead.

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

Thank you, Liz. Before we begin, I need to call your attention to our disclaimer statement on Slide 2 of the presentation. It notes that some of our comments today may be forward-looking statements and are subject to risks and uncertainties including 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 third quarter of fiscal 2023, and we'll update you on the continued progress we've made executing against our strategic growth framework including the vast opportunity of the rapidly emerging field of Generative AI. Shuky will finish by commenting on our financial outlook for the full fiscal year 2023. After which Tamar will provide additional detail on our third quarter financial performance and forward-looking guidance. And also elaborate on our continued commitment to ESG.

And so 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'd like to begin thanking our global base of talented employees for their hard work and incredible contribution towards another solid financial and operation performance in our third fiscal quarter. As we continue to execute against our core growth pillars for digital modernization, 5G monetization, cloud and network automation. As you can see, the financial highlights on Slide 6.

Record revenue, $1.24 billion was slightly above the midpoint of our guidance on a reported basis and was up 6.9% for a year growing constant currency. Non-GAAP operating margin increased by 20 basis points from a year ago as we continue to realize the benefits of operational efficiency initiatives in our business. On the bottom line, non-GAAP diluted earnings per share of $1.57 was above the guidance range, mainly due to lower-than-anticipatednon-GAAP effective tax rate in the quarter. [Operational] backlog was a record high $4.14 billion, roughly 5% from a year ago despite some impact from the challenging macro and industry environment.

Amongst the third quarter operational highlights, I'm encouraged to report continued cloud-related sales momentum. As shown on Slide

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AUGUST 02, 2023 / 9:00PM GMT, Q3 2023 Amdocs Ltd Earnings Call

7, following last quarter wins with (inaudible) in 2 leading European operators, Amdocs was recently selected to support the cloud strategies of Bell and TELUS in Canada and Claro in Brazil.

Additionally, we won new awards and deepen relationship with Verizon and DISH in North America and one in Telkomsel in Southeast Asia and many others around the world as we focus on driving greater adoption of our broad product offering and capturing more share of wallet at our customers.

Significant long-term growth potential also exists in Managed Services, which we delivered another record quarter, driven by expanded activities with long-standing customers like Globe in the Philippines and contribution from new first-time logos signed earlier. Additionally, I'm pleased to report growing sign of demand for our next-gen cloud operations as the latest future-ready component of our Managed Services offering.

I'd also like to highlight Media, where Amdocs Vubiquity extended its position as a trusted provider to the world's leading streaming services during Q3. We continue to work closely with Disney to execute on their content strategy globally as we expand our engagement with them. Amdocs Vubiquity has also been selected by Lionsgate to support the technical enhancement of its iconic 18,000-plus film and TV title library by performing quality assessment and content editing using industry-leading automation.

In addition to reach Vubiquity content and catalog, services was recently chosen to support premium services for Watch Brasil and VIDAA in the U.S. Superb execution was another highlight of Q3 as we achieved a very high number of project milestones in support of digital transformation journeys as customers like AT&T, T-Mobile, Vodafone, and Three UK. Demonstrating Amdocs capabilities we recently surpassed the migration of more than 18 million prepaid subscribers to our newest highly robust and scalable system for XL Axiata in Indonesia.

Moving to Slide 8, I would like to highlight a very important strategic priority to establish Amdocs as the telecom industry's leader in the rapidly emerging field of Generative AI. Earlier at (inaudible), we announced the launch of Amdocs amAIz, a cutting edge Enterprise-grade Generative AI framework, which creates a foundation for global service providers to benefit from the immense potential of the Gen AI area. Amdocs AmAIz combines our carrier-grade architecture and telco-specific expertise with open an eye and the industry most advanced open source technology and large language models.

The framework also empowers service provider to deploy Generative AI use cases across the telecom ecosystem. From customer experience to network provisioning for consumer and enterprise customers. The Amdocs amAIz framework follows the expansion of our strategic partnership with Microsoft earlier this year and marks an important step towards capitalization of market-leading Generative AI capabilities such as those resulting from this partnership.

Amdocs has also launched a company-wide program to accelerate the way in which Generative AI can be harnessed internally to derive organizational agility, operational efficiency and cost reduction. Spanning the software development cycle, our Managed Services activities and many corporate functions, the program has so far identified more than 80 Gen AI use cases, many of which are already in progress.

Now let me provide you with the progress in respect to our strategic growth pillars, which have driven a major expansion of our addressable market by ensuring we bring market-leading innovation to help our customers. Accelerated journey to the cloud, create seamless digital experiences by transforming IT system and operations for consumer and B2B, launch and monetize new 5G services and deliver dynamic connected experiences with real-time automated networks.

Starting on Slide 9 with cloud, the value of potential of which service providers are still in the early stages of maximizing. For most, the cloud will be a multiyear journey that will require the proven capabilities of Amdocs, including our cloud-native product suite and our ability to simplify complexity by delivering an end-to-end fully accountable migration paths.

As highlighted earlier, we signed cloud deals with multiple Tier 1 operators in the Americas this quarter. First, and of supporting Bell Canada's digital transformation by moving on-premise essential application to the cloud. Second, Amdocs collaborates with TELUS in

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AUGUST 02, 2023 / 9:00PM GMT, Q3 2023 Amdocs Ltd Earnings Call

Canada to move on price application to Google Cloud, helping TELUS to be more flexible and cost-efficient unlock new business models. Third, at Claro Brazil, we are moving on-premise infrastructure to the cloud, unlocking new opportunities in the customer and enterprise markets and improving cost effectiveness.

Overall, we are pleased with the recent sales momentum in our cloud business, which we believe reflects the combination of our unique industry expertise and our strategic cloud partnerships. Moving to Slide 10. Service provided continued down the path of digital modernization to grow revenue, reduce cost and improve experiences for consumer and B2B customers. Making the significant milestone in Vodafone Spain's multi-digital formation journey, Amdocs recently completed the successful modernization of a customer engagement software for this operator, providing it with the improved system stability, security and performance while enabling the delivery of new and exciting services to Vodafone Spain customers.

Among other highlights this quarter. Amdocs signed an agreement with DISH for a new software as a service-based billing presentment for Boost Infinite subscribers, providing an enhanced experience. We successfully added Swiss operator Sunrise modernization capabilities, enabling them to sell and deliver a wide range of innovative products to the customers.

In South Africa, restoring our partnership with Melon digital, digital-led mobile virtual network enabler, which has selected Amdocs eSIM cloud platform to provide its customer worldwide with eSIM capabilities on the primary and secondary devices. In Southeast Asia, Amdocs successfully implemented an IoT connectivity management platform at Telkomsel in Indonesia, thereby enabling this operator to increase business agility and quickly launch new IoT services for consumer and enterprise customers.

Turning to 5G monetization on Slide 11. Amdocs continue to provide a global service provider with the next-generation solution that will need to monetize and unlock the future market potential of a true 5G stand-alone network as they roll out over the next few years. 5G Fixed wireless is one of the most powerful use cases to emerge from 5G. And we can now say that T-Mobile selected Amdocs home operating system to simplify Internet and device management and to automate consumer customer support for its 5G Home Internet customers.

Additionally, we recently delivered a 5G-readynext-generation charging solution for a major European operator to enable enhanced agility and time to market for innovative new products and services. One of the early adopters of the true 5G stand-alone network is Singapore, where we are delighted to continue working with M1 Limited, a leading digital network operator, which has selected Amdocs monetization engine to power its prepaid platform.

By leveraging our monetization platform to launch their prepaid and MVNO offering, M1 will be able to main cutting-edge experiences to enterprising consumers and drive new revenue streams while increasing agility and efficiency.

Turning to network automation on Slide 12. I'm happy to say that we closed the previously announced acquisition of TEOCO''s service assurance business on June 30, thereby, equipment and us to deliver a unique end-to-end service orchestration offering, assuring the quality of the service and enabling the modernization of next-generation dynamic customer experiences. Amdocs expertise in network domain continues to be recognized by the market. Among recent example, DISH implemented Amdocs network services to expand its 5G services on the public lounge, which include 5G run core and voice services. Culminating this successful rollout of a comprehensive 5G network that now reaches over 70% of the U.S. population.

Additionally, in Verizon, we went live with the 5G orchestration platform, enabling service and network automation in addition to which we have expanded our engagement in operational engineering to include continued platform support in network function, onboarding and improved automation.

Now I would like to make a few points about our business within the current operating environment as presented on Slide 13. To begin, we remain on the deal that Amdocs is sitting at the heart of a multiyear technology-driven investment, cycle center around the major long-term trends of 5G, network automation, digital modernization and cloud. Moreover, we strongly believe global service providers must continue to participate in this investment cycle to ensure the long-term competitive position in their respective markets.

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AUGUST 02, 2023 / 9:00PM GMT, Q3 2023 Amdocs Ltd Earnings Call

Therefore, as a key technology enabler and trusted partner to the communication industry, we continue to see high level of customer engagement and large pipeline of opportunity, which we believe Amdocs is well positioned to monetize. The current economic uncertainty and industry pressure is, however, beginning to weigh on the spending decision of some customers which are now prioritizing multiyear strategic modernization programs ensure further investment to enhance legacy systems.

Amdocs is already at the heart of this modernization journey with many customers and we are ideally placed to expand our fully future scope of activity in these programs. Given we are also the incumbent provider of the legacy application for this customer, these business dynamics are nevertheless presenting some headwind to revenue growth. To adjust to these business dynamics, we are taking proactive and appropriate measures to optimize our expenditure and resource allocation and to ensure continued long-term growth, together with continued gradual improvement of our operating margins.

These measures include even greater emphasis on the operational excellence and cost leadership, primarily led by efficiency gains resulting from our growing adoption of automation, sophisticated tools and the future expected benefits of the Gen AI-related capabilities while maintaining investment in our strategic growth areas.

Wrapping everything together, revenue growth for the full year fiscal '23 is now tracking slightly below the 8% midpoint of our original guidance range of 6% to 10% in constant currency. On the bottom line, we are raising the midpoint of our outlook for non-GAAP diluted earnings per share growth in fiscal '23 for the second time this fiscal year.

Additionally, we are reiterating our free cash flow outlook of approximately $700 million for the full fiscal year, equating to a conversion rate roughly on par with expected non-GAAP net income. Overall, 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, and hello, everyone. Thank you for joining us. I'm pleased with our solid financial results for the third fiscal quarter, the highlights of which you can see on Slide 15. Record Q3 revenue of approximately $1.236 billion was up 6.9% year-over-year in constant currency. On a reported basis, revenue increased 6.5% and most slightly above the midpoint of guidance, including a positive impact from foreign currency movements of approximately $5 million compared to our guidance assumptions.

To clarify, there was no revenue contribution from the acquisition of TEOCO' Service Assurance business in Q3 as the deal closed in the last day of the quarter June 30. On a geographical basis, North America delivered its best ever quarter as we continue to support the strategic modernization journeys of customers across the border region while in Europe, we achieved the second consecutive quarter of record revenue as project activity continued to ramp up.

Rest of the World declined on a sequential and year-over-year basis in Q3, reflecting some fluctuations in customer project activity. Moving down the income statement. Our non-GAAP operating margin of 17.8% was up 20 basis points from a year ago and unchanged as compared with the prior quarter. On the bottom line, non-GAAP diluted EPS of $1.57 was above the guidance range, primarily due to a non-GAAP effective tax rate of 12.3%, which was lower than anticipated.

Diluted GAAP EPS was $1.32 for the third fiscal quarter, which was above the guidance range of $1.16 to $1.26 also due to a lower-than-anticipated GAAP effective tax rate. Moving to Slide 16. I'd like to double-click on our non-GAAP operating margin, which has trended higher in fiscal 2023, in line with the new and improved guidance range of 17.5% to 18.1%, which we provided at the beginning of the year.

The year-over-year improvement in profitability reflects our commitment to operational excellence and cost leadership in respect to which we are now planning to take additional and appropriate measures to further optimize our expenditures and resource allocation and to realize ongoing efficiency gains led by a growing use of automation, sophisticated tools and the future expected benefits of Generative AI-related capabilities.

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