Amdocs is due to report their Q223 earnings on Wednesday, May 10 after the market close. Please check the forum for an updates to the earnings report.
We recently did a deep dive here and discussed how its 12-month backlog, large recurring revenue stream and multi-year engagements with large telecom clients made for a compelling investment case. We expect the quarter to be at least in line with market expectations and demonstrate a steady progression toward meeting its FY2023 targets.
These are the key points we will be looking for.
1. Has the macro environment impacted their business?
2. Growth in backlog? Contract wins?
3. Profitability improvements?
4. Free cash flow generation targets?
5. Price action since April 20th?
6. Earnings expectations?
Importantly, we will look for signs that they may reach or exceed the upper end of their 2023 guidance, which hasn’t yet been priced into earnings expectations. Since our report, the stock has presented an attractive entry point if Q2 proves to be “business as usual”.
1. Any impact from the macro?
Amdocs Q1 beat expectations and during the call management described the macro.
“As we mentioned, yes, we are not immune. I mean, we like ourselves that we are a very strong company, but we are not immune to everything that's going on around us. But I think that overall, we see a lot of demand for our services. The area of growth for Amdocs, today are highly strategic for our customers.
Everyone wants to be successful in — when they deploy 5G use cases, fixed wireless, network automation. Everyone wants to move to the cloud. So while there is some uncertainty, I can tell that we see that we continue the project with our customers. These are highly important for them and we see a very rich pipeline ahead of us.”
While addressing the uncertain macro vs solid company fundamentals, Amdocs revised their full year 2023 sales target range upward during the earnings call. A few snippets are worth pointing out.
“Strong reputation for successfully delivering mission-critical systems transformation.”
Amdocs is providing critical software to telecom companies as they upgrade their networks to 5G, migrate their legacy systems to the cloud and monetize their subscriber base. This is not opex that the telecom companies can afford to reduce, which is why there is a strong backlog.
“Highly recurring revenue streams”
Amdocs estimates that 75% of their revenue is recurring due to its managed services business. This provides earnings and cash flow stability during difficult macro environments.
“Multi-year engagements”
The majority of Amdocs clients are large telecom companies in their respective regions. In the US, ATT, T-Mobile and Verizon make up about 50% of total revenue. These multi-year arrangements provide visibility into future revenue and managing the cost base.
“We see a lot of demand for our services. The area of growth for Amdocs, today are highly strategic for our customers.”
The competition for mobile subscribers is intense. Companies like Amdocs that can help increase a telecom operator’s competitive advantage are highly valued. The multi-year engagements are a reflection of that.
2. Growth in backlog? New contract wins?
Amdocs ended q123 with a record high 12 months backlog of $4.09 billion. This increased 6% from a year ago and went up $120m sequentially, reflecting continued sales momentum. According to management, the 12-month backlog has traditionally served as a good leading indicator of their business and has consistently averaged around 80% of forward-looking 12 months revenue over the years. We will look for continued growth in the backlog.
Amdocs has long standings relationships with large incumbent providers globally such as AT&T, T-Mobile, Verizon, Comcast, Dish, and Claro Brazil in the Americas; Vodafone and Three Group in Europe, Globe in the Philippines. In the most recent quarter, they announced new contract wins with regional providers in Europe and Latam. We will listen for new business engagements within its core client base and new clients.
3. Profitability improvements?
Amdocs has shown steady and incremental improvement in its non-gaap operating margin and currently stands at 17.7%. Amdocs has guided between 17.5% to 18.1% for the year. We will look for comments as to whether they may reach or exceed the upper end of guidance.
4. On track to meet 2023 free cash flow target?
In the Q1 call, management affirmed their free cash flow target.
“We are reiterating our full year free cash flow outlook of roughly $700 million, with free cash flow in the first half of fiscal 2023, tracking in line with our expectations, taking into consideration the normal seasonal timing of annual bonus payments in the second quarter.”
At current stock levels, this implies an attractive free flow yield of almost 7%.
5. Price action since April 20th
In our April 4th Amdocs deep dive, Knox’s technical analysis indicated that he was targeting better entry levels after its strong performance post Q1 earnings. Since April 20, Amdocs has declined more than the market. With only a 0.6 beta to the market, there was no company specific news to explain the price action.
One possible explanation is that Amdocs’s decline began at the same time ATT began its 12% decline post its Q123 earnings release on April 20th. ATT is one of Amdocs’s largest clients. The market reacted negatively to ATT’s reported fcf of $1.1 bn vs $2.9b consensus. Prior to Q1, ATT had already indicated that Q123 FCF, much like Q122, would be about of 5% of their total 2023 $16b FCF target due to seasonality issues. So this should have not been a surprise to the market. Management stated:
“We remain confident in our full year outlook for free cash flow of $16 billion or better. This expectation is largely due to the timing of capital investments, device payments, incentive compensation, which all peaked in the first quarter.”
We do not believe that this should impact Amdocs. ATT recently renewed its managed services engagement until 2026. Given the mission critical services that Amdocs provides, it is not likely ATT will reduce them.
Additional comments from the ATT’s conference call reinforced this.
“The second (priority) is the repositioning of our business to focus on exclusively communication services, particularly 5G and fiber. As the last few years have demonstrated, the solutions we provide are more critical than ever before, and we only expect the demand for purpose-built, best-in-class Internet access to grow. The resiliency of the services we provide, coupled with our improved financial flexibility, provide us with the right tool set to navigate the economic environment.”
“We recognize that in order to do that, we had to increase our investments in the business to enhance our customer value proposition and make more memorable and lasting connections with our customers.”
“In mobility, our largest business unit, we're growing subscribers and taking share. We also continue to see very healthy ARPU. This translates to growth in wireless service revenues and EBITDA, while improving margins”
We will listen to the call to see if anything has changed. If it’s business as usual, the price decline has presented a good entry point.
6. Earnings expectations
Amdocs has a recent history of telling the market what they will do and then doing a little bit better when they report quarterly through a combination of better than expected revenue and incremental improvement in non-gaap operating margins. We like this type of consistency and believe the market will pay higher multiples for businesses like this if Amdocs continues to deliver and the macro continues to weaken.
During the Q123 call, Amdocs reiterated FY 2023 sales, provided Q2 sales and revised up 2023 FY earnings guidance.
“We are reiterating our guidance for full year revenue growth of between 6% to 10% on a constant currency basis in fiscal 2023, with all three operating regions contributing positively over the full year.”
“Our annual outlook includes second fiscal quarter revenue within a range of $1.2 billion to $1.24 billion. On a reported basis, we expect full year revenue growth within an improved range of 5% to 9% year-over-year as compared with 4% to 8% year-over-year previously. The new outlook anticipates an unfavorable foreign currency impact of approximately 1% and year-over-year compared with an unfavorable impact of 2% year-over-year previously.
Moving down the income statement, we anticipate quarterly non-GAAP operating margins to fluctuate around the midpoint of our annual target range of 17.5% to 18.1%. Below the operating line, we anticipate that foreign currency fluctuations and cost of hedge will continue to impact our non-GAAP net interest and other expense lines, in the range of a few million dollars on a quarterly basis. We expect that our non-GAAP effective tax rate will remain within an unchanged annual target range of 13% to 17%, for the full fiscal year 2023.
Bringing everything together, we are raising our outlook for non-GAAP diluted earnings per share growth to a new range of 9% to 13% for the full year fiscal 2023”
For Q223
- Amdocs has guided sales of between $1.20 to 1.24b vs consensus of $1.22b (+6.45% y/y)
- Consensus expects a normalize eps of $1.47 lower y/y (-4.59%) vs a tough Q222 comp
We will be looking to see if Amdocs meets or exceeds consensus eps forecasts and if it can meet the upper of end of its sales guidance of 10%. Currently, the market is pricing 6%.
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