Company Overview: Amdocs Limited (NASDAQ: DOX) is a leading provider of software and services to the industry like communications, Pay TV, and media all over the world. The company is also engaged in providing managed, data and intelligence, quality engineering, digital business operation, cloud enablement, autonomous network service assurance and advisory services. The company’s technology is built on certain key principles such as Microservices, Reliability, Modularity, Scalability, Design-led, API-enabled, Upgradability, Cloud flexibility, and Backwards Compatibility, and Open Source software. 

DOX Details 

DOX Rides on Robust Managed Services & Geographical Expansion: Amdocs Limited (NASDAQ: DOX) is one of the top providers of software and services related to communications, Pay TV, and media industries across the world. The company offers amdocsONE, a line of services created for several stages of a service provider's lifecycle. The company has ~25,000 employees, with more than 350 communications and media service provider customers in ~85 countries.  

Talking about FY19, the company reported revenues of $4.087 billion, which increased from $3.975 billion reported in FY18. Region-wise, the company generated 63.2% of revenues from North America, 14.47% from Europe and the remaining 22.1% from the rest of the world. 2019 was a good year for Amdocs, as it was successful in maintaining stable margins and healthy cash collection. In 2019, the company won key digital transformation around the world, which included, expansion of strategic alliance with AT&T under a multi-year agreement. Driven by the continued ramp-up of such managed transformations at several customers in different geographies, the company’s managed services grew 10% year over year in 2019. 

With the ever-rising conjunction of wireless and Pay TV offerings, the company is seeing a transformational phase that requires traditional Pay TV providers to transform their legacy business systems in order to promote broadband and establish mobile services, thereby accelerating their new digital offerings. This transition has been a strategic growth engine for Amdocs over the years, and the company expects the same to continue in the future. Furthermore, the group recorded revenue growth at CAGR of 2.9% over the six years (FY15-19). Further, net income over the same time span grew at a CAGR of 1.8%. 

Historical Financial Performance (Source: Company Reports) 

Further, with the buyout of TTS Wireless, a provider of mobile network engineering services with proven 5G experience, the company strengthens its position to aid service providers speed up their plans to launch 5G networks. The company has gained more than 35 years of loyalty and capable partner and delivery powerhouse underpinned by its successful business activities. In an average quarter, the company completes more than 80 major productions, a success rate that is unmatched in the industry. The company remains on track to leverage technologies and methodologies such as DevOps, site reliability engineering, automation, and artificial intelligence. We presume that the company has an ability to tap growth opportunities on the back of its business strategy supported by expanding its global client base by signing long-term contracts and synergistic acquisitions with major telecom industry players across the globe. 

2QFY20 Key Financial Highlights: During the quarter, the company reported non-GAAP earnings of $1.08 per share, as compared to $1.06 per share reported in pcp. The figures came within the management’s guided range of $1.03-$1.09. The company reported revenues of $1.05 billion, soaring 2.9% year over year, which also came within the company’s guided range of $1.035-$1.075 billion. The increase was on the back of higher demand from North America and robust growth in the Rest of the World and Europe. Furthermore, the addition of new customers and robust project implementation raised revenues. Managed Services Revenue for the quarter stood at $ 604 million, up from $559.5 million, Non-GAAP operating expenses during the quarter came in at $867.4 million, which increased 3% on pcp. Non-GAAP operating income came in at $181 million, up 1.8% on pcp. 

The twelve-month backlog, stood at $3.46 billion in 2QFY20, down $60 million from the prior quarter and up 2.1% year over year. The backlog includes the expected revenue that the company will receive from its contracts, estimated revenue due to managed services contracts, letters of intent, which the company holds, and maintenance and estimated revenue from the ongoing support activities. We believe that the company will continue to maintain its backlog and its implementations, which can support top-line growth in the future. 

Key Financial Highlights (Source: Company Reports) 

Geographic Performance for the 2QFY20: During the quarter, for North America, the company reported revenue of $691.3 million, up from $634.2 million reported in the year-ago period. Moreover, in 2QFY20, for Europe, the company reported revenues of $148.3 million. The company, over the last few years, has invested organically into the acquisition for building the customer and service infrastructure in the key European markets. The revenues from the rest of the world for the quarter came in at $208.3 million. 

Geographical Highlight (Source: Company Reports) 

Balance Sheet & Cash Flow Details: The company exited the period with cash and cash equivalents of $763 million. Cash flow from operating activities stood at $103 million, with free cash flow amounting to $57 million. During the quarter, the company repurchased shares worth $120 million and its board also authorized a quarterly dividend of $0.3275 per share. The share repurchases are a good way of returning cash to investors while at the same time providing a boost to the bottom-line. 

Key Updates: 

1. On July 13, 2020, the company stated that it expanded its strategic alliance with PLDT, a leading telecommunications and digital service provider, to further hasten the digital transformation program of PLDT’s enterprise business.

2. On July 13, 2020, the company expanding the collaboration agreement with Cellcom Israel Ltd. to help the latter to streamline and strengthen its technology operations on an integrated, modern platform for both retail and enterprise customers.

3. On July 7, 2020, the company also expanded its agreement with Bell to integrate an expanded set of Amdocs’ real-time microservices which leverage the Amdocs Microservices360 framework. The agreement aids Bell’s investments to provide innovative new services to its customers.

4. On July 7, 2020, the company expanded its agreement with Globe Telecom, to include the deployment of a customer flow management system at retail stores, allowing secure and expedited customer communications.

5. On June 30, 2020, the company signed a multi-year managed services deal with CK Hutchison Holdings to allow Three UK to augment the enterprise customers’ experience with new services that can be rolled out and scaled as needed, empowering faster time-to-market. This collaboration will assist Three to expand its B2B services in the United Kingdom by leveraging an Omni Channel digital business system that will be developed by Amdocs. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 39.29% of the total shareholding. Fidelity Management & Research Company and Janus Henderson Investors hold the maximum interests in the company at 9.88% and 5.15%, respectively. 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters) 

Key Metrics: The Company reported Mar’20 EBITDA margin at 18.9%, higher than the industry median of 17.8%. Operating margin during Mar’20, stood at 15%, higher than the industry median of 10.8%. Net margin in the same time span stood at 12.1%, higher than the industry median of 4.5%. Mar’20 debt to equity ratio stood at 0.10x, lower than the industry median of 0.65x. 

Key Metrics (Source: Refinitiv, Thomson Reuters) 

Key Risks: The company faces stiff competition from peers like Oracle, Salesforce and SAP, Accenture, Cognizant, HPE, IBM, Tech Mahindra, and Wipro. Further, the company is also exposed to risk associated with general global economic and market conditions, particularly those impacting the communications industry. The company’s business is dependent on a limited number of significant customers, of which AT&T accounted for 23% and 27% of its total revenues in FY19 and FY18, respectively. Hence, the loss of any one of its customers could dampen the results in the future.  Further, currency risk and pandemic led by COVID-19 outbreak are persistent challenges to the company. 

Outlook: For 3QFY20, the company expects revenues to be in the range of $990 million and $1,040 million. Non-GAAP earnings per share is expected to be in the ambit of $1.00-$1.08 per share. For FY20, the company expects revenues to increase by 0.5% to up 3.5% year over year on a constant currency basis, down from the previous outlook of 2.5% and 5.5%. Non-GAAP earnings is expected to grow between 0 - 4% year over year (previously 3-7% growth year over year). 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters) 

Valuation Methodology 1: P/E Multiple Based Relative Valuation (Illustrative) 

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 

Valuation Methodology 2: EV/EBITDA Multiple Based Relative Valuation (Illustrative) 

EV/EBITDA Mutiple Based Valuation (Source: Refinitiv, Thomson Reuters) 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: The stock of DOX closed at $59.89 with a market capitalization of ~$7.99 billion. The stock made a 52-week low and high of $44.05 and $77.29, respectively, and is currently trading below the average of its 52-week trading range. The stock gave negative returns of ~6.91% and ~1.71% in the last one year and one month, respectively. The company has posted healthy growth in North America and the Asia Pacific during the quarter. Considering the above factors, we have valued the stock using two illustrative relative valuation methods, i.e., P/E multiple and EV/EBITDA multiple and arrived at a target price of lower double-digit upside (in % terms). For the purpose, we have taken peers like CSG Systems International Inc (NASDAQ: CSGS), Cognizant Technology Solutions Corp (NASDAQ: CTSH), DXC Technology Co (NYSE: DXC), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $59.89, up 1.27% on 22 July 2020. 

DOX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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