Company Overview: Amdocs Limited (NASDAQ: DOX) is one of the leading providers of software and services to the industry like communications, Pay TV, and media all over the world. The company is also involved 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

Geographical Expansion and Acquisitions synergies Aid DOX: Amdocs Limited (NASDAQ: DOX) is engaged in providing 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.

Recently, the company inked a definitive agreement to take over Openet, a provider of 5G charging, policy, and cloud technologies. The amalgamation of Openet would enable Amdocs’ service provider clients to accelerate their technological transition in the 5G space. The deal is worth $180 million and is expected to be close by the end of FY20. In addition to expanding the reach of Amdocs’ managed services business, the consolidation of Amdocs and Openet’s technologies will facilitate service providers to increase their opportunities during the 5G implementation uptrend. Another major step taken by Amdocs in September 2019 was the TTS Wireless buyout to bolster capabilities in the open cloud and the 5G network.

The company witnessed an attractive and ever-increasing pipeline of opportunity, which aid DOX to sustain for future long-term growth. The company remains on track to leverage its market-leading product offerings, track-record of execution, and history for innovation. The company started 2019 on a good note, as it was successful in maintaining stable margins and healthy cash collection. In FY2019, 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. 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.

The company has gained more than 35 years of loyalty and capable partner and delivery powerhouse underpinned by its successful business activities. 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 in years to come 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.

Furthermore, the group recorded revenue growth at a 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 Performance (Source: Company Reports)

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 be continued in the future.

3QFY20 Key Financial Highlights: During the quarter, the company reported non-GAAP earnings of $1.07 per share, as compared to $1.19 per share reported in pcp. The company reported revenues of $1.03 billion, up marginally 0.1% year over year. On a constant currency basis revenue increased by 1% on pcp. The increase was on the back of higher demand from North America. The company was awarded numerous contracts in the quarter, which included an agreement to help Bell Canada’s cloud-native strategy, and a contract from Three UK.

Managed Services Revenue for the quarter stood at $604.5 million, up from $578.1 million reported in the year-ago period. The twelve-month backlog, stood at $3.48 billion at the end of 3QFY20, up 2.4% year over year. We believe that the company will continue to maintain its backlog and its implementations, which is likely to support top-line growth in the future. As a percentage of revenue, research & development expenses came in at 6.8%, up 10 basis points (bps) on a year over year basis. Non-GAAP operating margin came in at 17.1%, down 20 bps on pcp.

Key Financial Highlights (Source: Company Reports)

Geography-wise Revenue Highlights: During the quarter, for North America, the company reported revenue of $685.9 million, up from $643.9 million reported in the year-ago period. Moreover, in 3QFY20, for Europe, the company reported revenues of $145.4 million, flat on a year over year basis. 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 $194.9 million.

Geographical Revenue Break-up Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Details: The company exited the period with cash and cash equivalents of $1.19 billion. Total debt at the end of the quarter amounted to ~$743.8 million. Cash flow from operating activities stood at $186.7 million, with free cash flow amounting to $145.4 million. During the quarter, the company repurchased shares worth $60 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 Latest Updates:

• On September 2, 2020, the company stated that Telefonica Vivo has extended its Amdocs alliance with a multi-year managed service extension agreement in assistance of VIVO NEXT postpaid and FTTH consumer business.

• On 5 August 2020, the company expanded its agreement with SES, to offer an end-to-end service orchestration solution based on the cloud-native Amdocs Service & Network Automation platform in order to aid service design, service inventory and orchestration across hybrid networks.

• On 5 August 2020, the company stated that Orange Liberia has aligned with Amdocs to upgrade its end-to-end digital enablement platform to offer enhanced services to its customers.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 41.49% of the total shareholding. Fidelity Management & Research Company and Janus Henderson Investors hold the maximum interests in the company at 11.24% and 5.12%, 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 17.1%. Operating margin during Mar’20, stood at 15%, higher than the industry median of 9.4%. Net margin in the same time span stood at 12.1%, higher than the industry median of 4.4%. Mar’20 debt to equity ratio stood at 0.10x, lower than the industry median of 0.51x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company faces stiff competition from peers like Oracle, Salesforce and SAP, Accenture, Cognizant, HPE, IBM, Tech Mahindra, and Wipro. 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. Also, the company is also exposed to risk associated with general global economic and market conditions, particularly those impacting the communications industry.  Further, currency risk and pandemic led by COVID-19 outbreak are persistent challenges to the company.

Future Expectations: For 4QFY20, the company expects revenues to be in the range of $1.015 billion and $1.055 billion. Non-GAAP EPS (earnings per share) is expected to be in the ambit of $1.16-$1.22 per share. For FY20, the company expects revenues to increase in the range of 1.1% to 2.1% year over year, up from the previous outlook of 0.5% and 2.5%. On a constant currency basis, DOX expects revenues to grow in the range of 1.6% to 2.6%. Non-GAAP earnings are expected to grow between 1.6% to 3% year over year (previously 0 - 4% growth year over year growth). For FY20, the company now expects free cash flow to be ~$420 million, up from the prior view of $400 million.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

P/E Multiple Based Relative 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 $62.66 with a market capitalization of ~$8.33 billion. The stock made a 52-week low and high of $44.05 and $77.29, respectively, and is currently trading slightly above the average of its 52-week trading range. The stock gave negative returns of ~4.93% and ~0.89% in the last one year and one month, respectively. Considering the above factors, we have valued the stock using a P/E multiple based illustrative relative valuation method 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 $62.66, up 1.8% on 2 September 2020.

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

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