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

Robust 5G Adoption & Geographical Diversification are Key Catalysts: 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. The company remains on track to leverage its market-leading product offerings, track-record of execution, and history for innovation. Further, an attractive and ever-increasing pipeline of opportunities has aided DOX to sustain for future long-term growth. 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, as compared to $3.975 billion reported in the year0ago period. 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. The company’s managed services went up ~10% year over year in 2019, driven by the continued ramp-up of managed transformations at several customers in different geographies.

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 the ability to tap growth opportunities in days ahead on the heels 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. It is worth noting that DOX recently completed the acquisition of 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 finalized by the end of FY20. By bringing Openet to its worldwide customer base, DOX will be able to strengthen its capabilities in open cloud and the 5G network.

Looking at the performance over the period of FY15 to FY19, the group recorded revenue growth at a CAGR of 2.9%. Also, net income over the same time period increased at a CAGR of 1.8%.

Past Performance (Source: Company Reports)

With the ever-rising conjunction of wireless and Pay TV offerings, the company is witnessing 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 Limited over the years, and the company anticipates the same to be continued in the future.

3QFY20 Key Results for the Period Ended 30 June 2020: During the quarter, the company reported non-GAAP earnings of $1.07 per share, down from $1.19 per share reported in prior corresponding period. Revenues during the quarter came in at ~$1.03 billion, up marginally 0.1% year over year. Reported revenues also exceeded the midpoint of the company’s guided range of $990-$1,040 million. 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. Revenue for quarter also consisted an adverse foreign currency impact of ~$3 million relative to the 2QFY20. 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.

3QFY20 Key Highlights (Source: Company Reports)

DOX Rides on Geographical Diversification: In 3QFY20, for North America, the company reported revenue of $685.9 million, as compared to $643.9 million reported in 3QFY19. Also, for Europe, the company reported revenues of $145.4 million in 3QFY20, 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.

Other Key Numbers: Revenues from Managed Services increased from $578.1 million reported in 3QFY19 and came in at $604.5 million, during the quarter. The twelve-month backlog, stood at $3.48 billion at the end of 3QFY20, up 2.4% year over year. It is worth mentioning that the company will continue to maintain its backlog and its implementations, which is likely to support top-line growth in the future.

Geographical Revenue, Managed Services & Backlogs Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Details: At the end of 30 June 2020, the company reported cash and cash equivalents of $1.19 billion, with total debt amounting 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 shareholders, which in turn provides a boost to the bottom-line.

Latest Updates:

• On September 22, 2020, Amdocs Media Division, Vubiquity, inked a long-term content services collaboration with the Liberty Global Group and its affiliates across Europe. The deal incorporates the development of the long-standing association between Virgin Media and Vubiquity. Per the multi-year contract, Vubiquity will offer content licensing and digital supply chain solutions to Liberty Global Group, to aid the latter’ consumer video and TV platforms.

• 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 post-paid and FTTH consumer business.

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 Jun’20 EBITDA margin at 18.9%, higher than the industry median of 16.3%. Operating margin during Jun’20, stood at 14.4%, higher than the industry median of 9.3%. Net margin in the same time span stood at 11.7%, higher than the industry median of 4.3%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s business is dependent on a limited number of key customers, of which AT&T accounted for 23% and 27% of its total revenues in FY19 and FY18, respectively. Therefore, the loss of any one of its customers could negatively impact the results in the future. Also, the company is 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 along with faces stiff competition from peers are persistent challenges to the company.

Outlook: For 4QFY20, the company expects revenues to be in the range of $1.015 billion and $1.055 billion. Non-GAAP 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: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales 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 $57.04 with a market capitalization of ~$7.59 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. On a technical front, the stock of DOX has a support level of ~$56.62 and a resistance level of ~$60.84. The stock gave negative returns of ~13.5% and ~5.5% in the last one year and one month, respectively. Considering the above factors, we have valued the stock using an EV/Sales 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 $57.04, down 1.64% on 23 September 2020.

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

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