Q2 2022 Amdocs Ltd Earnings Call
Good day and thank you for standing by welcome to the Q2 2022 Amdocs earnings conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your first speaker today, Matthew Smith head of Investor Relations, Sir you may begin.
Thank you operator before we begin I need to call your attention to our disclaimer statement on slide two of the presentation and note that some of our comments today may be forward looking statements and all subject to risks and uncertainties as 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 6K.
Participating on the call with me today are chairman, President and Chief Executive Officer of Amdocs Management Limited and Tomorrow I could pull at the game joint Chief financial and operating officer.
To support today's earnings call, we all 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 shoot well recap our business and financial achievements for the second quarter fiscal 2022, and we'll update you on the continued progress.
We have made executing against our strategic growth framework.
We will finish by commenting on our financial outlook after which tomorrow will provide additional details on our second quarter financial performance and guidance as a reminder, our comments today will refer to certain financial metrics on a pro forma basis, where applicable to provide you with a sense of the underlying business trends, excluding the financial impact of go to market, which we divested on December 30.
2020, and with that I'll turn it over to <unk>.
Thanks, Matt and good afternoon to everyone joining us on the call today.
I'd like to begin on slide six with a huge thank you installed thousands of employees worldwide. Following a great Q1 or second quarter was also very strong and I could not be more pleased with our operational and financial execution for the fiscal year to date.
Last quarter, we provided the guidance for constant currency revenue growth of between 6% to 10% over the next three fiscal years and on the strength of our recent performance I can only say, it's we are tracking at the high end of this range on a pro forma basis for the current fiscal year to date.
Believes such great performance is a testament to our market leadership and the successful education.
Hardly a relevant growth start to lead the Q&A to which belongs to our global and diverse base of incredibly talented employees across all dimension of our business I could not be prouder, Los Angeles people and I'm highly confident as we are well positioned for footsore success.
Now moving to slide seven let me address our second quarter operational highlights to begin overall business activity was very strong as we continue to enable our customers' strategy to provide a superior customer experience by supporting the highly necessarily investment insight Jean quoted monetization.
Cloud adoption digital modernization and network automation.
Davita was particularly felt particularly high in North America with Amdocs ease in the heart of the major strategic long term investments were carrying though with a large and long standing customers for.
For instance, we continue to support the multiyear modernization of AT&T consumer domain, which is the coal to its strategic focus on five G in Farnborough connectivity.
So glad to be called powerful T. Mobile's modernization journey, where we are implementing a lead generation product and cloud services that we support T mobile <unk> long term competitive position and the realization of the synergies related to disciplined integration.
We also maintained robust sales momentum in Q2, we extended our long standing managed services relationship with Bell, Canada for another five deals as we continue to support its cloud transformation.
We want a digital information project with Vodafone Ziegel, neither lands and a new five G policy deal with a tier one European operator, which expand our existing footprint at this customer.
Additionally, we signed a partnership with PDT in the Philippines with a three year extension of our existing managed services agreement. In addition to future projects to support <unk> cloud Xiaomi.
I was especially pleased we got a superb execution in Q2.
We set another record for number of project biased when deployed in Mongol achievements, we completed a major digital transformation program for two U K enterprise customer segments, where we move from scoping to building the cloud infrastructure and go live in just 15 months such accomplishments leading false.
Well what mutation for project delay really in selection our ability to maintain a high win rate in the market.
It's a final highlight we further accelerated our R&D investment this quarter underscoring our commitment to continuously bring cutting edge technology and world class border can protocols to the markets at mobile World Congress in Barcelona. This quarter, we launched C is 'twenty two our latest open and modular cloud native.
Five G suite.
Also the twill pandemic it was exciting to experience the positive customer I know G. N Tcl show and that was highly encouraged by the strong feedback we received in respect to our offering and strategic direction throughout it doesn't youll see living executive meetings, we hosted during Dewey.
Great operational performance translated to very strong second quarter results the highlight of which we could can be seen on slide eight.
Record revenue of 1.15 billion market third straight quarter in which pro forma gross was exceeding 10% year over year on a constant currency basis.
We also achieved record 12 months backlog was 3.89 billion up 10% for me either go in driven by the robust sales momentum I highlighted earlier on.
On the bottom line, we delivered non-GAAP earnings per share of dollar 50, full said, which was above the high end of guidance, mainly due to a lower than expected anticipated non-GAAP effective tax rate for the quarter.
Turning to slide nine let me say, a few words about amdocs exposure to Russia, and Ukraine, and our response to the room and its own crisis unfolding.
From billions perspective, Amdocs exposure to Russia, and Ukraine is immaterial and roughly 1%.
Of revenue and its impact is already reflected in our guidance.
Furthermore, we believe we have taken all necessary steps to ensure we are fully compliant with the applicable sanctions and export control and we have stopped all new sales of our product and services in Russia.
We also we have also taken steps to ensure the well being of the employees and contractors, we have in the region and to spend to support those who wanted to leave with our families. Additionally, we are actively providing humanitarian aid in Ukraine in neighboring countries.
Our many initiatives Amdocs is spot open donation campaign to provide essential services via unit chips too.
Two vulnerable children in affected families. We are also offering financial support to Amdocs employees, well hosting Gertrude G families.
Now, let's take a closer look at our recent progress executing against our four pillar growth strategy cloud say Gee digital and network automation is shown on slides 10 and 11.
Beginning with cloud services T. Mobile has recently implemented Amdocs business assurance solutions on AWS, lithology, and cloud and artificial intelligence. This implementation will help to drive merger synergies with sprint by accelerating the immigration to combined customer base and is part of the long loud you'll digital transformation.
<unk> and extended hybrid cloud operation, we are supporting for T mobile under the multiyear managed services agreement, we announced lusty additions.
Additionally, we are proud to say that we recently extended our long term standing relationship with Bell, Canada is part of a new five year managed services engagement, so enriches abuses platform with a real thumb Angel and cloud ready ecosystem as part of its continued cloud transformation.
Switching to five do you monetization we are excited to announce a five year deal with a tier one European operator, which will implement amdocs policy and control solution on cloud infrastructure to support its new five G Standalone network.
<unk> stand alone network will be central to unleashing the full potential of five G and Amdocs policy control solution is a key element. It will enable these customers to launch cutting age five G services and business model for each residential and business customers, while reducing operational costs.
Within digital we expanded our long term standing relationship with Vodafone Z go into Nederland, which has selected Amdocs Bullock and services for a wide waging digital transformation projects.
Amdocs wouldn't be great fixed line customers to a platform previously big by Amdocs for wonderful jingles mobile customer mills, thereby resulting in a unified customer journey shorter average handling times reduce time to market and cost saving linked to the retirement of its old fixed line.
Stuck.
Q2 was also a productive quarter and network automation in month among the customer highlights. We are delighted to announce that we have continued to expand our relationship with Comcast, which has selected amdocs for a multiyear network automation testing deep.
In Europe , we signed its first ever agreement with Vodafone, Albania, which expanded previously announced deal to provide inventory next generation Oss capabilities for Vodafone mobile feats and cable offering in Germany, Romania, and Czech Republic.
We also successfully completed our network inventory modernization project with Fastweb, which will enable the Italian service provider to improve time to market with innovative new services in the five gene cloud area.
It's just final comment let me mentioned Amdocs media, which has been selected to deploy of Amdocs market, one such platform on the public cloud for Virgin media.
Yeah.
Market, one will give consumers the ability to add entertainment subscription to their monthly bill or enjoy them as part of a bigger bundle, we still existing broadband mobile and cable packages.
Additionally, our religion radio two we'd be able to easily expand its growing portfolio or new OTT partners H, it's looks to further improve customer loyalty.
With all these exciting project provides another sign of positive customer traction Bull market, one which has already been selected by T Mobile AT&T, Mexico and others.
Now turning to our financial outlook on slide 12.
As I said at the beginning of my remarks, I could not be more pleased with our Q2 performance. Our sales momentum is strong and we see a large expanding pilot of opportunities ahead of us, which we expect it to monetize by level G.
Weighted markets unique technology.
Our unrivaled track record of execution.
Our highly skilled and talented employee base, which is focused on delivering value to our customers worldwide.
Wrapping everything together, we are confident that amdocs can deliver annual revenue growth within the range of 6% to 10% on a constant currency basis. Although this over the three fiscal years 2022 to 2024 ended and as a company, we have and until the new area of citizens growth.
Regarding fiscal year 2022, specifically, we are now tracking at the high end of our revenue growth guidance range of 8% to 10% on a pro forma constant currency basis.
Similarly, we are also tracking at the high end of our diluted non-GAAP , earning per share growth guidance range of 9% to 12% on a pro forma basis in fiscal year, 2022, which firmly position us to deliver double digit expected total shareholder return for the second year Rodney.
Including our dividend is a 42% with that let me turn the call to Tamara remarks. Thank.
Thank you sure can allow everyone. Thank you for joining us as a reminder, my comments today will refer to certain financial metrics on a pro forma basis, which exclude the financial impact of open market, which we divested on December 31 2020.
Turning to our financial highlights on slide 14, I'm very happy with our exceptional performance in the second fiscal quarter, which followed an already strong start to the year.
Record Q2 revenue of the $1 billion 15 was up 10, 1% year over year, driven by our best ever quarter in North America, and sequential growth in Europe and rest of the world.
He was in line with the high end of guidance, including an immaterial impact from foreign currency movements compared to our guidance assumption.
Moving down the income statement, our Q2 non-GAAP operating margin of $17 six was up 10 basis points sequentially and unchanged compared with a year ago as accelerated R&D investments and the effect of a competitive labor environment will more than offset by a relentless focus on operational excellence.
Including the ongoing implementation of automation and other sophisticated tools designed to continuously improve efficiency.
On the bottom line non-GAAP diluted EPS of $1 54 was above the high end of our guidance range.
Diluted non-GAAP EPS includes a non-GAAP effective tax rate of one 6%, which was much lower than we anticipated for the quarter, primarily due to release of tax reserves connected with funding decisions for the construction of our new campus in Israel.
That benefit was among the scenarios contemplated in our non-GAAP effective tax rate guidance for the full fiscal year 2022 would you still anticipate it to be within a range of 13% to 17%.
Diluted GAAP EPS was $1 28 for the second fiscal quarter, which was also above the guidance range of 96 to $1 point, though for primarily due to the lower effective tax rate, we anticipated for the den we anticipated for the quarter.
Moving to slide 15 robust sales momentum during the second quarter translated to record high 12 months backlog of $3 $89 billion, which was up 10% from a year ago on a sequential basis 12 months backlog was up $60 million as compared to December 31.
As a reminder, our 12 months backlog includes anticipated revenue related to contracts estimated revenue for managed services contracts letters of intent maintenance and estimated ongoing support activities.
Father clarify a new deal with a customer will only be included in 12 month backlog once contracts are signed.
Given the overall nature of the work included our 12 months backlog has traditionally served as a good leading indicator of our business having consistently average around 80% of forward looking 12 months revenue over the years.
Turning to Slide 16, Q2 was also a record high quarter for revenue for managed services engagements, which grew 5% from a year ago equating to roughly 58% of total revenue.
Multiyear managed services engagements underpin the resiliency of our business with recurring revenue streams close to 100% renewal rate and expanded activities, which may also include large scale digital transformation projects with existing customers.
For instance, we are.
We recently extended our managed services relationship with Bell, Canada for another five years through 2027.
As we continue.
Continued to support its cloud transformation.
<unk>, which strengthened our partnership with the team the Philippines, well, declaring operator has awarded Amdocs a three year extension of our existing managed services agreement with 2028. In addition to future project to support the entities cloud journey.
Turning to the balance sheet and cash flow as you can see in slide 17 DSO.
DSO of 81 days increased by two days year over year and two days sequentially in Q2.
Mainly reflecting higher invoicing levels triggered by a record number of milestone deliveries achieved in the quarter.
Additionally, the net positive difference of deferred revenue and Unbilled receivables further improved in Q2.
Altogether, we generated normalized free cash flow of $160 million. This was a strong performance considering that amdocs speak casual tends to be seasonally weaker in our second fiscal quarter due to the timing of annual bonus payments.
We believe we are well on track to achieving our target of $650 million for the full fiscal year 2022.
Overall, we ended the quarter with a strong cash balance of approximately $856 million, including added it barring of roughly $660 million.
Our balance sheet remains strong and with ample liquidity, we expect to be in a good position to continue to support our ongoing business needs, while retaining the capacity to fund our future strategic growth investments as and when the right opportunities arise.
Turning to capital allocation on slide 18.
As you can see the first chart, we repurchased $130 million of our shares in the second quarter.
Clothing cash dividend payments of 44 million really sound $174 million to shareholders in Q2, equating to more than 100% of normalized free cash flow.
We expect to return a majority of our normalized free cash flow to shareholders for the full fiscal year 2022.
As an added point, our normalized free cash flow outlook of 650 million assumes the conversion rate of roughly 100% of non-GAAP net income, which is consistent with our long term average.
Normalized free cash flow excludes anticipated capex of about $131 million in relation to development of our new Israeli campus consistent with our previous expectation.
Now turning to our outlook on slide 19.
The prevailing level of macroeconomic business and operational uncertainty remains elevated include.
Including with respect to the magnitude and duration of the COVID-19 pandemic.
Third quarter and full fiscal year 2022 revenue guidance reflects what we consider to be the most likely outcome based on the information we have today, but we cannot predict all possible scenarios.
That said we are tracking in line with the high end of our full year fiscal 2022 revenue growth guidance of 8% to 10% on a pro forma constant currency basis, which includes positive contributions from each of our three operating regions of North America, Europe and rest of the world.
Our annual outlook includes third fiscal quarter revenue within a range of 1 billion point 14, two 1 billion point 18, the midpoint of which represents the most likely outcome based on our internal analysis equating to healthy growth of roughly 9% as reported from a year ago.
On a reported basis.
What are your revenue growth is also tracking in line with the high end of our guidance range of five to seven 2% year over year.
Our reported revenue outlook anticipates, an unfavorable foreign currency impact of approximately 80 basis points year over year as compared with our previous expectation of 60 basis points.
Moving down the income statement, we anticipate non-GAAP operating margin to track roughly in line with the midpoint of our annual target range of 17, two to 17, 8% in the first and the third fiscal quarter and the fourth quarter.
This outlook continues to assume an accelerated pace of R&D investment to support our customers in line with our strategy balanced with our constant focus on operational excellence as mentioned earlier.
Below the operating line, we anticipate this foreign currency fluctuations will continue to impact our non-GAAP net interest and other expense line in the range of a few million dollars on a quarterly basis.
We expect that non-GAAP effective tax rate in the third and fourth fiscal quarters will be above the high end of our annual target range of 13% to 17% for the full fiscal year 2022, we expect our non-GAAP effective tax rate to be within this annual target range of 13% to 17%.
Bringing everything together, we expect to deliver pro forma non-GAAP diluted earning per share growth in line with the high end of our guidance range of 9% to 12% for the full fiscal year 2022.
On a reported basis, we also expect non-GAAP diluted earning per share growth in line with the high end of our guidance range of seven 3% to $10 three year over year.
Overall, we are firmly on track to deliver double digit total shareholder return for the second fiscal year running in 2022 excuse me the higher end of our pro forma non-GAAP, earning per share growth guidance, plus all dividend yield.
With that back to you shortly.
Thanks, Tamara well if.
As you can probably tell from our remarks today, we are excited by our first half performance. Our recent strategic progress and the strong outlook. We have provided for the full fiscal year with that we're happy to take your questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone again that is star then the number one.
We draw your question press the pound key.
In respect of time constraint, please be reminded to limit yourself to one question and one follow up only.
Please standby, while we compile the Q&A roster.
Your first question will come from Ashwin sure Vikar with Citi. Your line is open.
Thank you.
And congratulations on the solid quarters here.
King and so maybe I can ask both my questions together.
The first one is just given the trends in the solid backlog is it.
Would you assume this sort of growth rate could continue into fiscal 'twenty three and in two weeks here. This is a directional question I'm, obviously not looking for anything to your guidance.
And then the second question.
Partially related.
And Bell, Canada renewal.
Is there any price discounting or revenue margin impact revenue or margin impact that we should worry about or are you just absorbing this kind of impact.
Thank you Ashley let me start with the second question about Bell, Canada and <unk>.
I think we have discussed before we Netherlands U N agreement as you know and what we call an apples to apples.
So the new agreement is a comprehensive agreement Boswell managed services and the boastful way cloud transformation.
And we are very happy with this agreement and does not imply any pressure at all on all on our numbers.
Regarding the looking forward and how we should read into the 12 month backlog was a leading indicator.
So by definition. It is 12 months backlog, meaning it covers half two of the current fiscal year in the first half of it.
The next fiscal year and definitely the fact, we're tracking already for several quarters at the neighborhood of 10% year over year growth of the backlog its showing the great conversion and momentum we're seeing in signing new business in continuing to say this 100% renewal rate and managed services.
We think that we talked about which gives us strong confidence as you said, it's a bit too early to guide for 'twenty 'twenty three but the momentum is there. The pipeline is strong. The fact, we are seeing this growth in all the key regions is very encouraging as I said already in the prior quarter Europe is expected to accelerate in the second half of the year.
By the way most of the currency impact we're talking about at the company level is impacting on the Europe numbers. So we.
We believe that on a constant currency basis, Europe is already growing and he is going to accelerate in the second half of the year and also the momentum we are continuing to see in terms of the relevance of the offering we bring to market to the more strategic pillars and the investment areas of our customers as we said before we continue to see all indications of those.
Investment areas, our multiyear investment domain.
Not only the programs we are running already secured for many of these cases for many years also the investment plans, we aren't seeing by dialogue with our customers.
Got it.
Thank you good stuff.
Thank you thanks Ashwin.
Your next question will come from will power with Baird. Your line is open.
Hey, guys. This is charlie or other country well. Thanks for taking the question Tomorrow I'm just looking at the third quarter guidance and our full year guidance and I think if my math right.
It implies that Q4 revenue was down sequentially a bit from Q3 is if I do my math right is that correct and if so what would be the cause of that.
No it's not collect and this is why when we look talking about midpoint, it's not college.
Obviously a.
The reason, we are giving both the range, but also targeting and think very clearly we believe the most likely scenario is that we end the year at the high end of the range of 8% to 10%.
We need to give a range in order to take care of different scenarios that may play out, but we are confident in the outlook that we're giving and no I don't think we should see a sequential decline.
Okay.
Helpful. Thanks.
The short answer is no.
Yes.
And then on the R&D investments that you talked about can you just talk a little bit more about what those investments are going towards.
I mean.
They obviously are giving our position and we see lots of opportunity to continue to enhance all our products to support all the new use cases that will exist and are developing right now both for consumer will be to be.
So eating the network domain monetization platform, it's across the board.
And we always try and as much as we can to to be ahead of the market you know developing a product to be ready.
To take it to market so.
It's mainly in the St pillows, but getting to the next level.
And it capabilities.
Excellent alright, thanks both.
Thank you.
Again, if you would like to ask a question you May press star one on your telephone.
Right.
And I'm showing no further questions at this time I will now hand, it back over to Matthew Smith for closing remarks.
Thank you very much everybody for Raj for joining the call. This evening and if you do have any further questions. Please contact us here in the Investor Relations group without have a great night. Thanks.
This concludes today's conference call. Thank you for participating you may now disconnect.
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