Q4 2024 Amdocs Ltd Earnings Call
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Speaker Change: Thank you for standing by. Welcome to the Amdocs Limited fourth quarter 2024 earnings conference call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during this session you'll need to press star 1 1 on your telephone. As a reminder today's program is being recorded. And now I'd like to introduce your host for today's program, Matthew Smith, Head of Investor Relations. Please go ahead sir.
Speaker Change: Thank you, Jonathan. Before we begin, I need to call your attention to our disclaimer statement on slide two of the presentation. It notes that some of our comments today may be forward-looking statements and are subject to risks and uncertainties, including as described in Amdocs' SEC filings, and that we will discuss certain financial information that's not prepared in accordance with GAAP.
Speaker Change: 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.
Speaker Change: Anticipating on the call with me today are Shuki Sheffer, President and Chief Executive Officer of Andocks Management Ltd. and Tamar Rapaport Dugim, Chief Financial and Operating Officer.
Speaker Change: To support today's earnings call, we are 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, Shuki will recap our business and financial achievements.
Shuki Sheffer: for the fourth quarter and fall fiscal year 2024, and we'll update you on the continued progress we have made executing against our strategic growth framework, including generative AI and our continued sales momentum in cloud.
Shuki Sheffer: Shuki will finish by discussing our financial outlook for the full fiscal year 2025, after which Tamar will provide additional details on our fourth quarter financial performance and forward guidance. And with that, I'll turn it over to Shuki.
Shuki Sheffer: Thank you, Matt, and everyone joining us on the call today.
Starting on slide six.
Fiscal 2024 was another important year in ENDOG's journey.
Shuki Sheffer: My thanks for which goes to our thousands of employees worldwide who continuously serve our customers with innovative software products and services designed to Accelerate the migration and adoption of the cloud monetize next-generation networks
Shuki Sheffer: digitally transform the customer experience and automate their mission critical operations.
Shuki Sheffer: Despite a continuously challenging industry demand environment, the year was notable in several respects.
We expand activities with new and existing customers.
Shuki Sheffer: Winning important deals at AT&T, T-Mobile, Charter, Tarter and Rogers in North America Vodafone, Ziggo in the Netherlands, Excel and PLDT in Southeast Asia and NTT in Japan
Shuki Sheffer: We achieved double-digit growth in clouds which now accounts for roughly 25% of total revenue and further extends our industry-leading position in Gen-AI.
Shuki Sheffer: Managed services deliver another record year. We execute our plan to accelerate profitability, and we return more than 100% of free cash flow back to shareholders so our shares are purchased in dividends.
Shuki Sheffer: Summarizing our fiscal 2024 financial performance on slide 7, we delivered record revenue of $5 billion, up 2.7% from a year ago in constant currency.
Shuki Sheffer: Achieved non-gap operating margin of 18.4%, an improvement of 60 basis points year-over-year and met our commitment to deliver double-digit total sharehold return for the fourth consecutive year in fiscal 2024.
Shuki Sheffer: reflecting non-gap earnings per share growth of 9% plus our dividend yield.
Shuki Sheffer: As to the fourth quarter, we close the year with strong sales momentum, which includes several important deal-wits.
Speaker Change: At T-Mobile, we want significant projects to deploy Amdocs' next-generation monetization platform under the major multi-year vehicle transformation program we are supporting.
Speaker Change: Strong sales momentum continues in the cloud, with key awards at AT&T, Infinite in Japan, and Vodafone Italy. And we maintain a high renewal rate in managed services, signing expanded multi-year engagement with a Tier 1 operator in Southeast Asia and Telia in Denmark.
Speaker Change: I am also encouraged by the market-rapid adoption of MDoc's SaaS-based platform ConnectX.
It's the comprehensive solution for MVNOs and MVNEs.
Speaker Change: And, we are making steady progress in generative AI, where we have expanded activities to support T-Mobile's mission to revolutionize the customer experience.
Speaker Change: Regarding Project 4 execution, Q4 included successful product deployments at AT&T, T-Mobile, 3OK, A1 Bulgaria, PDT in the Philippines, among others.
Speaker Change: At AT&T, we achieved major production milestones related to the consumer modernization and simplification program.
Speaker Change: commenced the migration of applications from mainstream to the cloud under our new five-year agreement and collaborates with Cricut wireless to implement a new commission calculation system.
Speaker Change: Our reputation for consistent execution also extends to our customer industry consolidation strategies.
Industry consolidation sometimes creates short-term business uncertainty.
But often, results...
Speaker Change: in long-term opportunities for Amdocs to bring our post-merger integration and modernization expertise as we see following Colt's acquisition of Lumen EMEA business last year, and for other U.S. and European customers that are currently progressing consolidation strategies.
Speaker Change: Now, moving to slide 9, we remain confident in our multi-pillar growth strategy, which is designed to provide our customers with the market-leading innovation and technology they need to accelerate the journey to the cloud.
Did it transform the customer experience from consumer and B2B?
monetize the future market potential of next-generation networks
Speaker Change: deliver dynamic connected experiences by streamline automating complex network ecosystems and to simplify and accelerate adoption of generative AI.
beginning with the clouds.
Speaker Change: Andorff's unique ability to support complex multi-year cloud journeys as a primary technology partner continues to drive strong sales momentum in P4.
Speaker Change: Amdocs was recently selected to modernize Vodafone Italy's business platform by implementing cloud-ready and cloud-native solutions and migrating its business support system to the Microsoft Azure cloud.
Speaker Change: Such an under an extended five years agreement this modernization initiative will empower Vodafone Italy to deliver faster higher quality and next generation services and experiences to its customers enhance operation efficiency and reduce costs.
Speaker Change: Additionally, we expanded our relationship with NTT Infranet in Japan. We selected Amdocs to modernize and migrate core system applications to the cloud under a business transformation and managed services agreement that will enable great cost control, increased efficiency, and improve business capabilities.
Speaker Change: Cloud accounts for roughly 25% of Amdocs total revenue in fiscal 2024.
Speaker Change: And with this recent award adding to our strong book of business and in a traffic pipeline of opportunities, we are positioned for another year of double-digit growth in cloud in fiscal 2025.
Moving to digital modernization on slide 11.
Speaker Change: mvne.pl, a digital-driven mobile virtual network enabler in Poland, a selected MDocs telco in-a-box SaaS-based connected solution under a five-year agreement to launch an innovative telecom ecosystem.
Speaker Change: It empowers communities across the country to create and manage their own telecom brands with unprecedented speed and affordability.
We are delighted by Dorothy's adoption of ConnectX.
Speaker Change: which has positioned Amdocs in the forefront on the MV&E and MV&O market with the growing customer leads including AT&T and RISD, WIRELESS in the US, Winitin in Brazil and Melon Digital in South Africa.
Speaker Change: Additionally, Andok SAS Bait bill experience solution was recently chosen by Convera, a global commercial payments leader, to easily simplify the billing experience and improve customer satisfaction.
Speaker Change: We are excited to be working with Convera, who with this award demonstrate that Amdoc solutions can be applicable for enterprise scale customers beyond telco when suitable opportunities arise.
Speaker Change: Turning to monetization on slide 12. Amdos continues to deliver cutting-edge technology to help service providers monetize their investment in next generation networks including wireless, 5G standalone, fixed wireless, access and fiber.
Speaker Change: On top of the multi-year digital transformation we are delivering for T-Mobile, Amdocs has been selected for a significant project to deploy our next generation cloud-native, real-time monetization offering
Speaker Change: giving T-Mobile customers the freedom to define their buying experiences while delivering complete business flexibility on a single, all-inclusive platform.
Speaker Change: We also expanded our partnership with Altice SFR, one of France's leading telecom providers, on a five-year deal to transform the mobile and fixed-line B2C billing system into a single, unified platform.
Speaker Change: This consolidation will reduce operating costs and improve efficiency while unlocking additional monetization potential and enabling the delivery of a seamless enhanced customer experience.
Moving to network automation on slide 13.
Speaker Change: Anders is in a prime position to support the design and build of the fiber network, investment in the U.S. and globally, having just introduced our next-generation fiber offering, which capitalized on a recent acquisition in this domain, including Procom Consulting in fiscal 2023.
Speaker Change: Demonstrating the breadth of capabilities, a leading provider of fiber optic internet service in the U.S.
Recently chose Amdocs.
Speaker Change: to effectively manage and streamline complex fiber rollout, enabling it to accelerate sales, enhance agility, and realize new monetization opportunities in the fiercely competitive fiber-bonded market.
Speaker Change: MDoC's growing market recognition in the network domain is also reflected by recent industry works.
Speaker Change: including Network Technology Vendor of the Year at the 2024 Network-as-a-Service Excellence Awards and the prestigious Orchestration Award at FutureNet Asia 2024 with Amdoc Service and Network Automation has now won two years running.
Turning to slide 14.
Speaker Change: Amdocs continues to extend its position as an industry leader, able to help service providers unlock the transformative potential of generative AI.
Speaker Change: First, our flagship CS24 now embeds CS co-pilots across Amdocs catalog, monetization, intelligent networking, and many other components of the suite, while several customers are already utilizing such capabilities in production.
Speaker Change: Second, we have collaborated with NVIDIA to enhance our generative AI platform Maze with innovative new agentic capabilities that deliver immersive customer experiences with real-time interaction and visualization.
Speaker Change: Our first commercial platform awards are also materializing as we successfully progress many global production trials based on domains across several key domains.
Speaker Change: As we alluded last quarter, Eti Salat, by E, in the United Arab Emirates, is selected to integrate Gen-AI into its business systems.
Speaker Change: Leveraging EMAs, this expanded collaboration with Etisalat opens possibilities for new revenue opportunities, business efficiencies, and improved customer experience for the telecom pillar of Etisalat.
Speaker Change: Third, M-DOCS continues to evolve our data, AI, and generative AI platform with new capabilities designed to meet the needs of the market and to simplify and enable generative AI adoption.
Speaker Change: The platform is now equipped with custom experience insights, CXI, embedded analytics, and a unified generative AI foundation.
Speaker Change: allowing service providers access to actionable customer experiences insights based on real-time data harnessed from any source.
Our data AI and generative AI platform is ready.
Speaker Change: rallied by several service providers around the world, including Lobe Telecom in the Philippines, which recently selected Amdocs Data Intelligence Services.
Speaker Change: Similarly, we recently signed an expanded agreement to support our Data One Intelligence platform at T-Mobile, which is collaborating with OpenAI to revolutionize customer experience and deliver personalized services with the first-ever AI-enabled platform.
intent-driven decision customers.
Before addressing our outlook,
Speaker Change: Last quarter, we mentioned that we have been proactively evaluating Amdocs' portfolio of products, services, and business lines in relation to our strategic investment priorities for fiscal 2025.
As a result of this review process,
Speaker Change: In fiscal year 2025, we've already begun to phase out several low-margin, non-core businesses, activities that are becoming commoditized and hold little potential for long-term value addition or profitability enhancement.
Speaker Change: While Tamar will provide further comment in their remarks, we believe this action will reinforce our level of business visibility, including a higher share of revenue for long-term managed service engagements.
Speaker Change: This move also expected to sharpen our focus on higher margin strategic priorities like cloud, next-generation monetization platform, and generative AI where we are well placed to further extend our communication industry leadership with our commitment to innovation.
Speaker Change: Wrapping everything together on slide 16, let me comment on our outlook for the coming year.
Speaker Change: We enter fiscal 2025 as an industry leader with a unique competitive position, strong 12-month backlog visibility.
Speaker Change: and a high win rate. Moreover, we believe Amdocs is well positioned to monetize healthy pipeline of market opportunities while navigating a continuously challenging demand environment.
Speaker Change: Adjusting for the phase-out of the low-margin, non-cooperative activities I just discussed, we expect pro forma revenue growth of between 1% to 4.5% in constant currency in fiscal 2025, including another year of double-digit growth in clouds.
Speaker Change: For the first time in fiscal 2025, a significant milestone and a better reflection of the platforms, technology, and IT-based innovation we are delivering across our strategic areas of focus.
Speaker Change: Combined with robust early-to-cash conversion, we expect to deliver double-digit expected total sharehold return for the fifth year running in fiscal 2025.
Speaker Change: Assuming the midpoints of non-gap diluted earnings per share outlook of between 6.5% to 10.5% plus our dividend yield.
Tamar: With that, let me turn the call over to Tamar for her remarks.
Tamar: Thank you Shuki and hello everyone. Thank you for joining us.
Tamar: Record Q4 revenue of approximately $1.26 billion was up 2.1% year-over-year in constant currency.
Tamar: On a reported basis, revenue increased 1.7% from a year ago and was slightly above the midpoint of guidance, adjusting for a positive impact from foreign currency movements of approximately $3 million compared to our guidance assumptions.
Tamar: From a geographical perspective, we delivered year-over-year growth in North America, Europe, and the rest of the world this quarter.
Tamar: Europe and the rest of the world grew 5% year-over-year, while North America grew modestly by 0.2%.
Tamar: Shifting down the income statement, non-GAAP operating margin improved to 18.7% in the fourth quarter, up 90 basis points year-over-year, and 10 basis points sequentially.
Tamar: Profitability in Q4 was consistent with the high-end of our target range for the year, reflecting the cumulative benefits of discipline, resource management, automation, and tools leveraging AI as well as generating AI to drive cost savings and efficiency gains across the board.
Tamar: Interest and other expenses amounted to roughly $7 million in the fourth quarter, including adverse foreign currency movements.
On the bottom line, NANDGAP diluted EPS.
Tamar: of $1.7 was in line with the midpoint of guidance and included a non-gap effective tax rate of 14.8%, which was consistent with our annual target range of 13 to 17%.
Tamar: You look at GAAP EPS was $0.76 for the fourth fiscal quarter. This included the charge relating to our current restructuring program of approximately $83 million.
Tamar: or 64 cents per share, without which diluted GAP EPS would have been at the higher end of guidance range of 134 to 1.42.
Tamar: Summarizing our full fiscal year 2024 performance on slide 19, revenue was up 2.7% in constant currency, consistent with the midpoint of guidance.
Speaker Change: As Shuki referenced, we achieved strong double-digit growth in cloud, which accounted for roughly 25% of total revenue this year.
Speaker Change: On a geographical basis, we delivered record revenue across all three operating regions, with North America up slightly and Europe and the rest of the world growing by 3.3% and 8.6% respectively on a reported basis.
Speaker Change: highlighting the ongoing diversification of our business and growing traction international markets, two of our top ten customers for new logos added in the last ten years.
Speaker Change: Additionally, the number of countries in which we generate annual revenue of more than $40 million has almost doubled over the 10 years. Some of those added to the list include Philippines, Italy, and India.
The
Speaker Change: Overall, we delivered non-gap diluted earnings per share growth of 9% in fiscal year 2024, consistent with the midpoint of guidance and driven by sustained revenue growth, improved operating profitability, and the benefits of our share repurchase activity.
Speaker Change: Turning to slide 20, managed services revenue was a record $2.9 billion in fiscal 2024, up 1.7% from the prior year, and equivalent to approximately 58% of total revenue.
Speaker Change: During Q4, we signed important cloud migration deals with Vodafone Italy and Entity Infranet, both of which were structured under expanded multi-year managed services engagements.
Speaker Change: Additionally, we are extending our collaboration with Telia Denmark under a long-term agreement to provide managed services for their billing platforms through 2032.
Speaker Change: This renewal will enhance Teledyne-Denmark's operational efficiency, empowering them to deliver more streamlined services to their customers.
Speaker Change: Now turning to the balance sheet and cash flow highlights on slide 21.
Speaker Change: DSO over 74 days increased by 5 days year over year and were unchanged sequentially.
Speaker Change: The sequential increase in unbilled receivables net of deferred revenue was $49 million in Q4, aggregating the short-term and the long-term balances.
Speaker Change: As a reminder, the net difference between unbilled receivables and deferred revenue fluctuates from quarter to quarter, in line with normal business activities, as well as our progress on significant multi-year transformation programs we are currently running in North America.
Speaker Change: Reflecting strong execution, free cash flow before restructuring payments was $694 million for the full-year fiscal 2024, roughly in line with our annual guidance target of $700 million.
Speaker Change: Including restructuring payments of $75 million, reported pre-cash flow was $619 million.
Speaker Change: Overall, we ended the fiscal year with a strong balance sheet, including a healthy cash balance of approximately $500 million and aggregated borrowings of roughly $650 million.
Speaker Change: We have ample liquidity to support our ongoing business needs while retaining the capacity to fund our future strategic growth.
Speaker Change: Turning to capital allocation on slide 22, we repurchased $120 million of our shares in the fourth quarter and paid cash dividends of $55 million.
Speaker Change: Overall, we returned a total of $775 million to shareholders for share repurchases and dividends in fiscal 2024, significantly exceeding freight cash flow.
Speaker Change: Looking ahead, we expect free cash flow between $710 million to $730 million in fiscal 2025, which does not include additional payments we expect to make under our current restructuring program.
Speaker Change: A free cash flow outlet equates to a conversion rate of more than 90% relative to expected non-GAAP net income and translates to a healthy free cash flow yield of roughly 7% relative to Amdo's current market capitalization.
Speaker Change: Regarding our capital allocations in fiscal year 2025, we expect to return the majority of our free cash flow to shareholders.
Speaker Change: This includes dividends for which we are pleased to announce a proposed increase of 10% in our quarterly cash payments to a new rate of $0.527 per share, subject to SHELD's approval at the annual meeting in January.
Speaker Change: Turning now to slide 23. As mentioned last quarter, we have continued to invest in our strategic priorities while also evaluating ways to optimize our existing portfolio of products, services, and activities.
Speaker Change: Following a comprehensive review, we have already started to phase out several low-margin, non-core business activities that are becoming commoditized and hold little potential for long-term value addition or profitability enhancement in the future.
These activities were barely accretive to net income.
The activities being phased out include, among others,
Speaker Change: Certain low-margin software and hardware partner activities, including phase-out of some on-prem software and hardware infrastructure and other legacy-type activities, as we focus more on cloud-related infrastructure and Gen-AI partner infrastructure.
Speaker Change: The ubiquitous transactional video on demand business is another part of that, where we see a decreasing demand.
and non-core subscription services.
Speaker Change: To provide some added context for our decision, AMBOKS has historically demonstrated the discipline to optimize our business activities in response to market conditions and ever-changing telecommunications landscapes.
Speaker Change: During the 2010-2015 timeframe, for instance, we managed a gradual decline of our historical Yellow Pages directory business, which we chose to hold on
Speaker Change: while optimizing for positive free cash flow despite a persistent top-line headwind.
Speaker Change: As another more recent example, in fiscal 2021, we announced the divestiture and sale of OpenMarket, a rapidly commoditizing mobile messaging business that we elected to monetize while market conditions permitted.
Speaker Change: Back to our current decision, we believe phasing out certain activities will reinforce our level of business visibility, including a higher share of revenue from long-term managed services engagements.
Speaker Change: It will also sharpen our focus on higher-margin strategic priorities like clouds, monetization platforms, and Gen-AI, where we are well-placed to lead the communication industry through our commitment to innovation.
Speaker Change: Most of all, we believe this move will substantially improve our profitability, a point I will come back to in a few minutes.
Moving to slide 24.
12-month backlog was $4.06 billion at the end of Q4.
Speaker Change: Adjusting comparable periods for the phase-out of the previously discussed business activities
Speaker Change: 12-month backlog was up 2.5% from a year ago and up $30 million sequentially on a performer basis.
Speaker Change: The sequential increase reflects a combination of strong sales momentum in the quarter and ramp up of recently won deals within the next 12 months.
Speaker Change: As I just mentioned, phasing out certain business activities will also improve our overall level of visibility in the year ahead, with 12 months' backlog now equating to roughly 90% of forward-looking revenue, as compared with the historical average of roughly 80%.
Speaker Change: Now, turning to our revenue outlook on slide 25, we are continuing to closely monitor the prevailing level of macroeconomic, geopolitical, business and operational uncertainty, which remains elevated in the current business environment.
Speaker Change: That the first quarter and full year fiscal 2025 financial 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.
Speaker Change: The activities we are phasing out were substantially already seized in the first quarter, and that will naturally impact reported revenue for the full year of fiscal 2025.
Speaker Change: To therefore calculate our fiscal 2025 revenue growth versus fiscal 2024 in a comparable manner, we are providing an adjusted PORFOMA number based on our assessment that revenue from the phase-out activities was roughly $600 million in fiscal 2024.
Speaker Change: To assist your modeling, the regional mix of fish revenue was similar to the overall company.
and contributed roughly $150 million per quarter.
Speaker Change: Overall, we expect revenue growth of between 1% and 4.5% on a POFORMA constant currency basis in fiscal 2025, which does not include the activities we are phasing out.
Speaker Change: The forecast growth rate, midpoint, is similar to the prior fiscal year, includes some inorganic contribution and incorporates another year of double-digit growth in cloud.
Speaker Change: As for the first fiscal quarter, we expect revenue within a range of $1.095 billion to $1.135 billion, which assumes a favorable sequential impact of $2 million from foreign currency fluctuations as compared to Q4.
Speaker Change: Moving down the income statement, I'm excited to share that we expect non-GAAP operating margin within a new and improved range of 21.1% to 21.7% in fiscal 2025.
Speaker Change: The midpoint of which equates to a substantial increase of roughly 300 basis points as compared with our full-year non-GAAP operating margin of 18.4 in fiscal 2024.
Speaker Change: Assuming the midpoint of our new fiscal 2025 guidance, we believe our focus on operational excellence, automation, and the gradual implementation of Gen-AI will support ongoing margin expansion of about 60 to 70 basis points.
Speaker Change: Similar to the size of margin improvements we generated in fiscal 2024, the rest of the margin expansion in fiscal 2025 will result from phasing out non-core low margin business activities.
Our Margin Outlook excludes additional restructuring charges we may take.
Speaker Change: Below the operating line, we anticipate that foreign currency fluctuations and hedging costs will impact our non-gap net interest and other expense lines in the range of several million dollars on a quarterly basis.
Speaker Change: We expect our non-gap effective tax rate for fiscal 2025 to be within an annual target range of 15-17% for the full fiscal year 2025, and for Q1 specifically, above the high end of that annual range.
Speaker Change: Bringing everything together on slide 27, we expect to deliver non-GAAP diluted earnings per share growth of 6.5% to 10.5% in fiscal 2025, the midpoint of which positions us to achieve double-digit expected total shareholders' returns for the fifth year running.
when including our dividend yield of roughly 2.3%.
Speaker Change: With that, back to you, Shuki. Thank you, Tamar. We entered Cisco 2025 with a strong 12-month backlog visibility, supported by our unique business model.
Shuki Sheffer: Across our large, serviceable, addressable market, and with a challenging demand environment, we continue to see healthy pipeline opportunities.
Shuki Sheffer: And with our ongoing commitment to innovation and best-in-class execution, we are positioned to maintain a high win rate across our strategic domain, such as cloud, which continues to grow at a double-digit rate.
Shuki Sheffer: Next Generation Monetization Platforms, and Gen.AI, where we are starting to shift from production pilots to our first commercial roles.
Shuki Sheffer: We are also confident in our ability to drive ongoing margin improvements and a robust error-into-cash conversion, further supporting our commitment to deliver double-digit expected total share returns in fiscal 2025. With that, we are happy to take your questions.
Speaker Change: Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. We ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Tim Horan from OpCo. Your question, please. Hi, guys. Two questions. How integrated were these businesses with, you know, other units? And, you know, how difficult was it to carve it out? Or were they, you know, fairly distinct?
Speaker Change: Secondly, the free cash flow is growing the guidance by 3.5%, but earnings are growing 8.5%. Why such a big gap in the two different growth rates? Thank you.
Speaker Change: So, Tima, those businesses or activities that we decided to phase out from were not much integrated with other things, and we've been working on that for some time now in terms of how to do it in a...
Speaker Change: in the best way, of course, that it doesn't interfere with other activities that we have. So we feel comfortable that this is achievable. And this is why we said we already phased out as we started the fiscal year from these activities.
Speaker Change: And regarding the free cash flow, look, things are not tracking one-to-one in terms of earning growth to free cash flow. But if you look overall...
Speaker Change: on the health of the business, ability to translate earnings to cash. We feel very comfortable looking.
Speaker Change: on the past several years. You can see the good conversion rate. Some years have been over 100%.
Speaker Change: I'm using the 19th percent. So I don't think it's like a mathematical accurate formula because of course we need to build it bottom up based on the
Speaker Change: of the different business activities, the projects, the different deals that we have, and we're trying to give the best outlook that we got in terms of what's happening. But I don't think there's any reason for concern in that, and I don't think there's any fundamental change in the way we run the business.
Speaker Change: in terms of the expectations that we should be tracking on-par earnings to cash over time.
Speaker Change: And then, just can you characterize the backlog and I guess the overall demand levels out there, you know, right now compared to what it was a year or a couple of years ago? Thank you.
Speaker Change: Regarding the overall demand environment, I think we've been we've been seeing on the one hand a lot of excitement around the cloud opportunities that we can provide to our customers and it's
Speaker Change: Cloud-native products that are coming out of our shop to be deployed to the customer including gradual modernization to the cloud that we enable our customers to take with Upgrading current or prior product versions of Amdocs
Speaker Change: migration into the cloud from different legacy platform into the cloud platforms and manage service of cloud ops that we provide our customers so it includes many many aspects including consulting how to do it etc
Speaker Change: So, from that point of view, the demand is strong. In terms of the overall environment, I would say, I'm not seeing relative to the prior quarters we've been discussing, I don't feel there's a reflection point, but we continue to see a strong pipeline.
Speaker Change: In some aspects I would say flow conversion of pipeline to dill.
Speaker Change: As you can see, we have a very strong win rate. We've been winning a lot of deals, both in terms of managed services, renewal and expansion, as well as new transformations and new activities, very strong proof of concepts with the Gen AI that we start seeing, conversion into deals, etc.
Thank you.
Thank you.
Speaker Change: Thank you, and our next question comes from the line of Shlomo Rosenbaum from Stifel. Your question please.
Hi, thank you for taking my questions.
Speaker Change: I just wanted to ask you a little bit, Tamar, about the cadence of revenue growth that you expect in fiscal year 25 because
Speaker Change: the high end of the revenue growth and even just the midpoint.
Speaker Change: implies a tick up in growth over what you've been seeing over the last three quarters and
Speaker Change: maybe you can just talk a little bit about that and how we should be thinking about it. Or is it, if I strip out the non-core businesses that you're exiting, that it really is the same. Just trying to think of what the trajectory of the business really is that you're expecting in the guidance.
Thanks for the question, Shlomo.
Speaker Change: We've been trying to give a comparable number so that's why when we say one
Speaker Change: to 4.5%, that's after taking out the $600 million of the business we are facing out from. So from that point to you, we definitely feel that that's like the real expectation of comparing apples to apples.
Speaker Change: I would say better activity in terms of the pace of conversion of pipeline to build.
Speaker Change: As well to some extent, you know, we can't keep the backlog while we have such a great visibility of 90% entering a year. Of course, there are different moving parts in terms of pace of execution, the activities that we are taking into consideration. So that's also a question there.
Speaker Change: So, is it a, what's it called, is it really, it's basically you have line of sight to the vast majority, it's just a matter of how fast the pipeline is going to move, is that the way to think of it? And in terms of... Yeah, it's a matter of... When you have something in the pipeline, you seem to close the deal, right, it's not guaranteed. So yes, it's about...
Speaker Change: making certain estimations on how fast we can convert the deals into closure, but it's also to some extent about the pace of taking the back to the things that are in the backlog and recognizing it in the next year.
Speaker Change: So while we may have a great visibility entering the year, it's based on certain estimations of how the business we already have in hand is going to convert into revenue, right? So we are taking some scenarios on that as well.
Speaker Change: So should we see the revenue growth accelerating? Is that kind of what I'm looking for? Are we going to see an acceleration of the revenue growth through the year? Or is it just going to be bumpy, bouncing around between quarters? Yes, we will see acceleration of the revenue through the year. It's hard to predict exactly, you know, the exact trajectory.
But yes, overall, this is what to expect.
Speaker Change: And then what should we think about in terms of the restructuring costs that we're going to be backing out of or adding back to free cash flow? Is there a number or that you have a line of sight to or a range that we should think about that so we can get actual free cash flow and then, you know, kind of build back to the adjusted free cash flow?
Speaker Change: I would expect something in the ballpark of what we've had in 2024, so I would take that assumption into consideration.
So we're talking about roughly $70 million, $75 million.
Okay, thank you.
Thank you. Thank you.
Speaker Change: Thank you and our next question comes to the line of Tala Liana from Bank of America. Your question please.
Tala Liana: Hi guys, I normally don't give compliments to management teams on the call but I want to give you a compliment for the transparency and great detail in your presentation, very clear.
Tala Liana: But now comes the tough question. You pay for it now.
Tala Liana: And if I, I want to continue the last question in a different angle. So if I remove the 600 million, I'm still at the same growth rate of last year.
Tala Liana: which means, and that's the midpoint, which means the environment, so I assume, I just assume that the 600 million didn't have a high growth rate.
Tala Liana: So that means the core business, X to 600 million, is likely continuing the same weakness of last year.
Speaker Change: And the question is about the spending environment. I don't have, I don't think, looking at your presentation, which is excellent and understanding what you're doing, I don't think we have any concerns whatsoever.
Speaker Change: with what you offer with your portfolio with your added value, but we do have a concern over the
the spending environment. So can you take us through?
what happened in 2024, meaning...
Speaker Change: How the environment deteriorated, what have you seen in 2024 and your expectations for 2025 when it comes to the spending environment, to the willingness of customers to spend money on this kind of project, and what changes the current weakness that we're seeing?
Hi, Tal. I don't think we see deterioration in...
Speaker Change: from 25 comparing to 24, but on the other hand, we don't see yet a recovery of the environment. So,
Speaker Change: So far, while we have a lot of opportunities, we are experiencing the same demand environment, which means our win rate is high, but it takes more time to convert deals to real projects and revenue and everything.
Speaker Change: On the other hand, as we report, we see a lot of growth on the cloud. So on one hand, we have this growth engine which is working extremely well for us.
Speaker Change: Last year it said 20% of revenue, now it's 25% of revenue, it's going double digit. On the other hand, there is some headwinds in certain respects of legacy systems as we discussed before, so obviously this offsets some of the nice activity that we see in the cloud.
Speaker Change: But overall, to your question, we don't see deterioration in the demand environment.
Speaker Change: It's relatively similar, and you know, we check ourselves also with other people to see that we are not seeing something else, and everyone pretty much sees the same thing, is that we see relatively the same demand environment, while extremely strong in areas like
Speaker Change: and others, and less strong if you talk about the legacy implementation, etc. So I think it's pretty much the same environment, and this is why we didn't feel comfortable although we see a lot of opportunities.
Speaker Change: a lot of opportunities, you know, to change the growth projection for next year. Tal, I do want to add one point, which is about the amazing success we had in 2024 in renewal and expansion of managed services engagements, which is positioning as a base.
Tala Liana: in a strong way and given the fact we are continuing to bring new innovation to the table and a lot of
Tala Liana: of our success in winning new opportunities within existing customers as well as new logos has to do with the fact that a the base is secured and then the fact that we can continue and upsell into these accounts the new innovation we're bringing. So I think that by that
Tala Liana: We are positioned in a very good way, so once the demand environment is accelerating, we are coming with the right offerings, we have the right base of customers, we have secured our long-term agreement, and we can hopefully accelerate the sale of the new things we bring to the table.
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Speaker Change: But, Tamar, if I take the question, is cloud substituting the other 75% of revenues?
Speaker Change: You said that cloud is 25% of revenues. You said it's going to grow double-digit. So if I take 10% on 25%, it's 2.5% growth. So that means almost your entire growth is cloud, and the other 75% of the business is flat. That's just from taking your midpoint give or take.
Speaker Change: So, the question is, is cloud... At the same time... Some of the cloud activities...
Speaker Change: Not all of them are incremental. For example, if we had many services
Speaker Change: on-premise and we do a project and the migration to the cloud and we are moving from on-premise managed services to cloud doors.
Speaker Change: There is some incremental, but you cannot assume that everything is incremental because So you're replacing one type of funded services which one which is more expanded one, but it's not like a you know It's like everything is incremental
And on a set basis, eventually the company is growing.
Speaker Change: given the phenomena that Shuki mentioned, as well as the fact that we are continuing to add
Speaker Change: new scope in certain customers, right? So in some aspects it's replacing activities we've done before and in some aspects it's new activities. It's a combination of replacing on-premise activities with cloud and in many cases some incremental.
and lastly yes
Speaker Change: I understand. So lastly, how do you define cloud? Meaning I saw the chart and on the right-hand corner on top you say partnership with Amazon and others.
Speaker Change: So can you, I understand what you're doing with cloud activities with telecom providers.
which you just described.
Speaker Change: What do you do with Cloud Titans, meaning how do you participate in the Cloud Titan environment and how important is that part to your business?
Speaker Change: So it's a good question. We have different types of cloud activities.
He transformed our activities in a...
Speaker Change: T-Mobile and AT&T, which is a complete rip and replace. We are replacing everything.
Speaker Change: in the in the legacy platform to a completely our next generation platform, which is cloud native
and we are bringing to the customer a full
Speaker Change: from the system, the operation, the cloud consumption, everything. They are just paying us and we are obviously giving the whole service A to Z.
Speaker Change: This is like the model that we are running now, huge transformation programs both in T-Mobile and AT&T.
Speaker Change: We have some customers, for example, the one that we recently signed, Vodafone Italy. This is more like a gradual transformation. We take the current version that the customer is running and we are upping to the cloud version. So this is not a complete rip and replace.
Speaker Change: like we do in AT&T, T-Mobile, and all from Germany and others, and here, we are actually, they are embarking on a more gradual modernization journey.
Speaker Change: We have a customer that we take a non mdocs system
Speaker Change: which are in our domain and we transition to the cloud. This is another example. Another very good example is the deal we signed with AT&T. Over there we're taking hundreds of mainframe applications.
Speaker Change: of AT&T. And we are moving them from the mainframe domain, converting from COBOL to Java OC, and then moving and doing their services, rather than running them on the cloud environment.
We have our classroom on cloud agnostic.
So in some customers, we run it on AWS.
Speaker Change: Some customers want it on Microsoft Azure, for example, T-Mobile is AWS, AT&T is Microsoft Azure.
Speaker Change: and when we talked about our partnership with Bepscale, it depends on which cloud we are running, what type of infrastructure we are bringing to this type of modernization. It could vary between the different cloud providers.
Got it. Thank you very much for the detailed answer.
Thank you. Bye.
Thank you, guys.
Speaker Change: Hi, good afternoon. Thanks for taking my question. I just wanted to ask about the competitive environment and especially around the strategic domains. Are you concerned that
Speaker Change: might they be tempted to use kind of point solution for your competitors or you're still confident around your retention rate?
Speaker Change: We are very confident. First of all, we have an excellent 100% retention of all our customers. And actually, we discussed it before in our cloud operation.
Speaker Change: It's a bit, they are even more expanded comparing to the on-premise, and I will give an example. In most of the cases...
Speaker Change: In the on-premise environment, our managed services operations were, for the most part, including running our M-DOC system or other systems in the data center.
Speaker Change: All the data center operations, in most cases, was running by the customer.
Speaker Change: When we move to cloud operation, actually we are taking everything.
Speaker Change: We are both running the Our system in a minute services at the same time. We are running all the cloud infrastructure. It's part of the Demand service so I would argue that our position in the cloud definitely is not eroded if any it's even more stronger
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Speaker Change: Thanks for that, Shuki. That's all for me. Thank you. See you tomorrow.
Absolutely.
Speaker Change: Thank you. Our next question comes from the line of Ryan Potter from Citigroup. Your question, please.
Speaker Change: Good afternoon, Shiki and Tamar. This is Gage Hortsman. I'm for Ryan Potter. We're just going to dive back into the phase-out. I was curious if you could maybe go into a little bit more color on the business lines that are being included here.
Speaker Change: And the mechanics of how that will be phased out. It sounds like it's already begun, but I'm curious if it's like a gradual phase out throughout 2025, or is this something that you guys are expecting to happen?
Speaker Change: by a certain point in time. Is there any attempt out to selling these businesses prior to phasing them out? And to what degree is free cash flow being impacted by these phase-outs? Thank you.
Speaker Change: I will start. First of all, it's starting immediately. It already started in our first quarter in fiscal 25, so we are implementing this immediately. This is the whole phase of the process. It is a result of a very thorough
Speaker Change: I would say the methodological process that we've gone through is throughout the second part of 2024 as we prepare for 2025.
Speaker Change: And when we talk about the business when we are phasing out, it's clearly impacted by the strategic priorities of the company.
and we are actually phasing out an on-premise activity.
when we move to support more type of data
Speaker Change: generative AI and this type. So actually we did not see any point to continue to hold a low margin business which is a less
lower disability
Speaker Change: Low margin. There's not so much much more on-premise and legacy activities
Speaker Change: and that we thought we didn't see any way to improve the portability or to make it much more strategic. So the priority was on the...
Speaker Change: strategic domain of the company. This is where we are investing and this is where we want to make sure that we continue to grow and this was the rationale for the phase-out. Tamar, do you want to? I just want to say that, you know, as we
explain to some historical examples.
Speaker Change: When we decide that there is a business that is not going to be part of our future strategy, naturally we ask ourselves whether we want to keep it and milk it for margins and cash. Do we want to sell it or do we just want to cease doing it?
Speaker Change: And given these kind of activities that we are talking about now, unlike maybe other decisions we had in the past, in this case we decided the best approach
Speaker Change: will be to stop doing it, and we've prepared ourselves to doing it, of course making sure that we do it in the right way, while taking into consideration all aspects, and this is how we got to the conclusion.
Speaker Change: So something that makes sense to sell in any way. And it resulted, I think, as we discussed, with the new, I would say, milestone in profitability, which is over 21%.
Speaker Change: Gotcha. And are there any opportunities, like additional opportunities here to optimize the portfolio that you guys are evaluating? Is that possible maybe to near term, but just curious about that.
Speaker Change: I think any healthy company should ask it and we should ask that question on an ongoing basis right I mean so never say never that there isn't anything imminent that that we can talk about but it's something
Thank you.
But there's so much that we forgot to mention now.
Speaker Change: Gotcha. Yeah, that makes sense. And last question for me is just on some of the business minds that we're phasing out.
Speaker Change: It seems like some of these were related to acquisitions that we made in prior years and the thought process around M&A and maybe the due diligence process there changed at all, and has your approach for M&A and UNR 2025 changed at all, or really capital allocation more broadly?
Speaker Change: Yeah, but just to put some framework to that, the one piece that is related to M&A was something that we've done in 2018, so it's quite a while ago, and it's a specific piece of it that has to do with video on demand.
Speaker Change: It's not that the whole business there is changing, it's just that speed-on-demand became something that is really reduced and not relevant as it was in the past.
Speaker Change: But back to M&A, we're actually very happy with the M&A we've done. You know, when you look on some early success signs of recent M&A, like in the case of...
Speaker Change: Teoko, which is around service assurance. We've won a big deal of NexGen OSS in APAC, as we mentioned last quarter, in which
Speaker Change: The offering of TiOCA has been a major piece. We talked about the large deal of AT&T, of Maine from the Cloud, in which
Speaker Change: capabilities we acquired from the Astadia deal, the deal that we've done last November.
Speaker Change: was a part of. So we're actually pretty pleased with the recent M&A activities that we've done, and you know, we will continue to look at the right opportunities. There isn't any...
Speaker Change: anything to talk about in terms of change of M&A strategy. We've been continuing to do, you know, tackle deals where we may find opportunities to enhance our offering, original spread, etc.
Speaker Change: So I think you should consider that approach as something we will move on and do also in the future.
Thank you.
Speaker Change: Thank you. And our next question comes from the line of William Power from Baird. Your question, please.
Speaker Change: Okay, great. Thanks. I guess maybe a couple of follow-ups. I guess, Tamar, it'd be great if there was anything you could share on the inorganic contribution to Fiscal 25, any kind of framework there I think would be helpful. And then maybe for Shuki, just let's get your perspective on the generative AI momentum you're seeing, you know, customer conversations, you know, how we should expect the revenue on that front to potentially build over the course of the year.
Shuki Sheffer: So, I will start with a generative AI question. I think we will see it accelerate throughout the years.
Shuki Sheffer: Remember when we talk about generative AI, there are different layers or domains that we see potential
Shuki Sheffer: A revenue acceleration. There is the high-end generative AI when we partner with NVIDIA and OpenAI and others and we create the agent or the super agent and the capabilities.
Shuki Sheffer: But, as we discussed before, generative require is everything is about data.
Shuki Sheffer: and actually the whole plumbing that you need to do under the hood.
Shuki Sheffer: to allow the models to be accurate and to be efficient. So it's a very big data play. So we see a lot of potential in data play. For example, we announced that we are collaborating with T-Mobile, with OpenAI and T-Mobile to doing a data platform called Data One.
Shuki Sheffer: to be able to provide all the relevant data in real time.
which is relevant for all these activities.
Shuki Sheffer: We won a couple of deals, one of them we could not announce this quarter because we didn't get approval. So we see, I believe that throughout the year, when more and more proof of concept become real projects and we see more adaption to our platform and the data domain, that we see acceleration in revenue.
Shuki Sheffer: I forgot the first question. Yeah, I'll go back to the question about the inorganic contribution to the growth rate. So the majority of the growth is expected to be organic. Yes, we did factor in some impact also from M&A that will come through the year. And from a margin point of view,
Shuki Sheffer: Definitely organic. Based on a lot of activities we do around operational excellence, automation, the tools, the gen-ai, etc. As well as the change in the business mix given the phase-out that we discussed.
Okay, thank you all.
Speaker Change: Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Matthew Smith for any further remarks.
Matthew Smith: Thanks, John. And thanks, everybody, for joining us this evening. If you have any additional questions, just reach out to us here in the IR group. And with that, have a great night. Thanks.
Oh
Speaker Change: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.