2023-08-04 16:59:29 ET
Summary
- Amdocs Limited reported better-than-expected fiscal Q3 2023 financial results, beating revenue and EPS estimates.
- The company provides CRM, billing, and network management software and services to organizations globally.
- Revenue growth is slowing slightly, the stock is fully valued at around $89.00, so I'm Neutral [Hold] on Amdocs Limited stock here.
A Quick Take On Amdocs
Amdocs Limited ( DOX ) reported fiscal Q3 2023 financial results on August 2, 2023, beating both revenue and EPS estimates.
The firm provides a range of CRM, billing and network management software and services for organizations worldwide.
Top line revenue growth is slowing slightly and the stock looks fully valued at its present level of around $89.00.
My outlook on DOX for the near term is Neutral [Hold].
Amdocs Overview And Market
St. Louis, Missouri-based Amdocs Limited was founded in 1988 and provides customer engagement, billing and network management software to companies in various industries.
The firm is headed by president and CEO Shuky Sheffer, who joined the firm originally in 1986 and was previously CEO Retalix Limited.
The company’s primary offerings include the following:
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Customer engagement software
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Catalog management software
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Business process management software
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Billing and invoicing software
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Microservices platform
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Other software and services.
DOX acquires customers via its direct sales and marketing efforts in the communications, media, financial service, manufacturing and healthcare industry verticals, among others.
According to a 2020 market research report by Grand View Research, the global customer experience management market is expected to reach $23.6 billion by 2027.
This represents a forecast CAGR of 17.7% from 2020 to 2027.
The main drivers for this expected growth are the continuing transition to digital engagement by enterprises in response to changing customer behavior demanding increased quality, convenience, and speed of service.
Also, the ongoing rise in the use of social media networks and online business is increasing demand for "contextualized and personalized consumer experience through data management."
Brands now understand the ability of consumers to share their experiences and potentially affect the brand's reputation for better or worse.
Additionally, companies are choosing cloud-based delivery models for their ease of initial installation and expanding adoption within client firms through "land and expand" approaches.
The company is active in other major business software market verticals with large addressable markets.
Amdocs’ Recent Financial Trends
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Total revenue by quarter has continued its upward trend; Operating income by quarter has risen year-over-year.
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has varied within a tight range; Selling, G&A expenses as a percentage of total revenue by quarter have remained relatively stable over the past few years.
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted) have trended higher in recent periods.
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP.)
In the past 12 months, DOX’s stock price has risen only 1.8% vs. that of the iShares Expanded Technology-Software ETF’s ( IGV ) rise of 15.11%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet , the firm ended the quarter with $749.5 million in cash, equivalents and short-term investments and $645.5 million in total debt, all of which was categorized as long term.
Over the trailing twelve months, free cash flow was $587.2 million, during which capital expenditures were $180.0 million. The company paid $84.0 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Amdocs
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 2.4 |
Enterprise Value / EBITDA | 12.1 |
Price / Sales | 2.4 |
Revenue Growth Rate | 7.6% |
Net Income Margin | 11.3% |
EBITDA % | 19.5% |
Net Debt To Annual EBITDA | -0.2 |
Market Capitalization | $11,160,000,000 |
Enterprise Value | $11,140,000,000 |
Operating Cash Flow | $761,450,000 |
Earnings Per Share (Fully Diluted) | $4.67 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Discounted Cash Flow Calculation - DOX (Guru Focus)
Assuming generous DCF parameters, the firm’s shares would be valued at approximately $84.72 versus the current price of $89.10, indicating they are potentially currently fully valued, with the given earnings, growth, and discount rate assumptions of the DCF.
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
DOX’s most recent unadjusted Rule of 40 calculation was 27.1% as of FQ3 2023’s results, so the firm needs some improvement in this regard, per the table below:
Rule of 40 Performance (Unadjusted) | FQ3 2023 |
Revenue Growth % | 7.6% |
EBITDA % | 19.5% |
Total | 27.1% |
(Source - Seeking Alpha.)
Commentary On Amdocs
In its last earnings call ( Source - Seeking Alpha ), covering FQ3 2023’s results , management highlighted recent telecom customer wins.
Leadership also sees continued demand potential for managed services, with demand in the media segment with notable customers such as Disney.
The firm recently launched its AI initiative, called Amdocs amAIz, a generative AI framework aimed at the telecommunications industry and announced after a strategic partnership expansion with Microsoft in the AI field.
Management didn’t disclose any company, customer or revenue retention rate metrics.
Total revenue for FQ3 2023 rose by 5.7% year-over-year while gross profit margin fell by 1.1%.
Selling, G&A expenses as a percentage of revenue was flat YoY and operating income grew by 7.9%.
The company's financial position is relatively strong, with ample liquidity against long-term debt and strong free cash flow generation.
DOX’s Rule of 40 performance has been moderate, with low revenue growth being a feature.
Looking ahead, management expects fiscal 2024 topline revenue to grow at around 6.7% at the midpoint of the range.
If achieved, this would represent a slight decrease in revenue growth versus fiscal 2022’s growth rate of 7.55% over fiscal 2021.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
Earnings Transcript Key Terms Frequency (Seeking Alpha)
I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" three times, "Challeng[es][ing]" once, and "Macro" four times.
Analysts questioned company leadership about any customer pushback on sales cycles and management is seeing some "prioritization" by customers on developing new technology rather than running legacy systems.
Regarding valuation, my discounted cash flow calculation indicates Amdocs Limited stock may be fully valued at its present level of around $89.00.
Given its apparent full valuation and declining topline revenue growth, my outlook on Amdocs for the near term is Neutral [Hold].
For further details see:
Amdocs Growth Outlook To Slow Slightly As Customers Prioritize Efforts