Amdocs Stock: Some Time Before It Turns Attractive (NASDAQ:DOX)

Amdocs(NASDAQ:DOX) is a software and services company primarily aimed at telecommunications companies. The catch-up that most telecom operators have made to achieve vertical integration has somewhat diminished their charm as major technology adopters. As as evidenced by Amdocs gross margins telcos need to catch up which has led the company to focus much more on managed services than pureplay software which is why its margins are around 35% vs. 80%+ for subscription/SaaS players. .

We therefore remain cautious on the name and seek execution strength in the margins.

Q1 2022 results

According to the latest published financial statements, DOX’s revenue growth in the first quarter of 2022 (y/y) was 1.7%. On a pro forma basis, the company says it grew 10.6% (excluding the impact of the OpenMarket divestiture in fiscal 2021. Management says OpenMarket was grossing approximately $80 million per quarter).

Over the last four quarters, the maximum contribution (25.4%) to revenue comes from Q22021.

Q1 2022 revenue growth (y/y) was lower than both the TTM revenue increase (y/y) of 2.2% and the compound annual growth rate (2018-2021) of 2 .6%. For the year, management guided the following:

Management has further extended its dynamism to the company’s prospects for the next three years.

I would say, Amdocs best positioning ever that all the megatrends they were there, we predicted them, invested a lot to make sure we’re ready, and we talked about those megatrends like 5G, travel towards the cloud, network automation, digitization in general, I think we are very ready for this megatrend.

Source: Seeking Alpha Q1 2022 Earnings Call

Despite the new logo additions, weakness in AT&T(T) and the divestiture of OpenMarket led to faster growth in emerging markets (Amdocs continues to reduce its exposure in Europe following the exit of OpenMarket).

finance

Over the 2018-2021 period, the EBITDA margin and the ROE increased by 60 basis points and 889 basis points respectively. We expect EBITDA margin and ROE to move together, with EBITDA margin expected to decline by 67 bps and ROE by 457 bps, respectively.

Our expectations are etched in the fortunes of the company and continue to be tied to those of telecommunications, where the deployment and integration of 5G continues to overwhelm their focus on the application layer.

In the past, revenue and profit growth both showed an upward trend, resulting in a PAT margin expansion of 714 basis points. We expect revenue to be positive and accelerate going forward, with 2023 revenue expected to reach $4.9 billion, implying a compound growth rate of 6.6% over the 2021-2023 period. . From 2018 to 2021, revenue grew at a compound rate of 2.6%, to $4.3 billion, from $4 billion in 2018.

For net profit growth, we expect it to be slower going forward, with the 2023 PAT expected to reach $725 million or a compound growth rate of 2.7% over the 2021-2023 period. During the 2018-2021 period, net income grew at a compound rate of 24.8%, reaching $688 million in 2021 from $354 million in 2018. Our expectations for the movement of revenue and earnings imply a potential margin contraction of 117 basis points going forward.

Product portfolio

While the market seems to be excited about SaaS in Amdocs’ product portfolio, we see that the company still has the difficult task of getting these products into the customer base sufficiently.

the idea of ​​MarketONE (a SaaS platform) is rather that each of our customers will start to specifically integrate in a bespoke way with Netflix, Shopify, a lot of other content, Peacock, HBO Max, whatever, to do it in individual integration, today we have a platform that really integrates for very many OTTs

Source: Seeking Alpha Q1 2022 Earnings Call

Another risk that could increase pressure on margins is wage inflation. While management expects personal development and career opportunities to help alleviate people’s challenges, pricing dynamics in the telecom space may not allow for significant expansion, Amdocs management s expecting the operating margin to remain around 17%.

Risks

• While Amdocs’ European exposure has been somewhat limited (see above section on geographic distribution of revenue) by the OpenMarket divestiture, the Ukraine-Russia dispute could result in lower revenue , shattering management’s expectations.

About a quarter of the free market activity was in Europe. But I think the most fundamental and interesting thing in Europe is the fact that we have naturally accelerated some large-scale transformations and the recent rewards are now starting to increase in terms of income. We therefore expect a much stronger second half of 2022 for Europe

Source: Seeking Alpha Q1 2022 Earnings Call

• Although the three-year plan looks promising, by management’s own admission, execution risk remains central to Amdocs’ strategy.
• Amdocs’ SaaS products have yet to see significant adoption, so their margin improvement remains cautious.
• Also on the cost side, in addition to wage inflation, geopolitically inspired currency risk could act as a headwind on margins.

Additionally, a slight sequential and also year-over-year impact comes from currencies. A lot of the currency movements we’re talking about have an impact on our European business.

Source: Seeking Alpha Q1 2022 Earnings Call

Conclusion

We apply a multiple of 13.2x to the estimated EPS of $5.2 for 2022 to arrive at a price of $69. Our EPS estimate is obtained by keeping EBITDA below 18% and for the P/E, we have adjusted the historical P/E to reflect our perception of the risk involved.

Additionally, to account for the potential upside of any sales force, we also value the business on a P/S basis, applying a multiple of 2x (historical, risk-adjusted) to a figure of business estimated at $4.6 billion for 2022 to arrive at a price of $74. .

Our price range represents an 8-15% drop from the current price. However, based on the 10-day and 50-day moving average trend, there appears to be near-term strength in DOX stock price.

All in all, it might be prudent to let management’s plans bear fruit over the next few quarters before trying to play the telecommunications space through Amdocs.