Good day, and thank you for standing by. Welcome to the Q4 2021 Amdocs Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the conference over to your host, Mr. Matthew Smith, Head of Investor Relations for Amdocs. Mr.

Smith, you may now begin..

Thank you, operator. Before we begin, I would like to point out that during this call, we will discuss certain financial information that is not prepared in accordance with GAAP.

The company’s management uses this information in its internal analysis in order to exclude the effect of acquisitions and other significant items that may have a disproportionate effect in a particular period.

Accordingly, management believes that isolating the effects of such events enables management and investors to consistently analyze the critical components and results of operations of the company’s business and to have a meaningful comparison to prior periods.

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 finished with the SEC on Form 6-K. Also, this call includes information that constitutes forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future results to differ from those anticipated.

These risks include, but are not limited to the effects of general economic conditions, the duration and severity of COVID-19 pandemic and its impact on the global economy and such other risks as discussed in our earnings release today and at greater length in the company’s filings with the Securities and Exchange Commission, including in our Annual Report on Form 20-F for the fiscal year ended September 30, 2020, filed on December 14, 2020, and our Form 6-K furnished for the first quarter of fiscal 2021 on February 16, 2021 and for the second quarter of fiscal 2021 on May 24, 2021 and for the third quarter of fiscal 2021 on August 16, 2021.

Amdocs may elect to update these forward-looking statements at some point in the future. However, the company specifically disclaims any obligation to do so. Participating on the call with me today are Shuky Sheffer, President and Chief Executive Officer of Amdocs Management Limited; Tamar Rapaport-Dagim, Joint Chief Financial and Operating Officer.

To support our earnings call today and in the future, 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, Shuky will provide an update on our recent strategic process – progress and business performance. And Tamar will review our financial results and outlook for fiscal year 2022.

And finally, we invite you to join us for our fiscal 2022 Analyst and Investor Business Update, which will be a virtual event webcast live on Friday, November 5 at 9:30 Eastern Time. Please visit the Investor Relations section of our website for more information. And with that, I’ll turn it over to Shuky..

pro forma non-GAAP diluted earnings per share growth of 10% assuming the midpoint of our guidance range, and our dividend yield of 2% based on the new quarterly rate of $0.395 per share, which proposed for the shareholder approval at our upcoming Annual Meeting in January. With that, let me turn the call to Tamar for her remarks..

Thank you, Shuky, and hello, everyone. Thank you for joining us. As a reminder, my comments today will refer to certain financial metrics on a pro forma basis, which excludes the financial impact of open market, which we divested on December 31, 2020. Turning to Slide 13.

I would like to echo Shuky’s comments that we are very proud of our financial performance for the fourth quarter and fiscal year 2021. Let me start with our fiscal fourth quarter performance. Record Q4 revenue of $1.09 billion was up 10.2% year-over-year on a pro forma constant currency basis and was led by our best-ever quarter in North America.

Revenue was above the midpoint of guidance despite an unfavorable impact from foreign currency fluctuations of $5 million relative to guidance. Moving down the income statement. Our Q4 non-GAAP operating margin of 17.5% was in line with the high end of our long-term target range and improved by 30 basis points from a year ago.

As accelerated R&D investments were more than offset by a focus on operational excellence and a divestiture of open markets. On the bottom line, diluted non-GAAP EPS was $1.16 in Q4, which was consistent with the midpoint of our guidance range.

As we have said in the past, our non-GAAP effective tax rate may fluctuate throughout the course of the fiscal year. In the fourth fiscal quarter, our non-GAAP effective tax rate was 20.2%, above the high end of our annual target range of 13% to 17%, but consistent with our expectations.

For the full fiscal year 2021, we reported an effective tax rate of 15.4%, which was within our annual target range. Diluted GAAP EPS was $0.97 for the fourth fiscal quarter above the midpoint of the guidance range of $0.91 to $0.99.

Summarizing fiscal year 2021, we delivered accelerated revenue growth of 7% on a pro forma constant currency basis, which was ahead of our original guidance for the year.

This outperformance was primarily due to a stronger-than-expected performance in our core business as well as a small contribution from the acquisitions of Sourced, ADT and Clearbridge, which we executed during the year.

On the bottom line, non-GAAP diluted earnings per share growth accelerated to 9.8% on a pro forma basis in fiscal year 2021, driven by the faster pace of revenue growth and improved non-GAAP operating margin and the benefit of our share repurchase activity during the year. Moving to Slide 14.

The strong sales momentum of the last several quarters continued in Q4, resulting in record high 12 months backlog of $3.69 billion, which was up 7.5% from a year ago on a pro forma basis. On a sequential basis, 12 months backlog rose by $100 million as compared to June 30.

12-month backlog has traditionally serves as a good leading indicator of our business, having consistently averaged around 80% of forward-looking 12 months revenue over the years. Q4 was also a healthy quarter for Managed Services, where revenue grew from a year ago, equating to roughly 59% of total revenue.

Our multiyear managed services engagements underpin the resiliency of our business with recurring revenue streams, high renewal rates and expanded activities with existing customers, including into next-gen cloud operations.

For instance, in addition to the AT&T deal that Shuky discussed, this quarter, BT Group has renewed its relationship with Amdocs for a further three years to maintain, develop and enhance the BSS platform for BT’s EE brand. Turning to the balance sheet and cash flow.

As you can see on Slide 15, we are pleased to say that our great progress in achieving project milestones for our customers is translating to invoicing and strong cash collections. This is reflected in DSO of 73 days, which decreased by two days year-over-year and decreased by six days sequentially in Q4.

Moreover, our deferred revenue remained in a healthy position for the fourth fiscal quarter. Altogether, we generated normalized free cash flow of $172 million in the fourth fiscal quarter.

For the full fiscal year, normalized free cash flow of $869 million was significantly better than our prior guidance and equated to a conversion ratio relative to our non-GAAP net income of 140%, well above our long-term average of roughly 100%.

Overall, we ended the year with a strong cash balance of approximately $966 million, including aggregate borrowings of roughly $650 million.

Our balance sheet is 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. Additionally, we remain committed to maintaining our investment-grade credit rating.

Turning to capital allocation on Slide 16. For the fiscal 2021, we returned $857 million to shareholders, including $177 million in annual cash dividend payments.

For the year, we deployed $680 million towards share repurchases, which included the net profits received from the divestiture of open market, and we also accelerated our buyback program in Q4 and repurchasing $140 million during the quarter. Looking ahead to fiscal 2022, we expect normalized free cash flow of approximately $650 million.

Our outlook roughly assumes a 100% conversion rate of non-GAAP net income and excludes anticipated CapEx of about $131 million as we complete the development of our new Israel capital. Regarding our capital allocation in fiscal year 2022, we expect to return the majority of our normalized free cash flow to shareholders.

This includes dividends, for which we are pleased to announce a proposed increase of roughly 10% in our quarterly dividend to a new rate of $0.395 per share, subject to shareholder approval at the Annual Meeting in January. Now turning to the outlook on Slide 17.

The presenting level of macroeconomic business and operational uncertainty surrounding the magnitude of the duration of COVID-19 pandemic, including its novel strains remains elevated.

The midpoint of our first quarter and full year fiscal 2022 revenue guidance reflects what we consider to be the most likely outcomes based on the information we have today, but we cannot predict all possible scenarios.

With that said, we believe the business acceleration of last year will continue in fiscal 2022 with revenue expected to grow by approximately 6% to 10% year-over-year on a pro forma constant currency basis. We also expect to generate growth across all three of our key geographical regions.

Our annual outlook includes first fiscal quarter revenue within the range of $1.08 billion to $1.12 billion. On a reported basis, we expect full year revenue growth in the range of 3.7% to 7.7% year-over-year, which anticipates an unfavorable foreign currency impact of approximately 30 basis points year-over-year.

Moving down the income statement, we anticipate quarterly non-GAAP operating margins to track roughly in line with the midpoint of a new annual target range of 17.2% to 17.8%.

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 achieving operational excellence.

Below the operating line, we anticipate that foreign currency fluctuations will continue to impact our non-GAAP net interest and other expense in the range of a few million dollars on a quarterly basis.

We expect that our non-GAAP effective tax rate will remain within an unchanged annual target range of 13% to 17% for the full fiscal year 2022, but above the high end of that range for Q1. Bringing everything together, we expect non-GAAP diluted earnings per share growth in the range of 8% to 12% on a pro forma basis for the full year of fiscal 2022.

On a reported basis, we expect to deliver full year diluted GAAP – full year diluted non-GAAP EPS growth of 6.3% to 10.3% year-over-year.

Overall, we expect to deliver double-digit total shareholders’ returns for the second year running in fiscal 2022, including the 10% midpoint of our pro forma non-GAAP earnings per share growth guidance, plus a dividend yield of roughly 2% based on the newly proposed quarterly cash payment of $0.395 per share. With that, back to you, Shuky..

Thank you, Tamar.

Before we go to Q&A, let me take a moment to say that I’m excited to invite you all to join us for the virtual business update this coming Friday, which we are hosting to provide investors and analysts with an appreciation of the strong foundation we have built over the past several years and have positioned Amdocs for continued success in an increasingly digital world.

We look forward to discussing Amdocs strategy and our unique competitive advantage that will support accelerated growth and the continued success into the future. With that, we are happy to take your questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Jackson Ader of JPM. Your line is open..

Great. Thanks for taking my questions guys..

Hi, Jackson..

First one, any additional comments you can provide on the either adjusted or reported cash flow? And just given the kind of the strength in revenue combined with maybe cash flow performance double-clicking on that would be great?.

Sure. So, as we’ve always said, the business model we have is robust in its ability to generate first of all, healthy earnings, but then convert over time, earnings to cash roughly on par. And starting this year, we did expect that to be a stronger year. And if you recall, we started the year and then we raised the numbers twice.

It started with a very strong first quarter where part of the story there was the signing of a multiyear strategic deal with T-Mobile that also contributed to monetization and some upfront payments as part of this signed deal.

And then during the year, we continue to see a record high from quarter-to-quarter and definitely for the year as all in terms of the number of deployments, we achieve for our customers that translates into achieving many invoicing milestones and, in turn, of course, turning that invoices into collection in the bank.

So, I’m pleased to say that it’s a result of a lot of focus that we have although many years on the cycle we call deal to cash. That has to do with many things we do as a company and very strong execution and deliverables to our customers..

Okay. Great. And then maybe, Shuky, as we think about the very largest customers that you have, right, the kind of – very large carriers in telecom.

How should we expect maybe growth from those customers and specifically North America should look like in fiscal 2022 maybe relative to either the rest of the world or some of your customers that are just a little bit smaller?.

As I said, we said in the prepared remarks, we see growth in all geographies.

Obviously, the size of the customer of North America, if T-Mobile and AT&T, these guys are, as we mentioned before, are in the mids or the beginning of investment cycle, definitely the numbers here can be more, but I think some of the deals that we’ve signed across the world in 3UK, in other large operators in Europe in Vodafone and others are not that far, but we are pleased to see the megatrends that we discussed, which are on the 5G journey to the cloud, the utilization is pretty similar across the world, and you see very great momentum, which is reflected also another very strong backlog quarter increase in backlog.

So, I think definitely, because of the size of the operator in North America, which are probably the biggest in the world. The projects are bigger, but we see a lot of big projects around the world..

Maybe just to add color, if you look on the $100 million sequential improvement in 12 months backlog in Q4, it’s pretty much in line with the split of revenue we see within – between North America and internationally. So it’s broad-based. It’s healthy.

Naturally, as Shuky said, very happy to see that all over the place and not concentrated just in one region..

Yes. Okay, great. Make sense. Thank you very much..

Thank you..

Your next question comes from the line of Tom Roderick of Stifel. Your line is open..

Hi it’s Max [indiscernible] on for Tom.

I just want to start, I guess, by getting back on the cash flow, thinking about how strong they have been in going forward the forecast for next year? Can you just talk a little bit more about the kind of steep decline given the guide for full year 2022?.

Could you just repeat the last sentence?.

So the decline going, yes for the projected $500 million?.

So unfortunately, I have not found yet the patent to convert over time, more cash than earnings. And seriously, I think that over time, you should expect us to convert at par, meaning 100%. Now, we had a very strong year and very happy about that with 40% conversion rate..

We always said it’s not sustainable..

a, continue to invest in growth. I mentioned continuing to investment R&D, et cetera, while obviously protecting the margins and continuing to see that growth acceleration..

But I agree with Tamar, we did not find the magic to convert more cash than earnings. And this really was an exceptional year from this prospect..

Got it. And then speaking of growth, Shuky, talking about the strategic domain and those growth pillars of 5G and digital and cloud, et cetera.

Do you see like in the current environment that enough carriers are embracing those to generate that 3.7% to 7.7% revenue growth for next year? Or do more of these carriers need to embrace the movement and get on board to kind of reach that goal?.

I think that what’s nice about these megatrends that I don’t think there is some type of discretion. Every customer of Amdocs in the world in order to be successful in this new era, has to transition to 5G, has to be digital and have to do to go to the cloud.

So this is – and by the way, we see that all the budgets of our customers are actually funneled to these domains because they are key critical factors to their success in the future. And by the way, this is broadly. This is not just – it’s true that the U.S. is a little bit ahead for 5G deployment comparing U.S.

is following and APAC following is a very close followers so, but we see this aggressive across the world. And second, this is not like a one-off year.

These megatrends are used to say for several years because it will take a lot of time until the industry will be able to convert to 5G, complete utilization journey and definitely, the move to the cloud, which is really, really at the beginning..

Got it. Thanks..

Thank you..

[Operator Instructions] Your next question comes from Tal Liani of BofA. Your line is open..

Hi, guys. Thanks for the question..

Hi, Tal..

The growth acceleration we’re seeing this year, we’re seeing growth acceleration across companies who sell to carriers and cloud and I want to understand the longevity, the sustainability of the growth acceleration, meaning can you discuss whether this is – these are just projects that maybe were on hold during COVID or anything that was delayed and now being deployed versus projects who are starting on long-term cycle things you have done and translate into long-term growth? Can you give us a little bit color on the growth acceleration? Thanks..

Hi, Tal. Definitely, these megatrends are here to stay for several years. And by the way, all these projects are like a multiyear projects. I mean to transform companies in the size of T-Mobile, AT&T, Vodafone, it takes years. And it will take a lot of time until all the new 5G use cases and opportunities are going to – have been developed as we speak.

So the short answer to your question, these megatrends is to stay for several years. And these projects are not one year project. They’re a long-term project that that will take some time to deploy them. It doesn’t matter if it’s a medium-sized telco or very big these project takes time. And as I mentioned before, we are just starting.

So it’s not that – so the investment cycle is really in the early – we said early innings today..

Got it. And last quarter, Shuky, in your remarks, you spoke a lot about cloud. And in the meantime, since then, we’ve seen cloud companies announcing on big, big spending plans.

Can you talk about the cloud and your participation there and whether the investment in the network that we are seeing and we’ve seen other telecom names, telecom equipment names talking about big cloud investments? So, how do you participate in these big projects that we’re seeing?.

We are participating in this, what we call cloud journey in different aspects. The first one is all this transformational deal that we do, building a new consumer stack for AT&T, it’s being done on our cloud native CS21, which is the latest and greatest platform for monetization.

And as I mentioned, this was built from the ground up as a cloud native and all our deployments on the cloud. Some of them are on [indiscernible], some of them are on Azure. So, we are working with all the cloud partners. So this is the first angle to the cloud. Secondly, we are involved in several customers in activity of taking application.

It could be Amdocs legacy application or non-Amdocs application and lift and shift into the cloud. So this is another activity that we do, which is growing all the time. So in this case, it’s not full modernization, but taking the application, re-platform them and moving and leave them to the cloud. The sales activity on the cloud is cloud off.

As we announced this quarter, if you think what happened in AT&T, initially, we won and we awarded to do the consumer domain on our next-generation suite for 5G. And this quarter, we announced, which is the third pillar of doing cloud works, so doing old operation in a cloud environment.

So, I think that we have a lot of – we are the market leader, by the way, in all these three domains. And I think that the journey to the cloud represents for us a very nice tailwind..

Great, thank you..

Your next question comes from Ashwin Shirvaikar of Citi. Your line is open..

Hi there.

How are you guys?.

Hi Ashwin..

Hey my question is with regards to the supply of talent, obviously, many IT services companies have been talking about an even broader than IT services companies. Many companies have been talking about particularly high-end technology, talent being short supply.

Any commentary from you guys is affecting you guys that you somehow protected, because you have a wider net to cast? Any thoughts there would be great..

Thanks, Ashwin. So yes, naturally, as a company that see the people in the center of what we do, we very focused on our talent. And we are looking at it from several directions.

First of all, as the company itself went in the last couple of years into a major replatforming of our products into cloud native depots, et cetera, we definitely invested in risk scaling and continuously do so, risk scaling and creating new opportunities for our employees.

And that comes on top of the fact that our unique business model where we both develop products, deploy them and then operate them in the IT environment of our customers, provide multiple career opportunities for people that are very unique relative to companies that are just certain niches or certain kind of capabilities.

Put on top of that, of course, the global scale, the ability to make an impact on an industry that sits as the art of connectivity of society that gets into the sensors purpose that is so important to our employees.

I would say that in addition to that, we are continuing to think in the sense that not only how do we attract new employees because that’s obviously important.

How do we make our existing employees, re-choose every day to come to work, whether virtually or physically into the office and see the opportunity to make an impact and to enjoy their career development in Amdocs. And we do a lot of things around that.

On top of that, of course, there are the regular things how to onboard effectively employees all over the world, have to do it. And by the way, we’ve won awards on that how we effectively onboard employees into the company? How do we create learning platforms? Et cetera, et cetera. So yes, it’s a topic that we are very well engaged in.

To remind you, we have a global delivery model. We have access to talent markets all over the world, and we are leveraging that capability as well, of course.

And on top of all of that, being a technology company we’re continuously focusing on how to create automation and tools to move into automated flows or what’s called no-touch activities, whatever does not have to be done by people and focus the people’s efforts on the new innovation and the new capabilities that are being built..

Got it. Thank you for that. And then the other question is and as you talk about sort of early innings of multiyear 5G and cloud-based transformation cycle.

The way I think of that is it comes through is mainly project-driven work, is that going to kind of affect your project-driven versus managed services mix? And does that have an impact on the overall financial model then?.

So, we are very happy to see this cycle where many customers are adopting our new products on new technology and deploying it through the form of what you call the project.

But at the same time, we just announced today an example of a customer that selected us AT&T selected us for this deployment cycle and building all their next-gen stack for consumer mobility on the Amdocs product and at the same time now selecting us to run the cloud ops of these applications in their environment.

So, we are continuously seeing that pull-through Ashwin, that we like so much of entering a new cycle of investments with project and then moving fast and adding to it. The recurring revenue stream that comes with the managed services.

I believe that we will continue to see that model of what we are proud about, what you call it the accountability model of Amdocs, so we can do both.

We can bring the best products, cutting-edge technology having our customers building their future on Amdocs and at the same time, enable them to rely on Amdocs to run it for them in case they would like, of course to choose us for many services.

And we continue to see also a very high close to 100% renewal rate on the existing managed services engagement. So it’s hard to predict exactly the ratio to our specific financial question. What’s the ratio between project revenue and managed services engagement, how to predict as we see both growing and that’s great..

Okay, understood. Thank you..

Thanks, Ashwin..

[Operator Instructions] I am showing no further questions at this time. I would now like to turn the conference back to Mr. Smith. You may proceed..

Thank you very much for joining us this evening and for your interest in Amdocs. We look forward to hearing from you in the coming days, and of course, seeing you at our Analyst event on Friday. With that, have a great evening, and we’ll conclude the call. Thanks..

This concludes today’s conference call. Thank you for your participation, and have a wonderful day. You may now disconnect..