Amdocs: Financial Prospects And Capital Return Are Key Investment Considerations

seekingalpha04-16

Amdocs' upcoming second quarter results could miss the market's expectations, if a bigger-than-expected reduction in telecommunications companies' spending on legacy systems materializes.DOX boasts an...

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Considerations\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-16 21:39 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683999-amdocs-financial-prospects-and-capital-return-are-key-investment-considerations><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Amdocs' upcoming second quarter results could miss the market's expectations, if a bigger-than-expected reduction in telecommunications companies' spending on legacy systems materializes.DOX boasts an...</p>\n\n<a href=\"https://seekingalpha.com/article/4683999-amdocs-financial-prospects-and-capital-return-are-key-investment-considerations\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"DOX","symbol_name":"Amdocs 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to its shareholders.A Hold rating for Amdocs is justified, taking into account both its financial outlook and shareholder capital return approach.   PaulMcKinnonElevator Pitch I assign a Hold investment rating to Amdocs Limited (NASDAQ:DOX). My key concern is that DOX might potentially report an earnings miss for Q2 FY 2024 (YE September 30, 2024) as a result of a reduction in spending on legacy systems by telecommunications companies. On the flip side, Amdocs' expected high single digit percentage shareholder yield for the current year could provide some level of valuation support for the company's shares. I choose to rate Amdocs as a Hold, taking into consideration both its financial prospects and shareholder capital return outlook. Company Description Amdocs Limited calls itself \"a leading provider of software and services to communications and media companies\" in the company's media releases. DOX's Key Products In A Snapshot Amdocs' Corporate WebsiteAn Overview Of Amdocs' Key Services Amdocs' Corporate WebsiteSelected Examples Regarding The Value Proposition That DOX Offers To Its Clients Amdocs' Investor Presentation SlidesDOX derived 68%, 14%, and 18% of its full-year fiscal 2023 top line from North America, Europe, and other markets, respectively, as disclosed in its 20-F filing. Telecommunications companies AT&T (T) and T-Mobile US (TMUS) are Amdocs' top two clients, accounting for 24% and 23% of the company's revenue, respectively, in the most recent fiscal year. Fiscal 2024 Financial Outlook In February this year, Amdocs outlined its expectations of a moderation in the company's constant currency top line expansion from +7.7% in FY 2023 to +3.2% (mid-point of guidance) for FY 2024. DOX also anticipates a \"double-digit\" percentage increase in its EPS for the current year. Notably, Wall Street sees Amdocs' bottom line growth slowing from +11.5% for the prior fiscal year to +10.0% in fiscal 2024. It is likely that management and analysts considered the risk of a meaningful cut in telecommunications companies' IT budgets as a result of economic pressures in setting their expectations for DOX's FY 2024 performance. Earlier, Amdocs acknowledged at its FY 2023 earnings briefing in November last year that the company \"is not immune to an increased level of macro uncertainty.\" At the company's FY 2023 earnings call, DOX shared that \"some operators began to prioritize strategic modernization programs while reducing discretionary spending, including investments to enhance legacy systems.\" Furthermore, DOX indicated at the most recent Q1 FY 2024 results briefing in February this year that the reduction in \"legacy systems\" spending is \"pretty immediate\", and contrasted that with a new \"modernization project\" where the \"ramp-up of revenue takes time.\" In other words, telecommunications companies are inclined to slash their spend on legacy systems very quickly to manage costs in a weak economic environment. On the flip side, DOX will require a longer period of time to earn sufficient revenue from new \"modernization projects\" to compensate for the lost \"legacy systems\" top line contribution. May 8, 2024 is the expected date of Amdocs' Q2 FY 2024 (January 1 to March 31 this year) earnings announcement date. At the Morgan Stanley (MS) Technology, Media & Telecom Conference last month, the company noted that \"we did see some kind of headwind coming from some of the legacy stuff.\" DOX's reply was in response to an analyst's question regarding her observation that \"service provider spend has been under pressure given macro.\" In my opinion, there is a meaningful risk of Amdocs' Q2 FY 2024 and full-year FY 2024 results falling below consensus estimates due to a larger-than-expected cut in telecommunications companies' \"legacy systems\" spending. Shareholder Capital Return Approach DOX reiterated the company's expectations that \"the vast majority of that free cash flow will be returned to the shareholders in the form of dividends and buybacks\" in fiscal 2024 at Morgan Stanley's investor conference in March. The company has been pretty generous in the past few years when it comes to distributing excess capital. In FY 2023, Amdocs returned 96% of its free cash flow to its shareholders via repurchases and dividends. DOX's historical capital return-to-free cash flow ratios were also high at 104%, 99%, and 100% for FY 2022, FY 2021, and FY 2020, respectively, as revealed in its Q1 earnings presentation. Looking forward, DOX is guiding for a free cash flow of $750 million in this fiscal year. Assuming that the company allocates 96% (same as FY 2023) of its free cash flow to dividends and share buybacks in the current fiscal year, the stock's expected FY 2024 shareholder yield (buybacks and dividends divided by market capitalization) could be as high as 7%. In the first quarter of fiscal 2024, Amdocs had already spent $210 million on share repurchases and dividends, which represented 28% or more than a quarter of its full-year free cash flow guidance at $750 million. This implies that DOX is well on track to return most of its free cash flow to shareholders for full-year FY 2024, judging by its actual Q1 FY 2024 capital return. Closing Thoughts DOX's valuations are undemanding, but I am concerned that the company's upcoming quarterly financial performance might fail to meet the sell side's expectations.  The market is now valuing Amdocs at 12.8 times (source: S&P Capital IQ) consensus next twelve months' normalized P/E, which is -15% lower than its historical five-year mean P/E multiple of 15.0 times. DOX also offers an attractive high single digit percentage forward shareholder yield. However, Amdocs' appealing valuations could be reflective of investor worries regarding a potential Q2 FY 2024 results miss driven by lower-than-expected legacy systems spend for telecommunications companies. As such, I have a Neutral view and Hold rating for DOX.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427270398"}