Amdocs Growth Remains Anemic On Client Buying Scrutiny

seekingalpha08-23

Amdocs recently reported its FQ3 2024 results, meeting revenue estimates but beating earnings expectations.The market outlook for customer experience management is positive, with Amdocs active in ...

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I previously wrote about Amdocs in August 2023 with a Hold outlook due to revenue growth concerns and a full stock price valuation. While the company now has a record 12-month backlog of $4.25 billion, macroeconomic conditions continue to negatively pressure client spending and decision-making, resulting in likely continued slow revenue growth for the near term. I remain Neutral (Hold) on DOX until we begin to see the conversion of that big backlog into higher revenue growth. Amdocs' Market And Approach Per a 2024 market research report by Grand View Research, the worldwide customer experience management market was an estimated $11.8 billion in 2023 and is forecasted to exceed $32.5 billion by 2030. If reached, this growth would represent a CAGR (Compound Annual Growth Rate) of 15.8% from 2024 to 2030. The primary reasons for this estimated growth trajectory are an ongoing transition focusing on scalable and measurable digital engagement by organizations as customers change their behavior, with increasing demands for improved quality, speed, and ease of use or consumption. Additionally, the growing usage of social media marketing channels is increasing the demand for mass customization capabilities powered by data. Cloud-based delivery models are increasingly popular for both service providers and customers. AI-enabled technologies are also being developed and integrated, especially for the 'low-hanging fruit' of reducing customer service costs. Amdocs is active in various other large business software vertical markets. The company's revenue breakdown in the last 12 months is 58.2% Managed Services and 41.8% Other Services, as the pie chart shows here: Seeking Alpha Data DOX's main software offerings include the following:  Catalog management software. Customer engagement software. Billing and invoicing software. Business process management software. Microservices platform. Other software and services.  The firm seeks new clients through direct sales and marketing efforts as well as through resellers, systems integrators, and other technology partners. Recent Financial Trends Total revenue by quarter (columns) has risen quite slowly, at only 1.1% year-over-year due to macro pressures and slower CapEx spending by clients. Operating income by quarter (red line) has remained stable as gross profit and expenses have done so. Seeking Alpha Data Gross profit margin by quarter (green line) has remained flat as have Selling and G&A expenses as a percentage of total revenue by quarter (orange line). R&D expenses as a function of revenue (purple line) have also been flat. Seeking Alpha Data Earnings per share (Diluted) have fluctuated within a range, although with more volatility recently when compared to 2022 and early 2023. Seeking Alpha Data (All data in the above charts is GAAP). For balance sheet results, DOX ended the most recent quarter with $502.2 million in cash, equivalents, and short-term investments and $646.1 million in total debt, all of which was long-term. Over the trailing twelve months, free cash flow was an impressive $672.2 million and capital expenditures were $106.7 million. The company paid $103.3 million in stock-based compensation in the last four quarters, so the free cash flow net of SBC was $568.9 million. The net dollar decrease in stock outstanding for the last four quarters was valued at $576.5 million. In the past year, DOX's stock price has dropped by 2.1% vs. that of the benchmark iShares Expanded Tech-Software Sector ETF's (IGV) gain of 25.7%, as the chart illustrates below. TradingView A handy major financial and operating metrics table for the trailing twelve-month period and forward guidance is shown here:       Metric Amount   EV/Sales (\"FWD\") 2.0   EV/EBITDA (\"FWD\") 9.2   Price/Sales (\"TTM\") 2.0   Revenue Growth (\"YoY\") 3.6%   Net Income Margin 10.2%   EBITDA Margin 18.8%   Market Capitalization $9,750,000,000   Enterprise Value $10,090,000,000   Operating Cash Flow $778,880,000   Earnings Per Share (Fully Diluted) $4.34   FY 2024 FWD EPS Estimate $6.44   Rev. Growth Estimate (\"FWD\") 4.4%   Free Cash Flow/Share (\"TTM\") $5.77   Seeking Alpha Quant Score Hold - 2.75   Click to enlarge (Source: Seeking Alpha). The company's Rule of 40 performance has worsened significantly on a year-over-year basis due to both reduced revenue growth and lower operating margin, as the table indicates below:        Rule of 40 Performance (Unadjusted) FQ3 2023 FQ3 2024   Revenue Growth % 7.6% 3.6%   Operating Margin 19.5% 15.3%   Total 27.1% 18.9%   Click to enlarge (Source: Seeking Alpha). Why I'm Neutral On Amdocs DOX has produced slow revenue growth, year-over-year earnings per share decline, and reduced operating margin, so I don't see a meaningful organic catalyst for the stock any time soon. So, for its capital allocation strategy, the company continues to buy back stock and seek M&A deals in the focus areas of cloud, digital modernization/transition, and AI-driven technologies. The problem with the AI portion of its strategy, which many similar companies have, is that DOX will need to spend now on AI technologies while clients are still at the early stages of evaluation and are mostly focused on pilot projects for cost-takeout initiatives rather than more ambitious 'transformational' work. This is resulting in downward earnings pressure on many software companies as they spend in advance of client demand. Yet, what choice do these firms have? They know that the benefits of generative AI technologies are significant in customer experience and automation of various internal and external processes, so they have to keep up with their competitors lest they be left behind when clients become more ambitious. The graphic below shows the frequency of various negative terms used in the most recent conference call between management and analysts. Seeking Alpha The chart shows significant macro challenges and uncertainties the company and its clients are facing in the current environment, with customers slowing their purchase decision-making processes and increasing their expense scrutiny. Against this dour backdrop, the company posted a record 12-month backlog of $4.25 billion, due to 'a positive mix of projects, awards, managed services, renewals, and expansions with existing customers and new logos and has traditionally served as a new leading indicator of our business.' So, perhaps my hesitation will turn out to be overdone, and this backlog indicator will presage an upturn in topline growth.  Nevertheless, I remain Neutral on DOX due to growth trends and macroeconomic conditions until management can begin to convert that higher backlog into higher revenue growth.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"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":"4.28.3","shortVersion":"4.28.3","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/2461279511"}