- Amdocs reported its 2023 fiscal Q1 earnings, which beat expectations.
- Strong demand for solutions capturing themes like 5G, network automation, and cloud integration are driving growth and supporting a positive outlook.
- The company hiked its dividend rate by 10%, which now yields 1.8% on a forward basis.
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Amdocs Ltd. (NASDAQ:DOX) offers software and services specialized for the communications and media industries. The solutions cover everything from the infrastructure side of network development and testing, to analytical tools for critical functions like content delivery and subscription management. The attraction here is an ongoing industry shift into cloud-native capabilities and seamless integration with the internet of things (IoT).
There are plenty of buzzwords in there but the takeaway here is that business is strong with Amdocs just reporting its latest quarterly results highlighted by record revenues and strong profitability. Indeed, shares have been a winner over the past year, up more than 25%, as an exception to the broader market volatility.
We like the stock for its high-quality fundamentals and dividend growth profile considering its 10-year history of increasing the quarterly rate. We believe shares remain attractively priced and have more upside through 2023.
DOX Earnings Recap
DOX reported its Q1 fiscal 2023 earnings with non-GAAP EPS of $1.45, which came in $0.11 ahead of the consensus, and up from $1.20 in the period last year. Revenue of $1.2 billion also beat estimates and was up 7.3% year-over-year. As mentioned, this was a record quarter for the company reflected in the non-GAAP operating margin reaching 17.7%, up 20 basis points from Q1 2022.
Management noted that the operational momentum was driven by several key project wins with new contract awards while expanding on existing customer relationships. On this point, keep in mind that the business is global with Amdocs generating approximately 31% of sales outside North America.
A theme during the earnings conference call was that demand has been strong based on an underlying strategic tailwind in the industry by companies to push out more 5G compatible services. Beyond tier 1 U.S. telecoms like Verizon Communications Inc (VZ), AT&T (T), and T-Mobile (TMUS) as customers, Amdocs also services international names.
On the media side, the "Vubiquity" group is recognized as a market leader that helps manage the formatting and licensing of video content across different channels including streaming. Companies like The Walt Disney Co (DIS), Paramount Global (PARA), and Warner Brothers Discovery Inc (WBD) utilize Amdocs' platform.
The sense is that the demand from these core segments has been relatively resilient to macro headwinds evidenced by the company's backlog that climbed to $4.1 billion, up 7% y/y. The expectation is that roughly 80% of that figure can convert into revenue over the next 12 months incremental to any new business.
From there, an important development this quarter was the updated guidance with a revision higher to the full-year 2023 earnings estimate. Amdocs now expects 2023 non-GAAP EPS to climb between 9% and 13% from a prior midpoint estimate of 10%. The expectation is to capture further operating margin gains based on some recent efficiency efforts. At the top line, the forecast is for revenue growth between 6% and 10%.
Finally, we can bring up the company dividend. Amdocs just hiked the quarterly rate by 10.1% to $0.435 per share, with shareholders on record as of March 31st eligible for the payout set on April 28th. Considering the full-year guidance implying an EPS for 2023 of around $5.38, the annualized dividend rate implies a payout ratio of 32%, which is well supported by the underlying cash flows.
Our interpretation of DOX's dividend being high-quality is a view confirmed by Seeking Alpha's quant-based "Dividend Grades" which assigns the stock an A grade for safety relative to the sector. DOX also screens well for dividend growth and consistency. The forward yield on the stock at 1.8% is attractive within the technology sector and among "SaaS" names.
The other point here is the company's solid balance sheet. Amdocs ended the quarter with $735 million in cash against $650 million in debt. This is in the context of an outlook for the company to generate $700 million in free cash flow this year. The company also has an existing share repurchasing authorization of around $400 million. The goal is to ultimately return upwards of 100% of free cash flow to shareholders between the dividend and buybacks.
What's Next For DOX?
When looking at DOX, what stands out is the company's differentiated market positioning and segment leadership with best-in-class solutions for specific industry use cases. The long-term thesis is that "megatrends" like network "cloudification", 5G applications, and connectivity on demand everywhere are still in the early stages. For all the progress and adoption in these areas in countries like the U.S., other parts of the world are still years behind which remain opportunities for Amdocs moving forward.
All indications are that the company can repeat its success from the past decade for the next 10 years. The current consensus is for annual revenue growth to average in the mid-single digits through 2025, while EPS can trend a bit stronger around the 11% range.
These are solid figures, but not necessarily exceptional as a growth stock. On the other hand, the forward P/E of 16x is more attractive when remembering that DOX is still a tech and "SaaS" name, which is in contrast to larger peers that trade at even higher multiples.
From the annual report, Amdocs cites various tech players that offer similar solutions geared toward various sectors. We find that DOX's earnings multiple is around the average for a group that includes Oracle Corp (ORCL), Salesforce Inc (CRM), ServiceNow (NOW), Cognizant Technology Solutions Corp (CTSH), and Ciena Corp (CIEN) and others.
By this measure, DOX can be seen as reasonably priced, with a valuation supported by its overall fundamental quality. In some ways, the connection with themes like 5G and streaming media services could justify a higher premium in our opinion.
DOX Price Forecast
We rate DOX as a buy with a price target for the year ahead at $115 representing a forward P/E of 20X on the current 2023 consensus EPS. Our thinking here is that the market should continue rewarding shares based on its high free cash flow yield and consistent history of solid financial execution.
The latest dividend hike confirms management is shareholder friendly and we also see room for a new larger buyback authorization later this year. Global telecoms and momentum in international media streaming can be a growth driver over the next several years allowing Amdocs to outperform expectations.
Monitoring points over the next few quarters include the operating margin and cash flow trends. The main risk for the stock and any bullish case would be more concerning deterioration to the macro environment. Weaker-than-expected results could open the door for a repricing in shares lower.
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This article was written by
Dan Victor, CFA is a market professional with more than 15 years of investment management experience across major financial institutions in research, strategy, and trading roles. Dan is the president of Posto Asset Management - a startup investment advisory firm based in Miami Beach, Florida.Dan leads the investing group Learn more
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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