AMDOCS LTD Q4 FY2025 earnings call

• Fiscal 2025 saw revenue grow 3.1% in pro forma constant currency, with cloud achieving double-digit growth and long-term managed services accounting for 66% of revenue. • In the fourth quarter, revenue exceeded the guidance midpoint, non-GAAP EPS was above guidance, and the 12-month backlog grew. • Notable deals included a multiyear managed services SaaS agreement with AT&T, wins at Lumen Technologies and TELUS, and progress in generative AI with deals like the one with Telefonica Germany. • Focus areas included cloud with ongoing migration projects and adoption of SaaS platforms, and investment in generative AI with acceleration of the Cognitive Core development.

In fiscal 2025, cloud contributed over 30% of total revenue, and long-term managed services reached a record 66% of revenue. For the fourth quarter, revenue was $1.15 billion, up 2.8% year-over-year in pro forma constant currency. Non-GAAP diluted earnings per share was $1.83, slightly above the guidance midpoint. The 12-month backlog stood at $4.19 billion, up $40 million sequentially and 3.2% year-over-year.

• For fiscal 2026, revenue is expected to grow 1.7%-5.7% reported and 1.0%-5.0% in constant currency. • Non-GAAP operating margin is anticipated to be between 21.3%-21.9%. • Non-GAAP diluted EPS growth is projected to be 4%-8%. • There is an impact from T-Mobile's reduced discretionary spending, but a stronger second half growth is expected; the tax rate is expected to increase due to regulations like Pillar 2 and higher finance costs are also anticipated.

• Uncertain global macroeconomic environment may affect customer demand and spending. • Regulatory changes such as the Pillar 2 global minimum tax and other international tax requirements can impact the effective tax rate. • Higher finance costs due to a reduced cash balance and funding for strategic growth plans.

Q: You've had a lot more experience with AI at this point. Can you just talk about maybe qualitatively how impactful you think it will be to the telecom industry? And how much can you think improve productivity over time and generate kind of new services? And related to that, I guess the same thing internally, how much can it improve your own productivity internally? I realize you are reinvesting a lot of that productivity in R&D and in investing for longer-term growth?

A: Thank you, Tim. We are evolving our offering in the GenAI domain. Internally, we are using more generative AI capabilities in software development and operation, which is gradually improving in cost, quality, and speed. From the customer perspective, initial offerings were add-ons, but now we have the Cognitive Core which will add a layer to BSS systems, bringing new capabilities and being a growth engine.

Q: I guess I wanted to just probe the decision to kind of reallocate more capital into the business from an R&D perspective. I heard certainly what you said about building more agentic capability. I guess I'm just looking for sort of the puts and takes, right? You're implementing AI internally. You've been on a path of generating 60 or 70 basis points of efficiency each year. The coming year, it's going to be more like 20 basis points. Is that the amount of the investment, that incremental 50 or so basis points. Is that the right way to look at it? And -- or are there some other kind of growth factors we should look at?

A: Yes. Most of the margin story is the intentional decision to invest more in the exciting GenAI opportunity. We are reinvesting to capture growth, not just in R&D but also in sales and marketing. We are moving from proof of concept to actual commercial deals, seeing progress with examples like Telefonica Germany and PLDT, and there's a great opportunity there.

Q: I have like 5 questions. So stop me when I'm going through too much. Cash flow is down next year. Why is it? And then I have -- I'm not asking the question in any order. Maybe I'll ask 2 at a time. But also the growth, if I take your midpoint on a constant currency basis, the growth is not showing much acceleration from this year. It's actually below -- slightly below Street expectations. What are the puts and takes in the growth because you also made the disclosure that T-Mobile is going to be down in 2026. So can you kind of elaborate on the good parts and the parts that are maybe more flattish and declining? I thought after some discontinuation of businesses, growth should somewhat accelerate from where we are or where we were?

A: Thanks, Tal. Regarding cash flow, we ended 2025 with adjusted cash flow of $735 million, which is within the guidance range. For revenue growth, the strong sales quarter in 2025 will contribute to the second half of 2026 growth, but there's pressure from T-Mobile's reduced discretionary spending. T-Mobile is a major customer, and while we support them, they are reducing some discretionary spend.

Q: Tamar, can you elaborate on your top 10 customers? That's number one. This is kind of -- you normally give this time of the year, you give the disclosure in the K, if you have the data. And then just on T-Mobile, they announced they made a disclosure that they are starting to transfer customers to a new billing system, and they made a few days ago. And the question is, is this kind of an end of a project? That's why revenues are going to be down? And is this normal for big transformational projects that at the end, you start to see a decline? When you say discretionary spending, it looks like things are being pushed out. And I'm wondering if it's really things that are being pushed out or being deprioritized versus the big contract that is basically done?

A: Tal, we typically provide top customer information in the annual report due in December. Customer diversification is evolving positively, with more international names becoming top customers. Regarding T-Mobile, we can't comment on specific project plans, but we've taken reasonable assumptions into the guidance.

Q: Last question. I promised you 5 questions. So last question. You -- in the last year, you implemented AI in order to save -- to improve margins in order to reduce costs, and you've done it very successfully. And now you are talking about increased costs. Tell us about the margin trajectory, meaning on one hand, you are reducing expenses. On the other hand, you are spending more. What drives the increase in spend? And how soon could it translate into accelerated growth?

A: Tal, without generative AI capabilities in software development, there could be margin pressure. But we're able to accelerate GenAI investment and still increase margin by using developed capabilities to work faster, better, and with higher quality.

Q: This is Adam, on for Shlomo. What is the organic constant currency growth implied in the guidance for fiscal 1Q '26 and full year '26? There's some commentary around some contribution from inorganic deal activity. If you could talk about that, please.

A: We expect roughly half of the growth to come from inorganic. In 2025, we had some inorganic contribution, and we want to capture strategic growth opportunities like fiber through inorganic deals.

Q: Okay. And the change in AI spend, where are you seeing customers put their budgets and capital? And how does that match up to the areas where you're stepping up investments in GenAI?

A: So far, most investment is in building agents and use cases for call center activities. Now, we're moving to augment core billing systems with the Cognitive Core layer, which is a larger scale of capabilities relevant to all Amdocs customers.

Q: Okay. And there was some commentary about some pressure from below-the-line items just on the modeling side. What areas specifically you're referring to and what's driving that?

A: Specifically, tax rates are affected by regulations like Pillar 2 minimum tax, moving the effective tax rate range. Also, financing costs increase due to a reduced cash balance and funding for strategic growth plans.