Resurgent Amdocs expands into banking market

Tamar Rapaport-Dagim credit: Yossi Cohen
Tamar Rapaport-Dagim credit: Yossi Cohen

The flourishing Israeli business software giant is bringing its experience in overcoming disruption in the telecom market to banking and finance.

Israeli business software giant Amdocs Ltd. (Nasdaq: DOX) is nearing a symbolic threshold share price of $100, close to its all-time high. The share price has risen 5% since its financial results were published two weeks ago, making it Israel's fifth most valuable company after Mobileye, SolarEdge, Check Point and NICE Systems, with a market cap of $11.4 billion.

Since the start of 2023, Amdocs has risen by less than 10%, while the Nasdaq index is up 21%. But last year, Amdocs share price rose by 24% while the Nasdaq index slumped 33%.

The company, led by CEO Shuky Sheffer, provides IT systems for telecom companies. Amdocs solutions allow telecom operators including mobile phone, landline and cable providers, to manage all operations and services with their subscribers. Amdocs has nearly 30,000 employees worldwide.

At a conference organized this week by Oppenheimer in Tel Aviv, Amdocs SVP & CFO Tamar Rapaport-Dagim spoke about the company's activities and new engines of growth, which are not in its traditional market. In recent years, Amdocs has been stressing the finance and banking market and has set up a business unit targeting this market, which is a type of fintech company within Amdocs. At this stage the company is providing any numbers or forecasts but it already serves large customers in the US and elsewhere. For example, Amdocs recently reported a collaboration with Bank Hapoalim in which its solutions enable the Israeli bank to quickly launch digital services for its customers.

Rapaport Dagim says, "We are looking beyond the telecom market, not necessarily as something that will lead to a leap forward in the next year or two, but more in a long-term perspective. The world of banking is relevant to us in terms of capabilities, we already have several dozen clients, and the momentum is good. We have not yet made a significant strategic decision on how to break into the market, and that means we will have to make an acquisition. This is one of the interesting areas for Amdocs over the next decade."

A boost from the banking crisis

Amdocs previously ventured into the financial market back in 2004, when it reported a contract with a large Dutch bank, and later served other customers in the field. However, today's activity is more strategic and less opportunistic in the market, and Amdocs has made acquisitions in areas that are of interest to banks, such as moving to the cloud. The goal is to help them modernize their systems in order to allow them to operate quickly in an industry that is undergoing disruption, with a rapid transition to digital, closing of branches and competition from fintech companies. Amdocs sees itself as having experience in the field in the disruptions that have happened to the telecom industry, therefore in believes it will be able to do the same in banking, thus significantly increasing the market that it is targeting in the future.

The current crisis in US banking may benefit Amdocs. Just as mergers in the telecom industry created work for the company in the past (because it provided companies with the systems related to integration and replacing old systems of the acquired companies, for example), so it may benefit from a similar trend in the banking industry.

On the telecom industry, Rapaport-Dagim told the Oppenheimer conference, "In the world prior to Covid, telecom operators invested mainly in the transition to digital. If we used to call a service center, today we want to be in touch with the company at any point in time. The digital revolution has produced low annual growth rates of 2%-3% for us, with market leadership. Over the past few years, we have expanded to other significant growth engines and expanded our target market."

She added, "The transition of the industry to the cloud is just beginning, there will be investments of billions of dollars. We have developed capabilities in this area, and we have acquired several companies. We are a company that already serves many customers in a managed services model, with long-term contracts for operating the IT systems for the customer. The transition to the cloud is a decision point, (which allows the customer to switch to the management of Amdocs)."

Other trends she mentions are the transition of networks to software (virtual networks), where Amdocs has expanded its capabilities through acquisitions, and according to her this is a market worth billions of dollars that is just starting out, as well as 5G cellular which is leading "A tremendous wave of investments from telecom operators."

According to Rapaport-Dagim, 5G networks for the first time allow the allocation of a share of the network for the benefit of a certain service or group of customers - for example, a gaming company can cooperate with a telecom provider and sell gamers a communication package. "It's a change in terms of services and monetization," she said. "The telecom operators understand that they are investing billions in the network and it must come with software applications that allow monetization, and that's where we come in 'big time' because our systems allow it."

"Translating profit to cash

"We have become a company that is reporting 6-10% growth annually, and this translates to strong profitability - double-digit growth in net earnings per share," Rapaport-Dagim explained. "Beyond this there is also a translation from profits to cash. There are companies that think it is 'sexy' to report on profit without translating it to cash flow but for us they go together."

In the first half of financial year 2023 (the first half ending in March), Amdocs revenue grew 7.1% to $2.4 billion while GAAP net profit fell 4.4% to $279 million, although non-GAAP net profit rose 4.3% to $356 million, and operational cash flow amounted to $378 million. The annual forecast is for free cash of $700 million.

According to Rapaport-Dagim, the lion's share of the cash that the company earns goes to shareholders through buy-back programs and dividends. At the same time, Amdocs is investing in R&D and mergers and acquisitions. This month Amdocs announced the acquisition of the activities of TEOCO for $90 million.

Published by Globes, Israel business news - - on May 23, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Tamar Rapaport-Dagim credit: Yossi Cohen
Tamar Rapaport-Dagim credit: Yossi Cohen
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