- Amdocs (DOX or “the Company”) is a cryptic entity based in the tax-dodge haven of Guernsey that provides revenue management, BPO and IT services primarily to telecoms. Industry forces have dragged on sales growth to the point that Amdocs appears to be in organic decline. We believe that DOX has engineered superficial top and bottom-line growth alongside unusually stable margins through opaque M&A, aggressive percentage-of-completion accounting, software cost capitalization, and repeated one-off net tax benefits. Challenged FCF growth, self-imposed minimum cash balances, and likely leverage limits will constrain DOX’s ability to pursue growth via M&A going forward. We are also concerned that DOX is accelerating its earnings-inflating cost capitalization scheme by constructing a new Israeli campus. An obscured JV loan, receivable factoring, and capex statements which hide asset sales all point to slowed underlying FCF growth. With insider ownership at an all-time low, evidence that management is milking DOX’s cash through aggressive option comp schemes, and Board members tied to allegations of option back-dating and software cost capitalization, we believe that shareholders should keep a vigilant eye on management’s accounting practices and compensation decisions.
- Suspiciously Steady Margins: Amdocs shows remarkably steady margins for a firm which frequently absorbs acquisitions ($1.6B since 2012), which should have some degree of operating leverage, and whose business has come under pressure from its largest customer (AT&T). Peers and telcos show much more natural margin variability. Unusually steady margins support our suspicion that Amdocs engages in aggressive percentage-of-completion accounting.
- Growing Divergence Between Adjusted And GAAP Metrics: Amdocs’ proprietary Adjusted EPS measure has grown steadily through the last 5 years, while GAAP EPS and cash flow have been flat to down over the same period despite the Company’s M&A-fueled growth. Spruce Point has observed both of these patterns among numerous companies on which it has published research, and feels that they are strong indicators of impending financial strain.
- Questionable One-Off Tax Items: DOX claims up to $60M of one-off net tax benefits on a yearly basis, with the specific sources of these benefits changing almost every year (it claimed $28M in benefits related to its spending on its new campus in FY 2018). We do not believe that these benefits – worth 10% of EBT in FY 2018 – are a sustainable source of earnings. Excluding these items, Amdocs’ tax rate looks much closer to that of most companies.
- Struggles Generating Cash: In Dec ‘18, DOX began to disclose that it factors accounts receivable (on non-transparent terms). It also obscured a loan issued via a recently-formed JV to finance its new HQ, despite saying previously that it could finance the project internally without material impact to results.
- Who Signs DOX’s 20-F And Credit Agreement: We observe that DOX’s Head of IR/Secretary signs its 20-F and Credit Agreement. Our research shows that this is a highly unusual practice: the CEO generally signs the 20-F, while the CFO and/or Treasurer normally signs Credit Agreements.
- Closely Tied To A Low-Growth Industry: As IT support for major telcos, Amdocs’ organic growth is ultimately tied to a stagnant industry – AT&T in particular (~30% of sales). Management attempts to describe industry trends such as consolidation as a tailwind for the Company, but, in reality, slow growth among telcos translates into slow organic growth for Amdocs – particularly as elements of revenue management software become less complex.
- Management Engages In Frequent M&A To Grow Sales: Amdocs has purchased a jumble of IT and media businesses through the past decade to support growth where it can’t generate its own. Many of these businesses appear to be only tangentially relevant to Amdocs’ core services, and are only partially integrated into Amdocs once acquired. Without these acquisitions, we estimate that Amdocs generates zero to negative organic growth.
- Management Not Transparent About Inorganic Sales Contributions: Management is frequently asked on earnings calls about the contribution of acquired businesses to total revenue. It often writes them off as “small” even when the announced purchase price is relatively sizable – and, when it does give more granular details, it appears to understate their likely contribution, thus inflating implied organic revenue growth.