Amdocs (DOX)

Telecom software provider Amdocs (NASDAQ:DOX) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 9.4% year on year to $1.13 billion. The company expects next quarter’s revenue to be around $1.13 billion, close to analysts’ estimates. Its non-GAAP profit of $1.78 per share was 4.5% above analysts’ consensus estimates.

Company Overview

Powering the digital experiences of approximately 400 communications companies worldwide, Amdocs (NASDAQ:DOX) provides software and services that help telecommunications and media companies manage customer relationships, monetize services, and automate network operations.

The Enterprise Networking subsector is poised for growth as businesses accelerate cloud adoption, AI-driven network automation, and edge computing deployments. While these seem like big, nebulous trends, they require very real products and services like switches, firewalls, and datacenter hosting services. On the other hand, challenges on the horizon include intensifying competition from cloud-native networking providers, regulatory scrutiny over data privacy and cybersecurity, and potential supply chain constraints for networking hardware. While AI and automation will enhance network efficiency and security, they also introduce risks related to algorithmic bias, compliance complexity, and increased energy consumption.

Amdocs competes with a diverse set of companies across different segments of its business, including telecom software specialists like CSG International, Netcracker, and Optiva; enterprise software giants such as Oracle, Salesforce, and SAP; IT service providers including Accenture, Infosys, and Tata Consultancy Services; and network equipment vendors like Ericsson, Nokia, and Huawei.

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $4.75 billion in revenue over the past 12 months, Amdocs is one of the larger companies in the business services industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because finding new avenues for growth becomes difficult when you already have a substantial market presence. To expand meaningfully, Amdocs likely needs to tweak its prices, innovate with new offerings, or enter new markets.

As you can see below, Amdocs’s 2.8% annualized revenue growth over the last five years was sluggish. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Amdocs’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

Amdocs also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Amdocs’s backlog reached $4.17 billion in the latest quarter and averaged 1.6% year-on-year growth over the last two years. Because this number is in line with its revenue growth, we can see the company effectively balanced its new order intake and fulfillment processes.

This quarter, Amdocs reported a rather uninspiring 9.4% year-on-year revenue decline to $1.13 billion of revenue, in line with Wall Street’s estimates. Company management is currently guiding for a 9.6% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 3.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Amdocs has been an efficient company over the last five years. It was one of the more profitable businesses in the business services sector, boasting an average operating margin of 14%.

Looking at the trend in its profitability, Amdocs’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Amdocs generated an operating profit margin of 17.5%, up 5 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Amdocs’s EPS grew at a decent 8.9% compounded annual growth rate over the last five years, higher than its 2.8% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

Diving into the nuances of Amdocs’s earnings can give us a better understanding of its performance. A five-year view shows that Amdocs has repurchased its stock, shrinking its share count by 16.7%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, Amdocs reported EPS at $1.78, up from $1.56 in the same quarter last year. This print beat analysts’ estimates by 4.5%. Over the next 12 months, Wall Street expects Amdocs’s full-year EPS of $6.76 to grow 7.8%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Amdocs has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 13.4% over the last five years.

Taking a step back, we can see that Amdocs’s margin dropped by 4.6 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Amdocs’s free cash flow clocked in at $156.5 million in Q1, equivalent to a 13.9% margin. This result was good as its margin was 4.8 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Amdocs’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 15%, slightly better than typical business services business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Amdocs’s ROIC averaged 1.1 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Amdocs reported $323.7 million of cash and $787.7 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.02 billion of EBITDA over the last 12 months, we view Amdocs’s 0.5× net-debt-to-EBITDA ratio as safe. We also see its $30.48 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Amdocs blew past analysts’ full-year EPS guidance expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, EBITDA missed and its EPS guidance for next quarter missed. Overall, this print was mixed. The areas below expectations seem to be driving the move, and the stock traded down 3.5% to $86.26 immediately after reporting.

Updated: May 21, 2025 at 11:52 PM EDT

Before making an investment decision, investors should account for Amdocs’s business fundamentals and valuation in addition to what happened in the latest quarter.

We cheer for all companies serving everyday consumers, but in the case of Amdocs, we’ll be cheering from the sidelines. To kick things off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its cash profitability fell over the last five years. On top of that, its backlog growth has disappointed.

Amdocs’s P/E ratio based on the next 12 months is 12.6x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $101.61 on the company (compared to the current share price of $89.50).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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