Amdocs Ltd Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Amdocs’ Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. It is now my pleasure to introduce Head of Investor Relations, Matt Smith.

Thank you, operator. Before we begin, I would like to point out that during this call, we will discuss certain financial information that is not prepared in accordance with GAAP. The Company’s management uses this financial information in its internal analysis in order to exclude the effect of acquisitions and other significant items that may have a disproportionate effect in a particular period. Accordingly, management believes that isolating the effects of such events enables management and investors to consistently analyze the critical components and results of operations of the Company’s business and to have a meaningful comparison to prior periods. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today’s earnings release, which will also be furnished with the SEC on Form 6-K. Also, this call includes information that constitutes forward-looking statements, although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future results to differ from those anticipated. These risks include, but are not limited to, the effects of general economic conditions, the duration and severity of the COVID-19 pandemic and its impact on the global economy, and such other risks as discussed in our earnings release today and at greater length in the Company’s filings with the Securities and Exchange Commission including in our annual report on Form 20-F for the fiscal year ended September 30, 2019, filed on December 16, 2019, and our Form 6-K furnished with the first quarter of fiscal 2020 on February 18, 2020, for the second fiscal quarter of fiscal 2020 on May 18, 2020, and for the third quarter of fiscal 2020 on August 17, 2020. Amdocs may elect to update these forward-looking statements at some point in the future. However, the Company specifically disclaims any obligation to do so. Participating on the call with me today are Shuky Sheffer, President and Chief Executive Officer of Amdocs Management Limited; and Tamar Rapaport-Dagim, joint Chief Financial and Operating Officer. Finally, a copy of today’s prepared remarks will be posted on the Investor Relations section of Amdocs’ website following the conclusion of this earnings call. And with that, I will turn it over to Shuky.

Thank you, Matt, and good afternoon to everyone joining us for our fourth fiscal quarter earnings call today. I want to begin by reviewing our quarterly full-year operating performance after which I plan to address some important strategic steps that we have taken to accelerate our long-term growth around 5G and the cloud. I will wrap up with a quick summary of our financial outlook for fiscal 2021, including our expectation for faster pace of revenue and non-GAAP diluted earnings per share growth in the year ahead. With that, I’m pleased to report record fourth quarter results, which include the return to sequential revenue growth. Among additional operating highlights, we delivered consistent execution, accelerated our R&D investments, maintained stable profitability and achieved our best-ever quarter for cash collections. Amid the ongoing global pandemic, we are also pleased to see the acceleration in sales momentum as reflected in our record 12-month backlog, which grew $140 million sequentially and 3.7% year-over-year in the fourth quarter. As to the full fiscal year 2020, revenue grew 2% as reported, while non-GAAP earnings per share was up 3% year-over-year, both of which were at the higher end of the revised guidance we provided in Q2. Our ability to generate modest revenue and earnings growth during a global pandemic is a testament to the strength of our technology and our product-led services model and the visibility provided by our solid base of highly recurring revenue streams. These recurring revenues accounted for roughly three quarters of total revenue in fiscal 2020, a large portion of which flows from Managed Services engagements with customers under multiyear agreements. As further proof of our stable business model and their ability to meet our customer commitments, we generated normalized free cash flow of $527 million in fiscal 2020, which exceeded our initial target of $480 million for the year. Overall, I’m proud of our financial performance in fiscal 2020, which was made possible by our talented employees to whom I’m grateful for their extraordinary professionalism and commitment throughout the ongoing pandemic. Additionally, let me again thank our customers for their continued trust in Amdocs as we partner to ensure the essential services the world needs in this difficult time. Now let me provide some color regarding our regional business activities. Beginning with North America. We finished a positive year, which included a better-than-expected growth at AT&T and contribution from M&A. Across the broader region, we supported the strategic activity of customers like Comcast Business where our open modular BSS and OSS platform are being implemented to automate and streamline at scale end-to-end customer lifecycle. Regarding the outlook in North America, regional market dynamics are favorable and supportive of growth. Service providers are continuing with strategic investments in digital modernization, media, 5G and the cloud including AT&T, where last quarter, we said that Amdocs started the program to modernize the consumer mobility domain. We are encouraged by positive signs of momentum in this area. As demonstrated by today’s news that AT&T has selected our 5G solution to quickly launch and monetize exciting new 5G services, including gaming, mobile virtual reality, vehicle-to-vehicle communication, remote sales and much more. This leverages 5G monetization capabilities from our recent acquisition of Openet and highlights the way in which we are collaborating with AT&T to bring innovative 5G experiences for the future. At T-Mobile, we continue our strategic partnership, working hard to demonstrate our ability to support T-Mobile’s strategic domains of postpaid, media, enterprise B2B, 5G network and more. In respect to 5G, Amdocs is collaborating with T-Mobile and others as one of the founding partners of the 5G Open Innovation Labs, which is focused on helping service providers accelerate the wave of 5G advancements around cloud, edge computing, IoT and new customer experiences. Finally, we have won a notable new project with a North American banking group, where we have been selected as a partner to accelerate customer experience and digital transformation and corporate operation. This leverages the proven capabilities of projekt202, which, to remind you, is a digital consultancy we acquired in fiscal 2018 for its design and experience-driven methodologies across different verticals. Combined with Amdocs’ transformation expertise, we look forward to teaming with this financial services leader to frame the design, development and delivery of the very best experience for their customers and employees. Moving to Europe. We delivered our best-ever quarter, which includes new deal wins and ongoing project activity with some of the region’s largest service providers like Vodafone Germany and now in Spain. During Q4, we maintained a high win rate that includes the digital transformation award at A1 Bulgaria, a cloud-based provisioning and 5G-ready converged charging deal at Sky U.K. and the signing of our first project in a multiyear Managed Services deal into the U.K. This was a busy quarter in media. Vubiquity extended its partnership with Israel’s Cellcom to provide content licensing and processing and was selected to provide content services under a multiyear agreement servicing AGI European affiliates. Vubiquity also successfully completed a significant and complex technology project for Sky and Virgin Media, whereby it processed over 1,200 hours of Sky 4K UHD content to Virgin Media’s IP VOD platform via Vubiquity’s AWS cloud. Regarding the year ahead, we expect to sustain growth in Europe by executing against our healthy backlog and further expanding our customer footprint throughout the region. Turning to the rest of the world, sequential drag improved slightly in the fourth quarter. Demonstrating our technology leadership in 5G, we successfully deployed catalog-based solutions for KT Corporation in South Korea. Additionally, LGU Plus, one of the fastest-growing 5G telecom providers in South Korea, has selected Amdocs’ cloud-native catalog solution to accelerate the launch of new 5G services, enabling its end customers to benefit from more frequent service innovation and added plays and bundles. In Managed Services, we reached a new multiyear agreement with India’s Airtel to migrate its mobile and broader customer systems to Amdocs’ modern digital business system. While in Brazil, Telefónica Vivo extended our existing multiyear agreement with an expansion of scope to include Amdocs’ data management solutions. Regarding the year ahead, in the rest of the world, quarterly trends are likely to fluctuate, reflecting healthy activity in Southeast Asia, ongoing macro challenges in Latin America and the project orientation of customer activities across the entire region. To summarize my regional comments, I believe we extended our market leadership in the fourth fiscal quarter. Our many project wins reflect the unique innovation we are bringing in the strategic domains where our customers are focusing their spending. One such domain is the telecom industry journey to the cloud, which we believe is approaching a tipping point, as service providers invest to realize the increasing agility, speed of innovation, fast time to market and reduced cost of ownership that is needed to meet the business demands of today. As a trusted customer partner, Amdocs is highly differentiated by our technology and product-led services model, which uniquely position us to accelerate the industry journey to the cloud. Amdocs’ BSS/OSS is in the very heart of the customer experience of more than 350 communications service providers worldwide, providing us with an intimate understanding of the communications environment and the expertise we need to help service providers transform the way they work. Our core cloud-native BSS/OSS products are best-in-class and we are already investing to bring fresh innovation using DevOps teams and CI/CD approaches that constantly enhance our platform, drive agility and shorten customer time to value. Amdocs has a range of services with which we offer every customer a ready and tailored-made journey to the cloud. These services include consultancy, migration and modernization services for new and legacy Amdocs and non-Amdocs BSS/OSS applications as well as supporting customers’ cloud-native application development and data capabilities. Additionally, Amdocs offers end-to-end accountability for the customer cloud operation, including secure and optimized hybrid cloud operation, packaged under multiyear next-generation cloud operations service agreements. The value of Amdocs' cloud offering is well-proven in the market as demonstrated by AT&T’s selection of our charging solution, which is designed to speed up its move to the cloud in addition to monetizing 5G. Additionally, many other new and existing customers have already chosen to modernize on Amdocs' newest cloud-native products, including Globe Telecom, Orange in Spain and Vodafone Germany. Looking ahead, we see an expanded pipeline of opportunities as the world premium service providers formulate and accelerate their cloud strategies. This strategy will be implemented gradually in the coming years, over which time we believe Amdocs’ addressable market for cloud services will grow to be billions of dollars. To help accelerate the market potential and Amdocs’ growth, we are today happy to announce a new multiyear strategic agreement with AWS to deliver integrated cloud-native BSS offerings and to jointly build and promote a wide range of services to help customers migrate and modernize their systems, utilizing best-in-class cloud capabilities. We look forward to working closely with AWS as well as with other firms like Microsoft Azure and Google Cloud to ensure that we are providing a path to the cloud for all current and future Amdocs’ customers. As part of another move to focus on our strategic domains, we are today starting an agreement for the divestiture of OpenMarket and other subsidiary assets for $300 million cash to Infobip, a company in which One Equity Partners is the primary institutional investor. Those of you who have followed Amdocs for a while may know OpenMarket as a leading provider of mobile messaging solutions to enterprises including global one-way and two-way SMS, MMS and other application-to-person messaging solutions. With this transaction, Amdocs is divesting nonstrategic assets and being laser-focused on our core strategic growth initiatives. We expect to complete the divestiture of OpenMarket within the next few months, and we plan to return the majority of the net proceeds to shareholders by way of our quarterly share repurchase program. Turning finally to our outlook for the year ahead. Let me remind you that we remain in a time of great uncertainty regarding the spread and the severity of the COVID-19 pandemic and its adverse effects on the global economy. Having said that, we expect our revenue growth in constant currency will accelerate to 3.5% to 7.5% in fiscal 2021, which is more than twice the rate of last year. Our confidence in the outlook is supported by the visibility of our record 12-month backlog as well as the expanding pipeline we see across our strategic growth domains. Moreover, we are positioned to deliver expected total shareholder return of almost 10% in fiscal 2021, including non-GAAP earnings per share growth of 5% to 9%, plus our dividend yield. With that, let me turn the call to Tamar for her remarks.

Thank you, Shuky. Fourth fiscal quarter revenue of $1.05 billion was slightly above the midpoint of our expectations of $1.02 billion to $1.06 billion. After adjusting for a positive impact from foreign currency of approximately $7 million compared to our guidance assumptions and a partial quarter from our recent acquisition of Openet, which was not yet included in the fourth quarter guidance range. On a reported basis, revenue performance included the positive impact of foreign currency fluctuations of approximately $11 million relative to the third fiscal quarter of 2020. Our fourth fiscal quarter non-GAAP operating margin was 17.2%, above the midpoint of our long-term target range of 16.5% to 17.5%, and consistent with our guidance that we will protect profitability despite COVID-19-related challenges. Below the operating line, non-GAAP net interest and other expense was $7 million in Q4. The mix of which includes interest expense related to the short-term borrowing, a full quarter of interest for the 10-year bond issuance and the impact of foreign currency fluctuations. For forward-looking purposes, we expect that foreign currency fluctuations will continue to impact our non-GAAP net interest and other expense lines in the range of a few million dollars on a quarterly basis. Diluted GAAP EPS was $1.23 in Q4, above our guidance range of $1.16 to $1.22. Consistent with guidance, our non-GAAP effective tax rate of 6.5% in the fourth fiscal quarter was below our annual target range of 13% to 17%. Diluted non-GAAP EPS was $1.01 for the fourth fiscal quarter, above the midpoint of our guidance range of $0.95 to $1.03. Free cash flow was $145 million in Q4. This was comprised of cash operations of approximately $205 million, less $60 million in net capital expenditures and other. Normalized free cash flow was $161 million in the fourth fiscal quarter. For the full fiscal year 2020, normalized free cash flow was $527 million; this exceeded our initial target of $480 million for the year and reflected a better-than-expected conversion rate of 108% relative to non-GAAP net income in the fiscal second half. Please refer to the reconciliation table provided in our Q4 earnings release for an explanation of the differences between normalized and reported free cash flow in the quarter and for the past period. With a strong collection in Q4, DSO of 75 days increased by 12 days year-over-year and was down by 10 days as compared to the prior fiscal quarter. We remind you that DSO may fluctuate from quarter-to-quarter. The sequential gap between unbilled receivables and trade revenue narrowed by two million compared to the third fiscal quarter of 2020, reflecting a decrease in total EBIT receivable of $2 million and an immaterial change in total deferred revenue short and long-term. Relative to a year ago, the gap narrowed by $28 million. Changes in this gap are primarily due to the timing of contract-specific milestones relating to transformation projects we are delivering to our customers. Moving forward, you should expect receivables and total deferred revenue to fluctuate from quarter-to-quarter in line with normal seasonality. Moving on, our 12-month backlog was a record $3.62 billion at the end of the fourth quarter, up $140 million sequentially from the end of the prior quarter and equivalent to year-over-year growth of roughly 3.7%. This record-high sequential growth in 12-month backlog is mainly a result of new awards across existing and new logos and a benefit of a few dozen million dollars of Openet backlog in this number. As a reminder, we believe our 12-month backlog continues to serve as a good leading indicator of our forward-looking revenue, and we are pleased to see it supporting visibility of over 80% entering the new fiscal year. I’m pleased to report another record quarter for Managed Services arrangements, which comprise roughly 58% of total revenue. This performance reflects high renewal rates, the growing adoption of our managed transformation model and the continued expansion activities within existing customers. Our cash balance at the end of the fourth fiscal quarter was approximately $984 million, which includes aggregate borrowings of $750 million. Our September 30 balance sheet reflects the acquisition of Openet for a net consideration of roughly $190 million in cash. We remain comfortable with our balance sheet and believe that we have ample liquidity to support our ongoing business needs, while retaining the capacity to fund strategic growth investments when the right opportunities arise. Additionally, we are committed to maintaining our investment-grade credit rating. During the fourth fiscal quarter, we repurchased $91 million of our ordinary shares under our current authorization. As of September 30, we had roughly $678 million of authorized capacity for share repurchases with no stated expiration date, which we will execute at the Company’s discretion going forward. Now turning to the outlook. The prevailing level of macroeconomic and business uncertainty surrounding the magnitude and duration of the COVID-19 pandemic remains elevated. The midpoint of our revenue guidance reflects what we consider to be the most likely outcomes based on the information we have today, but we cannot predict all possible scenarios and we remind you that our outlook may be impacted materially as our customers continue to evaluate their strategic business priorities and future pace of investment. As an additional point, our Q1 and full fiscal year 2021 outlook still includes OpenMarket as the transaction is not yet closed. Where applicable in our guidance remarks we will provide pro forma revenue and GAAP earnings per share guidance which excludes OpenMarket for fiscal year 2020 and 2021. The divestiture of OpenMarket is expected to close within the next few months, following which, we will update our full-year fiscal 2021 outlook. With that said, we expect revenue for the first fiscal quarter of 2021 to be within in the range of $1.055 billion to $1.095 billion. Our Q1 revenue guidance anticipates an immaterial sequential impact from foreign currency fluctuations. Regarding the full fiscal year 2021, we expect to deliver accelerated revenue growth in the range of 4% to 8% year-over-year as reported. This outlook includes the positive impact from foreign currency fluctuations of approximately 0.5 percentage points year-over-year and roughly 1.5 points of growth from Openet. To provide you with additional color on our growth projections, we expect the ramp-up of customer activity to contribute to an acceleration in the rate of year-over-year growth in the second fiscal half of the year. We are also pleased with the fact that growth is expected to be generated across all three of our key geographical regions. On a constant currency basis, we expect to deliver total revenue growth in the range of roughly 3.5% to 7.5% year-over-year. We anticipate our non-GAAP operating margins to be consistent with the higher end of an unchanged target range of 16.5% to 17.5% over the full fiscal year 2021. As we continue to operate within the environment of the ongoing pandemic, we remain focused on protecting our profitability while maintaining consistent execution and increasing R&D investments to support our future growth strategy. We expect the first fiscal quarter diluted non-GAAP EPS to be within the range of $1.09 to $1.15. With respect to Q1, we expect a net effective tax rate to be slightly above the high end of the annual range of 13% to 17%. Our first fiscal quarter non-GAAP EPS guidance incorporates an expected average share count of roughly 132 million shares. We excluded the impact of incremental future share buyback activity during the first fiscal quarter as the levels of activity will depend on market conditions. For the full fiscal year, we expect to deliver diluted non-GAAP EPS growth of 5% to 9% year-over-year. We expect our non-GAAP effective tax rate to be within our annual target range of 13% to 17% for the full fiscal year 2021. The impact of Openet on Amdocs’ non-GAAP diluted earnings per share is expected to be neutral in the full fiscal year 2021 and accretive thereafter. On a pro forma basis, given the effect of the OpenMarket divestiture, we expect to achieve the same revenue and non-GAAP diluted earnings per share growth in fiscal 2021, assuming the majority of the net proceeds are used to accelerate our share repurchase program in the remaining quarters of the fiscal year post-closing. We expect normalized free cash flow for fiscal 2021 of approximately $620 million which is equivalent to a conversion rate of roughly 100% relative to our expectations for non-GAAP net income. We expect reported free cash flow for fiscal year 2021 of approximately $470 million. Reported free cash flow includes our $250 million anticipated expenditures in relation to development of our new campus in Israel and other items. As an additional point, we expect fiscal year 2021 to be a peak year of capital expenditure for new company investments. Regarding our capital allocation plans, we expect to return to shareholders in the form of our dividend and share repurchases the majority of our normalized free cash flow in fiscal 2021. Moreover, we will carefully assess the deployment of capital in fiscal 2021, having regard to the status of the COVID-19 pandemic, the outlook for M&A, financial markets and prevailing industry conditions. Finally, we are pleased to announce the proposed 10% increase in our quarterly dividend to a new rate of $0.36 per share per quarter, which is subject to approval by shareholders at the annual meeting in January. If approved at the annual meeting, it would yield about 2.4% on the current share price. Taking the dividend increase into consideration, we expect some of our dilutive non-GAAP EPS growth midpoint, plus dividend yield to equate to total shareholder return of almost 10% in fiscal 2021. With that, we can turn it back to the operator, and we are happy to take your questions.

Thank you. Our first question comes from the line of Will Power with Baird.

Okay, great. Thanks for taking the questions. And great to see the expectation for accelerated revenue growth next year. Maybe my first question is on just that. As you look at digital transformation, I wonder if you could just talk broadly about the trends you are seeing from the service providers, why now and what is driving those efforts. And what are the pieces that could get you towards the higher end of that revenue growth guidance versus some of the areas of potential caution that might lead to the lower end.

Hi. It is Shuky. The reason for the further growth, we actually see a lot of demand in three different areas. First one, as you mentioned, is digital transformation. I think COVID-19 accelerated this. So we see pretty much it is consistent across all geographies. People want to change the whole way engagement with the consumer to be completely digitized and with the best experience. The second one is 5G, dominated by North America. Everyone is betting on 5G. 5G requires new monetization capabilities, obviously new charging and policy systems; we believe those are required, and then definitely with the Openet acquisition, we have one of the best products in the market. And the third one is the jump to the cloud. This is something that, as I mentioned in the script, is accelerating. All our customers are either in the process of, or are already in, the migration process of moving to the cloud. We are coming with a very robust offering for the jump to the cloud for every end of system, both new systems and legacy systems, and we believe this trend of moving whole systems to the cloud will accelerate. And we see ourselves as a main contributor to this journey to the cloud. Obviously, it is going to be accelerated with our partnership with AWS that we announced today.

Okay. And maybe for my follow-up, just coming back to Openet, it seems like that is already generating some nice opportunities. So I would just love to kind of hear what you are hearing from carrier customers now that it has been closed for a couple of months. How is the integration going? And as you look at that 1.5% revenue growth contribution for fiscal 2021, does that include the new AT&T win? Just any more color there.

First, I think that if you want to move to 5G and actually to get the value that the 5G network brings, you need to upgrade your charging and possibly your policy systems. And with Openet, we are bringing a cloud-native solution, both for charging and together with policy. So we see a lot of demand. We had a very nice win rate in Q1. We announced some of it in Q4. We announced all of it, including AT&T, which probably is the largest one. We see ongoing demand across all regions for this type of product. And to your question regarding AT&T and the outlook, yes, the answer is yes, AT&T is included. But we are very pleased with the post-merger integration. We see immediate traction. We are able to bring the Openet solution to our customers as a combination of a great product with great incumbency and customer relationships across the world; this has proven very successful.

Okay, great. Thank you.

Thank you. And your next question comes from the line of Shaul Eyal with Oppenheimer.

Thank you, good afternoon Shuky, Tamar and Matt. Congrats on achieving some record milestones. Shuky, also congrats on the many contracts you have announced. I wanted also to ask about specifically AT&T. Given it's a large customer, where else can you go with your expanding product portfolio? Do you think there are divisions or sales groups at AT&T you can penetrate further or approach with your services that are currently not under service?

First of all, we operate in many domains at AT&T. I mean, obviously, the consumer domain, in broadband, U-verse, DIRECTV, AT&T Mexico, in the network domain, in the data domain. So we are in media, obviously, with our activity in media. I think we see progress in all domains, but the main opportunities we see, as we reported last quarter, is that we started the consumer mobility transformation at AT&T. This is a strategic project for us. AT&T is buying our best and new products. Now on top of it, with the announcement this quarter, they are also going to use our charging solution and policy from Openet. If you listen to AT&T’s announcement, it looks like 5G and mobility in general is the main growth engine for AT&T. We are very happy to support AT&T in pushing this new solution to help them be very successful with the new 5G offering.

Got it. And my follow-up is, Tamar or Shuky, when we look at the quarterly revenues, when we factor out, when we exclude the Openet contribution and even foreign exchange, did revenues grow sequentially?

Yes, absolutely. And it was even ahead of the midpoint of guidance, absent those items. So while those were factors contributing nicely, even taking out Openet and taking out the positive impact of FX, we were ahead of the midpoint of the guidance range.

And as we said, after one quarter, we returned to sequential growth. This was another record quarter for us.

Understood. Congrats again on those milestones. Good job.

Thanks Shaul.

Thank you.

Thank you. And our next question comes from the line of Ashwin Shirvaikar with Citi.

Hi Shuky, hi Tamar. Congratulations on the quarter. I guess I want to get some clarification. The 4% to 8% growth, it's good to see. Is there any catch-up in that outlook from sort of the slowdown earlier this year or is that sort of more of a growth rate based on what you won and the bookings strength you have seen? In other words, based on some of these trends, which seem to be multiyear trends. Are you permanently ratcheting up to a solidly mid-single type of range?

Hi Ashwin, I don’t think we can call it a catch-up in the sense that, as you know, most of our revenue is not such that you just deliver a license and recognize for it. It is more of a fundamental change in the pace of signing and winning deals that is lasting now multiple quarters, if not years. Some of these deals are multiyear. So we are very pleased to see this momentum across regions, which is very important. Now looking into a multiyear outlook, I think it is a bit premature given the environment that we are in to say we can rerate on a consistent basis now to a 6%-ish revenue growth. But we are definitely seeing the growth drivers there. When we look at the multiple growth drivers that we have and the fact that many of them are performing well, of course, it is a much healthier base of growth opportunity. And when we look at, for example, the cloud, it is just beginning. The tipping point is now; we feel that the journey to the cloud of communications service providers is accelerating. Our product portfolio has been cloud-native for some years now. So it means that everything that goes out of the R&D shop is by definition cloud-native; we are continuing to see acceleration and the opportunities also helping service providers move to the cloud, including legacy applications that they have in incumbency. The pedigree that we have in helping them do that, including all the way to cloud operations, is a great opportunity with an addressable market in the billions of dollars that we are just starting to tap into. So I think it is a combination between more mature growth drivers like digital transformation, that COVID is helping to accelerate, then we have 5G that, as Shuky mentioned, is way ahead of the curve in the North American market and in South Korea, with Europe lagging and probably later on, and we see that momentum coming in APAC. And the cloud journey is accelerating as we speak. So I think there is enough firepower for multiyear growth. Now guiding to specific numbers for the long term may be a bit too soon.

Got it. No, that color is very helpful. And then obviously, we have seen for a number of years industry consolidation related uncertainty in the North American market. With T-Mobile’s completed merger with Sprint, what sort of opportunities are there? I know there is not full clarity, but are you getting incremental color or granularity with regards to the opportunity there? Can you perhaps discuss that?

As we discussed before, we have been very active in supporting the pre-merger activity and helping the new T-Mobile get ready for day one. So far, it looks like it was a very successful transition. We enjoy a very strategic partnership with the new T-Mobile. I think we have the right product and services to support them in all their main strategic goals as they clarified recently in their earnings: continuing to grow in the postpaid domain; continuing to expand in B2B; activity in media; and building out the 5G network. We are very active there. We have good discussions with them about what is next. We will be happy to report when we make more progress, but as I said before, we are enjoying a very strategic and productive relationship with them, and we have ongoing engagement about what will be right for them in the future.

Thank you.

Thank you. And our next question comes from the line of Tom Roderick with Stifel.

Hi Shuky, hi Tamar, hi Matt. Thank you for taking my questions, great to hear from you. I would love to hear a little bit more about the AWS partnership. The cloud journey is clearly a potential growth driver. We are starting to see telcos finally embrace that for a variety of reasons, whether it is their data moving into the cloud or trying to modernize. Would love to hear a bit more, just on the go-to-market aspect of this partnership. Can you talk about how you might be going to market with AWS? Which products are sort of optimized today to run on top of that? And then how you think some of your Tier 1 or Tier 2 customers think about the opportunity to move quickly to that cloud-based partnership.

Okay. So I think it is a combination of Amdocs' incumbency. Every Amdocs customer in the world is looking in some shape or form to move to the cloud. As Tamar mentioned, all our new portfolio is cloud-native. At the same time, we developed a migration path for every end customer regardless of the platform that they are using. AWS is a leader in this market so far, especially in the service provider segment with cloud capabilities, tools and engines. In this partnership, we will be working together and talking together to customers to see how both of us can bring the biggest value. As I said, leveraging AWS' unique capabilities and our understanding of the market. The go-to-market is a very holistic value proposition that includes consultancy, cloud migration, cloud operation; in most cases, we start with hybrid operation between on-premise and cloud and then move to cloud operation, which is actually the next generation of Managed Services that we used to do on on-premise. So there is a great engagement between the teams, and I believe that both companies can accelerate taking the industry to the cloud.

Outstanding. Looks really interesting. And then apologies, we are juggling a few things over here. You may have talked a little bit more about this on the Q&A section. But the Comcast arrangement seems very interesting. You have been making great headway with them — I know they have been a long-time customer. On the commercial side more recently, it seems like you have been making some great headway. Can you talk a little bit more about what is new and incremental as part of this updating of their BSS and OSS stack?

We operate with Comcast in several domains today. We are providing support for Comcast Mobile and there is platform leverage there, which is growing very nicely for Comcast. We are also active in OSS in the network domain. The item we discussed this quarter is the next-generation B2B platform that we are building with Comcast and starting to deploy nationwide. The whole enterprise domain is a major growth engine for Comcast. We are very happy to support them in this domain.

Excellent. Tamar, just really quick for you. I think you mentioned it on the call already, but I’m not sure I quite wrote it down properly. Openet contribution in the quarter for revenue and then the contribution to the backlog this quarter—did you reveal those?

Openet’s contribution in Q4 numbers was roughly $10 million, and that is for about two months since the closing. And within that, we have a few dozens of millions of dollars of backlog. So even if you take out the Openet contribution to the backlog, it was extremely high from new deal awards, both in existing and new logos.

Wonderful. Really helpful. Thank you, I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Jackson Ader with JPMorgan.

Great, thanks for taking my questions. First one on the AT&T 5G win with Openet. How should we think about the revenue recognition for these types of wins? Is it similar to a price times subscriber where someone who is an AT&T subscriber, and then they also are one of these gamers that uses one of the new 5G services? How should we think about this expanding the pie for you guys?

So when we think about the opportunity of taking Openet to our customer base, Openet on a stand-alone basis was more of a pure product play where they mainly made the revenue from license, maintenance and a bit of professional services. When we come to our customers, we can sell a much more holistic solution including additional capabilities around that. So you should think about it over time as something that, yes, we will enjoy through the license pricing, the subscriber volume and capacity that this license enables. But our opportunity to take a share of the wallet of spend by our customers around the product itself is much bigger for the services. And the whole opportunity is open to us with our capabilities. It could be the deployment itself, could be all kinds of services around the migration from existing systems, all the way to full operations of the system on behalf of the customer. Accordingly, there will be the associated revenue. So again, depending on the type of the deal, the revenue recognition will vary.

Okay. Great. And then similar to Tamar, just a clarifying question on the OpenMarket divestiture. Again, how much revenue did that contribute to Amdocs in fiscal 2020 so we can get a sense for next year as well?

To make life simple for you, we made it clear that on a pro forma basis, if we take out OpenMarket in 2020 and in 2021, we can support the same growth outlook that we provided for 2021, both on the top line and earnings per share. In terms of the revenue of OpenMarket, we sold OpenMarket for roughly one times revenue for the forward 12 months, based on our current expectations. Again, we think it is a good pricing. The most important thing from our point of view is that this is in the context of our whole focus and being laser-focused on our growth strategy that we defined around cloud, 5G, et cetera, and OpenMarket, while a great asset and one that contributed to Amdocs for many years, was a noncore asset for us.

Okay. Thank you.

Our next question comes from the line of Tal Liani with Bank of America.

Hey guys. I want to ask a question on margins. I see that margins are coming down this quarter and next quarter. So first, I want to understand the reasons for the slight margin pressure versus the street. And then what is the outlook—how do you see margins going forward?

What margin are you referring to?

Operating margin. Operating margin.

We went up from 17.1% to 17.2% sequentially. And as we said all along, taking a look on margins, we think that changes of 10 basis points up or down are not something we look at with too much attention. I think the overarching message is we believe margin should be at the higher end of the 16.5% to 17.5% range in 2021. We continue to focus on protecting margins, and that is while investing more in R&D, which means that that investment will be made through efficiencies elsewhere. So we are actually feeling very comfortable with the ability to maintain these kinds of margins. We don’t see it going down, definitely not.

Got it. Maybe my spreadsheet wasn’t good, but gross margin was 34%. The Street was at roughly 35%, 34.8%. So the question is, of the new deals that you have heading into a 5G cycle and other deals that you spoke about this time and announced, is there any structural margin pressure coming from the new deals or what you could see with 5G rollouts next year?

No. I don’t think there is a structural margin change. Yes, you are right, our gross margin is 34%. As we have always said, we are more focused on the operating margin than gross margin standalone. But I don’t see any structural changes in the way we look at it. It is usually more of a combination of how we are seeing ramp-up of new logo deals or new country penetration or first-time deployments of offerings versus a more mature customer, more of a recurring revenue mix. So we don’t think there is anything unique in 5G per se that should put pressure on margins.

Got it. My next question is more general. You have done great things on the P&L, buying companies, going after new businesses, etc., and growth is still only 2% year-over-year. When you look forward and you look into the opportunities next year, some of the big customers are no longer cutting spending as they were in the last two years. How do you think growth could look in recovery times? What are your targets for sustainable growth once we get into 2021, spending improves and you start benefiting from all the initiatives you are going after?

Tal, thanks for the question. We mentioned in our prepared remarks that we actually expect a great acceleration in growth in 2021. The average midpoint for the year is going to be 5.5% on constant currency, 6% reported basis. During the year, we expect acceleration so you can understand from that we believe we exit the year 2021 on a high note. We see the backlog we entered the year with providing us strong visibility of over 80% in achieving that. In addition to that, we see a strong pipeline, so we feel that we can more than double the growth rate of the year we just ended in the year that is coming ahead as a result of multiple growth drivers that we see around both continuation of digital transformation and the acceleration of that following COVID and a lot of customers around the world understanding the benefit of that, the 5G journey, as well as the tipping point of cloud migration.

So Tal, we are very bullish on the accelerated growth with a 6% midpoint on a reported basis. We more than doubled the growth rate and feel very comfortable with the accelerated growth.

Great. Thanks. I joined the call a little bit later, so I apologize.

Our next question comes from the line of Tavy Rosner with Barclays.

Hi this is Chris Reimer on for Tavy. I wanted to touch on managed services and you having reported record revenues this quarter. Looking at the driving forces behind that growth, is there a particular geography where customers are more keen or more interested in having you manage their transformation? And how would you quantify the opportunity to grow Managed Services among your client base?

We see Managed Services as a compelling model globally. It started originally with North America where we still have the largest pace of managed services engagement. But over the last couple of years, we have expanded the managed services model both in Europe and the rest of the world. The interesting part is that while in prior years developing a Managed Services engagement with a customer often required many years of relationship-building, in the recent two to three years we are actually seeing a model we call managed transformation as a very successful one, also in penetrating new customers. By managed transformation, we mean we sell to a customer both the license to use a software product, deploy these products into the customer environment and then operate that for the customer. So it is a whole valuable proposition of our software portfolio as well as the accountability model we can provide for making the system go live and operating it under predefined KPIs. That model has been successful in selling into several new logos in recent years; great examples are PLDT in the Philippines. We have signed a deal recently with Three U.K., for example, that is a new logo for us to manage transformation, which is enabling the growth. In addition, we have a very high renewal rate of expansion within existing customers. So we believe Managed Services as a model should continue to drive growth for us.

Okay. And just as a follow-up, touching on M&A and your recent expansion into media, have you identified any other addressable verticals that might complement your existing portfolio?

Interesting question. We announced this quarter a deal that we signed with a large financial institution in the United States. In that deal, we are leveraging our capabilities in digital consultancy of projekt202, which we acquired a couple of years ago. Customers liked that we have strong design capabilities alongside IT capabilities in the digital domain. We are not saying we are pivoting into banking broadly, but we see some traction from other verticals for our digital consulting capabilities.

Interesting. Okay. Thank you very much.

Thank you. I’m showing no further questions, so I will turn the call back over to Head of Investor Relations, Matt Smith, for any further remarks.

Yes. Thank you very much for joining our call this evening and for your interest in Amdocs. We look forward to hearing from you in the coming days. And if you do have any additional questions, please call the Investor Relations group. With that, have a great evening, and we will wrap up the call. Thanks.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may now disconnect.