In the past few weeks, against the background of a worsening global macro-economic situation, with expectations of a slowdown and even a recession, many technology companies in Israel have reported layoffs of employees, extensive layoffs in some cases. This week, it was reported that Amdocs was joining the trend and dismissing 700 employees, 2.3% of its workforce, which numbered 30,288 people at the end of September. 100 of the layoffs are in Israel. Amdocs, headed by Shuky Sheffer, provides IT systems and services to telecommunications companies.
At the privately-held technology companies, the layoffs have generally been because of a need to become more efficient in the light of the difficulty in raising capital at present, while in the case of many public companies they follow downturns in revenue and profits and plunging share prices. At Amdocs, however, the situation looks different.
By contrast with the slide in the share prices of most local technology companies, Amdocs stock showed a positive return of nearly 24% in 2022, and it is traded at a price close to its all time high, giving the company a market cap of $11 billion. Amdocs reported 6.7% revenue growth in its 2022 fiscal year to $4.6 billion, and growth would have been 10.3% had it not been for the negative effect of exchange rate fluctuations.
Net profit in 2022 was $550 million, and $655 million on a non-GAAP basis. The company even expects its profit margins to improve in 2023, alongside continued revenue growth, amounting to 6-10% in fixed exchange rate terms. The company had an orders backlog approaching $4 billion at the end of its last fiscal year.
Furthermore, during the last fiscal year (which ended in September) Amdocs generated cash flow from regular operations of $757 million, and at the end of the year it had $818 million cash, versus long-term debt of $650 million.
"Normal practice"
That being so, why is Amdocs firing people? The company stated in response: "Amdocs is a robust company, with continuing growth and strong forecasts for the future. Nevertheless, out of a sense of responsibility and of awareness of what is happening in the world, we need to take action to maximize our flexibility and efficiency, which includes reducing the workforce by 2-3% globally."
Oppenheimer senior equity analyst Sergey Vastchenok says that there is currently greater sensitivity to employee layoffs. "As a matter of course, every technology company has a procedure in which at the end of the year it assesses who’s good and who is less good, and dismisses 2-5% of its employees, while at the same time hiring and promoting others. That has been a normal general practice for very many years. The problem now is that no company is hiring. If at one time anyone laid off would immediately find work elsewhere, today that’s not happening. Everyone is streamlining, because they realize that 2023 will be tough, at least as far as budgets are concerned, at very many enterprises."
Still, Vastchenok sees Amdocs as relatively immune to the global slowdown. "First of all, its customers are major telecommunications companies, whose situation has much improved in recent years, and they are strong companies (AT&T accounted for 27% of Amdocs’s revenue in 2022, and T-Mobile for 20% - S. H-V.).
"Secondly, telecommunications companies have at this stage finished investing in the physical infrastructure for 5G and there is a now a change in their capex mix: less procurement of equipment and rollout of physical infrastructure, and more improvement of the network’s efficiency and added value, which is exactly what Amdocs offers. Thirdly, Amdocs has an extra opportunity at times of crisis, namely a transfer of IT services from in-house at the telecoms companies to outsourcing. No other company has the strong vertical expertise that Amdocs has, and almost every telecoms company in the world works with it."
Change in dollar trend could help Amdocs
Apart from this, Vastchenok points out that Amdocs is exposed to currency fluctuations, because about a third of its sales are not in US dollars (in Europe and Canada). But he says that the trend in the US dollar is now changing, which could help Amdocs. "We recommend the stock," he says. "Amdocs is a classic company for the current situation, in which there is a preference for companies with high cash flow, low multiples, and financial stability. We look less at the growth, and more at the profitability and the constantly rising dividend.
"Amdocs’s business does not fluctuate much, because these are services that are constantly needed, and are not a one-time sale," Vastchenok adds.
Published by Globes, Israel business news - en.globes.co.il - on January 4, 2023.
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