Amdocs Ltd (DOX) 2002 Q3 法說會逐字稿

Good day everyone. Welcome to the Amdocs third quarter fiscal 2002 earnings announcement conference call. Today's call is being recorded and web cast. At this time I will turn the call over to Mr. Tom O'Brien. Please go ahead, sir.

Thank you, Operator. I am Tom O'Brien, Treasurer and Director of Investor Relations at Amdocs.

Before we begin I would like to point out this call may contain forward looking statements as defined under the Securities Act of 1933 as amended including statements about Amdocs growth and business results in future quarters. 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 materially from those anticipated. The risks include but are not limited to the affects of general conditions, Amdocs ability to grow in the mobile wire line segments. Rapid technical logical shifts that may render the products and services obsolete. Potential loss of a major customer, and risks associated with operating risks in the business in the international market. These other and risks are discussed in length with the filings with the Securities and Exchange Commission included in our annual report in for m 20F filed in Dec. 27, 2001 and our Form 6 k filed May 13, 2002.

Participating in the call today are Dov Baharav President and Chief Executive Officer of Amdoxa Management Limited, El Gellman, the Executive Vice President and Ron Moskovitz, Chief Financial Officer. Following Dov and Ron's comments we'll open the call to Q & A. With that said let me turn it over to Dov Baharav.

Thank you. Good afternoon, ladies and gentlemen. This is my first earnings call as CEO and I would like to welcome you all. I look forward to working with you into my new role.

During the call today I am going to cover the following topics: A brief overview of the quarter, a recap of some of the immediate actions taken, our products strength and focus, then we will turn to our quarter release and Ron will walk you through the financial and I'll provide some concluding remarks.

Before I start I would also like to thank my friend, Avinoam, for his leadership of Amdocs. Avinoam guided evolution of Amdocs from a privately owned company with annual revenue of $117 million to a public company with annual revenue of $1.6 billion. I feel extremely fortunate to succeed the CEO like that but do so at a time of great challenge for our industry and company. The telecommunications market is going through a prolonged crisis with no signs of improvement. Earnings release revenue for the third quarter was $380 million. A decrease of 5.9% over last year. Proforma EPS decreased to 20 cents per share. Our backlog was done $1 billion 165 million. All in all it has been a disappointing quarter.

During the quarter, closing bills became increasingly difficult. Several deals that were expected to close and provide revenue during the quarter were delayed. As with customers are taking a more faith approach to new products. We're not losing any ground in the market. And our pipeline of potential projects is strong. But it has been frustrating because our conversion of pipeline has been much slower than in previous quarters. Overall, the number of new wings was substantially less than what had originally been anticipated. And most of this was smaller than expected.

In addition, several customers decided to trim discretionary expenses which resulted in reduction of business from existing customers. One large customer decided to delay implementation of its project. This decision cost over $50 million in reduction to the third quarter. In response, the new management team acted swiftly to reduce expenses and bring them in line with revenue. In the first week after the close of the quarter the company reduced employees by approximately 1,000 personnel. We believe we implemented the reduction carefully, thoughtfully and fairly as possible. This has allowed us to move swiftly to re-energize our employee base to focus on the challenge in front of us.

Now let me take a few moments to talk about our strengths and our current focus. The strong flow of recurring revenue Amdocs enjoys today is the result of the long term relationship we have built throughout the years with tier 1 and tier 2 providers. Because of systems are mission critical to our customers we believe this recurring revenue will continue. Because of the needs of the market have shifted, we are accellerating our product development to meet short-term needs of our customer. We are currently enlarging and upgrading our product offering as we are have already done with Enabler and CRA. We are aligning the internal focus of the organization to respond to this strength and better serve our customers. The uniqueness of the Company is the combination of products and services which we lead to the long term success of the Company. Given all this and the very sound fundamental as reflected in the cash flow and profitability on the proforma basis, I am confident about the future. With our new management team the Company can weather this storm, get stronger and resume the growth in the years to come. To the benefit of our customer, shareholders and employees.

Regarding our overall financial position, we were profitable in the third quarter on a proforma basis. Even where there was minimal ability to adjust our costs to reduced revenue levels. Prior to the stock buy-back we generated $66 million in cash during the third quarter. We expect to continue to generate solid level of cash from operation in the coming quarters. Regarding sales, let me provide some information on some of our wings during the quarter. In this short-term focused environment we have had good response to our product offering such as Amdocs Enabler and Prepaid. We want the products to provide software and services to major customers in North America and Europe. We want an end to end product for a new entry wireline carrier to use Amdocs wireline product. This carrier will be the third operator in its market. We also want to see our new product to integrate with an existing Amdocs billing system for a large customer. This is a project that has been delayed from the prior quarter.

Just a quick comment on the pipeline. Unfortunately it is going due to postponement deals. The pipeline is large with a number of high quality prospects. Some are quite sizable and look promising. While we are encouraged by the prospect we presented in our pipeline, we won't recognize that the pipeline is potential only and carriers have been increasingly unwilling to make commitments. Clearly the on-going issue is conversion of the pipeline into [inaudible].

With no recovery in sight we are reiterating the forecast we provided on June 30th. Revenue for the fourth quarter ending September 30, 2002 is expected to be in the range of $350 to $360 million. With proforma EPS excluding acquisition related charges and the one-time charge of $28 million to $25 million for the right sizing, expected to be in the range of $17 to $26.

Due to uncertainty in the current market involvement environment it is too early to provide guidance for the first quarter of fiscal 2003. But it is possible we could experience additional softness. We are currently engaged in preparing our 2003 budget which will provide better indication for Q1 2003. So you can see we are at the challenging time. But one that includes opportunity.

Let me turn the call over to Ron Moskovitz our CFO for his financial review. Then I'll come back with some concluding remarks.

Thank you, Dov. For the third quarter revenue was down 5.9% to $318.9 -- .1 million dollars. Our proforma EPS was 20 cents per diluted share. A decrease of 39.4% over last year. Cash equivalent and short-term investments grew by 66 million dollars in this quarter before spending $94 million on stock repurchase. At the end of the quarter, we add cash balance of $1 billion and $13 million dollars. At the end of the quarter our DSO stood at 86 days which is in the mid range of our target range of 75 to 95 days.

For the third quarter, the third revenue decreased by $2 million to $134.3 million. Our twelveth month backlog which includes letter of intent, and the committed revenue from on-going support and maintenance decreased from $1.33 billion at the end of the second quarter to $1.165 billion at the end of the third quarter. The decrease is due primarily to a lower number of new business wins during the quarter and a decrease in projectedrevenue from existing customers.

Let me now give some detail regarding backlog. We expect the levels of on-going support and out sourcing to remain stable in the near term. Based on levels of new sales we currently expect during the first quarter it is likely that the balance of the backlog at the end of the fourth quarter will be lower than the current balance of $1.165 billion. We ended the third quarter with approximately 9,000 IP professionals and total head count of 10,000 employees. Following the close of the quarter we reduced approximately 1,000 positions. This work force reduction combined with other measures should ultimately reduce our quarterly costs by approximately $30 million. We should see approximately $20 million of saving in the fourth quarter with the full affect beginning the following quarter. During the quarter we continued executing on our stock buy-back program which was approved by the Board last November . This quarter we committed approximately $94 million purchasing 7.1 million shares at an average price of $13.16 per share. To date we have bought 7.7 million shares at the cost of $109 million.

As previously mentioned, we are reiterating the guidance that we provided on June 20th. Revenue for the fourth quarter ending September 30, 2002, is expected to be in the range of $350 to $360 million. With pro formal EPS, excluding related charges and the one time charge for right sizing, expected to be in the range of $17 to $26.

In the fourth quarter we will be taking the one time charge of $20 to $25 million related to the cost reduction measure that we have already discussed. This charge is primarily for severance related costs and the majority will be paid in cash during the fourth quarter of fiscal 2002 and the first fiscal quarter of 2003. With that, let me turn it back to Dov.

Thank you, Ron. It has been a tough quarter. However we believe that by decisive action we can create a more competitive, more efficient, and more effective organization that will emerge strengthened from the current challenges. I would like to share with you some of the reasons why our management team and I are very energized about the future prospect for the Company. We have a solid fundamental business. Amdocs is the leader in its field now and will be for the years to come. We have real growth engine. Even in the tough environment including out sourcing, wireline and geographical opportunities in the far east. We have a backlog compromised of engagement with the living carrier. Our product line is excellent.

In an environment when customers are looking for smaller quick implementation we have the capabilities that our customer needs. We are the only company that combines great product offering with great service. We are able to move quickly. We completed our cost cutting and employee reductions swiftly and have already redirected our management team.

Above all, we have excellent employees and a talented, committed management team. Our people give us a unsurpassed advantage and everyone is energized and on board to deliver quality to our customers and to translate this into shareholders. And with that let me now open the call to Q & A.

Thank you. The question and answer session will be conducted electronically. To ask a question press the star followed by the 1 key on your telephone. We'll pause a moment to assemble our roster. Our first question comes from David Razor with Morgan Stanley.

Dov, Ron, if you would just touch on first your -- just two questions. If could just touch on your plans to achieve your as stated goal of 20% operating margins. You know, how rigid will that goal be? Meaning if -- first, when do you expect to be back to 20% operating margins? And, two, should revenues continue to shrink, should we expect further head count reductions that would enable you to maintain and achieve 20% operating margins going forward? That's the first. And the second is, on the $250 million annuity booking stream that you guys have spoken to and spoke to last quarter, sort of a billion dollars annuity on an annual basis, could you give us a little greater clarity into what comprises that and what risks there is. Really the goal being to assess what sort of risk there is to that annuity. Thanks a lot.

David, thank you for this question. Let me start with the first one regarding the goal of 20% margin.

Yep.

We indicated that our goal is to get back to 20% margin. And it might take a quarter or two. And that's where we are aiming to. Now the Company is committed to profitability. And given the fact that most of our revenue is derived from services, we have the ability to trim our expenses in such a way that they will continue to be profitable. So if the revenue level is changed, we will of course adjust the level of expenses accordingly.

Regarding your second question about some clarity regarding the backlog and what it can comprise of. We have in our backlog three elements. You refered to the annuity I refer to all the backlog and what you called the annuity as well. All the back log of Amdocs is compromised of our sourcing bills. Which we are charging the customer [inaudible] and usual I long term and contractional obligation of the customer. On top of that we have our long-term relationship with the large carrier where we provide them on-going support. Usually we are serving them in their mission critical operation. The operations that enables them to bill the customer and collect the money. Which is the most critical part of the operation these days. And the last one is implementation of new projects. So what we believe there is very high probability that this backlog is solid. And it will be converted to revenue at the two quarters.

Dov, could you give us some breakdown? You did speak to the billion dollar number. Could you give us some idea maybe -- aassume that billion dollar consists of the outsortsing and long term relationship? Could you give us some idea maybe of how those breakdown or to the extent that you think there is risk to that billion, you know, how we would approach assessing that risk?

Well, even when we are having a signed contract with the customer, it doesn't say that its -- it's full proof. We had cases where existing customer with a full contract just had some problem and we agreed to postpone some of the charges to deviate from the contract. Give then fact that we are developing with our customer long term relationship and building the partnership for many years.

Now, as we said some of our long-term relationship with customers are not necessarily long-term contracts with the customer. However, since we are part of the IT department, since we are serving them in their mission critical, since it takes a long time to replace a team like Amdocs, since we are serving them in the most sensitive area of their activity, we assume that for the short-term we are a very well protected and for the long term we attribute high probability that the backlog will be converted to revenue.

Thanks a lot.

Thank you, Dave.

Our next question comes from Susan Pasoni with Credit Swiss First Boston.

Good evening. Sorry about that. I had a couple quick questions. Ron, can you give us a breakdown CCNB and directory and in addition if you could give us the international and domestic breakdown.

Okay, Susan. Directory accounted for about 11 percent of revenue this quarter.

Okay.

And in terms of international breakdown, approximately 65% was North America, about 25% Europe, and the rest is the rest of the world.

And then could you talk a little bit about when you say you know in terms of the full effect going into the first quartor the cost savings for $20 million, are you looking basically $20 million off of this $88 million base? Or more like the $90 million base?

I'm not sure I understand what the 88 and the 90.

You were talking about the full effect of the employee reductions was basically going to be give or take something in the order of you know about $40 million. In the fourth quarter about $20 million. But you'll get the full effect in the first quarter of next year. I was just wondering the $20 million in terms of modeling you should we take off that of the third quarter as the base or the second quarter as the base?

From the third quarter. We are going to reduce spending in Q4 from the level of Q3 for about $20 million. And additional $10 million from the Q4 level to Q1.

Okay. Then the last question I have is you know, Dov, you talked a little bit about you have a very sizable pipeline. What is the average age of those deals? And at that point do you start to say you know the odds of these deals getting closed are, you know, pretty much falling away and you take them out?

We do not have a rule that this a deal is too long in the pipeline and take it out. We just are looking at this on case by case basis. So we talk to the customer. We see what he wants. Whether we have still a real prospect or not and accordingly we react. So right now of the pipelines that we have are real prospects.

Okay great. Thank you.

We'll move on to Gregory Golds with Goldman Sachs.

Hi this is Liz I'm sitting for Greg. How are you.

Good.

First question, the Lacey's revenue line dow expect that to still be about 10% of revenues going forward or is that going to trail off as new revenues start growing?

This quarter we closed with 9.7%. With the coming quarters to be more in the range of 9, even 8%.

Okay. And with the increasingly negative outlook on telecom operators credit quality, do you feel you are adequately reserved against bad debt? And what is that level of reserve right now?

We -- most of our customers are the prime customers. Like Deutch Telecom and SBCS f the world. And we don't see as of yet any collection problems. And I feel in general we are still conservative in our accounting. But we don't have any doubts per se.

But we're provided. Let me add to what Ron said. We do not -- the kind of customer that we are serving are tier 1, tier 2 customers are a stronger customer, stronger provider among the carriers. However, given the environment I would say that we provided enough according to what we think and according to what [inaudible] think to any potential problem of collection.

Great. Just one last question. European revenues seem to be particularly weak on this quarter declining about 40% year over year. With Telefonica being a big deal the signing at the beginning of the year what deals are coming out in Europe that are causing sharp declines there relative to North America?

Well the overall what happened is that the overall revenue of amdocs has been reduced. We have $450 million last year and this quarter we have $380 which is by far lower. However, in North America we have less reduction than in comparison to what we had in Europe. And in North America we have customers like Nextel and Canada and others that we have not changed substantially the current revenue. And in Europe we have completed several large projects and we didn't have a new large project to replace them.

Great. Thank you.

Thank you.

We'll move on to Hampton Adams with CIBC World Markets.

Hi guys. A couple questions. Number 1 is I realize you probably aren't going to talk about twelve month visibility any more but can you talk a little bit about the visibility of the two quarter you are forecasting?

The coming quarter, q 4, we see visibility which is slightly higher than 90%. As for q 1 or 4 we didn't give ni guidance so we can't to visibility.

What about q 4.

Q 4 is slightly higher than 90%.

The other question would be I know at one point ITDS had business with world com. Is that business still around and is it significant and is there anything we should know about that?

This business is I would say still around. Not for long. It generates a very small amount of revenue every quarter. And since we are generating the revenue for them, we believe that the small amount they owe us and will owe us due to the current activity is protected and we have provided for it.

Okay. Another question Deutch Telecom was supposedly going to make an announcement about their real time plat form sometime in the near term. Any kind of update on that?

That's one of the projects that we see further delay on. We're still working with them on several projects including what they call pre-billing. They refer to in their latest analyst. But there is no sign there.

Okay that's one that is delayed. The final question I don't know if you want to talk about it. But has senior management made any purchases of shares recently and do they intend to?

Yes. Actually senior management including the people around this table bought shares. And not only senior managers from the previous management bought shares and some of the board members bought shares. So I am very encouraged.

Good luck. Thanks.

Thank you.

Our next question comes from Michael with Prudential securities.

Good evening, guys.

Good evening.

First of all I just wanted to be clear that you thought the backlog would likely be down again next quarter; is that correct?

Yes it is. That's exactry what we said.

So and I think, Dov, you said it looked like 1Q might be, quote, soft as well. With the backlog going down next quarter does it seem pretty safe to assume that we'll have declining revenues again for that quarter therefore?

We have not guided -- we have not given any guidance for next quarter. I said that we do not rule out possibility of additional softness in the first quarter of 2003.

Is it possible to start predicting when the back log will continue to increase?

We have not given any guidance for Q1 and Q2 and that including the backlog. However, what we can say is that and that's something that we said on June 20th before, we feel we are getting closer to a point where we have a strong recurring revenue that might serve to kind of a safety net.

Meaning the backlog is coming down to the annuity recurring revenue level?

Yes.

On the cuts, I think you said 1,000 it said 900 in the press release. Maybe you could clarify that and also go into detail where they were in the organization. How many of them were professionals, and what reasons they were, you know where it is that you actually felt you could afford to cut people.

Actually, the total number of employees that have been reduced is 1,035 employees. Out of them, 890 were employees of the Company and the rest of them were sub-contractors. Out of the 890 or all of the 1035, about 150 were from administration and the rest of them were professional IT. And the reduction took place all over the globe. And about 50% in Israel, about 50% in other places. We use criteria in order to make sure that the way that we act will not impair the business, will not affect the service to the customer, and will be fair. And accordingly we trimmed activities that we found out that were added to the Company in the base of growth and seems to be today the market is different and we are adjusting the ways that we operate to address the current market. This reduction of people is adjusting the structure of the Company to the new needs of the market.

And lastly, you said that you were changing the organization and also the product offering. That was kind of a broad question to ask you what you mean by that but maybe you can go into some details.

We believe that Amdocs has to accelerate its offering to the market. And it means to accelerate the depth of the product and the quality of what we offer. And that in order to increase our edge in the market. We believe today we have excellent offering with excellent products. However, the market changed. There are new needs in the market and we are going focus and dedicate resources in order to do it better. And that will take some organizational changes that will translate this intention of the management to accelerate our effort to real focus of the Company. So we are doing the right thing. We started and we will implement the changes in the coming few months.

All right. When might we get some more description of what all the changes are?

I would be more than glad to share with you in our next quarterly meeting once the changes are implemented what we have done.

Okay. Thanks a lot, guys.

Thank you.

Our next question comes from Imran Com with Volcom Global Partners.

I was wondering if you could comment a little bit about your average deal size in the quarter.

This quarter we had five wins. One was quite successful it was the deal with the major carrier in North America. The other deals were the size of the lower than what we expected. Lower than the average. So overall the average size of the deals this quarter was below the expected average.

Okay. And can you also talk about your pricing environment in the market place since your last conference call and also did your recurring revenue decline during the quarter and do you expect it to decline, like, going forward?

Can you repeat your second question?

Do your reoccurring revenue from your existing customer base I believe it's like 60% of your revenue, did it decline during the quarter?

Actually you asked two question. One is regarding the pricing. And secondly is regarding our revenue from existing. Is it continue to be -- is it lower than what it used to be?

Yes.

Regarding the pricing pressures, the market is not easy. Our customers are under heavy financial pressures. So the pressure is translated to the fact they don't sign new deals and they're hesitating whether to expand the existing activity. And they're trying to trim the cost. So, we do not feel pressure to change our rate. And so we can continue and serve our customer and be paid for the services.

Regarding new projects there is pressure on the licensing, on the cost of new projects. And that is mainly for the deals that are signed.

Regarding revenue from existing customers and the recurring revenue. The portion of the recurring revenue out of the total revenue of the Company is growing. That's the affect we are having few new deals, so the portion of the recurring revenue continue to be higher. And we do not see a decrease in the revenue from existing, which is a trend. We saw it and we indicated in the conference call that we have still have cases where we saw some decrease in the backlog due to reduction of discretionary cost by existing customers. However it's not very substantial and I would say the majority of the recurring customer the vast majority of the recurring revenue is -- continues and we feel quite good that it will be translated to additional revenue in the quarters to come.

Okay thank you very much. Good luck.

Our next question comes from Cane with JP Morgan.

One quick question then one broader question. What was the cap x for the quarter?

About $16 million.

Okay. The other question is can you just comment a little bit about the notion that others are growing wary of customer development projects and whether you're seeing that is materializing. We've heard this from a couple large carriers.

Okay. Can you elaborate what you mean please?

That perhaps some of the carriers are growing a little bit wary wanting to move away from custom development in their billing systems. And may want to kind of lessen the relationship with an Amdocs type model.

Well we are providing our customers product & services. And what we find out that our products are [inaudible] for the total cost of ownership. As you can see the revenues we generate from our customer is the largest in the industry. And when you think our Q1 customer can be served usually they will need a combination of product and services and that's what we provide them. So we feel in that environment, when the customer are trying to cut back on their cap x and spend less money, its -- there is a trend to buy some small product to address some special needs. And we are doing -- we are addressing this need as well. We are providing some product like the Enabler or the CLM just to address the needs to provide some new generation service. And we feel that we have the offering to our customers. It's stand alone products that can be delivered and we can -- with quick implementation and address some need for a new service and we can provide them with an end to end solution which will include the product end of the services. The most important for the customer is the understanding that they will get a delivery. That once they start a huge project it will be delivered on time according to their needs. And Amdocs with unprecedented reputation in the market regarding it.

Okay thank you.

Thank you.

Our next question comes from Elizabeth Jamison with Lehman Brothers. Just one moment.

Hello?

Please go ahead.

Hi, Elizabeth.

Hello there. I had a question regarding the post goodwill tax. Is there a reason why that has increased? Significantly this quarter.

You are talking about the accounting report?

Yes the 32.4 amount which represents the percentage of taxes is significantly higher compared to other quarters.

Yes. In the accounting report there was some catch up because we account for taxes using one effective tax rate for the entire year. So we had to change the accounting affect of tax rate so there was some significant catch up which will turn around next quarter.

Going forward, what would you have us model?

In the pro formal -- pro forma report we have a current 28% effective tax rate.

Right.

We think that Q4 in 2003 will either stay at 28% or it may go slightly down.

Sure. And on the post goodwill?

The goodwill amtorization is going to start in Q1 2003. We don't expect to have any more goodwill amtorization.

All right. Secondly could you just jog my memory. I remember that Ron at the beginning of the call you said you had purchased slash committed up to 7 .7 shares to date. Last Q4, in November, you authorized 11. I believe there was a second authorization. Could you just confirm the total stocks authorized for repurchase.

The total authorization is $ -- 20 million shares.

That was 11 last November plus --

It was 11 authorized initially and the last quarter the authorization grew by 9 million shares to overall 20.

Great. And just one last question I guess this is more for Dov. Of the deal wins, the new deal wins signed this quarter, I think we all know in the market it's hard to close deals. I was wondering if you could I deent fi a common thread among the deals that had been signed that would indicate what does convince a client to close, to sign a deal, even in these very tough markets.

As we indicated the deal that we signed this quarter were first of all it's year-ending. [inaudible]. It enables our customer to increase the loyalty of their subscribers. Just bear in mind some of the carriers in the United States are losing about 33% of their subscribers every year. So they are replacing all subscribers every three years.

So by having an efficiency run system you can reduce that that can change completely your ability to survive in this business. So CRM is acquiring it in this industry and we find out that it takes less time to close a crm deal. The second type of deal is the two and a half 3 G. The carriers are getting ready for 3 G. It's not that they are expecting huge revenue and profit in the near future, however nobody can afford not to have something ready to go. So this is an activity and we have deals to install our software which will enable them to prepare for the new generation services in the future. The third one is wireline. We sell our system to wireline carrier and we have pipeline, wireline companies.

And next it's not growth area. And the last one, our customers are still having needs in various areas and they are look for good service and we are selling them additional projects to support their needs. And so those are the characteristic of the bill this quarter and we hope that in the coming quarter and the quarter after we will have some sourcing bills that might represent another need of the market and the capability of Amdocs.

Thanks very much. Good luck.

Thank you, Elizabeth.

Our next question comes from Mike with Raymond James.

Good afternoon. What percent of the quarter revenue was out sourcing and what percent was related to wireless?

As for wireless, it is represented about 60% of our revenue. As for outsourcing, it was around 15%.

Great. And is it fair to say that the pipeline -- I think you commented on this last time around -- but is the pipeline still more heavily weighted towards small and large deals and less of your average size deals. Is that a fair way of characterizing it?

Not at all. I think that the pipeline is populated with large prospect. Some of them are quite nice and large for outsourcing. Some of them for just large deals. And there are small deals. So I would say when we said in the past and say today there are large deals and large potential deals in the pipeline, to everything asay. And on top of it of course we have smaller deals than then pipeline.

In terms of revenue assurance solutions, have you seen much interest in that out there?

Certainly yes we did. We actually saw one obligation of this quarter as well. Not a very large project but the customers and operators are trying to make sure that they are not having any leaks and they're not losing any potential revenue and trying to get the maximum out of the revenue stream. Revenue assurance is something they're looking for.

Great. The last question is any signs of additional signs of current customers may pull back even a little bit more or do you think that has stabilized?

When you are looking at the market the last quarter was not good. We saw a lot of delays in new projects and some reduction of discretionary costs by existing customers. And look forward, we have not seen yet the slow down bottoming. It my be that it would be worse. We don't know.

Okay. Thanks a lot.

Thank you.

We have time for one more question. That comes from Tom Ernest with Thomas Wieisel Partners.

Good afternoon. Dov, can you talk a little bit about enlarging the offering. Where do you see the opportunity from a functional perspective? Are you considering moves either deeper into OSS or increase in the scope of the application from a functional perspective?

When we are talking about increasing our focus on the offering, it means that we will do it in three dimensions. One, additional functionality as you said. We might bring to our customer additional functionality that we have not yet introduced and offered to our customers. It might be in the [inaudible] area. It might be maybe other areas that are maybe stronger like improving our mediation offering and others. Second, I mentioned it might be in maybe a new services to the existing customers. We are on the verge in the wireless and in the wireline of offering new services. Right now we are not seeing it. There are not too many services in play that customers are using. But the industry is getting ready for it. And we will invest in all -- in order to get our offering ready for future services in a way that we can serve the large carrier and enable them to offer their customer the complex and new services. And the third I mention is improving the quality and the efficiency of our existing offering. By having better products, more efficient. That overall we reduce the total cost of ownership to the customers.

Okay great. And you mentioned that we have more structural changes coming into the company to enable these new dimensions. Looking at the R & D ramp up over the last three quarters, are you already at a spending level in terms of R & D that supports the new approach along the three dimensions? Or do you anticipate further increases in R & D over the next couple quarters?

We think that the level of expenses we have now can support our goal. We can make therefore more efficient. And we are committed to continue and invest in the R & D marketing area in the quarters to come.

One final question. Can you comment on what you have seen in an activity basis out of Keenen post their recent merger?

Actually we do not see them too much in the market. They have presence in several areas we actually competed with them. I think in one place and I would say there are more -- not our major headache these days.

All right thank you.

Thank you.

And concludes our kbe and answer session. I'll turn the call back over to you, Mr. O'Brien for closing comments.

Thank you on behalf of the management of the company we'd like to thank you all for participating in the call tonight. This ends the call. Good night.

That does conclude today's conference. Thank you for your participation.