Amdocs Ltd (DOX) 2003 Q1 法說會逐字稿

Good day everyone and welcome to this Amdocs 1st quarter fiscal 2003 earnings announcement conference call. Today's call is being recorded and webcast. At this time, I'll turn the call over to Mr. Tom O'Brien. Mr. O'Brien, please go ahead, sir.

Thank you, operator. I'm Tom O'Brien, Vice President, head of Investor Relations for Amdocs.

Before we begin I'd like to point out that 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.

These risks include, but are not limited to, the effects of general economic conditions, Amdocs' ability to grow in the mobile wire line and IT business segments, adverse affects of our competition, rapid technological shifts that may render the company's products and services obsolete, potential loss of a major customer, and risks associated with operating businesses in the international market. These and other risks are discussed at greater length in the company's filings with the Securities Exchange Commission, including in our annual report on Form 20F filed in December 2001, and our most recent Form 6K, filed December 27, 2002.

Participating in the call today are Dov Baharav, President and Chief Executive Officer of Amdocs Management Limited, Eli Gelman, 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 the call over to Dov Baharav.

Thank you, Tom. Good afternoon, ladies and gentlemen.

During today's call I would like to review our earnings for the quarter. I'll take some time to review current market conditions as we are encountering them and how we're dealing with this environment. Ron Moskovitz will then give some financial highlights and provide our outlook for the 2nd quarter of fiscal 2003.

We met our financial targets with revenue of $339.4 million, slightly exceeding the upper end of our range, and pro forma EPS of 20 cents per share, in line with guidance. We generated free cash flow $68 million and increased our cash balance to $1billion 130 million. Given the difficult market situation, we are pleased with this result. We're also satisfied with our financial parameters such as DSO, which Ron will detail later.

From our viewpoint the market for business system in the TelCo industry remains tough. Our customers and prospects remain hesitant to commit on new deals. It is difficult to say whether this market has hit bottom yet or not.

In regard to our revenue, we might see additional softness but the pace of reduction will be slower. Notwithstanding the challenging environment, we are confident that our financial and business stability enables us to focus on new term results while continuing our strong investment in R & D and customer development to ensure that we're well positioned for the future.

Despite difficult market conditions, we closed five new deals during the quarter, in line with our expectations. The sales highlight this quarter was a significant win we had at SBCBO, a subsidiary of SBC Communication and one of the largest yellow pages and white pages directory publishers in the world.

We are very pleased to expand our relationship with SBC and appreciate the confidence that they have shown in Amdocs. This is a full outsourcing solution for IT services and is a validation of our outsourcing strategy. It includes IT operation, as well as consolidation and mobilization of SBCBO System, a cross operation in 13 states.

This IT operation includes application development and maintenance, help desk services and user support, implementation services, procurement, facilities and data center services. The initial agreement is for seven years. This reinforces our business model, which focuses on increasing shareholder's value by ensuring a solid recurring revenue streak.

This SBCBO forging further strengthens Amdocs' position in the outsourcing market where we're having significant success with both yellow pages and customer care and billing customers. This follows up similar large outsourcing deals at Nextel, TelStar, and our project with Certen at Bell Canada.

We have invested in developing our capability, and recently established an outsourcing division. We have a unique proposition in outsourcing, as we are the only company that can combine world-class products and software services with the ability to run our customer's data centers and billing operation.

This unique proposition has carrier to reduce costs throughout the organization, not just in the IT area. In a similar arena, we won an important project to support [INAUDIBLE] management with a major European carrier.

On the billing side we sold the customer care and billing system to a unit of a large U.S. carrier which consolidates billing for marketable operations, supporting several customer segments and services. For one, for our mobile customers in North America we have been selected to implement our commerce [INAUDIBLE] management module, enhanced with our online charging module, to support commerce, content and data services.

Another important win was Amdocs Mobile with one of our Latin American customers. We were selected to implement Amdocs Mobile, our new end to end billing system, to provide convergence support for voice, data content and commerce services.

Looking forward, the pipeline is large and diverse and includes opportunities in billing, CRM, directory, and outsourcing, and spans all our key geographical markets, North and South America, Europe, and Asia Pacific.

I would now like to take a couple of moments to discuss our perspective moving forward. From our ongoing intensive interaction with market leaders, we remain confident that the telecommunication market will transition out of this difficult phase and will eventually resume[INAUDIBLE] In particular, in the expansion of new data and content services. We remain firmly committed to this market.

Despite recent reduction in our revenue and head count, our investment in R & D has remained stable. We believe this continued solid commitment will announce our industry-leading product service offering, ensuring we are well-positioned to address the future needs of this market. We continue to make progress on CRM side, especially in CRM billing integration, where we have unique and compelling advantage in this market.

We also continue to move forward on our R & D program for billing products. This quarter, we completed the on schedule release of version 4.5 of Amdocs Mobile. The key feature of version 4.5 is an [INAUDIBLE] to [INAUDIBLE] prepaid, postpaid convergence. This provides great value to operators because it reduces the total cost of ownership, allowing them to run both prepaid and postpaid operation from one system. It also gives operator marketing flexibility, enabling building of prepaid and postpaid service packages.

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

Thank you, Dov.

Our 1st quarter revenue was $339.4 million, slightly above the high end of our guidance range, although a decrease of 19.7% from last year. Our pro forma EPS was 20 cents per diluted share, in line with guidance, but a decrease of 44.4% compared to last year.

We had exceptionally good results in DSO which stood at 69 days at the end of the quarter, well below the bottom end of our target range of 75-95 days. Although we have no clear indication at this time, it is likely that DSO will move back toward the midpoint of our target range.

During the quarter, we completed the final purchase price adjustment related to our November 2001 acquisition of Clarify. The net result is that we will show on our cash flow statement for this quarter a reimbursement of cash paid for acquisitions of approximately $11 million, reflecting cash receipt from Nortel with corresponding reduction in the carrying value of the assets purchased.

Free cash flow defined as cash flow from operations, less capital expenditures and payments on capital leases, was again very strong at $68 million for the quarter. The $68 million along with $11 million received from Nortel helped to increase cash balances by $80 million, and we ended the quarter with a cash balance of $1 billion 128 million. At the end of Q1 deferred revenue stood at $149.8 million, approximately the same as the Q4 balance.

Our 12-month backlog which includes letter of intent, contracts and the committed revenue from outsourcing, on going support, and maintenance was $1billion 66 million at the end of the 1st quarter, which is a slight reduction from the backlog of $1 billion 75 million at the end of the last quarter. We do not rule out additional small reductions in the backlog for the next quarter.

As we announced on the last quarter call we have reduced our effective tax rate for 2003 to 25% beginning this quarter. We ended the 1st quarter with approximately 8100 IT professionals. This number includes the approximately 400 IT professionals who were included in the recent work force reduction, but are still on their notice periods. The cost saving measures taken this quarter, mainly the reduction of approximately 400 positions will generate approximately $8 million in quarterly savings on an ongoing basis.

Please note that starting this quarter, we have adopted statement of Financial Accounting Standard 142 and as a result, we are no longer amoratizing goodwill and certain intangible assets which only affects our as reported results. On an as reported basis, net income was $32.2 million and EPS was 15 cents per diluted share.

Our guidance for the 2nd quarter of fiscal 2003 is for revenue of 333 to $340 million. And pro forma EPS of 18-20 cents.

With that, let me turn it back to Dov.

Thank you, Ron.

It is difficult to determine whether we've reached the bottom of the market yet. However, we do believe that the rate of sequential revenue decreases has diminished significantly. We are riding out this tough environment by focusing intently on quality execution. So with this disciplined approach we add a great win this quarter with SBCBO.

While persevering through these currents conditions we're also in the fortunate position that we can simultaneously look to the future. Our financial stability allows us to continue our R & D investment in our product so that we will have strong momentum when the industry picks up.

With that, let me now open the call to Q&A.

Thank you, gentlemen.

Our question and answer session will conducted electronically. If you would like to ask a question, please firmly press the star key followed by one on your tone telephone. If you find that your question has been asked and answered before you could ask it and would like to remove yourself from the question roster, please firmly press the pound key. Also, if you are on a speaker phone, please make sure that your mute function is disengaged so that your signal can reach our equipment. Again if you would like to ask a question, press the star key followed by the digit one.

And for our first question we go to Greg Gould with Goldman Sachs.

Hi, guys. Quick question on the industry. Dov, I know it's hard to tell if business is stabilizing industry-wide, but for contract discussions or proposals that you've had over the past year that you're bidding on and the customers are thinking about, are we getting to the point now after the delays, that they have to make a decision? And if so, are they starting to make those decisions? I know the SBC was a special event but are there other inferences that you can draw from the other conversations?

Greg, it will be difficult to draw conclusion. We are having mixed signals from the market. And on one end we see customers that they continue to grow and invest and on the other end we see customers that they continue to cut back on the Cap-X and their expenses.

Regarding the hesitancy as they have signed contracts --as we explained we have about five wins this quarter, so at least five customers were ready to sign the contracts and they -- we hope that we will see more contracts coming in this quarter and we would like to wait and see, whether we see this hesitancy turning to be a decisive approach by customers.

Okay, and just one follow-up. Geographically any new trends on demand? Is Asia Pac picking up?

All in all, we don't see a big change. We see more activity in Europe. We see more activity in Europe. We see growth in the market in Asia Pac. Regarding the revenue [INAUDIBLE] which derive more from previous sale win, we are at 60% in North America, 30% in Europe and about 10% in the rest of the world.

Okay. Thank you.

For our next question, we go to Tom Ernst with Thomas Weisel Partners.

Hi. Good afternoon. I wanted to check in and see if you can give an update on Certen, how the progress is going over there, the various installations, what sort of progress you've made in the last quarter? And if you could also give us an update on what the ownership status will look like as we move through the year here?

Well, the project is progressing very well. We're working hard hard on testing and implementation. Continue to put systems into production this quarter and next. And we are pleased with the progress so far. We expect to complete significant implementation in fiscal Q2.

Regarding the options, we will get to an agreement with Bell Canada only after we are completing substantial portion of installation of the product, so I would say that right now we do not have a good estimate when it's going to happen and in what form.

Okay great. Will Bell Canada be a 10% customer this quarter?

Bell Canada it's about 10 percent. Since we're listing the numbers on an annual basis, I don't have the exact number. However, about 10%.

Okay. Great. And just one last question. Can you give any metrics around what outsourcing, what percent of revenue is outsourcing right now?

Okay. Outsourcing is expected to become a larger part of our business. Definitely given the SBCBO deal. It was about 10% of revenue last year and will increase to the high teens this year.

Wonderful. Thank you guys, very much.

Thank you.

For our next question, we go to Michael Turits with Prudential Securities.

Good evening. Couple of questions. First, in the revenues you said you could see continuing softness and you can't call the bottom yet. But are your bookings this quarter, how are they directionally from where they were last quarter? Flat? Up? Down?

Well, Michael, we had this close with SBCBO which is a huge win and as a result, the overall bookings this quarter is by far more than what we had in previous quarters, so we're pleased. However it was cued up substantially by the SBCBO deal.

I know it's not completely fair, but if we were to pull that out, what would it be or another way of looking at it would be, what would you say your next quarter revenues will be, next quarter's bookings should be? How would they be directionally from where you were in the previous quarter, in the fourth quarter?

We had this quarter about five wins and we indicated that the size of the other deals that are not SBCBO are average size or smaller and looking forward to next quarter we expect to have the same number of wins, which will bring us to the result that Ron guided.

Okay. Can you, on the SPC deal, or even on, let's say, what might be a typical outsourcing deal, I am understanding or guessing[INAUDIBLE] that the revenues are pretty linear over the course of the contract,, but is there a back end load to this profitability?

Yes. We expect, as you mentioned, revenue to be relatively flat over the course of the contract and the profitability go up to the later years of the contract, so you would expect margin to be low at the beginning and then go up in the future.

Any general range? I know you've said you hoped that it will not be much of a discount to your typical levels, but where might we start in the near term and where might you get to?

We don't discuss specifically the profitability of a specific contract of outsourcing.

And last question. On the pipeline, could you talk about what the different components are relative to how they have been in the past? Is directories, for example, a bigger percentage than it has been historically? Where does outsourcing fit? Where does CRM? What are the trends there?

Let me just make sure that we understand stood the question. You asked about the proportion of the directory business overall given this contract?

No. I'm sorry. If we look at your pipeline for business overall. What are the components in terms of CRM, billing, outsourcing and directories, and have they changed as some components, like directories, have gone up?

Michael, no. We don't see a major change in the mix or the different type of prospect [INAUDIBLE] in the pipeline. We do have their several directory businesses. But we have the normal level of CRM, [INAUDIBLE] of CRM for licenses and services. We have some end to end billing applications demand there, and some smaller projects as well. So I would say to about what you've seen in recent quarters.

Okay. Thanks very much.

Thank you, Michael.

For our next question, we go to Mike Latimore with Raymond James and Associates.

Good afternoon. Nice quarter. Can you provide the percent of backlog that is in the outsourcing category? I think you said last quarter it was like 15%.

We give some rough indication definitely given the SBCBO deal, the percentage is going up. And we cannot discuss the specifics of that.

Okay. Also I think last quarter you suggested that there may be two outsourcing deals by the March time frame. You've obviously announced one. Is the other one still kind of in that time frame, still?

We, in the last quarter, we indicated that we might add one or more outsourcing deals. So the SBCBO was the one. So regarding more, we have deals in the pipeline that, potential deals, that we would be glad to conclude and then announce.

Sure. Okay. And then just in terms of current customers, I guess primarily with the consulting and maintenance model, have they come back with work orders? Are you seeing those work orders shrink at all or is there some stabilization there? Maybe just some characterization on what your current customers work orders look like.

Most of our customers continue to have the same volume of business. With some customers, we experience some reduction in the volume of the activity. And with some customers, we see some increase. So over all there was a slight reduction in the activity of the current customers that actually affected the results. We are pleased to see that it's -- the size of this reduction is quite small.

Okay and then you mentioned Bell Canada was about a 10% customer. Can you suggest what other 10% customers you had in the quarter.

Among the large customers, we can find [INAUDIBLE]Deustche Telecom, SBC, Bell Canada, and [INAUDIBLE].

Okay. Thanks a lot.

Thank you.

For our next question, we go to Peter Jacobson with Kaufman Brothers.

Thank you. On the comment of the five wins, the ones other than SBC were smaller. Did you mean smaller than SBC or did you mean smaller than a historical average size deal?

Since we have the five wins, one is SBC. The other four deals were either average size or smaller than the average size.

Okay. In terms of the pipeline, would you say you have one or more opportunities -- I know what your Analyst's Day you showed a few opportunities valued at $100 million or more. Would you say you have one or more deals in the pipeline valued at hundreds of millions of dollars?

The answer is yes. We have few -- some of them are naturally outsourcing or multi-year prospects. But the answer is yes.

Okay. And can you characterize the odds on those opportunities early stage? Medium, high odds?

It will be difficult to give the exact probability. However, we see a demand. We see the needs of the customer, on one end. On the other end, we feel that we can provide a lot of value to the customers and we see that the customers hesitate to sign. And we have uncertainty regarding our ability to convert the prospects to [INAUDIBLE] deal.

And do those deals generally, in your view, show a tangible return on the investment for the customers or is it more their desire to off load the IT responsibility?

We found out that our customers can get a tangible return on investment if we can help them reduce immediately the current costs. It can enable them to modernize and get additional functionality that helps them in the competition. And if it helps them to consolidate different and several operations and data centers and different billing or other system to one system which helps them to save money, not only on the IT operation, but over all operation of the company.

Okay. And then finally, you mentioned, I think implementation of a major phase of Certen in the second fiscal quarter meaning the March quarter, is that correct? And in the past, you've talked about various phases that went through the end of 2003. And my general impression is that those major phases are going to wind down by the end of 2003. Beyond that, you will have new enhancements, versions coming out. Maintenance and so forth. But it wasn't clear to me that you have any -- that you have continued major work in 2004.

Can you kind of characterize that, and if it is going to naturally wind down at the end of 2003, what might the recurring revenues look like? Would it be similar to a typical historic, typical contract? Or would those recurring revenues be less than typical recurring revenues?

You are correct in describing the plan of a winding down our activity as the vendor for installing the new modern system for Bell Canada in 2004. And we expect that during 2003, most of the system will be in production and our activity as a vendor will be reduced.

Now the question will be what type of security [INAUDIBLE] Bell Canada going forward. We might exercise our option in coordination with Bell Canada to acquire the ownership of Certen. Then we'll enjoy outsourcing revenue instead of our revenue today as a vendor.

We might continue in providing services as a vendor and then see some reduction in the [INAUDIBLE]revenue. And it might be that the joint venture of Certen will win some new projects and Certen is now weighing an effort to sell to new companies. Some of them affiliates of Bell, our offering which might generate additional source of revenue.

Okay. Great thank you very much.

Thank you.

Again if you would like to ask a question, press the star key followed by the digit one. We go next to Vincent Damasco with Janney Montgomery Scott.

Hi, good evening, gentlemen. Just a few questions. One, I guess, a cleanup question on directory versus customer account billing. Could you guys provide the split?

Yes. Directory presents a 12% of the quarterly revenue this quarter.

Now, I guess, regarding with the large SBC deal, are we looking for directory services to exit the year north of 12% or do you think it will go back down, or track back down to your historical range of between 10% and 90%?

The directory business given the magnitude of the SBCBO deal will go toward the 15% of revenue.

Okay. That is my question, gentlemen. Thank you.

Thank you.

We go next to Thomas Vincent with Solomon Smith Barney

Thank you. A couple of questions. You've talked about in the past that you have roughly 90% visibility into the current quarter. Has that changed or are you still looking for that?

No. That will not change. We still see a visibility for the coming quarter which is above 90%.

And also in the past, you have a talked about $1 billion a year or $250 million in quarterly and annuity revenue stream. Has that changed with the SBC deal or has anything changed in other parts of the business that -- means that stays intact?

The SBCBO helped to stabilize our recurring revenue. And looking forward, I would say you can see our guidance for next quarter will feel comfortable that we're not getting close to the $1 billion revenue. And so I would say that the question today is not as interesting as it used to be in the past.

Regarding our recurring revenue. Given what we have today and given the winning of SBCBO, given the projects that we're turning into production if we turn to a phase of ongoing support, we believe that we have recurring revenue, and we will have recurring revenue, which is about, or more than $1 billion.

Okay. Great. Now, how much of your revenues in the 1st quarter came from existing customers versus customers that are completely new to Amdocs?

I would say that most of the revenue came from existing customers. The generally, the customers generates revenue which is a spread of along about a year or so, so the impact on the 1st quarter is limited.

Okay. And can you provide some comments on target profitability? Seems like you made several steps to restructure over the last couple of quarters. Do you have more visibility into that, now?

Yes. For at least the coming quarter, given the existing level of revenue, we see profitability around 15%. As for the period following that, it is a question of the level of revenue. Whether it is stabilized or going up or down.

Now in your press release, you talked about a new project with one of your existing customers, where you're going to consolidate billing for multiple operations in supporting specific customer segments. Can you provide some more color on the nature of that contract and potential size of that contract?

It's not a big project. It's not a huge one. However, it's important. We're installing our systems there and by that, actually consolidating several small billing systems. And if we're successful, it might open the door for a installing the same systems for additional application which might create additional substantial revenue to us.

Is this wire line or wireless? Can you comment on that?

Well, since there are not too many carriers and I say wire line and you say what part of North America, so I prefer not to refer to it.

Okay. Great. Thank you.

Thank you.

We go next to Atay [INAUDIBLE] with CIBC World Markets

Hi, guys. Good quarter. Congratulations. Just had a quick comment. Last conference call you've indicated that you're looking to expand into what you had defined as adjacent markets. Expanding the functionality of your platform. Any progress on that side and what are your views going forward now that you've secured the SBC deal and provided more stability into your business.

As a matter of fact we're progressing with this approach. There is nothing significant to report as of today but we do feel satisfied the long-term getting into adjacent markets such as the[INAUDIBLE] operation and support system. Maybe cable and maybe some other activities.

Thanks. I appreciate it. Good quarter.

Thank you.

We go next to Sterling Auty with JP Morgan. Mr. Auty, your line is open. Hearing no response, gentlemen, we have no further questions on our roster. Therefore, I'll turn it back over to you for any closing remarks.

Thank you, operator and on behalf of Amdocs, we appreciate everyone attending the call tonight. Thank you and good night.

Ladies and gentlemen, this does conclude our conference call for today. You may disconnect at this time.