Amdocs Ltd (DOX) 2003 Q2 法說會逐字稿

Good day welcome to this Amdocs second quarter fiscal 2003 earnings announcement conference call. Today's call is being recorded and web cast. At this time I will turn the turn the call over to Mr. Tom O'Brien. Go ahead.

I'm Tom O'Brien, Vice President, and head of Investor Relations for Amdocs. Before we begin I would like to point out during this call we discuss pro forma information not in accordance with GAAP. Investors should to the construe the pro forma measures as being superior to GAAP. The company's management uses pro forma analysis and internal analysis because it enables the management to consistently analyze the critical components and results of operations and to have a meaningful comparison to prior periods. The company's management please such measures provide useful information to investors for meaningful comparison to prior periods and analysis of critical -- results of operations and also, this call includes information that constitutes forward looking statements made pursuant to the safe harbor provision of the private securities litigation reform act of 1995, and including statements about Amdocs growth and business results and future quarters. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumption, we can give no assurance that our expectations will be obtained or 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, Amdocs's ability to grow in the mobile, wireless, and IP segments. Market competition, rapid technological shifts that may render products and services obsolete. Potential loss of major customer, ability to develop long-term relationships with our customers 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 SEC, including in our annual report on form 20-F, and our form 6-K, both filed on March 24, 2003. Participating in the call today are Dov Baharav, President and Chief Executive Officer of Amdocs Management Limited. Eli Gelman, EVP, and Ron Moskovitz, CFO. Following the 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 will review our earnings for the quarter. I'll be talking about drivers behind our results and our expectations for Amdocs moving forward. Ron Moskovitz will then give some financial highlights and provide our outlook for the third quarter of fiscal 2003.

This was a very good quarter for Amdocs. We are pleased to see that for the first time in several quarters, we showed sequential growth in both revenue and earnings. In addition, we exceeded all our revenue, earnings and sales targets. We achieved revenue of $355 million, which is well above the upper of the range we provided in guidance. We achieved pro forma EPS of 22 cents per share, which is also ahead of guidance. GAAP EPS which includes acquisition related charges for amortization of purchase, intangible assets and related tax effects was 21 cents per share.

We are also pleased with our other financial parameters, such as free cash flow, the increased cash balance and DSO. The market this quarter continued to be tough. We cannot be sure that the market has hit bottom yet. There is a lot of uncertainty in the market, and operators are hesitant to make decisions about new systems.

Despite the challenges -- the challenging market condition, we achieved strong sales results this quarter. In fact, this quarter, due to strong sales, we increased our backlog for the first time since December 2001 quarter.

Among our new business this quarter were seven (key wins) including SFR (ph) and DEX. We exceeded or sales goals. These results were achieved throughout spending, execution and superior quality of our product and service offering. We continued to gain market share and win more business than our competitors. This quarter we bought a number of long (sale cycle) to successful fruition. We expect to see further goals next quarter as well. Though given market uncertainty, and the length of our sale cycle cycle, it is difficult to project whether our goals can be sustained in subsequent quarters, and if so, at what rate.

I would like to discuss now two of the wins from the quarter, beginning with (SFR (ph). We will be supporting (SFR mobile operation, which includes over 13.5 million subscribers. We will be installing Enabler for billing, ClarifyCRM for customer management and PRM for partner relationship management. We will select -- we were selected by SFR for several reasons. Firstly, our truly unique ability to provide an integrated billing CRM offering. This allows SFR to serve its customer better. Secondly, we offer prepaid, post-paid convergent. This reduces total cost of ownership by supporting prepaid and post-paid on one system, and will so enable innovative pre-paid/post-paid marketing offers. And thirdly, we are able to support all SFR's operation, voice, data, commerce and content. And all of their subscribers on one integrated carrier grade system.

From the Amdocs point of view, SFR will represent an important penetration for Amdocs into the French market. SFR's decision is an important reflection of the leadership position occupied by our product. In particular, given the SFR conducted very intensive and professional evaluation of the vendors. We are also delighted that this project allows us to extend our long-term relationship with the Vodafone group.

Another key win this quarter was the outsourcing agreement with DEX media, the former directory publishing subsidiary of Qwest. At DEX we will be consolidating and modernizing the system under a five-year agreement supporting DEX media yellow-pages), white-pages, and electronic products. We are also providing IT application development in maintenance and user support and implementation services. This follow, following last quarter's, SBC directory publisher. Our wins and outsourcing space are in line with our plans for the year.

Regarding SBC (ph) -- we are pleased to report we have transitioned (ph) the responsibility for the directory IT, to Amdocs as of March 1st, over 90% of the SBC IT employees, have accepted our offers and we welcome them as they join the Amdocs family. Under the deal are based on proven product base and our domain expertise and experience. As such, our sources deals have proven to be more profitable and to add less risk than traditional outsourcing) deals. This allows our margin from outsourcing deals to be comparable to companies of (our own) margin. Though these deals might have lower profitability in their initial period.

I would like to provide some color on some operating highlights from the quarter. We expended our ClarifyCRM application suite through the acquisition of asset of exchange. Exchange is a provider of campaign management and real time marketing automation software for hundreds of large companies worldwide. This complements Amdocs's strong operational CRM capability with a non-closed loop analytical CRM.

For Telefonica ESPANA, we completed implementation of the acquisition and management module. This is the first stage in the roll-out of Amdocs's comprehensive billing platform, supporting end to end convergent voice, PBX, and data, wireless services, including broadband and DSL (ph)).

At PT Excelcomindo a leading Indonesian mobile provider, we implemented Amdocs's enabler to support pre-paid/post-paid convergent, all voice next generation data services.

With HP, we announce a convergent platform for pre-paid/post pre-paid/postpaid and voice data services for mobile operator. We announced that Amdocs Enabler has been combined with Cisco, mobile exchange framework to support pre-paid data and content capabilities.

We also announced benchmark results which demonstrate the ability of Amdocs Enabler to support customer base of 30 million subscribers. Looking forward, we are confident that the Telecom industry will recover. What we don't know whether the telephone market has hit bottom or the timing and magnitude of the recovery, we are sure that it will eventually emerge from the current cycle.

This was reinforced in many conversations that we have had with leaders of the Telecom industry. We are confident that the fundamentals of the industry are strong, and that expending needs for new advanced data services, especially in the corporate sector, will over time rekindle growth in the Telecom industry overall, and in the Telecom system industry in particular. Our pipeline of potential business is strong and diverse. It includes opportunities in billing, CRM, directory and outsourcing, and spans all our key geographical markets.

Given our ongoing commitment to our R&D program and our established potential as the industry's leading provider of billing and CRM products, we believe when industry eventually turns the corner to recovery, it will serve a significant catalyst for our goals. 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 second quarter revenue was $355 million, a sequential growth over Q1 of 4.6%, and well above the (high end) of our guidance range of $333m to $340m. Although, a decrease of 22% from last year. Our pro forma EPS was 22 cents per diluted share, also ahead of guidance of 18 to 20 cents, but a decrease of 40.5% compared to last year. Our GAAP EPS for the quarter, which includes acquisition-related charges for (amortization of) purchase of intangible assets and related tax effects was 21 cents per share. We had very good results in DSO this quarter. With the March 31st DSO, standing at 61 days.

Free cash flow defined as cash flow for operations less net capital expenditures and payment on capital leases, was very strong at $93 million for the quarter. We ended the quarter with a cash balance of $1.221billion. At the end of the second quarter, deferred revenue stood at $178.5 million. This significant decrease in the third revenue is a result of the wins this quarter and some advance payments from customers.

Our 12-month backlog which includes letters of intent, contracts, and the committed revenue from outsourcing, ongoing support and maintenance, was $1.110 billion at the end of the second quarter, an increase over the backlog of $1.66 billion at the end of the previous quarter.

We ended the quarter with approximately 8,150 IP professionals, which is about the same as last quarter.

Our guidance for the third quarter of fiscal 2003 is for revenue of $360 to $370 million, as we expect pro forma EPS of 22 to 23 cents. GAAP EPS is expected to be approximately 1 cent less than pro forma EPS. With that, let me turn it back to Dov.

Thank you, Ron. This was a good quarter for Amdocs. In which we achieved sequential revenue growth for the first time in several quarters. We expect to see further growth in the third quarter, though given market uncertainties, it is difficult to project whether these goals can be sustained in subsequent quarters, and if so, at what rate. We are remaining very focused on the quality of our execution in order to drive sales in this challenging period. This approach brought us the key wins this quarter at DEX and SFR.

Longer term, we'll be looking to a renewed and sustained growth in the market to ultimately stimulate and support our own growth. We are confident that the industry will emerge from this current state and that we will be well positioned as the eventual transition gains momentum. With that, let me now open the call to Q & A.

Thank you. Our question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by press pressing the star key followed by the digit 1 on your Touch-Tone telephone. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal and take as many questions as time permits. Once again, that is star-1 on your Touch-Tone phone to ask a question. We'll pause for just a minute to allow everyone the opportunity to signal. We take our first question from Tom Ernst with Thomas Weisel Partners.

Good afternoon, thank you. Congratulations on the excellent results, great surprise. The first question, you mentioned in the press release that you've been selected to implement an end-to-end system and a mobile operator in North America. Can you help us understand a little about what the existing relationship is with that carrier today? Previous implementation?

This is Eli. Currently in this specific customer we have a voice system in several of its operators, we have several operators in Brazil and in some other places, and we are extending our system -- expanding our system to follow up on data requirements, as well as some other components to expand the functionality of the system.

Okay, great. Very helpful. It's great to see the backlog building, but I'm a little surprised to see the sharp upside to the revenue in the current quarter. Any sense of what was kind of stronger that you weren't expecting in the guidance, and what kind of came in post-last quarter's guidance to the positive, in terms of projects, where was the upside coming from?

Actually, the upside came from the number of wins that were above what we had expected in the -- they came pretty much some of them at the beginning of the quarter. On top of that, we saw some strengthening in our existing customers, so that contributed to the upside.

Is it some of the bigger ones you've announced like the DEX media, have you already been begun collecting revenue on that deal?

Yes we did.

Okay. Great. One more question, then I'll turn it over. Give us a sense for how long it takes to ramp the SBC contract up to what you consider the steady state margins, and a sense for any capital outlays necessary as we ramp that deal up. Thank you.

The SBC contract in the coming quarter, will be at the current level. We actually transition the activity on March 1st, so we had one month last quarter and we will have three months of outsourcing in the June quarter, the quarter that we are in right now.

I assume you're looking for additional cost synergies out of the operations as well, though weeks time, going on. Is there a time frame for kinds of the major structural changes or employee organizational changes that you plan that might bring cost savings?

It is a seven-year contract, and we plan to consolidate all the four different systems and modernize them so the main saving and re-structuring will be once we are completing the installation of the new software, the consolidation of the different various activities, and then we will achieve most of the saving. In the short-term, we do not expect substantial saving and restructuring.

Right, so that would be typical for a contract the size probably year and a half, two years, kind of major implementation work, I would assume?

Yes, that's usually what it takes to us implement our solution.

Great, thank you again, and congratulations.

Thank you.

Once again, it is star-1 to signal for a question. Due to time constraints, we do ask all of our participants to please limit themselves to one question, and one follow-up. At this time we'll take our next question from Mike Latimore with Raymond James & Associates.

Yeah, good afternoon, likewise, very nice quarter. Last quarter you provided some indication of where you thought backlog might go in the upcoming quarter. Can you provide any kind of color as to the direction of backlog, what you see it being next quarter? Up, down, flat?

With respect to next quarter, it depends on the level of the sales that we see this quarter, and in the next quarter, and what the best indications we can give so far, is that we might see slight fluctuations, although we don't know to -- where it will be.

Okay. And then, with the operating margin target, I think you said it was historically or last quarter was about 15% and now you're well over that. What kind of operating or company operating margin target do you have at this point?

First of all, the reason for the increase in the margins was the increase in the revenue. As we said in the past, that if we see increasing revenue, we are able to keep the R&D, and SG&A relatively the same absolute level, and that's what happened this quarter, so we were able to increase the operating margin. Going forward, we don't -- for the short-term, we believe that the margins will stay stable, and the longer time, it depends on the level of revenue that we will see and the amount of business that we get from outsourcing compared to other (inaudible) of business.

Thank you.

Our next question comes from Greg Gould of Goldman Sachs.

Thanks. To drill down a little bit more on the better services revenue in the quarter, Ron, you mentioned that there was increased spending from existing clients. Can you elaborate on that a little bit more? Is this a broader trend, or do you think it was a one-time pop?

What we saw this quarter, actually, what we saw this quarter is some stabilization of our relationship with existing customers. And I would say that in some indication cases they increased level of services that they bought from us, so that was encouraging. However, we are not carried away, looking at the overall market, still under a lot of pressure, so we do not see any substantial change in the market. However, in our -- through our (inaudible), we had a better quarter.

Thanks. And just a separate question on the certain joint venture. The 30-month anniversary comes up in July. Can you give us some thoughts on perspective there, what options you have, and I don't know if you can comment yet, but what seems more likely?

Well, I will say that the project is progressing very well. With major implementation completed in this quarter. Amdocs and Bell Canada are pleased with the results so far. Regarding the M&A side, though, the ability of Amdocs to exercise the option, we are evaluating our options now, regarding increasing our -ownership of Bell Canada and we will update you as soon as we have news to share with you.

Okay. Is the joint venture profitable?

Yes.

Thank you.

and our --

Thank you.

Our next question comes from Mike Turits with Prudential Securities.

Hi, guys, congratulations. It's really fantastic quarter.

Thank you, Michael.

Obviously, the license flat to slightly down and services went down, so does that -- in terms of the out performance in the quarter, which I think Ron said came largely from the timing of some of these new deals near the beginning of the quarter so you could recognize them, why would you have recognized more service than less and why didn't we see a bump in license as well?

Actually, there are two factors. One, we see more services mix in the outsourcing deal, so in places like DEX, SBC Co., we see less amount of license than they should have expected in other deals. And the second, as I mentioned, we saw some upside in existing customers, all the revenue is coming from services.

One other thing that it seemed, on quick analysis, it seemed that the -- this -- by my analysis but in the terms of way backlog ages, that you pulled a higher percentage of your backlog out of last quarter than you do typically. It seems like the backlog seemed to flow into revenue at a faster pace than it generally does. And again, it's just my math. That's the best I can do from outside. But is there anything going on there that I should be thinking about?

Actually, the growth of the backlog is a result of two factors. One is the new sales, the amount of new sales which were -- which contributed a lot of (inaudible) to the backlog, and on top of that, we saw some increase in the existing customers. So it added also to the backlog.

Okay. I was asking more about current quarter revenue. We'll pursue it off line. Once again, great quarter guys.

Thanks.

Our next question comes from Thomas Vincent of Smith Barney.

Thanks. Congratulations again on a good quarter. As a follow-up to the previous question, can you provide some more color on how much of your revenues in the quarter came from outsourcing and how much came from the directory assistance business in?

Directory assistance was around 14% this quarter.

And that includes the SPC and DEX media?

Yes.Outsourcing, there's some kind of overlap between overlap and directory, outsourcing sourcing was mid-teens in terms of percentage, and due to the wrap up of SBC Co. it's expected to go toward the high-teens in the next quarters to come.

Now, and can you talk about maintenance renewal rates and what you've seen, both in terms of pricing pressure, but also maybe have you seen any customers decide not to renew maintenance contracts?

We -- I would say that we see a stability in the rate of renewal of maintenance, and we see it in increase, especially in the CRM area. So we are encouraged, giving this phenomenon, and actually given the fact that we are moving today to sell more (inaudible) product. We believe that we will see an increase in the maintenance in the future.

Great, and final question, if I may. Can you talk about visibility into the third quarter?

Visibility to the third quarter is above 90%.

Great, thank you. Great quarter.

Our next question comes from Vincent Damasco of Janney Montgomery Scott.

Good evening, gentlemen. Great quarter as well. Just a few questions, I guess a cleanup one on the breakout of geography North America, Europe and the rest of the world. And then secondly, if you can discuss some of the opportunities that you guys have in penetrating existing or new affiliates of Vodafone.

On the geography question, first. This is Tom. Pretty similar quarter before. North America about 60%, and Europe 30% and the rest of the world making up the final 10%.

Okay. And then regarding opportunities in expanding within Vodafone? Given that you have, I believe, England, Ireland, as well as a suspended contract in Switzerland?

We did not disclose all of the names that you mention right now, but definitely we are enjoying a positive momentum within Vodafone. Vodafone, in several of their regions have been looking and are looking for a new billing and sometime new CRM applications, and we enjoy strong position with Vodafone group. I would imagine that we will have some additional project in the future.

Okay, those are my questions. Thank you.

Thank you.

Our next question comes from Peter Jacobson with Kaufman Brothers.

Thank you. Question on Certen. The option to buy the joint venture, is that a long-term option over a multiyear period? And with respect to your updated, you kind of suggested that's more of a near term update can we expect that, say in the second half of this year?

The options that we have -- is to some extent long-term, which is to say several dates in it but the initial period where we can start discussing it, will be July 2003. And regarding the short-term, since we -- as I said, July, we are evaluating it together with Bell Canada, and that in order to leverage what we've done so far, in order to build farther, the joint venture and the corporation between the two companies to the best interest of both sides, and the best long-term interest of both sides. So we are not yet there, and the option is long-term, as I said before, and the once we have some decision, we will be happy to share it with you.

Okay. Nice quarter. Thank you very much.

Thank you.

Our next question comes from Marianne Wolk with Fulcrum Partners.

Yes. Dov, it looks like you were pleasantly surprised by a couple of deals in the March quarter and you were able to recognize quite a bit of revenue from them in the quarter. I was wondering about the pace of business as you exit the quarter and whether it was similarly as strong?

I would say that we are surprised by the number of wins that we have this quarter and the quality of the wins, including the large deal with SFR group, we elaborated on and the DEX media. And it seems that we didn't see weakening toward end of the quarter. So that was part of the reason why the backlog increased this quarter.

Follow-up question on the professional services increased this quarter and the rising demand from existing customers. Can you talk about whether that's focused on maybe one or two North American customers increasing professional services demand, whether it's more broad-based than that?

I would say that -- this is a combination of events in the in a lot of companies. I couldn't specify one customer in one geography. Overall, the geography split remains the same.

I guess I'm asking you if the pickup in demand from existing customers is concentrated within one or two, whether it's more broad-based.

It's more broad-based.

Okay, thanks very much.

Thank you, Marianne.

Our next question comes from Tal Liani of Merrill Lynch.

I would like to ask about your offering which is Amdocs mobile. How much of your strength in the quarter is associated with this product offering?

Okay. Well, I would say that they are offering in the mobile has important contribution to this quarter. We mentioned Cegetel; this is a very important win. We mentioned other wins actually during the quarter that has to do with mobile, the one in Latin America. And I would say the fact that we gained leadership in the market regarding the next generation product is supporting that activity in our existing customers. Once our existing customers feel that we have the leadership we ask them to award us additional business.

And in the last conference call that was conducted probably somewhere in January, I can't remember the exact date, you said that backlog is expected to decline, and you actually show pretty nice increase in the backlog and all the other factors in your balance sheet. So the issue is, what was the surprise? Why did you give a guidance for declining backlog, and when -- when did you -- or why did you suddenly see an increase in the backlog? My question is about visibility. When in the quarter or -- why did the visibility improve, et cetera?

Actually, what happened is that we were negotiating a lot of deals and that is the reality that we operating for a long time, and the main challenge is, how you concluded it, and a lot of customer showed hesitancy and even though we discussed in detail, and we have almost signed contract, they postpone a decision, which caused us to be very careful in anticipating wins and anticipating increasing business. Now, actually this quarter, we were successful in having a few important wins that where above our expectation and guidance, and that what contribute to the backlog.

Let me add one more thing. Some of the bills, our bills that we worked on for a long time, like such as (inaudible) more than a year, and they came to fruition, and so that help us a lot and we're not sure it will happen, given previous history. Just to add one more thing. It might be the fact that we are successful in selling and implementing that 3 integrated CRM billing solution, is having an impact on the market. (inaudible) the CRM, and the mobile Amdocs mobile, is pre-integrated. And we see it in other customers this trend, so the progress that we made in clarifying, integrating it to the mobile helped a lot and came to fruition as well. And the last one is the outsourcing deal that, you know, all the it's binary if it's -- substantial increase in backlog. If they do not, postpone it by one quarter, then you have a -- might have a decrease in backlog, and we were successful in closing SBC and DEX media last quarter and we are very pleased.

The last question I have is related to the (Cegetel) contract. Accenture was also part of the contract. Is this a patent? Are you expecting to have a partner, and I'm not saying center, but a partner in all the Vodafone contracts or was it -a sort of one-off, because I know they dictated to use your solution.

In terms of the way we work with extension Cegetel, it was a desire of Cegetel to have a SI to take care of a lot of the aspects of the project. Nevertheless, although we have products, we are also providing quite a lot of services in this project as well, and on top of it, Accenture is doing PMO work and data center and many other activities there. In other projects in Vodafone, we do the system integration work, and that basically gives the whole range. We are working with external SIs as positively, and naturally as we do it on our own.

Great, thank you very much.

Thank you.

Our next question comes from Shaul Eyal of CIBC World Markets.

Yes, hi, good evening. Good quarter, good guidance. Really two quick questions from me. On the Cegetel contract. If you could disclose some of the other contenders of the contract. And my next question is on the adjacent markets that you used a couple of quarters ago, Dov, any new developments?

Shaul, regarding the Cegetel, they we want through a very thorough process of more than six months, they started with many contenders. At the end of the process, on the CRM side, we competed head to head with C-Tel (ph) and on the billing side with () and we are please that we won both projects. Regarding the adjacent market, we are continuing looking in different areas to extend our offering in Telecom. We said all along that our strategies to provide full range of services, full range of applications, and in all the line of business for Telecom, and we still continue looking into different areas, such as provisioning other applications of OSS, which is under the OSS arena. And maybe in the future some other areas.

Fair enough. Okay, thank you very much. Again, great quarter.

Thank you.

Our next question comes from Robert Jaworski (ph), of Jefferies and Company.

Hi, three quick questions. What was depreciation and amortization during the quarter and what was CapEx?

CapEx was $14 million, and depreciation amortization was $22 million.

Do we have guidance for full fiscal year for cap ex?

No.

Okay, thank you.

Thank you.

We go now to a follow-up question from Greg Gould with Goldman Sachs. Mr. Gould, your line is open.

Okay, thanks. Dov, I just wanted to get some perspective on why the directory business is so strong. Is there a new sense of urgency within the customers, or are there any other underlying motivating factors that have driven so many wins in that area?

What we see in the directory is two main catalysts to our business. One is the outsourcing, since we have long experience, positive experience, with our customer, where they enjoy our services for many years, some of them saw in this tough period when there is a need to achieve more for less, as they can reduce costs and achieve a business advantages by actually moving to outsourcing and that's what happened to us with SBC Co, and achieved with DEX. The second phenomenon in this area is the fact that we have successful in delivery -- in delivering a value to our customers so we had the more wins in several other large publishers. It seems that the yellow pages industry does not continue to have some small growth and continues to generate nice business to the owners and they feel that there is a need to continue and invest and maintain the system first time and productive.

Okay, so they're not held to the same capital expenditure constraints that the rest of the Telecom industry has been under?

Well, they're not under the same pressure. I would say that they've not suffered reduction in revenue. They've not suffered the reduction in profits, and they would like to continue and invest in systems on one end. However, to be able to reduce cost, the same as the rest of the telephone company, which usually is they're owned by.

Okay, thank you. Great quarter.

Thank you.

This does conclude our question-and-answer session. At this time for any additional or closing remarks, I'd like to turn the conference back over to Amdocs.

Thank you, operator, this is Tom O'Brien on behalf of the management of Amdocs and all the employees of Amdocs, we'd like to say thank you for attending our call. Happy holidays, good night.

Once again, this does conclude today's presentation. Your participation is greatly appreciated. You may disconnect your line at this time.