Amdocs Ltd (DOX) 2003 Q3 法說會逐字稿

Good day, everyone and thank you for holding and welcome to today's Amdocs third quarter fiscal 2003 earnings announcement conference call. Today's call is being recorded. At this time, I would like turn the call over to Mr. Tom O'Brien. Please go ahead, Tom.

Thank you operator. Tom O'Brien, Vice President in Charge of Investor Relations for Amdocs. Before we begin, I would like to point out that during this call, we'll discuss pro forma information not prepared in accordance with GAAP. Investors should not construe the pro forma financial measures as being superior to GAAP. The company's management uses pro forma financial information in its 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 believes that such measures provide useful information to investors from meaningful comparison to prior periods and analysis of the critical components and results of operations.

Also, this call includes information that constitutes forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities and Litigation Reform Act of 1995, including statements about Amdocs growth and business to 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 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 IP business segments, adverse affects of market competition, rapid technological shifts that may render the company's products and services obsolete, potential loss of a major customer, our 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 Securities and Exchange Commission, including in our annual report on Form 20-F filed on March 24, 2003 and our Form 6-K filed on May 15, 2003.

This call is being Web cast today. Participating in the call 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. As you are likely aware, Amdocs made these three announcements earlier today; earnings, Sprint PCS, and 6-K filing. Each will be addressed in my comments.

This was a very good quarter for Amdocs. We achieved revenue of $377 million, which is above the upper end of the range we provided in guidance and it represent a sequential growth of $22 million. Pro forma EPS was 23 cents per diluted share. GAAP EPS, which includes acquisition related charges, was 21 cents per diluted share.

We are also pleased with our other financial parameters, such as free cash flow, the increased cash balance, and DSO. Despite the challenging environment in the telecom industry, I am pleased that Amdocs continued to produce strong business results. We were able to close some major deals that drove revenue growth in Q3 and will also drive our expected growth in Q4.

This quarter, Amdocs continued the expansion of our businesses. This contributes to our revenue and backlog and also has an impact on license revenue. Ron will discuss this more fully during his remarks.

A significant event in Q3 was the expansion of our relationship with Bell Canada. We have made great progress in the organization of Bell Canada billing systems. This has given them the confidence to transfer their ownership interest in certain to Amdocs. As a result, we now have an outsourcing agreement with Bell Canada through 2010.

This is a milestone for Amdocs and represents a significant announcement of our position in the market. With this deal, we have demonstrated our ability to deliver on an outsourcing business , and consolidation including wire line, wireless, ISBN data, for a tier one carrier.

This not only allows Bell Canada to offer billing, it also allow provides Bell Canada with a single view of their customer. We can enable them to more efficiently retain and grow their customer base. In addition, through the Certen project, we have successfully introduced an innovative new modem into the industry. This leverages the outsourcing vehicle to facilitate system modernization and consolidation without the need for major up phone investment by the operator.

Among our new business this quarter were seven key wins, including Sprint PCS and Vodafone Hungary. This helped us achieve our sales goal for the quarter. These results were achieved through outstanding execution and the superior quality of our combined product and service offering. We continue to gain market share and win more new business than our competitors.

I would like to discuss now two of the wins from the quarter, beginning with Sprint PCS. This is a great win . Spring PCS engage in a comprehensive analysis of its billing operation and determined that it would move all its 18 million business and consumer subscribers to Amdocs' billing and CRM platform supporting their voice and data needs.

Most of the development work related to this project has been completed and we are now in the process for and the migration. For Vodafone Hungary, we are providing an extended configuration of our Enabler product to support end to end billing, including new data services, such as MMS and WiFi. We are pleased that Vodafone has chosen to extend their relationship with Amdocs. These wins are further evidence that Amdocs is the vendor of choice for tier one carriers.

I would like to provide color on some operating highlights for the quarter. In the product and R&D area we announced the release of Amdocs' Enabler version 5 and also Amdocs' ClarifyCRM version 12. With Enabler version 5, we announced out of the box integration with Amdocs CRM, advance online charging capabilities and support for multi-market or multi-national operation on a single platform.

ClarifyCRM version 12 includes out of the box integration with Amdocs Enabler, advanced user interface technology incorporating support for browser-based access, a new functionality designed to transform the high volume call center into a more efficient and effective multi-channel customer contact center.

On the customer , we completed the system deployment at Nextel, which Nextel's CEO high-rated in their recently quarterly earnings release as one of the three significant contributions to their success. On their earning quarter they further referenced, the benefits of their new system. For example, when they said, and I quote, "We are benefiting from 40 percent productivity gains in our collection activity. As a result of our new integrated billing collection system." This is a great example of the benefit our customers continue to see from utilizing our systems.

At T-Mobile U.S.A. and it's Mobilkom Austria commercially we implemented Enabler, allowing support for next generation data and content services. For the leading mobile provider in Greece, we deployed our Amdocs relationship management product.

Now, I would like to spend a minute to discuss the Form 6-K we filed earlier today concerning the SEC investigation. We have not been informed as to what the investigation, but it appears that focused on the company's forecasting in 2002. This is similar to the issue raised in the class action lawsuit filed last year.

As with the lawsuit, we are confident that we can satisfy the concern that have been raised. As we said today, , the company has been informed that the Midwest regional office of the Security and Exchange Commission is conducting a private investigation into the events leading up to the announcement by the company June 2002 for revised projected revenue for the third and fourth quarter of fiscal 2002. The investigation appears to be focused on, but is not explicitly limited to, the company's forecasting beginning with December 23, 2002 press release.

Although the company believes it will be able to satisfy any concern the staff may have in this regard, the company is unable to predict the duration, scope or outcome of the investigation. It is important to know that at this point the SEC has requested only certain documents and information from the company, mainly focused on forecasting. We are cooperating fully with the staff as to conclude this matter as swiftly as possible.

Looking forward, we are confident that the telecom industry will gradually transition into recovery. We are seeing some initial financial stability in the market, however we cannot be sure regarding the timing or magnitude of this recovery.

In the short term, our ability to provide carriers with enabling them to retain their customers, reduce cost, quickly roll out new services, as well our unique understanding of an offering, allows us to continue to show strong performance even in today's difficult market conditions.

In the long term, this same factors that contribute to our short term success, coupled with our R&D efforts, will allow us to do even better when the market improves. Let me 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 third quarter revenue was $377.2 million, a sequential growth of Q2 of 6.2 percent and above the high end of our guidance range for 360 to $370 million. Our per forma EPS was 23 cents per diluted share, in line with the upper end of the guidance. Our GAAP EPS for the quarter, which includes acquisition, related charges for acquisition of purchase of intangible assets, and related tax effects was 21 cents per diluted share.

License revenue in absolute dollars and as a percent of total revenue is lower than in recent quarters. This is due to several factors. First, the outsourcing deal that we bring in, and the very low license component when compared to the large service revenue. Second, continued industry softness translates into fewer license deals. Every result in Q4 will make few license revenues stay around the 12 to $13 million level, depending on sales. We do expect license revenue to grow as market conditions improve.

As Dov mentioned earlier, the key event in Q3 was the expansion of our relationship with Bell Canada including the purchase of Bell Canada's interest in Certen. The purchase price was $66 million and the transaction closed on July 2nd. We expect that Bell Canada will contribute approximately $250 million in revenue annually.

The acquisition of Certen will provide a function increase in our revenue in Q4 as did in Q3 and contribute to a growing, outsourcing business. Outsourcing such as Bell Canada and are important part of Amdocs future, representing substantial long-term revenue strength, cash flow, and operating income.

While outsourcing projects over their life are expected to generate margins comparable to our license and services business, they can be less profitable early on before we see the full benefits of system modernization and consolidation. That is the situation that we see now with and Bell Canada projects putting pressure on our margins in Q4 and beyond.

Therefore, in Q4 we expect operating income to be flat when compared to Q3, implying operating margins as a percentage of revenue approximately one to two percent less than what we see in Q3. However, we view this is a short-term situation. Essentially, it's an investment in the future. As the efficiencies generated by our system organization activities come into play, our margins are expected to improve. This will allow us to align bottom line growth with the current growth in the top line.

We had good results in DSO this quarter with the June 30 DSO standing at 68 days, slightly above the March figure. Free cash flow, defined as cash flow for operations capital expenditures, the same as on capital leases, was strong at $67 million for the quarter. We ended the quarter with a cash balance of $1,289,000,000.

At the end of the third quarter, deferred revenue stood at $197.5 million. We expect this may decrease slightly in Q4 as - with position to full ownership of Certen. Some of the deferred revenue related to Certen will be reclassified as part of the purchase price accounting for the deal.

Our 12-month backlog, which includes letter of intent, ongoing support, contracts, and the committed revenue from outsourcing and maintenance, was $1,310,000,000 at the end of the third quarter, a 200 million increase over the Q2 backlog. The increase is also due - is due to the Certen and also due to strong sales in the quarter. We ended the quarter with approximately 8,250 IT professionals, slightly more than last quarter.

Our guidance for the fourth quarter of fiscal 2003 is for revenue of $410 million. We expect pro forma EPS of 23 cents, diluted EPS - diluted GAAP EPS is expected to be approximately two cents less than pro forma EPS. With that, let me turn it back to Dov.

Thank you, Ron. This was a good quarter for Amdocs. We are navigating the challenging business environment by staying very focused on the kinds of opportunities such as outsourcing and expanding businesses with existing customers that have the highest potential in the current environment. In we are continuing our investment in R&D and marketing, ensuring we maintain momentum and further strengthen our leadership over the competition. Our objective is to be positioned strongly so we can effectively leverage the industry future transition into recovery. With that, let me now open the call to Q&A.

And if anyone would like to ask a question today, you may do so by pressing the star key followed by the digit one on your telephone keypad. If you are on a speakerphone, we ask that you please depress any mute button feature you may have in order to allow your signal to reach our equipment. Also, we ask that you please initially limit yourself to one question. We'll take our first question from Tal Liani with Merrill Lynch.

Hi. I have a quick question. You've raised the guidance or actually, when you look at a sequential revenue growth this quarter, it's up significantly. However, EPS sequential improvement, or there is no sequential improvement on EPS. Does it imply that all these new revenues have zero margin -zero net margin or how should we be looking at it? Thank you.

As we indicated, the main reason for the growth in revenue is the outsourcing bid. As you're fully aware of, we add the with our sourcing team and now we have Certen and so we have - and actually we indicated that the characteristic - the financial characteristic of any outsourcing bid is such that the initial period, the profitability is very low, if at all, and over time we are getting a , which is the same level as our regular business of license and services.

So, the deal has not contributed to the profitability to the profit of the company in the third quarter and we also predict that in the fourth quarter we'll see the same phenomenon where the additional activity with Certen will not contribute to the EPS. However, it won't dilute the EPS. However it will - but it will contribute just marginally when - in the further quarter, June 2004, we'll see an improvement in the profitability.

Thank you.

Now we'll move to Greg Gould with Goldman Sachs.

Hi. It's sitting in for Greg. Can you give us a sense as to what the timing would be of that margin improvement and if it happens on the gross margin line over the course of 2004 or do we see if just gradually improve at the beginning half and more aggressively ramp at the end of '04? And will it be more rapid for certain as you're farther into that implementation than you are at ? Thank you.

We believe that we will see, maybe starting the second quarter of 2004, some improvement in the specific , in certain and maybe others. However, the overall profitability of the company is affected by many items. There is a lot of uncertainty in the market and lot of activity - other activity. And we are not giving projections for 2004, so I would say that we have high confidence that stability will improve on this deal. However, regarding global stability of the company, we will give projection as time comes.

And we'll move on to Tom Ernst with Thomas Weisel.

Yes, good afternoon, thank you. One quick follow-up on that point, Dov, maybe specific to both and Certen, can you tell us about how much work will be necessary in the first quarter '04? I know that we'll be - we would expect to complete the wireless migration on Certen in 1Q. What's the relative level of magnitude of migration necessary in 1Q versus 4Q?

Well, if once we complete the migration of mobility, we are actually completing the majority of the modernization of the Bell Canada initial plan, or the initial roadmap. So, regarding migration there is not too much to do, but there is a lot of work to be done in order to create efficiency and building more profitable organization for Amdocs.

OK, and is there - I know you expect, or at least I believe you expect the bulk of that migration to happen here in 4Q, or do you think the level of work necessary in 1Q is as large as in 4Q on the migration?

We assume that we will need - well, there is, for sure, we will need less people to be working on the migration.

OK, great.

Now, the only question is the accounting . Maybe Ron, you can elaborate.

Basically once we have a certain part of Amdocs, all of the migration efforts regarded as setup course, so there will capitalized, and we recalled a revenue basically - a relative to the cash that we collect from Bell, and on one hand, we recalled the expenses of the operating expenses and we have some cap ex which will be amortized over the term of the contract.

Great, and could you give us a sense for the size of that capitalized investment?

It is - I would say it is early on in the, after the completion of the transaction, so we are assessing the numbers now. We cannot share with you at this point what's the magnitude.

But it's not a large number, it might be from now until the end of the migration and less than $30 million.

OK, very helpful. Thank you.

Shaul Eyal, CIBC

Yes, hi Dov or Ron. Can you talk a little bit about your Sprint PCS and what are your expectations? I didn't get kind of, you know, the number. What's kind of the figures involved with this project - with this contract? Thanks.

Well, we do not have the discretion to disclose numbers without the consent of the customer. As we mentioned, a substantial portion of the development have been completed. We are now focusing on conversion and the migration, so there is still a lot of work to be done. And, so we do not expect here some big jump in our revenue due to the Sprint PCS activity. The important - the importance of this win is the fact that the Amdocs system will serve as the platform for the 18 million subscribers for and for billing, and it might create additional opportunities for Amdocs in the Sprint and might serve as a showcase to carriers.

Thank you very much.

Thank you.

Vincent DaMasco with Janney Montgomery Scott.

Good evening, gentlemen, great quarter. Just a quick follow-up on that Sprint PCS contract. One, I guess looking at your competitors revenue run rate last year of approximately $150 million. Is that a good assumption for that to use going forward in our models?

Well the project with Sprint PCS - that is not an outsourcing project for us. Basically, we sold them license for both the billing platform and the CRM platform and we had services for implementation and customization. And now we have a large project with them for the conversion from the converted system onto Amdocs system. But the Amdocs system will be served as an in-house system.

So I guess just to clarify, are you looking for higher or lower than that $150 million number?

Lower.

Probably it will be lower.

Lower, OK. And then I guess the margin expectations and given the conversion work, excluding the license component, obviously - what's the ramp in getting to kind of a full margin outlook comparable to other license services, billing contracts that you guys have signed in previous years?

Well, as I indicated, we have some difficulty disclosing details regarding the size of activity and the possibilities that we have in specific customer. So we believe it's a traditional Amdocs activity.

OK. Those are my questions. Thank you very much.

Thank you.

Thank you.

We'll move to Thomas Vincent with Smith Barney.

Thank you. A quick follow-up on the PCS question earlier. Can you give us a timeline on when Sprint expects to be fully converted on to the Amdocs platform?

We cannot provide specific timeline, but we can say that we are converting as we speak customers in rates of thousands a day. So it may take some time and most likely the exact timing of in different markets is something that is better asked and answered by Sprint PCS.

OK. Great. And in your press release you mentioned that a North American directory publisher selected some new product and services. Could you provide some more color on that relationship and what you've done for them in the past, if anything?

Yes, it is an existing customer that we have relationship with and they made a decision to expand the functionality of all systems that are installed there. So it it's been an exciting additional project and as we mentioned in the press release and in the press release.

OK. And then two quick housekeeping, can you provide percentage of revenues generated from outsourcing and the percentage from directory assistance?

Yes. A percentage of outsourcing in the Q3 was around 20 percent. Directory represented, in Q3, 15 percent of revenue.

And does that include the and businesses?

Yes, it is.

Great. Thank you very much.

Peter Jacobson, Kaufman Brothers.

Thanks. Good afternoon, everyone. In the past, you have provided some description of your pipeline and I was wondering if you could describe, generally, the characteristics of the pipeline as far as, are there still large deals available in the market globally and maybe a characterization between directory services billing? And also, are there meaningful revenue opportunities in CRM outside of the telecom industry?

Yes. We can give you some color on the pipeline. Generally speaking, we have strong and pipeline. The only issue we have right now is with the in the market. It's hard for us to predict when you can close some of the deals there. But if you're talking about the variety of the prospects in the pipeline, we have directory businesses there, small and large.

We have CRM deals, including licenses and services. We have billing - all over the world we have billing opportunities and we have outsourcing - significant deals on outsourcing that we are working on, and we expect them to be there for quite some time since outsourcing sales life is very long. So altogether, I would say a strong pipeline and a very diversified one.

OK. Thank you.

Mike Latimore, Raymond James & Associates.

Good afternoon. Of the 410 in the upcoming quarter here - the 410 guidance, what percent, roughly, would be in the outsourcing category of that?

It is expected to be around 40 percent.

Four zero?

Yes.

And when do you think the, let's see, the Bell Canada deal and the , when will they start getting on kind of the full operating margin - with your operating margins, would you say? How many years would that be?

I would say that it could vary from one bid to the other and, in general, you should expect in the second or third year to see the full effect of the - I would say lower margins and every time we have some of the abilities of getting more efficiencies down the road. So, I would say that the margins should extend over the years and reach a very nice margin, say through the end of the quarter.

OK. And then capital expenditure - what were they this quarter and what should we expect maybe next quarter?

This quarter it was $20 million. I would say this is going to increase in the coming quarter because of the setup costs of Certen, also in we saw some increase in the cap ex. We don't provide specific guidance - an guidance of this number for the next quarter.

OK. Thank you.

Thank you.

As a reminder, if anyone does have a question online today, please press star, one at this time. We'll move to Sterling Auty with J.P. Morgan.

Hi, guys. Just wanted to ask the question in a slightly different way; when do you think the Certen deal will be accretive to EPS?

It certainly will be accretive to EPS almost immediately, doesn't - not necessarily in the third quarter but during the 2004, early on it will be accretive.

OK. Second question is headcount that you gave; did that include the headcount from Certen or could you give us an idea what that might be with the Certen headcount?

It doesn't include the headcount of Certen. The Certen people will add to our headcount about .

OK. And then last question would be can you give us a little color as to what you might think backlog might look like at the end of the next quarter?

We don't know. It depends on the level of new service we achieve in the quarter. I cannot indicate one direction or the other.

OK, thank you.

And we'll take a follow-up question from Tom Ernst with Thomas Weisel.

Yes, good afternoon. Thank you. Dov, you mentioned at the Analyst's Day that you wanted to take a particular CRM to new verticals, you were interested in cable. Any update on maybe efforts to either look for partners, channels, staffing to go after some of the - some of the new markets?

Right now we do not have substantial news to share with you. However, as we indicated, we are exploring the possibility of selling our CRM suite with the services to the financial services industry. So we are - we started off and it's too early to report results.

OK. On the product I know that one of your earlier customers sells that essentially as OEM technology. You announced in the press release two new carriers. Is this essentially work as an OEM contract and if so, is it limited use versions of in which maybe you can up-sell or is it full use versions?

No, this is not an OEM type. this is basically piece of our system that allows bill presentment and end payments of bills by significant carrier in the - in North America.

And would you say that these two new relationships are fully featured or are they limited featured?

I'm not sure that I'm ...

Are you selling the full capabilities of ?

Yes.

OK, thank you.

And it appears we have a follow-up from Sterling Auty as well.

Yes, guys. On the SEC item, can you tell us did they contact you in writing or did they contact you by phone? And then when you say it's a private investigation, is that the same as seeing other companies label it as an informal investigation?

It's a private, non-public formal investigation where we get it in writing and as I indicated we are not aware what prompted it and it seems that it's focused mainly on the forecasting for 2002.

And then can you remind us again on - you had alluded to the class action suit from last year. Can you give us kind of the highlights from that again?

Well, actually not too much happened since then and it seems that we got new version of the class action. Again, it's focusing mainly on the forecasting for 2002 for the third and the fourth quarter, mainly. And this will take some time, I think, several years to discuss it.

OK. Thank you.

We'll go back to Greg Gould.

Hi, it's again. I have another question. One of your competitors indicated that a client out in Europe had pretty much shelved a project based on a 3-D roll out being delayed further. Are you guys seeing anything new from your clients out in Europe, particularly in wireless? Thanks.

I would say that the new , we see a substantial activity new services. A is Vodafone with their Vodafone live, where they provide - they're offering data services, and a other data services and - which is one of the reasons why we are engaged with several projects with the Vodafone group these days to replace the system and Cegetel in France and Vodafone Hungary and some others.

So I would say that the roll out of new services is the main catalyst for the similar market in Europe and it's creating activity in our , and we expected this to continue on and create more business for us.

Mike Latimore with Raymond James.

Yes, just getting back to the break between outsourcing and your implementation of main on services. If outsourcing is about 40 percent of that 410, then it looks like the other services that you, you know, traditionally provide would decline by about - I think it was like about $40 million. Just first of all, is that all correct? And second of all, what would be behind that change, I guess?

We - , as we move into owning Certen, actually some of the revenue that is now regarded as implementation and development is going to move into outsourcing mode. So we, and as you know we report Bell as the part of the 10 percent customers in recent quarters so this revenue is going to go away instead of it outsourcing is kicking in, so you see this shift - a shift of mix.

That would explain, what, about half of it, half the change, though?

Maybe more.

More than that.

OK. OK. Thanks.

Michael Turtis with Prudential.

Hi. It's actually for Michael. Could you quantify or break down, that is, the net addition to backlog, the $200 million between, you know, what Certen contributed, what was new business, what was rolled in from ongoing business, and I think you mentioned it, but was there any PCS contribution in the backlog as well?

Out of the $200 million of additions to the backlog this quarter, I would say the majority with this contributed by Certen, I would say more than the $150 million. All the rest is the old, the other wins we had this quarter including some piece of the PCS contract.

OK, just a quick question on directories. Is there any opportunity in the European market for directory business on an outsource or license basis?

Well, the European market is not as big as the United States market. It is fragmented, many small carriers and just maybe a handful of large carriers, not large publishers like . And maybe the French publisher and maybe three. And other than that, there are not too many. And even those are not as big as the ones that we are serving to date. And so, however, there is some potentials there. We are working with this potential. We - I would say it will take time to close additional deals though.

Are any of those mentioned customers currently? Are they mentioned European directories? Are they customers of yours as we speak or ...

The French one is not and the Spanish and are customers on a relatively moderate scale.

OK. Thank you.

We have a follow up from Vincent DaMasco, Janney Montgomery Scott.

Actually, gentlemen, my question was answered. Thank you.

Then it would appear we have no further questions. Did any of our speakers have any additional comments today?

Yes. This is Tom O'Brien again. On behalf of Amdocs, I'd like to thank everyone for attending on the call today. Thank you, and good evening.

And that will conclude today's audio conference. Again, we do thank everyone for their participation.