Amdocs Ltd (DOX) 2004 Q1 法說會逐字稿

Please standby we are about to begin. Thank you for standing by and welcome to this Amdocs First Quarter 2004 Earnings Release Conference Call. Today's conference is being recorded. Now at this time I'd like to turn the conference over to Tom O'Brien. Mr. O'Brien, please go ahead.

Thank you Blaine. I am Tom O'Brien Treasurer and Vice President of Investor Relations for Amdocs. Before we begin, I would like to point out that during this call, we will discuss pro forma information not prepared in accordance with GAAP. Investors should not consider 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 critical performance, and results of operation and to have a meaningful comparison to prior periods. The Company's, management believes that such measures provide useful information to investors for 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 Litigation Reform Act of 1995, 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 expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future result to differ than those anticipated. These risks include but are not limited to, the affects of general economic conditions, Amdocs ability to grow in the mobile wireline and it business segments, adverse effects of market competition, rapid technological shifts that may render the Company's product and services obsolete, potential loss of 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 filing for Securities And Exchange Commission including in our annual report on Form 20 F, filed on December 24,2003. 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. Now let me turn the call over to Dov Baharav.

Thank you Tom. Good afternoon ladies and gentlemen. This one was a very good quarter for us and we achieved revenue of $428.3m which exceeded guidance and it represent a sequential goals of 4% or 26.2% compared to last year. Pro forma EPS increased 8.3% sequentially to 26 cents towards diluted shares, also exceeding guidance and growth of 30% over Q1 last year. GAAP EPS was 24 cents per diluted share. Our financial position remained strong and we had very good quarter, in terms of sales. We are pleased with this results and see reason to continue to be optimistic.

On a macro level where the market is still facing challenges there continues to be improvement in business conditions and the major carriers are slowly improving as well. The reason is that carriers are increasingly willing to be -- to commit to new projects. Our strategy is to enable true integrated customer management for the leading carriers. We are executing this strategy by offering an integrated platform, which can be deployed on a modular basis. The carriers focus is on retaining and growing their customers, and now industry leading, billing and CRM products combined with our services position Amdocs as the leader in this market.

The carriers increasing willingness to spend combined with our leading market position translate into expansion, in our business including both with new customers and extension of business with our now existing customer base. I'll spend a minute now to talk about some of our wins this quarter as they truly illustrates the diversity of our activities from the perspective of products. Liable business and geographies ensure how our strategy translates into new business.

A win at telecom, South Africa the flagship carrier in South Africa is a great example of the integrated customer management [conflict]. With [inaudible] project Telecom South Africa is upgrading to Amdocs clarify CLM version flow having Amdocs order management and enhancing it's existing Amdocs speeding system to support integration with CRM version and order management. This is an example of a carrier having functionality from Amdocs on a modular basis to create overtime in integrated and to [inaudible]. The system here will provide unified real time use customer across their entire portfolio of data, voice, internet, [ABA] sale and value added services. Our integrated solutions allow them to eliminate without assistance and reduce total cost of ownership.

We continue our momentum in wire line with another sale of our order management system. This time to a major carrier in North America. For this carrier our system will handle complex ordering covering all needs for new generation data services and is capable of handling voice as well. [Inaudible] management system is unique with nothing compelled in the market. This is critical because order management is the key wicket enabling wire line carrier to effectively and efficiently offer new services to the market. Our offering in this area, which can be integrated on the modular basis we other billing in [all those] system differentiates Amdocs from the competition and puts us in the leading position to capture increasing market share in [vial]. The addition to this means, we [add sales] of CRM system to carriers in Europe, United States, and Asia Pacific illustrating the needs in the market to address customary relationship. We are leveraging our leading position in the CRM market for telecom, which has shown great interest in our strategy of combining CRM product with services integrated with billing. Speaking of billing, our enabler product continues to be a strong catalyst for our goals including a [QV] of this quarter at a major wireless carrier in North America, first priority for this system will be data with voice in the second phase. On the operational front phone we are pleased with our progress at the Bell Canada and SBCDO managed services project. We are achieving our operational target and meeting our [inaudible]. We are confident that we can continue to execute according to the financial plan on this deal and increase the marginal contribution for 2004 at the modest level.

As we announced in December, Amdocs has reached an agreement to acquire XACCT Technologies, a provider of industry leading mediation software to telecom market. Some of their [spending hours of] ability the network mediation space an increasing our ability to deal a leading position and sell more in the data area, a growth market for telecom. This acquisition is in line with our strategy of enhancing our implant product capability by selective [M&A] utilizing our financial strength to improve our market position. As we discussed in December we were disappointed with the decision by Sprint PCS not to continue the conversion of their business and consumer subscriber to an [Amdocs system] beyond the initial 125, 000 subscribers already converted. Sprint decision was made considering some board of business issue beyond [inaudible]. However, we continue to have a good very good relationship with Sprint PCS and they will remain a valuable customer of ours as we continue to support their fast growing wholesale business among other projects. We are also in discussion with Sprint regarding their future needs.

Moving on to legal matter, we were pleased to report that the class action law suit again Amdocs was dismissed last month. The plaintiffs have filed an appeal over the dismissal but we have said from the beginning we believe that the plaintiffs allegation are without merit. Regarding the SEC, we are not aware of any substantive development since last quarter conference call.

To summarize we see improvement in our business conditions and given our market leadership we believe that the momentum that we have enjoyed in the last few quarter will continue.

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 fourth quarter revenue was $428.3m above our guidance and a growth of 26.2%. Our pro forma EPS was 26 cents per diluted share, 2 cents above guidance. GAAP EPS for the quarter, which include acquisition related charges amortization of purchased intangible assets and related tax asset, was 24 cents per diluted share. License revenue of $16.6m is higher than last quarter both in absolute dollars and as a percent of total revenue. We expect slight growth in license revenue again next quarter and further improvement in this line as market conditions improve.

The main reason for the 80 basis points increase in operating margin this quarter was leverage from our operating expenses line as R&D and SG&A were flat even though total revenue increased. We are pleased with the increasing operating margins and we expect slight improvement next quarter as well due in part to our progress in managed services. Our interest income in [other line] was a little bit low this quarter primarily as a result of decisions we have made to shorten the duration of our investments due to volatility in interest rate environment. Our effective tax rate was reduced from 25% last quarter to 22% this quarter. This 22% rate is less than the 23% that we had projected last quarter for 2004. We anticipate that the 22% will be our effective tax rate for the entire fiscal 2004 and it may be in the low in future years.

We continue to have very good results in DSO this quarter with the December 31, DSO standing at 45 days. The key drivers for this reduced DSO continuous to be managed services deal, which features steady payments on the regular basis.

Free cash flow defined as cash from operations less net capital expenditures and payments on capital leases was strong at $63m for the quarter. We ended the quarter with a cash balance of $1,229,000,000, down $62m from the last quarter due to repurchases of shares and notes. During Q1, we used approximately $124m to repurchase nearly 5m shares at an average price of $24.82 per share substantially completing share buyback program announced last quarter. We still are able to recession to purchase additional shares in connection with the exact acquisition.

In addition, we used $5m to repurchase convertible notes this quarter. Our 12 months backlog, which includes letter of intent, ongoing support contracts, and the committed revenue from managed services and maintenance was about $1,335,000,000 at the end of the quarter, about the same as Q4, even though we removed $30m related to the Sprint conversion project.

Looking forward our guidance for the second quarter of fiscal 2004 is for revenue in the range of $432m-$438m. We expect pro forma EPS of 27 cents. Diluted GAAP EPS is expected to be approximately 1-2 cents less than pro forma EPS. Just for the clue, I wanted to emphasize that we have not included any potential impact of pending exact acquisition, closure in this guidance. With that let me turn it back to Dov.

Thank you Ron. This one is a very good quarter for Amdocs. We exceeded our guidance, signed some important new business, and continued to position Amdocs as the industry leader. With that, let me now open the call to questions and answers.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question you may do so by pressing the "*" key followed by the digit "1" on your touchtone telephone. If you are utilizing your speakerphone, you want to make sure your mute function is disengaged so your signal will be registered and we ask that you limit yourself to one initial question. We will first go to Tom Ernst with Thomas Weisel Partners.

Yes, good afternoon and thank you. Dov, first question, continued pricing pressure regarding to slight compression again in revenue, it seems very much in contrast with what you are giving us as the outlook here can you help us reconcile, the difference in outlook in billing?

Yeah, what we believe that a the decision made by customer, is based on the several factors including the quality of the product the quality of the services. The functionality of the product, the ability of the offering to resolve if there is business [enemy]. Pricing is one of the factor. The overall package that we offer to our customer is such that we are able to increase our market share, we are able to win a lot of deals, which prices that -- which prices that are, I would say higher, than the competition. So from what we see in the market, we see improvement in the market. I would say that customers are ready to sign more contracts say to more then they were ready three months ago. The market is still challenging, and we actually expand our market share. So, looking forward we believe that our a unique offering to the market with integrated customer management we saw in at CRM and billing, and product and services, and the unique [inaudible] that were linked to the market will enable us to maintain the margin moving forward.

Okay. Great. At last quarter, you were able to comment that looking beyond, just the one quarter forward guidance, you also saw growth in revenue and earnings, do you see the same thing now beyond Q2?

Yes we actually believe that we will see growth in the coming quarter, so it's not only this quarter, but the quarter after, so given the balance between the challenging market there on one end and the initial sign of growth on the other end; we anticipate modest growth moving forward.

Fantastic, one final question. Beginning to hear more of the market about Amdocs gaining traction with CRM outside of your core telecom vertical, any comments on efforts and traction that you are getting outside telecom?

Our main focus today is the telecom and I would say that we are very pleased with the traction that we have in the telecom industry where we are gaining a lot of these large deals for products and services with few [one] customers. However we continue to have extensive activity with the customers outside of the telecom, we continue to support, and we continue to sales them [inaudible] license product and services and we will continue to do it. The growth is mainly coming from the telecom industry right now.

Okay, thank you again.

Thank you.

Our next question will come from Thomas Vincent with Smith Barney.

Great thank you. Could you just give us the percent of revenues coming from the managed services business?

The revenue from managed services is approximately 40%.

Okay, and how would you expect that to, you know, going forward, how would you expect that to trend. You have in your press release, you know, your comment that you have extended the deskmedia business to include deskmedia, [inaudible] are assumed that the managed services business, are continue to grow going forward?

It is expected to continue to grow on an absolute basis; however, we have given the growth in the overall revenue of company, we should expect given that we won't see any substantial deal in the coming quarter to be around 40% as we see this quarter.

Okay and on the margin side, obviously, you've commented that you saw a pretty nice incremental contribution from the managed services business in the December quarter; now you have gone through two quarters, have you executing on your plan to implement this big managed services contract, could you maybe give us an update on what you think the timing is for you to get to, you know, what double digit margin in the big contract you signed, you know, twelve months ago? And when you would expect to get to similar margins as the rest of the business?

Actually, the answer varies from one pointer to the other and in SBCDO, we started with a one -- single digit margin, which we expect to creep up all the time and may be to get too close to double digit may be next year. With respect to the [inaudible], we said it's from the beginning we are in area of double digit because it is not -- it was not a -- we actually -- both the -- James mentioned not till day one of the contract and also we are looking at the managed services from financial standpoint. We are executing according to the plan, we are seeing a slight creep up quarter-over-quarter of margins, and I would say that overall given the new business that we have in managed services and the old business that we have very nice margins, which are comparable to the rest of the business.

Okay and last question. May be can you comment on your pipeline and if you have any managed services deal in there and what kind of timing for any potential closing of those?

Thomas, in terms of the pipeline, we have a strong and diversified pipelines that includes OMS and CRM and billing applications indeed. In terms of managed services, we have few managed services fits in the pipeline. But we do not expect to sign anyone of them with in the near future in the next quarter or may be two. We are not speaking about large managed services, I am speaking about mega services, mega deals of, have this [inaudible] dollars. Large deals are normalized deals in the pipeline.

Great, thank you.

Thank you.

Our next question will then come from Adam Waldo with Lehman Brothers.

Hi, good afternoon. Given the recent commentary in the business press around AT&T wireless is likely auction. I wonder if you could comment around the nature of your relationships with keep at central acquirers of AT&T wireless removed in process such as SBC, Cingular, [inaudible] handed Vodafone on the other?

Well. It seems that you, we fail to most of those information that we can share. We have few or no relationship with Cingular, one of our most important customers and we have a very tight relationship with SBC as well. And same is -- and to certain [inaudible] customers in that. And if we add the Vodafone to the picture it's a very, very important customer of Amdocs with several wins last year. So we, we are also waiting to [inaudible] we'll move -- we have relationship with the potential acquirer. And now we don't think AT&T wireless, they issued another fee lately and you can imagine the emphasis they want - they are the leader in the market, we are one of the leaders and so we are looking at this development, this is positive development for us.

Okay in the quarter obviously terrific DSO performance again, surprisingly though your allowance for [inaudible] accounts as a percentage of gross AR picked up quite a bit sequentially versus at the end of the September quarter and I wonder whether that was just a conservative reserving practices or something you saw in the your aging trends which would be countered to your consolidated DSO. Give us some sense for why the uptake in ADA reserve relative to the strong sequential progress in DSO.

Most of the time the question there we don't have a - we haven't disclosed a doubtful account number what you may have seen in the press release is the unbilled amount which was up to $26m from the $16m over the last quarter. Basically if you look at the path we used to be at the round $24-25-26m many times so this is not to be perceived as an issue.

Okay and then finally just if you would update us for with respect to your priorities for using surplus cash as between additional share buybacks you have essentially offset your dilution this year, but additional share buybacks acquisitions, new client contract investments and potentially hopefully inaugurating a dividend at some future point?

We basically have exhausted substantially all the provision that we have for buyback and you may not expect the significant buyback in the -- next coming quarters. We see the most important thing in our cash is to supply resources for investment in managed services and in acquisitions. This quarter we are going have exact and we will keep on looking for opportunities to enhance our portfolio.

And a comment on the dividend just like last quarter?

We are not planning of any distribution of dividend.

Okay. Thank you.

Our next question will come from Marianne Wolk with Susquehanna.

Hi, just had a couple of very quick questions. First of all, your service margin did decline sequentially. Can you help me understand how that could be if outsourcing margins improved? And then secondly, can you let me know whether or not you think service margins have bottomed and then I had a follow-up question after that?

Basically we had a slightly reduction in this quarter's service margin but we expect that to go back up next quarter. The main reasons for that we have selected with slight catch up of the bonuses that we increase this quarter with some slightly and minor other expenses but basically we expect the margins to go up again next quarter.

And then a follow-up question was regarding your outlook for the backlog. Would that add to the backlog next quarter?

It might at some amount but we cannot tell exactly what it will be.

And then finally, you mentioned you want to wire line carrier in North America. Are you going to benefit from some of the roll outs of voice over IP and are you already benefiting from some of those expansions?

The main reason the customer that we are talking about here needed an autonomous system is for new data services, it is part of an overall larger programs that they are running. Voice over IP is just one application, you can exhibit high speed internet and [ADC] application, [inaudible] on top of ATM and primarily -- so it is variety of data services that we are going to help them serve.

Thanks very much. Congratulations.

Thank you.

Our next question will come from Tal Liani with Merrill Lynch.

Hi, thanks. This is I actually Gilada (ph.) for Tal Liani. I have a general question, you said that some of the carriers or most of them are slowly coming out to the down cycle and are willing to invest again in new project. Can you characterize those projects? What are the Carriers most interested in? Is it CRM? Is it combing data application and are you equipped to provide those potential new demands? Thanks.

Well, what we see in the market is a trend by our customers to invest into the future. What we see in the wire line industry is the willingness to start investing in the growth area. This is to say in data services, new services and as a result of it we see interest in older management system as early as we felt before and what we see though is also a demand for Integrated Customer Management. What carriers are doing today are putting the customers the middle. So that's why I am to provide their customer all the services ignoring the technology. Ignoring the type of functionalities that is needed. So I would like to provide the business customer with the wireless and wire line data, a long distance, and all of the other services. And for in order to that, they are looking for abandoned services for Integrated Customer Management for CRM, billings, ordering together, and a good example of that is Telkom South Africa that we saw here. Now so in CRM as standalone, was another driver because we need to focus another customer, improve the relationship with the customers. So we still -- we still be -- the new project in the wireless area, we saw it in the wire line area, we saw it in bundling we are saying with.

Okay. Thanks.

Next question will come from Sterling Auty with JP Morgan.

Hi guys. You talked about some great margin improvement in the managed service next quarter. Can you give us more color, is that from some of the efficiencies in one contract starting to kick in? Should we expect the margin of improvement and may be accelerate as we move beyond the March quarter?

We basically have the financial plan in the [original] sense for each managed services deals that we already encountered with and we mix at the equip of margins in each of the deals that we have closed, not one quarter or not one deal, basically all of the deal and we expect quarter-over-quarter to see slight improvement in margins.

Okay and then on the backlog basically being flat and when you take out the 30m, the dollars going into the backlog is that more coming out of the traditional kind of license in consulting business or is there actually a little bit of additional managed service that contributed to the backlog this quarter.

We haven't signed any significant managed services in this quarter except for the closing -- the second closing of [debt] so the second of this closing of [debts] has contributed to the backlog but on top of that we see contribution from the new sales of the quarter then the transitional license and services and some strengthening of the businesses with the existing customer.

Okay and then last question is you talked about the leverage you are getting out of the research and development, sales and marketing line, I mean, can that continue again? How long can you go before you have to start putting more you know more dollars to work in [IBAC].

It depends on the level of the face of the growth but we may see slightly increase in this number going forward. We have to actually pay bonuses to our sales force and they -- if you see acceleration of revenue we may want to spend more money on R&D. So we have some leverages but it's not that will keep on holding these numbers with the same level.

Okay and last question is just the from a geographic stand point. If you look at 2004, where do you think that the biggest opportunity lies from a geographic perspective?

Well Eli.

I would say that we see very strong market for us in North America given although less deals in North America, there will be managed services where in North America, so we feel that North America will continue to be a strong market for us. Now, in Western Europe again this is the second strongest fair market for us and to a lesser extent our activity in Asia-Pacific where we have a progress, but number wise and dollar wise, it will have less than two main markets of North America and Western Europe.

Okay. Great. Thank you.

And as a reminder for an initial question or follow-ups "*" "1". We'll next go to Greg Gould with Goldman Sachs.

Thanks to follow-up on one of the earlier questions Dov, is -- I think someone mentioned that spending from existing customers on existing projects is strengthening, is that correct?

Yes.

It is mainly -- not only existing projects, only the regular day-to-day operation. They finally may have the guts to invest in some news that [inaudible]. So, it looks on a specific project, but its overall activity which is [inclusive].

It's important may be to add here, it's more a comment. I would say that a very strong indication to the level of -- the strength of the market, of the industry is a -- what is the level of activity with the existing customer? When they are more positive about the future, about the activity -- we see an increasing - an increase in the activity with existing customer. And that what we see this quarter, we saw it last quarter and we see it intensifying this quarter. So, that is a good indication of the -- health of the market and our activities are.

Greg, and also just to re-emphasize on the pricing trends just because of what Convergys said earlier today. Are you seeing any pressure from -- any unusual pressure on sales or contracts that are in the sales pipeline now because of converges?

Great, yeah -- we've been in this competitive environment with pressures on prices for quite many quarters by now. We did not see any additional pressure in recent quarter. When we analyzed the nine wins, nine major wins that we had this quarter and some additional smaller wins, most of them, if not all of them, we did not win on price. As a matter of fact, many of them are kind of looking at the list here. We won where our prices were not below one. We won most likely on quality and functionality. Altogether, we provide low product ownership overtime and the immediate reason why we believe because we provide low risk with higher value to our customers. So we are in this price pressure all the time. We do not see any worsening of this situation.

Okay and sorry one last question if I could, could you update us on your view of the cable industry. Are the economics there yet, or this is going to be attractive to Amdocs or you know, within the foreseeable future?

What we see is our several billings end on this industry that are making money, so there is some value of being there. However, we see that there is an accelerating trend in the markets to move towards voice over IP on top of providing a data services and fast access. So just as Time Warner announces they would like by the end of 2004 to have a voice over IP, COX is doing very -- they are very aggressive in this regard. A contest of going towards a full market consorted a June 2004 to voice over IP. One thing most of the voice over IP and telephony and once they are trying to provide more data services, on top of fast access, they will need by far more robust system plans of it which would include ordering, which would include a mediation, which include a provisioning, billing, the CRM have to talk to the customers, have to actually communicate to this customer or if we have to summarize if they need an integrated customer management and that what we send for. We provide all the functionality end-to-end improving the services that would enable them to cope with this new challenge and to bring the norm out of it in the best way. So they can be competitive in the market. So we believe that over the coming two or three years, there is a build up of a substantial need for end up share offering.

Okay, thank you.

Our next question will come from of Ben Abramovitz of Jefferies & Co.

Hi. Thank you. Good evening. I just had a very brief question and looking at this quarter versus last quarter, I am looking at your revenue and your backlog, I am trying to get an idea or a sense of how much of an impact you may have had in terms of the dollar decline versus the Euro and some of your businesses coming from international versus domestic?

It will -- we have a very conservative policy regarding a hedging, we consider ourselves as the dollar company we are sell in dollars so I would say that there is the fact that the dollar has been weakening in comparison to the euro and the other currency, it does not effect us, does not cause us any financial damage. On the other hand the our relative prices in Europe considered to be lower so it seems that the, its easier for us to do business there. The customers are less complaining about the prices, however, as we indicated before, pricing was always the issue and would be always the issue even if the prices are lower by 20%.

Okay, thank you.

Thank you and our next question will come from Peter Jacobson with the Kaufman Brothers.

Thank you, I just wanted to clarify an earlier response to a question, did you state that you are in the process of responding to a request for proposal at AT&T wireless.

What we said is that there was a formal announcement about it some of the -- about two months ago more than that of AT&T wireless and at that point we were in the process.

Okay and I just want to make the distinction between RFI and RFP at one point has been described as a request for information had moved forward to our request for proposal stage being a more serious procurement activity. Is your sense of that, that the wheels are turning on that and has it migrated from RFI to RFP or are you not making any distinction on that?

Peter, what we meant is that they are seriously looking at different alternatives. We are not sure about the, you know, technical terms that are using internally. This is not the government agency and I am just openly looking for information and capabilities and functionality, and commercial aspects and as we have mentioned before we are engaged and this process is being -- for the industry it is a natural thing for us to be involved there.

Okay and just further clarification, did you just say that the activity was for the year was it a couple of months ago or is it also activities that's going on currently?

I would say that there wasn't broadly identified [inaudible] probably it's my mistakes saying [inaudible] where they try to get a more information, it was about a two months ago and we cannot elaborate what exactly we are doing right now with the potential customer.

Okay, that's fine. I appreciate the feedback. Thank you.

Thank you.

At this time there are no further questions. I would like to turn the conference back to Tom O'Brien.

Okay, operator, thank you very much and to those on the call thank you very much for attending this Q1 conference call. Good night.