Amdocs Ltd (DOX) 2004 Q2 法說會逐字稿

Good day everyone and welcome to this Amdocs second-quarter 2004 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tom O'Brien. Please go ahead, sir.

Thank you, Abe. I am Tom O'Brien, 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 that is now 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 of 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 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 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, wireline and IP business segments, adverse effects 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 the risks associated with our 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, included in our annual report on Form 20-F filed on December 24, 2003 and our Form 6-K filed on February 17, 2004.

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 will open the call to Q&A.

Now let me turn the call over to Dov Baharav.

Thank you, Tom. Good afternoon, ladies and gentlemen. We are pleased to report that this was a very good quarter for Amdocs. We achieved revenue of $442.8 million and pro forma earnings per share of 29 cents -- both exceeding guidance. Cash flow was strong in (inaudible). We achieved this excellent result in a still challenging and competitive market, and we continue to have reasons to be positive about the future.

As we have seen for the last seven quarters, there appears to be steady improvement in the market. We are seeing new sales into our existing customer base, as well as new levels. We see strength in wireline as these carriers meet our CRM and modem management in order to prepare themselves to offer new services. In this quarter, we had a win with a major wireline carrier in Europe who used Amdocs ClarifyCRM and its strategic service platform to support provisioning and service fulfillment.

For North American wireline carrier, we will support the business Internet customers, including the ability to bundle service with other wireline services already being on the Amdocs system. Geographically North America was very strong for us this quarter, representing 68 percent of revenue. We believe the our strategy of providing a broad and comprehensive offering of products and services on a unified platform to serve wireless and wireline, which enables true Integrated Customer Management for leading carriers is the reason for our success.

As stated in our earnings release, we had a wide range of wins in the quarter. The (inaudible) wins included CRM project system integration work, business Internet support, and managed service when including billing and CRM and work in the directory area. I have discussed some already today, so I will not repeat here each win in detail. But I would like to point out that some of these wins represent expansion of our relationship to new applications and new services with existing customers. The ability to establish long-term relationships is vital to our success and the ability to support integrated customer management across all lines of business allows us to expand our presence within our customer base.

On the operational front, we completed the acquisition of XACCT, and their leading platform will strengthen our capabilities in the network Mediation space, particularly for the fast-growing data area. The acquisition of XACCT is already paying dividends with the wins this quarter with the leading mobile communications provider in Europe.

At the recent CTIA show in Atlanta, Amdocs and Flarion Technologies collaborated to demonstrate the industry's (inaudible) limitation of our obligation on the packet switch mobile broadband network. This highly advanced network allows for continuance and seamless broadband service while moving between a fixed and a mobile environment. The demonstration showed how the Amdocs Integrated Customer Management solution can enable mobile operators to offer their customer innovative Internet friendly wireless broadband services with the reach (inaudible). To summarize, with the improvement in our business conditions and given our market leadership, we believe that the momentum that we have enjoyed in the last few quarters will continue.

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

Thank you. Our second-quarter revenues were $442.8 million, a growth of 24.7 percent over last year and sequential growth of 3.4 percent. Our pro forma EPS was up 31.8 percent to 29 cents per diluted share. GAAP EPS for the quarter, which includes acquisition-related charges for amortization of purchase intangible assets and related tax effect, was 28 cents per diluted share.

License revenue of $18.1 million is higher for the third quarter in a row both in absolute dollars and as a percentage of total revenue. We expect the same percentage of license revenue again next quarter and further improvements in these lines as modest conditions improve.

Pro forma operating margin increased 110 basis points compared to Q1. The main reason was the increasing gross margin on services as the contribution from the Bell Canada and SBCDR (ph) projects continues to improve according to the plan. In addition, we saw leverage on operating expenses, primarily R&D. Our best estimate now is that operating margins will be at similar levels in Q3, as our revenue gross operating margins should continue to improve.

The deferred revenue increased by $50 million to $232 million, primarily due to XACCT billing on maintenance renewals and from new deals. Deferred revenue balance is likely to be reduced through the next couple of quarters.

We continue to have very good results in DSO this quarter, although the March 31st DSO of 51 days is slightly above the December calculation of 45 days. Free cash flow defined as cash flow from operations less capital expenditures and payments on capital leases was very strong at $85 million for the quarter.

We ended the quarter with a cash balance of $1,567,000,000, an increase of $338 million above the last quarter's balance. The main reason for the increase was the new convertible notes offering which we completed in March. With this offering, we took advantage of several good terms in the market to issue $450 million of convertible notes with a coupon rate of 0.5 percent and a 54 percent conversion premium. We used approximately $170 million of the proceeds to repurchase 6.1 million shares out of the 10.4 million shares underlying the new converts, thus offsetting the short position created by the new convertible notes.

Our twelve-month backlog, which includes letters of intent, ongoing support, contracts and the committed revenue for managed services and maintenance, was $1,380,000,000 at the end of the quarter, an increase of 3.7 percent from last quarter.

Regarding the SEC, we are not aware of any substantial developments since last quarter's conference call.

Looking forward, our guidance for the third quarter of fiscal 2004 is for revenue of approximately $450 million. We expect pro forma EPS of 30 cents. Diluted GAAP EPS is expected to be across approximately 1 to 2 cents less than the pro forma EPS.

With that, let me turn it back to Dov.

Thank you. This was 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 Q&A.

(OPERATOR INSTRUCTIONS). Marianne Wolk, Susquehanna.

A couple of quick things. On these new data deals that you have been signing, how many of these customers are buying multiple products from you such as Order Management, inventory management and the like, and how do you see those trends continuing? Also a question for Ron. In the guidance, what kind of share count are you expecting for Q3? Then finally, in the backlog, I noticed you did not mention a win-less (inaudible). Was there one, and can you confirm it?

In terms of the customers that you asked about, some of them do buy from us Order Management as well. We do not provide Order Management to date, so it is not part of our offering to date, and some of them are buying some other businesses as well. You have to remember that all of our products are modular, so they can be sold separately or as an integrated package where customers want to achieve Integrated Customer Management at the end of the day.

In terms of the project in Russia, we basically can see that there was an announcement, and we had been selected alongside with IBM to provide the Russian operators an end-to-end billing project. We did not have a contract, and we did not consume or relate to the size of the project.

As for the share count, we should expect something in the range of 215 million shares for Q3.

Shayal Layal (ph), CIBC World Markets.

Thank you. Good afternoon, gentlemen. You talked about strength on the wireline front. Can you just provide us with more color what is happening on the wireless front any progress that Amdocs is seeing there?

Well, we believe that the wireless will continue to be one of the areas that will support the growth of Amdocs. We see substantial development in Europe and North America in this area. We are strengthening our relationship with existing customers, and one of them is Cingular for example. They are going through a challenging period where they have to consolidate AT&T Wireless, and we hope that our experience in this area will be utilized in this regard.

We have activity with our other major carriers and (inaudible) in this area. We believe that the wireless industry grows faster than the wireline, and we are the world leader in this area. So we are looking forward and we can expect more progress in this area in 2004 and later.

One quick question with respect to revenue from Vodafone. Anything you can provide us with some more color? Was it flat; is it declining; is it growing?

In general we have a growing trend in Vodafone. Vodafone is regarded as one of the 10 percent customers. So the same this quarter is a 10 percent customer.

And on top of the numbers that we see this quarter, we believe that our strategic offering to the Vodafone group and our presence there actually changing, conforming the relationship between us and Vodafone to be strategic relationship. We are providing them with Integrated Customer Management, which includes the billing and the CRM, plus Mediation, and we hope to increase our role in fulfilling the Vodafone strategy to have one brand, one user experience, one platform all over all the territories at Vodafone.

Gregory Gould, Goldman Sachs.

Congratulations on the quarter. First, I just wanted to see if you could quantify the sales pipeline. What does it look like in terms of business in the billing area versus Order Management and CRM?

Greg, basically the pipeline is strong on both ends. We said that we have strong CRM quarters in sales for the last few quarters, and we see some strong pipeline in the CRM. On the RMS front, we have several potentials there, although these usually are slower to materialize, and we have some pipeline and opportunities for the billing as well as outsourcing, although the outsourcing or the magazines are not likely to be anytime soon.

Okay. And then strategically, what is Amdocs doing to get into the Financial Services industry? What kind -- would you look for tuck-in acquisitions here to strengthen your presence?

Well, as we indicated in the past, we were approaching the Financial Services industry with a low width strategy. We said that we are not going to bend down, that telecom is our main market, and our main focus is on the telecom.

So we continue to have activity in this regard. We have already said in the CRM area and, therefore, in the billing area, we are developing our offering with I would say low-level effort, and we would be considering an acquisition only when we feel that we have enough understanding of the industry, and only then would we be ready to consider acquisition.

Julie Cintarello (ph), Morgan Stanley.

I was wondering, Ron, if you could comment on the average deal size in the quarter and perhaps how it has changed over the last year and perhaps over the last three years?

I would say that we have diversity in the deal sizes from relatively small deals, might be $4 or $5 million deals to maybe 30 or even larger -- $30 million deals and an even larger. So we do not see a one pattern of deals, and basically it is similar to what we have seen in the last year or through the last year.

If I could just get a quick follow-up on the sales cycle. As you see a business beginning to pick up and carriers needing to make some more investments, are you beginning to see the sales cycles come down now?

As a matter-of-fact, it is really hard to run statistics about it. I think we see some improvement in some cases, but anytime you see improvement, we have some cases where the decision is still being delayed and they still see the hesitancy. But I would say without really running statistics about it, there is some improvement on the sales cycle.

Michael Turits, Prudential.

Again on the Russian deal, was the Russian deal in backlog or in revenues this quarter?

Neither.

That was no?

No, no. That was no.

Okay. Also on margins, you said that margins should expand with revenue growth. Why is it that we are not expecting margin expansion next quarter where you are looking for revenue growth?

Since the growth is modest, so we should not expect from one quarter to the other that each quarter we will see expansion of margin. So in particular in the next quarter, the margins will remain flat, and if we see higher revenue in the further quarters, we will see more revenue. We should expect a special margin.

Thomas Vincent, Smith Barney.

I just want to follow up on the previous questions on the margin if I could. Could you maybe talk about where you think you are on the managed services contract, the big contracts you announced over the last, say, one or two years? If margins are not going to improve sequentially next quarter because revenues are not growing significantly, does that mean that you are pretty much as close as you can get to the longer-term margins within those deals, or are there still some upside margins?

Not at all. Actually when you analyze the growth of the margin this quarter, you see the main contributor is a service margin. There it is primarily attributed to the large deals of Bell Canada and SBC deals, the main services deals. We should see further expansions of the margin of these deals, not necessarily from one quarter to the other. But over time, it should expand in 2005-2006 and should be significant.

Okay. In the press release, you go through a bunch of new wins. There is one win that stood out was the managed services solution you won with a mobile service provider in North America. Can you maybe talk about what type of carrier that is? Is that an affiliate or a regional carrier? Maybe provide some more color on maybe the size of the carrier.

Well, let us just give you the name. There are not too many carriers in North America, so if we start elaborating about the characteristics, you will know. What we can say, it is not a big one. It is not one of the major carriers.

Adam Waldo, Lehman Brothers.

You did the convertible offering in early March on very favorable terms. Congratulations on that. You closed the quarter with 1.2 billion of net cash if we back out the convert that you are presumably going to call in June. I wonder if you can update us with such a large cash horde and 340 million in run-rate annual free cash flow, how you would expect investors should think about deployment of that surplus capital among large-scale acquisitions, potentially to get into the cable DBS market, dividends and stock buybacks?

Well, we have a very clear strategy. The main priority for using the money would be for more things on managed services activity. However, it is not something that we can schedule every quarter, and when the opportunity matures, then we have it.

The second one is acquisition, and as we said in acquisition, our M&A corporate development strategy is to support the strategy of the Company. And we offer to the telecommunications market end-to-end functionality to all lines of business with all the services in all the geographies. And for that, we bought XACCT for example, which complemented our functionality, and we might be doing additional acquisition in order to have end-to-end functionality in this industry.

We might be willing to do some acquisitions in order to offer to all lines of business. We have wireless wireline. We don't have yet in the cable any real offering, so that might be another way. In the functionality, I said that we might add more functionality. One of the areas might be OSS. In the service area, we do not have strong system integration offerings, not strong enough according to what we are willing to have. So we might do some acquisitions in this area as a result. So the cash reserves that we have right now will be used in order to facilitate this acquisition.

Now regarding the purchase buyback of shares, we have done a lot. We bought in the last three quarters I think about $400 million shares back and reduced the number of shares to 216,000 this quarter, which improved the results to the shareholders.

Then as my follow-up, you all did another great job sequentially reducing the allowance for doubtful accounts reserved by another 300 basis points to 4.3 percent of gross AR at the end of the quarter. That takes us back to fiscal 3Q '02 levels before the downturn really set in, and I wonder what further room you see for improvement going forward in that area?

I am not sure that I got your question. What we put in the press release is the unbilled amount.

I see. Okay.

Okay?

Okay. Thanks. And then finally any update on the class-action lawsuit appeal at the end of December?

Well, we actually -- the bid was fine. It was changed, so it was reduced substantially. We feel very comfortable regarding our position and the fact that there is no merit in all this claim, and we are quite encouraged by the fact that the claim was dismissed with prejudice. So we believe that it is a nonissue, and we are focused on building value to our investors.

Sterling Auty, J.P. Morgan.

Can you start by just giving us, I missed it if you did give it, the breakdown between percentage of revenue from outsourcing and also percentage from directory business?

Mail services, which includes the outsourcing, is approximately 40 percent. And with respect to the directory, they are approximately 14 percent.

So about the same as last quarter. On the margin front, just one more time. While overall operating margins are expected to be flat for the next quarter, do you expect some movement? In other words, is there the potential for maybe a little bit more improvement on the gross margin side but maybe spending a little bit more on the operational side or vice versa, or do you expect both to be flat?

We should expect both to be flat. Maybe, yes, I would say that is the most likely.

Tom Ernst, Deutsche Bank.

Congratulations on your new position.

Thank you. I have noticed quite a bit of hiring seemingly around the world for Amdocs and in particular there were some large scale interviews walking in India. Can you talk a little bit about your hiring plans and perhaps the use of India as a development resource?

Yes. We continue to expand our research and development capabilities and building a Integrated Customer Management platform that will be unique in the industry. So we have intensive activity in the San Jose activity in the San Jose development center and the other development center. So we are doing a lot of hiring, recruiting the best people in the industry.

On top of that, we opened our development center in India, and we have already a sizable start there. We relocated people from Cyprus having three years of experience in Amdocs to the site, and we expect fast growth of our activities there, which will enable us to facilitate the growth of the Company in the Asia-Pacific area region and other local countries and, on top of it, to support the overall activity of the Company worldwide.

As a follow-up to that, that led nicely -- the growth over the last three quarters is then concentrated to North America. As you talk about seeing a pickup in health in the pipe, is that concentration still in North America, or do you expect to see a pickup in the other regions of the world?

I just want to say that the pipeline itself is actually quite diverse. It is not necessarily concentrated in the same proportion as our revenue in North America. We have a strong pipeline in Western Europe and Eastern Europe and Asia-Pacific and other areas. So it is not in proportion to the revenue stated here right now. Obviously we have some bids and large bids in the sales cycle as well in North America but not in this proportion.

Peter Jacobson, Kaufman Brothers.

In terms of the competitive environment, can you characterize where you are fighting most of your battles? Is it versus pure in-house development, is it versus integrators providing services for development, or is it versus packaged software?

I would say all of the above. Sometimes I can say that when we think about, let's say wireline and billing application, it would be more likely that we will face competition from the usual suspects as well as the internal IT.

When you're talking about CRM, we are the only one I believe in the telecom market to offer product and services around CRM. There you would see sometimes we are bidding against Siebel and others and sometimes against Siebel (inaudible) one of the SIs. We are also cooperating with some of the SIs depending on the situations. We also see competition from the ISPs independent of the vendors such as the converters and portal and Siebel and others.

Thank you. With respect to making inroads into the high-tech manufacturing with your CRM offering, would you characterize that similarly to what you described with financial services, or is there anything else going on there?

Well, we are supporting this industry. We have a nice installed base of CRM platform in many companies, so we believe in the expensive R&D effort that we put in our system, which enables our customers to enjoy this area, and we will continue to support this industry in the future.

Scott Sutherland, Wedbush Morgan.

Good job on the quarter. First question, I want to get back to the operating margins. On your managed services, especially the big contracts in place, how would you characterize where you are in the cycle to get those margins up to your traditional billing margins of the past as you indicated in previous quarters?

Well, as you are aware, actually we saw a pickup, a significant pickup, in the revenue for managed services in June 2003 mainly because of the Bell Canada deal, the SBC deal and the (inaudible), each one of which is in a different stage. I would say the main in Bell Canada will operate down the road in order to get to the normal margins, I would say that maybe in 2005, 2006, maybe 2005 we are going to get to the average margin.

In SBC deal, it will take longer, and there I would say that toward late 2005 and maybe 2006 we are going to get to the average margins.

So trying to understand operating margin is guided flat next quarter, are you seeing new managed service deals that are less profitable coming in, or is there anything else keeping margins down?

The second question I want to ask is, what do you see on the pricing front, and have you made any response to competitive pricing pressures?

I will answer the first one, and Eli may take the second one. Our guidance does not assume any significant managed services deal in the next couple of quarters.

Regarding the pricing pressures, we are used to sell and to operate in an environment that is always characterized by pricing pressures, and it is natural to some of our competitors when they are pressed to offer some suite deals to the customers. However, we believe that the value that we provide to our customers, given the quality of the product which is the result of our substantial investment in R&D of $120 million a year, plus the fact that we are the only one in the industry that provides Integrated Customer Management, that is to say CRM and billing and connectability integrated to the Order Management to the Mediation through the eCare, with products and services with a reputation of delivery in the last twenty years of which is unprecedented. All of that actually brings value to the customer that enables us to protect our prices and our margins.

Richard Sherman, Janney Montgomery Scott.

I had a question about the backlog increase up about 3.7 percent I think you said. Can you give us an idea of how much that may have come from North America versus the rest of the world?

I do not have the numbers, the exact numbers, but I would say that it should be similar to the trend that we see in the revenue.

Okay and then Vodafone you had mentioned a little bit earlier as well continues to be a 10 percent customer. Is there a way, some kind of guidance you can give us on what you believe the penetration rate you have achieved at Vodafone is at this stage?

We basically have a lot of business from Vodafone being a 10 percent customer, but we believe that the potential is by far higher than what we have right now. I think we share this opinion with Vodafone executives as well. Vodafone is expanding. We are serving the Tier 1 within the Vodafone outgrowth, the VD2 (ph) in Germany and Vodafone in England, and many other operations around the world, and we believe that between the billing offering that we have and the CRM offering that we have, the new Mediation eCare and other components we believe that -- I don't know to give you the percentage, but we believe there is a lot of upside in the future of Vodafone.

Sterling Auty, J.P. Morgan.

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Dwayne Fennyworth (ph), Raymond James.

Thank you. With regard to managed services, do you have a long-term target for that versus the 40 percent you are seeing currently?

We believe that managed services is one of the main potentials for the growth of the Company. When you think about the customer care billing industry or in the telecom, a market of $25 billion, you recognize that about 10 billion out of it or according to some other research maybe 12 billion out of it is in-house activity. Spending of carriers on customer care and billing. This is the main potential for Amdocs, and just for example, our bill with Bell Canada, which provides about $250 million and maybe more per year, used to be an internal activity in-house activity. We believe that there is a lot of additional potential in this area.

There is a trend in the market of shifts from make to buy. We believe that we can grow the company with a rate that which is faster than the growth of the industry because we can get more business from the in-house, and that will increase the percentage of the managed services in the overall activity of the company. So if now it is 40 percent, we expect to grow to 50 percent and even beyond.

Is there any opportunity to reuse some of the infrastructure you have invested in for your larger managed services deals, for instance in a smaller deal like the one you announced with the North America Wireless carrier?

Well, that is exactly what we are doing. We are using the existing infrastructure, the existing (inaudible), the existing operational capabilities in order to offer a service that will be economical to the carrier and profitable for us.

Eliad Alpur (ph), Merrill Lynch.

I am actually speaking for Tal Liani. Dov, you mentioned in the past that the cable industry is very important for you, and you still don't have an offering for that industry if I heard you correctly. How urgent do you think it is to prepare yourself to enter that industry? Is it something that needs to be done this year, or do you think this opportunity is still a few years down the line?

Well, we -- everything in the cable industry is not moving so fast, so it is not a matter of months. What we estimate is that the level of activity and complexity of Integrated Customer Management system in the cable industry will intensify in two years, three years, four years. So I would say that we would like to be there as a player in two years time, three years time. So we will have to see how we get there either by selling our own offering to cable companies or maybe by acquisition.

Gentlemen, I will turn the call back to you for any closing comments.

Okay. Thank you very much for attending the Amdocs call. Goodnight.

Thank you. That does conclude our call. We do appreciate your participation. At this time, you may disconnect. Thank you.