Amdocs Ltd (DOX) 2004 Q3 法說會逐字稿

Please stand by. We're about to begin. Good day and welcome to this Amdocs' Third Quarter 2004 Earnings Release Conference Call. Today's call is being recorded. At this time, I will turn the call over to Mr. Tom O'Brien. Please go ahead, sir.

Thank you, Patty. I'm Tom O'Brien, Treasurer and Vice President of Investor Relations for Amdocs. Before we begin, I would like to point out, during this call, we will discuss pro forma information that is 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 and its internal analysis, because it enables the management to consistently analyze the critical components of 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 for meaningful comparison of our periods and analysis of the critical components of results of operation.

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 statement 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 attained or that any deviations will not be material. Such statements involve risk and uncertainties and 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 IT 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 custome, our ability to develop long-term relationships with that customers, and risks associated with the operating businesses in the international market.

These and other risks are discussed at greater length in the company's filings with the Securities & Exchange Commission, including in our Annual Report on Form 20-F, filed on December 24, 2003, and our Form 6-K, filed on June 10, 2004.

Participating in the call today is 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. We are pleased to report that this was a solid quarter for Amdocs. We met our guidance with revenue of $450 million and pro forma earnings per share of $0.30. Cash flow was strong, and we increased our backlog. There were some important developments for Amdocs, including wins at Vodafone and Astro during the quarter, we believe according to the Worldnet by converting their mobility to the Amdocs system.

All this was accomplished in a still-challenging and competitive market, which is not growing at the pace expected. The net result of all of this is that we expect very modest growth in coming quarters, but this development and others that we know about should provide higher growth rate in the future.

Let me explain the significance of some of the quarter's activities. You have heard about our vision of integrated customer management, a way of doing business that puts the customer at the center. As I always do, during this quarter, I met with some CEOs of major communications service providers. I was very encouraged by the alignment between our vision and their business imperatives and, in particular, their desire to explore this further with us, which would result in faster implementation of new services.

We had two wins in the system integration area, at Vodafone Hungary and a North American customer. System integration services are a natural expansion of our addressable market, and we think that we bring a unique perspective to this market. Our domain expertise in the complex telecom environment combined with our pre-integrated product offerings make us the best choice to provide system integration services for carriers, as they move towards integrated customer management.

We announced a long-term global framework agreement with Vodafone, positioning Amdocs into a strategic billing provider for Vodafone worldwide. Vodafone's strategy is to provide a consistent customer experience around the globe. To achieve this, after deep analysis by their technical team, they chose Amdocs as a strategic platform for the future. After nearly 10 years of serving Vodafone and the many successes we have had at individual Vodafone properties, we are delighted to enter this new phase of our relationship.

We are progressing on schedule at our SBCDO and Bell Canada managed services portal. As I mentioned earlier, we moved Bell Mobility into production on the Amdocs system in Q3. We have delivered on the Worldnet, for Bell Canada, which helped them to achieve the vision of one bill across multiple line of businesses.

In addition to this development, since the end of the quarter, we were able to close two important deals. This may not be a major driver for Q4 revenue, but we believe that they will help to support accelerated quarterly growth in the future.

To summarize, we believe that Amdocs is in a position to continue to generate growth in market share, revenue and earnings, and to continue to generate strong cash flow. Let me now turn the call over to Ron Moskovitz, our CFO, for the financial view; and then I will come back with some concluding remarks.

Thank you, Dov. Our third-quarter revenue was $450.2 million, a growth of 19.4% over last year and sequential growth of 1.7%. Our pro forma EPS was up 30.4% to $0.30 per diluted share. GAAP EPS for the quarter, which includes acquisition-related charges for amortization of purchased intangible assets and related tax effect, was $0.28 per diluted share.

License revenue was $17.3 million. This slight decrease compared to Q2 was due in part to the slower than expected growth in the market. We expect about the same level of license revenue in Q4.

Other income was approximately $1 million lower than last quarter due to the sharp increase in short-term interest rates. We also had some costs related to foreign exchange. Other income should be up slightly next quarter.

As you remember, the deferred revenue has increased about $50 million in the March quarter due to significant advance payments. This quarter, the deferred revenue is slightly lower by $1.5 million. We expect that more of this advance payments will come out of deferred in Q4.

DSOs at the end of the quarter was 65 days.

Free cash flow defined as cash flow from operations less net capital expenditures and payments on capital leases was strong at $59 million for the quarter. We ended the quarter with a cash balance of $1.228 billion, a decrease of $339 million from last quarter's balance. The main reason for the decrease was the use of $395 million for the repurchase on June 1of substantially all of our 2% convertible notes.

Our 12-month backlog, which includes contracts, committed revenues for managed services contracts, letter of intent, maintenance, and estimated ongoing support activities, was about $1.4 billion at the end of the quarter, an increase of $20 million from the March quarter.

Regarding the SEC investigation, we are not aware of any substantive developments since last quarter's conference call. Looking forward, our guidance for the fourth quarter of fiscal 2004 is for revenue of approximately $452 million. We expect pro forma EPS of $0.30. Diluted GAAP EPS. is expected to be approximately $0.01 to $0.02 less than pro forma EPS.

With that, let me turn it back to Dov.

Thank you, Ron. We are pleased with what we accomplished this quarter and are looking forward with a vision of success in the coming quarters.

With that, let me now open the call to question and answers.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the "*" key followed by the digit "1" on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We'll take as many questions as time permits. Once again, please press "*, 1" on your touch-tone telephone to ask a question. We'll pause for just a moment to give everyone an opportunity to signal for questions.

Our first question, today, is from Tal Liani from Merrill Lynch. Please go ahead.

Hi. Good afternoon. Dov, I'm wondering, if you can elaborate a bit more on the new contracts? Are these two contracts from the same customer in different divisions, maybe or not? And second, why, if you got it after the quarter closed, is the revenue recognition depends on sort of the delivery of the system? So why don't you start recognizing already in the next quarter? Thank you.

Well, we characterize these two things as important things that might help us and support actually the company in growing its market share and supporting the acceleration of the growth in the future quarters.

Now, regarding the recognition of the revenue. We said it's not going to be a main driver for Q4, because it's not going to create a substantial, I would say, immediate impact. There is, however, a strategic importance -- and by the way, these are not in the directory areas and the billing side of the business -- we will see gradual impact of these things on our financials.

OK. Thank you.

Thank you.

And we'll go next to Greg Gould from Goldman Sachs.

Thanks. Dov, how much of the deceleration in sequential revenue can be attributed to meeting major milestones on the certain contract?

The certain contract is a -- actually a -- primarily it's recognized for a bill stop. So meeting the milestones has no effect on the revenue combination.

OK. This is Liz (ph). Can you guys just help us understand why the margin isn't expanding any quicker? I mean, we only saw about 10 basis points this quarter, and based on the guidance that you have given, probably, it's about flat next quarter, as well, with the maturation of some of these managed services contracts? Thanks.

First of all, the managed services contracts are not expanding the margins in each and every quarter. It's a gradual buildup. And specifically with respect to this quarter and the next quarter, we saw some slight decrease in licenses and some increase of investment in R&D, on the other hand, we decreased the spending on SG&A. And we should see in the next quarter basically the same margin -- the same structure of the profitability.

With the current level of the shares, are you considering or if the board considering to initiate another share purchase program?

Not in the near future.

OK. Thank you.

And we will take a question from Marc Griffin from Prudential Equity. Please go ahead.

Hi. How are you doing? This is Marc Griffin calling from Prudential. I just want to make sure I understood, was there official guidance for 1Q '05? You used the phrase at the beginning, very, very modest growth in the coming quarters, and with that official guidance for the first quarter of '05 December?

It is not an official guidance. We don't give specific numbers, but...

No. No. We've been going with the phrase, you know, before the Analyst Day, very modest growth, then we went to very, very modest growth. Is this a similar phrase we are using for the December quarter?

And -- when we said the coming quarters, we mean that we should expect some growth in Q1.

OK. Along that you had a lower backlog number. You look like you are up to $1.42 billion, little bit lower than we had anticipated. Have some deals falling out of the pipe? Are they having -- what's the -- how is the pipeline looking? What's the deal with the backlog going up, are those deals anything like Orange, and the Russian deal, any of those getting signed and put in backlog?

For the first half of the question, the backlog is up. It is up by $20 million, which is about 1.5%, so this is a positive development given the market and the trend of the revenue. And as for - and I don't know on what basis you build your expectation, but I'll let Eli to discuss the pipeline.

Mark, as for the specific deal that you mentioned, specifically the Russian deal - excuse me, we said before that we have been selected to be the provider of sales unit as a customer care billing vendor. We said we still need to sign the agreement and it will - it is something that we are working on with our partner on this day, which is IBM. And we will announce it when and if it's done.

Regarding other deals, they are not part of the backlog in any case. We are counting in the backlog only deals that we have commitment already about them. Generally speaking, the pipeline is diversified geographically from North America, Europe, A-Pac. We announced one specific deal in A-Pac, which is the Astro deal, and also diversified from the application standpoint, that is to say CRM billing, outsourcing, and now we also include some pipeline from aviation, it was another fine acquisition of Amdocs.

OK. Thanks, guys.

We will go next to Sterling Auty from JP Morgan.

Thanks. Sorry about that. In terms of the outsource managed deals, especially with Bell Canada, now that you kind of completed the integration, can you talk to where the headcount in some of these are? Should we expect to see some headcount reductions and maybe some contribution to margin, maybe two quarters down the road or give us some idea in terms of the timeline?

Sterling Auty from JP Morgan: With respect to the headcount, we don't give for obvious reasons a specific - our specific plan. And we are building only expansion of margin. And our managed services builds a great deal of our spending is with the contractors and data centers and stuff like that, so it's not all built on people.

Let me elaborate a little bit. The delivery of the last part of the roadmap to Bell Canada of Bell Mobility is extremely important. And first of all, you alluded to it regarding the fact that we are not supporting anymore and through the legacy system and the new system, and now which will enable us gradually to reduce the operational cost and expand their margin. Some of it was anticipated before. But the important thing about the deal is that Bell Canada is a showcase now for many as a T1 carrier.

First of all, we -- Amdocs is now delivering a full outsourcing of all the billing activity in the wire line, wireless data ISP on a single platform, and that is for the last, actually -- since we signed a contract a year ago, and that exceeding all the (inaudible).

Secondly, the fact that we delivered to Bell Canada according to the roadmap is a success that encourages Bell Canada to explore further a possibility of a cooperating with Amdocs to fulfill their vision of one bill, which will enable them to reduce the time to market and reduce the costs of their activity.

OK. In terms of the modest growth, can you just give us an update now that we are down the road little bit from the Analyst Day, what you feel the, I guess, the underlying drivers in the industry are that are causing the growth to only be modest at this point? And is there any sense -- you talked about the fourth quarter, maybe a little bit growth in the first quarter, do you think that this is something that might be an elongated kind of muted growth environment or is it something that may only be a couple of quarters long?

Overall, when we analyze the market that we operate in, we see at some customers, some hesitation as they delay some decisions, and as a result of it, we do not see the deals, that so many deals that we expected to be signed -- to be signed, so as a result of it, we see just very modest growth and not higher growth.

However, looking at the market it seems that the main drivers of growth, that is to say, the need of wire line companies to move to new services, data services, to move to video, in order to be competitive with the cable company, in order to, not to lose access lines, we will drive the wire line companies to invest in new system.

We see the cable companies, they will - they are moving toward the voiceover IP. And they will have to invest in this system in order to be there, and we, as we said before intend to be a player in the cable industry, as well, as part of telecommunication. And on top of all that -- on top of the overall situation of the market, we believe that we can grow faster than the market by increasing our market share.

And we - and the deals that we refer to that we signed after the end of the quarter are a vindication of our ability to increase our market share. And on top of it, the type of business we are doing on including managed services might help us to grow by moving activity from the in-house part of the market to the external market so we can grow faster than the market by getting managed services, by growing market share and by expanding our addressable market. And our addressable market, as you know, that did not include cable but it would in future, did not include the OSS activity and it that will include in the future and some other elements.

OK. Thank you.

And we will go next to Julie Santoriello from Morgan Stanley.

Thanks. Good afternoon. I have noticed that when we look at the telecom market that we are beginning to see some carrier spending free up on the hardware side, especially in the past month. Does that give you some confidence that eventually over the next several quarters that spending will begin to flow more to your back office type applications?

We are talking to the CEO's of some of the customer. It seems they are determined to be more competitive and to move to new area. So they invest in hardware in order to, for example, wire line companies need the capability of providing video services. They need the capability of providing DSL and data services. And we see the same with cable companies that are moving forward.

So we believe that we will see a continuing trend of investment in the hardware and in the back office. On the other hand, in order to be competitive though, they all need to cut expenses, which would be another driver in the activity. And actually, leveraging our integrated customer management offering can help them to cut expenses.

OK. Thank you. If can get one more question. Ron, can you help us with the mix of revenue from SBC in the quarter? And I am wondering perhaps if there's been at all a temporary slowdown in your SBC or Cingular activity ahead of the acquisition of AT&T Wireless?

With the SBC in terms of percentage revenue, we don't disclose the exact number. It is regarded as part of our five largest customer, which are a 10% customer. So in the range of a 10% customer. So this is one of our largest activities. As for Cingular and SBC...

Regarding Cingular, we see an increase in the activity with Cingular. And we were and we are and we will be a very strategic partner with Cingular.

OK. Thank you.

Thank you.

And we will take a question from Mike Latimore from Raymond James

Hi. Good afternoon. On the two deals that were closed, out here in the quarter here, sounds like they are sizable. Should we expect backlog to increase by a fair amount next quarter? And the second part of that would be, since you are not going to see a lot of revenue right away, should we assume they are not managed service deals?

With respect to the first part, these deals are going to contribute to the backlog, to the entire backlog of the company and some to the 12-month backlog that we communicate. As for the overall backlog as of the end of next quarter, it is dependant upon some other factors, like other deals that we close. So all together, we may expect a slight increase, but it could be flat -- I would say flat to slight increase. That's our best guess at this point.

And since the revenues are not going to be big right away, should we assume they are not manage services deal?

We prefer not to add more comment, but important thing is that we do not, should not consider this to be a mega-deal, that will going to change the landscape. And it's not in the directory area. So they are important, they are strategic, but not going to change the landscape.

I seeOK. Averages percent from directory and percent from managed services in the quarter?

Directory is around 14% and managed service is approximately 40%.

Thank you.

We will go next to Marianne Wolk from Susquehanna.

Not to beat a dead horse, but I just want to clarify the two deals you signed post-quarter were traditional wireless, wire line deals and not deals that were in new strategic areas?

No when we said they are strategic, at least we specifically referred to one of them. It's strategically important because it's vindication of our strengthening position and leadership position in the marketplace. So that's one of the comment that we made.

Does that mean it's outside of the wireless, wire line arena?

No, it is inside the wire line, wireless arena. Customer care billing, mainstream business for us but it's something that basically demonstrates our leadership in the market. That's one of the deals. And we said that they are not mega-deals, but they are very important for our position going forward.

Can you talk to us a little bit more about the market? And when you get a sense of some of these large deals that are in your pipeline that have not yet closed, do you get a sense of what might trigger those closings? Could we expect some sort of December quarter budget flush or do we have to wait for calendar 2005? I am just trying to get a little bit more insight from your discussions with the telecom marketplace.

Well, they vary quite a bit. We mentioned before that we do not expect a mega-deal in this quarter. And we do not necessarily expect a mega-deal in quarter four, as well. On the other hand, we do see large important deals from all spectrums of the market, CRM deals, billing deals, managed services bids that we're participating in. A lot of the deals are our own, triggering in our own initiative due to the fact that we are talking to the leaders of industry. And we understand quite well what they need. But to give you some kind of overall average flavor of the type of deals, it would be quite hard.

I am just trying to understand the disconnect between the guidance for short term and your optimism longer term. So we should assume that you do expect to close some of these deals more in the calendar 2005 timeframe?

Well, first of all, yes, we will sign some deal in 2005. However, the overall activity of the company and the numbers are the summation of all the activity with existing customers and new customers. And you know it's also a reflection of the status of the industry. So we feel very good regarding our success in the market. We are gaining market share substantially.

There are two deals we signed, one of them as I earlier said is a clear demonstration of our winning market share. On the other hand, we talk to our customers and they show a substantial interest in moving forward and implementing integrated customer management.

Moving to situations where they will have older management mediation, billing, CRM, eCare actually on pre-integrated, and to buy it from the same vendor with services and product, which will enable them to shorten substantially the time to market and to reduce operational costs and IT cost. So we see an interest and we see them acting upon it moving forward. Now, it takes time.

We are talking about strategic systems, and so we are encouraged by the trend in the market and the fact that we are getting stronger and stronger. However, overall, when you are looking at the numbers of Q4, we indicated a month ago, two months ago that it will be very modest growth. And probably that will be the case. Looking forward, it seems that the growth is imminent.

Thanks.

Thank you, Marianne.

And we have a question from Shaul Eyal from CIBC World Markets.

Thank you. Just a quick question. Dov, on the two new deals, are they from a new or an existing customer? And I don't know geographically if you can share with us whether it's a European or US customer?

We cannot share this information at this point.

Shaul, if we start scrutinizing it, you know North America, west of the hot zone and the size in terms of, it will be meaningless.

There are two things, what we can say that it's in customer care and billing, and it's among our traditional market.

And existing or new customer?

I said it's -- those deals are with customers in our traditional market.

OK. Thank you.

Thank you.

We will go next to Richard Sherman (ph) from JMN.

Yes, hi. Good afternoon, guys. The question back, we're hitting these two important deals over and over. When you say important, is it important because this will be a springboard to additional opportunities and expansion in 2005? Could you talk about it in a strategic -- does that mean there is more coming behind this and not so much an immediate or a near-term revenue impact, but it's a sort of an opportunity to penetrate more deeply and move into more significant revenue opportunities next year?

I think we should stop digging into this. Once we are ready to release the full details, we will do it. When we are saying strategically, it means that it is again a vindication of our leadership of the market. It means that it is a strong important win for us. And yes, it will generate revenue in the future, and also represent room to grow above and beyond the specific initial deals that we are talking about.

OK. And then maybe just a number of clarified wins and thoughts on M&A strategy any change, any thoughts on acquisition going forward?

Well, we said several times that we are going to use M&A as a vehicle to support our strategy. We've joined recently with XACCT and we see some good signs of that. We actually had a couple of important wins with XACCT Mediation this quarter, as well.

But by and large we are basically using M&A to support and expand our strategy. We cannot share any specific target, although we hear a lot of rumors, and -- but we have these type of rumors or other type of rumors every single week. So, I suggest until we really release something concrete, people would ignore the rumors.

OK. And the number of clarified wins in the quarter?

We don't disclose the number of clarified wins.

OK. Thank you.

And we will go next to Reg King from WR Hambrecht.

Great. Thank you. Dov, I was hoping if maybe you could give us any geographic breakdown of revenues in the quarter?

OK. The geographical breakdown of this quarter is we have 66% of the revenue coming from North America, 26% approximately from Europe and 8% from the rest of the world.

And then can you talk a little bit about -- you talked about the modest growth. Can you talk a little about the growth across your various applications? Have you seen any differentiation in the demand characteristics across several of your different applications like in billing, mediation, CRM?

Well, I would say that, I don't know if this is a phenomenon of this quarter, but in recent quarters, we see increased activity in, let's say, additional areas, so not only in the billing where we're having substantial success. We see a momentum in the order management, in the CRM, in the eCare, in the mediation. So, which actually vindicates the need for integrated customer management.

The need of customers to have a coherent solution, coherent design over all sides of the business, where the customer is put in the middle, and he can be treated as one customer by one company. And every new service can be implemented in a very short time. This is a unique offering to the market. We are the only company, which is having all this type of product.

We can sell the product on a stand-alone basis, we can sell them as a suite, and we are the only company that can provide the know how and domain expertise that can enable to put everything together and implement it successfully.

Dov, when you look at these areas that you're already very strong in billing, mediation, CRM, have you seen that same sort of pattern from the Telcos where they have up-end slower than you expected to make a decision, or has one forwarded their position more than others?

It actually varies quite a bit. Some quarters we see tendency to have more CRM sales and new win either with existing customers or new customers. Some you see maybe tendency to have more billing, but the fact that we are diversified and we have many, many applications in all geographies and as Dov said, we have this coherent, but holistic view of different applications.

Usually we sell this integrated management components on a modular basis and the carriers can grow as they move forward. That's one of the nice things about this approach. So, which component they would start from, and in what pace is not necessarily greater specific trend.

OK. Thank you very much.

Thank you.

And we will go next to Tom Ernst from Deutsche Bank. Please go ahead.

Yes, good afternoon. Thank you. Dov, over the last few months you've had a couple of opportunistic wins to expand the services you provided to customers and play the role normally filled by a system integrator. A couple of questions there. Do you see this is something that could becomes strategic that you want to invest in more aggressively? And if so, are you looking to fill the role as a prime contractor in bringing in third-party integrators to work under Amdocs or do you want to build out the staff yourself?

Tom, basically, there is nothing opportunistic about these wins. We work quite hard. It's part of our strategy. We are expanding. It's not instead of what we are doing today, but we are expanding our range of services into more traditional system integration. And yes, that would include prime contractor position.

In Vodafone Hungary, just for example, we are the prime contractor. We are doing the PMO, the project -- the program management office. We are doing the training and some other activities, and these are deals that are right along the strategy of the company and we are very proud that we managed to execute them properly.

More than that, we are accelerating the talent that we have in these specific areas of system integration. We recently appointed a gentleman by name Rick Mitches (ph) that came from ENY to join our company with vast experience in these type of applications in Nextel and other places. He is a Division President responsible for promoting and expanding the system integration activity in Amdocs.

So, all together, this is on target for us. It's part of the strategy. It's a natural growth area and it's very appealing to our customers because they can expand these type of services that they do with us. We see it in many cases and places. We released only a few of them.

OK. We went through the, kind of the worry over the last couple of years as to whether or not you could run the managed services business and I think you've shown some capability to do that the last year or so. Do you feel you are already at critical mass to be able to handle this expanded role? Is this profitable business already in terms of the expanded integration work?

Yes, it is. We have this experience in many customers. Some of these activities we were doing before without specifying it as a system integration activity. So we have this experience for quite some time. We accelerated it recently in the last few quarters. And based on the receptiveness of the market, as well as the type of people that we have, we believe that we will be successful in expanding this line of business.

Let me add that we just added two recent examples, which I cannot mention, of two customers. When we were having implementation one in Europe, one in North America, that were moving very slowly but our domain expertise, our ability to cope with complexity, the understanding of the business of the customer, the product on the horizon led us to the conclusion that if we are taking over and you will be the client, we are able to do a much better job, and we did in both customers.

Today we have a smashing success in both customers. The two systems are in production and the customer is happy and it will bring more business. We are very encouraged by this experience and others. And we believe it will enable us to increase the success of our activity with our customers and generate some revenue.

One final follow-up, if you will allow me. I was a bit surprised to hear about some of the subcontracting. It appears even some of the competitors like Accenture have shown-up as subcontractors with Amdocs. Could you comment quickly on the availability of subcontractor partners and how extensively are you using them today?

We are living in an environment of competition where we cooperate and we compete. Just Accenture -- you mentioned Accenture. Accenture by the way is the prime of the Cegetel deal and we're the subcontractors providing the product and some of the services. And so in other cases, Accenture is our subcontractor where we are the prime.

Now, we do not have yet a full SI practice with all the armies there. We do not intend to start activities there by recruiting 3000 people and actually put a sign on our door "Open for business." So we are getting the business. We are having the people that are leading the activity, and Rick Matthews is bringing some of the people and we are converting some of the other people to this activity. And when there is a need for additional help, we take one of the other system integrators to help us out as a subcontractor.

All right. Great. Thank you.

Thanks.

And we have a question from Adam Waldo from Lehman Brothers.

Hi good afternoon, everyone. Dov, you all recently -- as early to mid-fiscal 2001 were running surplus cash balances in the $200 million $400 million range on a company that was about 80% the revenue base of the company today. Now you are running about a $1.3 billion cash balance.

Obviously part of that increase is the need to invest in more managed services deals going forward that are more capital intensive, but I wonder, given the comments made earlier in the call around M&A, if you could lay out for us some parameters that we might think about in terms of potential size of acquisitions being contemplated and the expectations you would have around EPS accretion and cash-on-cash return targets for those acquisitions?

Everyone is (inaudible) regarding cash when Microsoft announced a $30 billion plus one-time dividend. We believe that Amdocs can grow much more than what we see in the coming quarter. And the cash has a strategic importance to our activity. As we said, we see consolidation in the market. The tier one customers are becoming larger.

We see Cingular buying AT&T wireless. And we might see more consolidation in the North American market. And these tier one customers will need to invest in transforming their business, moving from a just combination of different silos to one integrated customer providing integrated customer management. Now, they will need, in order to do that, to invest money and to work with a partner like Amdocs that can invest money, whether it's managed services, whether it's some other arrangement where it would be a substantial undertaking that will bring big benefits, but might include some investment.

The cash that we have would be used first for managed services or some large deals or some undertaking in order to promote our business with the leader of the industry, the tier one customers. Secondly the M&A. We will use the appropriate development to promote our strategy and our business goals.

So as we said, and we expect the deals to be accretive, or, maybe not bringing substantial increase to the EPS immediately, but we make sure that everything we do brings value to the shareholders. Now the deals will be according to our strategy, that is to say, expanding the functionality that we provide to our customers, maybe enabling us to get to additional line of business in the Telco, maybe expanding our services, maybe expanding our activity to different geographies. And regarding the --maybe the financial part --

-- Maybe some of the relevant points comparing Amdocs to the capital of three or four years ago. A very different company, we are now about 40% of our business is managed services. In managed services you need to present to your customers that you need a very solid balance sheet. So we haven't been in this situation in 2001.

Secondly in 2001, the company grew 40%, 50%, all of it organic growth. Today in order to grow the business significantly, you need to invest in various fields and M&A is a significant layer of the strategy. And so we need the cash to M&A as well as what we mentioned, we need flexibility in our strategic move. And on top of that, we have the convertible note on the balance sheet, on the other side of the balance sheet. So, on a net basis we have about $800 million of cash.

OK. And then just turning to Ron's comments, and thanks for that specificity, turning to Ron's comments around modest sequential revenue growth and what that might mean. If we interpret that to be sort of 1% to 1.5%, maybe 2% sequential revenue gains depending on the quarter over fiscal '05, we're probably looking at something like 4% to 8% all organic growth in fiscal 2005 absent acquisitions, is that a reasonable expectation for to us have?

Let me be specific. We said we should expect very modest growth for the next coming quarters and through 2005 to seek acceleration of the growth rate. So we should expect acceleration of the quarterly growth rate and with respect to a specific number, we don't give guidance at this point in time.

OK. So it sounds like certainly the numbers I am talking about are certainly conservative and you might be aim to do somewhat better based on the new business pipeline. Is that a fair qualitative conclusion to draw?

It is -- I will stick to what I said earlier....

OK. Thank you all.

Thank you.

Thank you.

And we have time for one more question today. And it will be a follow-up from Tal Liani from Merrill Lynch.

Just a quick follow-up. I know you asked not to go back to those two contracts. You said that it improves your competitive position in the market. The question that I have was, are these contracts predominantly wins from internal departments of carriers or are these wins from sort of competitors in the market?

Well, we gave already a lot of details. And I would say that the deals are giving us additional vindication to our strong position in the market, and the preference with customer have to Amdocs system in comparison to the competition. So I suggest we will not add details at this stage.

Right. Thank you.

Thank you.

And that does conclude our question and answer session. At this time I would like to turn the call back over to Mr. O'Brien for any additional or closing remarks.

OK. Thank you very much. On behalf of the company, I would like to thank everyone for joining our call tonight. Thank you very much. This concludes the call. Good night.

And once again thank you for your participation on today's call. You may now disconnect.