Amdocs Ltd (DOX) 2006 Q1 法說會逐字稿

Good day everyone and welcome to this Amdocs first quarter 2006 earnings release conference call. Today's call is being recorded and web cast. At this time, I will turn the call over to Mr. Tom O'Brien. Please go ahead, sir.

Thank you, Sherry. I'm 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 certain financial information that is not prepared in accordance with GAAP. The Company's management [and uses] this financial information its internal analysis in order to exclude the effect of acquisitions and other significant items that may have a disproportionate effect in a particular period. Accordingly, management believes that isolating the effects of such events enables management and investors to consistently analyze the critical components and results of operations of the Company's business and to have a meaningful comparison to prior periods.

Also, this call includes information that constitutes forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risk 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 and such other risks as discussed in our earnings release today and at greater length in the Company's filings with the Securities and Exchange Commission, including in our annual report on Form 20-F filed on 28, 2005.

Amdocs may elect to update these forward-looking statements at some point in the future, however the Company specifically disclaims any obligation to do so. 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 Baharav's comments, we will open the call to Q&A. No met me turn the call over to Dov Baharav.

Thank you, Tom. Good afternoon ladies and gentlemen. Fiscal 2006 is off to a great start for Amdocs as earnings-per-share, excluding certain items, grew 24% and revenue grew 25% as the momentum that we enjoyed last year continues. These excellent numbers are the result of success with our customers as well as our ability to execute on our market.

Operating and financial strategies -- we expect our success to continue, and let me explain why. From a market perspective, we continue to benefit from trends that we had seen in recent quarters. The customers that we serve are going through a transformation. Service providers are coping with the challenges of consolidation while also offering new IP-based products and services with innovative business models.

Wireline carriers, such as AT&T and others around the world, are pushing ahead with IP-based services, including IPTV. Competition among service providers is intensifying, which increases the need for differentiation. This means derived demand for Amdocs products and services. Amdocs is uniquely positioned to enable service providers to rapidly introduce new offerings, lower total cost of ownership and focus on their customers. This demand and our ability to address it has fueled our growth this quarter and will be the driver of our growth in 2006 and beyond.

In the current quarter, we translated this demand into nine key wins, and we discloses a few details about some of them in our press release today. These wins were across a line of business and geographies and include significant expansions of several existing customer relationships. The wins are also the direct result of our belief that customers prefer to get best-of-suite free integrated offerings from a single vendor. This strategy allows our customer to leverage their existing investment as they add functionality necessary to offer new products and services to their subscribers.

The fact that we continue to expand our business with the market leaders is also a testament to our delivery results and high customer satisfaction.

On top of this win, I am delighted to say that Sprint Nextel has selected Amdocs to provide a single billing and customer care platform to enable a full integrated customer management strategy. The system will support Sprint Nextel's customer base of over 46 million wireless subscribers and will provide Sprint Nextel's customer care representatives real-time access to account information for all subscribers on both the nationwide Sprint PCS network and the national Nextel network, creating an enhanced customer experience while enabling the realization of operational efficiencies.

We have reached a preliminary agreement with Sprint Nextel and expect to sign an 8-year definitive services agreement. This win further strengthens our leadership position in this industry.

Operationally, we are happy with the progress we have made on integrating this DST Innovis and Longshine into Amdocs. These integrations has gone smoothly and we feel even more confident that this acquisition will deliver value to our shareholders in 2006 and in the future.

Our excellent results in the third quarter position Amdocs to achieve our growth for 2006. [There is] tremendous amount of activity as service providers are changing their way of doing business in order to compete for the customers. These changes present challenges for our customers and for Amdocs as we navigate these changes, but they are also a tremendous opportunity and we can turn these opportunities into growth.

There is a strong demand for our product and services and we have a substantiated track record of delivering excellence and the leading companies in the market as our customers.

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

Thank you, Dov. Our first-quarter revenue was $587 million, representing growth of 25%. Our EPS, excluding acquisition-related costs and equity-based compensation expense net of related tax effects, was up 24% to $0.42 per diluted share. GAAP EPS was $0.36 per diluted share.

Our EPS benefited from an increase in operating income, strong investment earnings and continuing improvement in our effective tax rate as I will discussed in a minute. On the revenue side, license was up this quarter. We are projecting that license may be near this level or maybe slightly lower for the next few quarters. We are pleased to report that operating margins were 17.3%, up from 17% last quarter.

While gross margin overall was stable this quarter, we did see a decrease in the gross margin on services. This was due in part to investments in our systems made in anticipation of a positive decision at Sprint Nextel prior to receiving a commitment from the customer.

Looking at operating expenses, you can see a significant saving in R&D cost this quarter. The driver here was better execution using measures such as a shift to lower-cost geographies as well as a reduction in the number of subcontractors supporting our broadband cable and satellite business.

Offsetting the R&D benefit is an increase in SG&A expenses partly due to increased selling costs related to the signing of some recent deals. Other income was up this quarter mainly due to higher rates on our investments. We expect to see similar level in the coming quarters.

Our effective tax rate in Q1 was reduced to 18% compared to 20% in 2005. We may see some fluctuations in the quarterly tax rate this year, but we are using an 18% rate in our annual guidance.

DSO at the end of the quarter was 53 days, up from last quarter's 48 days. Deferred revenue decreased slightly this quarter in the normal course of business. We had been focusing deferred revenue to decrease for a number of quarters. As we have mentioned for some time now, we had some unusual contracts where several customers wanted to prepay. It has taken over a period of time for some of these deferred benefits to work their way through revenue.

Our 12-month backlog, which includes contracts -- committed revenue for [manned] services contracts, letters of intent, maintenance and estimated ongoing support activities was $1.8 billion at the end of the quarter, an increase of $20 million from the September quarter. This balance does not reflect any impact of the Sprint Nextel decision as this occurred after the quarter ends.

Beginning this quarter, Amdocs accounted for employee equity grants under the new SSB 123-R. This required that we show an expense for the cost of employee stock options and restated stock and the impact on our GAAP EPS was $0.04 per share. Our best estimate is that the impact of equity-based compensation expense on EPS will be in the range of $0.04 to $0.05 per quarter for the remainder of the fiscal 2006.

Looking forward, our guidance for the second quarter of fiscal 2006 is for revenue of approximately $600 million and EPS of $0.42, excluding the effect of acquisition-related charges, net of related tax effects and excluding equity-based compensation expense of approximately $0.04 to $0.05 share. Diluted GAAP EPS is expected to be approximately $0.35 to $0.36 per share. Our EPS guidance for Q2 is based on a fully-diluted share count estimate of approximately 220 million shares.

For fiscal year 2006, our updated guidance is for revenue of approximately 2.42 to $2.47 billion and EPS in the range of $1.68 to $1.72, excluding the effect of employee equity-based compensation expense of approximately $0.16 to $0.19 per share and excluding the effect of acquisition related charges net of related tax effects. This guidance is based on a fully diluted share count estimate of approximately 222 million shares. On a GAAP basis, 2006 diluted EPS is expected to be approximately $1.40 to $1.47. This guidance includes the impact of the Sprint Nextel deal which is expected to put some pressure on margins. We believe that we can report stable operating margins in 2006 by offsetting the pressure on the gross margin with leverage on the operating expense lines.

With that, let me now turn it back to Dov.

Thank you, Ron. We are pleased to with our results this quarter and are looking forward to additional success in coming quarters. And with that, let me now open the quarter call to q and a.

(Operator Instructions). Ashwin Vas Shirvaikar, Citigroup.

Hi. Very nice results. Congratulations on those as well as on the Sprint contract.

Thank you.

On the Sprint contract, Dov, can you provide us some comments on the pricing for the deal, and also maybe get into a little bit more detail on what kind of investments you need and how long it might affect the gross margin line?

Well, let me start that the guidance that Ron mentioned for the year of 2.42 to $2.47 billion and an EPS of 168 to 172 represents our guidance taking into consideration the Sprint Nextel deal. So as you can notice, we weighed guidance for the EPS for the year and we are very encouraged by the Sprint deal. We think it's a great indication of our superiority of our platform on one end and the quality services that we delivered to Nextel over the year and the fact that we can be their strategic partner to achieve their goals. So I think that I cannot go further than that to describe pricing for this deal.

Now to (indiscernible), I mentioned a few points before that. We, as Dov mentioned, 2006 guidance includes all the impact of the deal with some pricing impact that that put some pressure on the gross margin. Though we are able to compensate by other factors and to basically provide throughout the year a flat operating margin.

Following 2006, we expect this deal to help us to improve the profitability. So a typical pressure that we have seen in [minutes] services deal in the first period will help us further down the road to improve the margin.

Ashwin, I just wanted to add maybe one more point not necessarily directly related to the Sprint deal. But I think that Amdocs over the years has been known for the value that they provide for our customers for our product on the CRM and the building. And I would maybe say that we are not known for winning bids because we come up with the lowest price possible. So I think that we demonstrated the value over the years. We believe in the case of Sprint, they saw the value in choosing Amdocs (indiscernible).

Thanks, and if I could have a follow-on. Given your solid cash flow performance and the cash on the balance sheet, could you just review the uses of cash going forward? And what in your opinion is the optimal amount of cash you need on the balance sheet?

As we said many times in the past, we have a strong balance sheet which is derived from the fact that we need to have a strong balance sheet in order to support our growth to support the largest customers and the largest minute services deal. So the recent -- the deal that was just announced with Sprint Nextel is an indication of this strategy. Further than that, we expect to do some M&A as a top priority in order to bring additional growth drivers to the Company.

Should I assume the M&A is primarily now in the financial services to build up that practice, or are there -- I think of your product as a reasonably complete product as it stands. So where would you do the M&A?

Ashwin, as we said before, we are looking in different ways to expand the capabilities of the Company in terms of complementing technology, generating new growth engines and we are not done with the telecom industry by all means or by any stretch of the imagination.

Okay, great. Thank you.

(Operator Instructions). Michael Turits.

I'm very glad to see that the Sprint deal got done in your favor. The impression I got from your prior guidance -- $1.65 to $1.70 -- was that the low end of the range would have been the result if you'd won the deal, and you're suggesting that there was a little bit of dilution from the deal. Now you're raising the guidance slightly. My first question is, it looks as if this quarter's upside as well as the lower tax rate that offset that, what $0.02 dilution -- is that correct? And the second part of that question is, what should we expect for 2007? Will this deal, Sprint deal, be dilutive, neutral or accretive in 2007?

As we said, Mike, -- this is Ron -- the guidance that we gave for the EPS is inclusive, which means that includes the impact of the Sprint Nextel deal with some other changes like the tax rate and others. And you know, we are having a dynamic business [order] from changes in other businesses and deals that we won or didn't win. As for 2007, as we expect after the initial pressure that we have in margins in the large [minute] services deals, we may see some improvement. So our internal plan is to improve 2007 over 2006.

Okay, so once again just be specific, does that mean the deal will be -- the Sprint deal will be accretive to earnings in 2007?

We cannot tell you, Mike, or discuss the specifics of the deal in that (indiscernible).

And is there a cash component to the investment that we don't see on the income statement? And about what that might be? In other words, is it a capital -- a CapEx investment versus --?

We are going to see some cash investment in the form of some CapEx and some working capital, and we're going to show with you more information in the next quarter.

Let me just add maybe one comment. We should not lose sight of the importance and the gravity of this deal. For the position of Amdocs in the managed services area, for position in the market, for customer [can] billing, for our ability to serve the largest possible carriers in the world, we're talking about 46.5 million subscribers eventually and the future businesses we'll have with Sprint Group. So the financials are, as we reflected in the guidance, and the overall picture is very, very positive for us.

Liz Grausam, Goldman, Sachs & Co.

The first question I had was just on the cable industry -- if you could give us any update on the integration of GST and how your response from customers has gone so far, and also if the Sprint transaction that you feel may help your position within the cable industry, given the relationship that Sprint has?

We are quite pleased with the progress that we have in the integration of this thing, [obviously]. We feel now more confident that we can achieve the growth that we have set up. We experience a very positive reaction of customers to our roadmap and to the plans that we have to upgrade our customers with Amdocs' platform. And this win with Sprint actually represents completely new opportunity for the Company.

The fact that there is an alliance between Sprint and the cable company -- Comcast, Time Warner and Cox -- and there is -- and therefore it will be realized to offer quadruple-play. And the fact that Amdocs will serve on one end Sprint and on the other and Comcast and other cable companies will enable us to offer to our customer the ability to launch this quadruple play and enable us to grow our business.

Great. And then Ron maybe more specifically on the services gross margin as we move through this deal, where you see the services gross margin going over the next few quarters? And when do your subscribers actually start cutting over from Sprint system onto your system such that we may see some revenue come online?

With respect to the subscribers as we mentioned in the Sprint announcement, the conversion is going to start in 2006 and end by the end of 2007. As for the gross margins, we expect gross margins to go down also in the second half of the year, but we didn't give any specific number. But in order to complete the picture, we said that the operating margin is going to remain flat.

And that's flat from the 17.3 you reported this quarter?

Ye.

Okay, thank you very much.

Tom Ernst, Deutsche Bank.

Good afternoon, thank you. Real quick question and then a second part to it. First, you mentioned that the contract with Sprint you expect to be full integrated customer management. Are we to assume that that's full platform billing across retail prepaid wholesale, et cetera? And then abstract and back a little bit, this deal really is very significant to the industry. I'm wondering from your perspective now, how do you see it changing competition? Do not worry more about other companies perhaps with younger technology like Comverse more than you do about some of the other older competitors?

Tom, thanks for the question. As for the first part of it, we cannot relate specifically to the type of obligation we're going to support. We can just (indiscernible) Sprint announcement that they're talking about using us as a single billing and customer care platform for all of the entire 46.5 million subscribers. You can look at the Nextel numbers and Sprint wireless numbers and their [wholesale] customers and you can make up the calculations. But we're talking about a call center and billing. It's a full system.

In terms of the competition, we do not count on the competition. We invest more than anyone else in developing our products. We have a better traction with the leading customers where you can trial and exercise new technologies and new applications. And therefore, we are quite confident that we are better than any younger or newer competitor in the industry. So we're watching our competitors very carefully and were trying to be ahead of them at all times.

Is there anybody you can point to that you think is rising on the competitive map relative to the ones that obviously have fallen a bit in terms of resources?

Tom, let me add my two cents. Amdocs always operated in a competitive environment. And I can assure you that moving forward, there will be always a competition. Every large carrier when it considers to modernize its system is looking for several alternatives. And I would say that we compete with Accenture in several places and there are many product providers, like [C-Bell] as it is now becoming [overkill] that are -- and Comverse and [InTech] and [Total] to some extent and maybe some other smallers.

And Convergys on the cable.

And Convergys on the cable. So I would say, we will continue to have competition and we think the competition keeps us honest and will force us to be better moving forward.

Alright, thank you again.

Tom Roderick, Thomas Weisel Partners.

I wanted to ask my first question here just a little bit more around the migration path. Dov, you mentioned obviously we're seeing 46.5 million subs are on the Sprint network will be migrated. Do you anticipate that the full amount of those subs will be migrated over to your system by the end of '07 as that's the timeframe that you've laid out for the migration period?

Well, I would say that -- let me just quote from the Sprint press release that it is expected that conversion will be complete in 2007. So I trust the publication of Sprint.

And as far as your existing data center goes for the managed services, do you anticipate moving these subs to the system in place at the Champaign, Illinois Data Center?

Today, we're walking out of Champaign, Illinois for the Nextel business. We'll see how we are expanding it, but obviously we need to expand it.

Okay, very good. Just on that last question here, I wanted to ask you a little bit about the trends in some of the bigger customers that you signed last year. You had [size invest], you had SPC IPTV. Where are these projects in their lifecycle? How much do you anticipate that there is for work left to be done? And then just speaking generally about IPTV, can you offer some sense of what the pipeline of opportunities looks like there?

Tom, I would say that I know there is the dynamics of the businesses that we have many new projects starting and many of them going into what we call the OGS -- ongoing support mode -- throughout the year. So we usually do not provide specifics, but we move into production and going to OGS have a quote of several projects and we open up new projects this quarter. Obviously, we'll start working on the Sprint Nextel or continue working on Sprint Nextel. We delivered last quarter significant portions of the Lightspeed project and so on and so forth.

In terms of the IPTV, IPTV -- one of the uses is AT&T in their Lightspeed project and we see some demands on other carriers as well in Europe and in North America.

And to add to that without getting to the project-specific information, usually when we have large projects with very large customers, we are working in phases. So we may have some drops of a softer in Phase I, and then we are getting additional orders to Phase II and so on and so forth. So usually in these kind of customers, we may see additional growth of business throughout the years.

Very good. Thank you very much.

Mike Latimore, Raymond James.

Can you report the percent of revenue that related to managed services in the quarter? And then what do you think it will be for the year?

It is -- we can provide the number for the year, but in the last quarter, it was slightly above 35%.

And then on DST, can you break that revenue out still as a percent? And then when do you think you will start seeing some sequential growth in that business?

We have some sequential growth. The cable business this quarter was around -- approximately 10% of the business.

And you did see some sequential growth in this quarter?

Yes.

Mike, I just wanted to add to the question on the cable. As Dov mentioned, we see a great traction and receptiveness of the customers to the revised roadmap that Amdocs can offer today. As you know in North America specifically, this is a zero-sum game so it takes some time to gain new customers. But we believe that with the superior offering that we will have and it will start generating new business, significant new business in the future, and we have in the pipeline today several opportunities that we're working on.

Just on that point, within the North America market, is the receptivity to new applications, or is it for you guys to take over certain additional regions?

Potentially both.

Julie Santoriello, Morgan Stanley.

I am wondering about revenue generally on the Sprint Nextel contract. If we were to look at the original Nextel contract, it's roughly 250 million in revenue per year. If we were to look at that on a price per sub type basis, could we imply that type of pricing to the new deal? Or what may have changed with this new larger arrangement?

Julie, we cannot disclose a specific pricing of this deal. As we said, the impact is included in our numbers for 2006. In 2007 and going forward, we expect increasing in the revenue and in the earnings coming from this business.

For modeling purposes then, should we be looking at fiscal 2008 as a year when you're at a full run rate in terms of revenue and profitability on that contract?

Not necessarily. We are going to see -- no, we are thinking about 46 million subscribers customer and growing. So this business is growing and we expect to see additional activity with the excellent delivery that we expect to bring to Sprint Nextel, we expect to see a further growth in the business. But from a subscriber standpoint, we are expecting starting in 2008 with the entire subscriber base on our systems.

If I can just get one more general question. Amdocs is certainly asserting itself as a company, as the go-to company for the carriers in consolidation. I know the two big ones have been wireless customers, but there are two out there on the wireline side that may be looking to do some integration; obviously Verizon, MCI and SPC, AT&T. Are there specific opportunities for Amdocs with any of those carriers in consolidation?

Julie, we cannot provide a lot of data, but I can assure you that there are opportunities we are talking about in some way in our pipeline.

Okay, thank you.

(Operator Instructions) Julian Bu, Lehman Brothers.

First question, on the Sprint contract, does that cover also the CRM part?

The call center is what we referred to as the CRM part, yes.

So Sprint will use the Amdocs CRM?

Across their line of businesses, yes.

Okay. And also the second question, the backlog increases 20 million this quarter. It seems still relatively small. I guess you have been talking about eight or nine wins each quarter. How come we are now seeing a [decent] increase in backlog?

You know, we're sitting the first quarter with $1.8 million of backlog for the next 12 months, which positions us very well for a growth in achieving our numbers in 2006. In addition to that, we are very strong in the vast set of opportunities in our pipeline. So we expect that a reasonable number of opportunities will translate into wins and into backlog.

Now the way we are [crossing] our focus are based on many factors and backlog is only one of them. So it's a bottom-line process. And when we provide the guidance and we provide expectation for growth, we take into account what we see in the business and the comfort level of our business leaders.

Okay, if I could get in just really last one. On the M&A front, I know you had been [looking] at the OSS space for some time. I guess are you not finding anything interesting, or is the evaluation there right? What's kind of holding you back?

Julian, we are looking at quite a large number of areas, including OSS. And you know the only thing I can tell you that we'll be more than happy as we did in the past to share with you targets with that we thought is appropriate for Amdocs to support its strategy.

Thanks a lot, and congratulations on the quarter.

Peter Jacobsen, Kaufman Brothers.

Thank you. Just a little bit more in terms of the market opportunity. You commented on a tremendous amount of activity. Can you review what you see as far as the size of the addressable market and maybe the characteristics of what's happening with legacy system conversions? And additionally, there are only so many Sprints and Bell Canadas and Telstras out there. Do you see any signs in the foreseeable future of maybe it getting more challenging to find these large deals?

Peter, we feel that the market is going through a substantial transformation. Wireline companies feel that they have to find an alternative revenue sources to their traditionally voice revenue. As a result, we see Telstra unfortunately we chose Accenture trying to go through a full transformation. And SBC, which turned to be AT&T is going through a full transformation actually moved to the Lightspeed project based on Amdocs' platform. And British Telecom is renewing completely their business model and we have a substantial presence there. So -- and we have in our pipeline several prospects of wireline companies and wireless companies that are planning to go through a transformation to be able to be successful in this IP-based [era] where they have to launch many new services in a very short time for a very low cost.

So some of the wins this quarter were a result of it, some of them in Europe. And looking forward, we are encouraged reviewing our pipeline that this trend of the industry, of moving to IP broadband services for consolidation and convergence is positioning Amdocs in a unique place where we have a unique capability to support these consolidated converging large carriers.

Okay, thank you.

Shaul Eyal, CIBC World Markets.

Thank you, good evening, guys. Congratulations on the Sprint Nextel. Good quarter and guidance. One quick question from me. Eli, if you look into your robust pipeline of opportunities, can you share with us kind of the geographic breakdown to some extent the opportunities for '06 coming mainly from Europe, or still the majority is coming from the U.S.?

Well, I would say that from both, unfortunately, or maybe actually fortunately, Sprint moved from the pipeline to the reality so we lost in the pipeline [this name] --.

And we like it.

And we like it this way, the purpose of the whole selling process. But seriously, we have in North America significant opportunities in some of the carriers that are converging, some carriers that are looking for modernizing their systems, both on the wireline and the wireless, on the cable and satellite industry. So we have quite a few prospects in the pipeline from North America, we have many prospects in the rest of the world -- Western Europe, Eastern Europe, Russia, Asia-Pacific. And on top of it, we have quite a few opportunities in the directories business. So it is diversified and coming from different geographies and for different type of applications.

Fair enough. And just quickly, if I may, a final question with Longshine, specifically on China. Have you seen actual progress since you have acquired the company?

Yes. We feel much more confident today that we can achieve our growth in China case in comparison to what we felt before acquired Longshine. I personally visited China, met some of the leaders of our customers, talked to our people, and we feel that we have a good company there. And it is aligned already with Amdocs' activity. Customers express a lot of interest in Amdocs' offering and reinforce the strength of Longshine with the help of Amdocs. So we are to a good start in China.

Now, it's not going to be so easy. There is a lot of differences in culture and the way business is conducted in China. And with the help of the 900 people of Longshine and the excellent presence of Longshine in the Chinese market and with Amdocs' offering of products and services, we believe that we can grow the business successfully in China.

Thank you very much, good luck again, congratulations.

Scott Sutherland, Wedbush Morgan Securities.

Thank you, good afternoon -- congratulations on the print deal and the quarter. A couple of things on the Sprint deal. Given that you had some upside this quarter, your tax rate's helping you buy a couple of cents and you raised the top line by a couple of pennies, are you assuming like a few pennies of dilution as you ramp up for this Sprint deal this year? And the second part of that deal, as you add subscribers over the next year-and-a-half, should you see revenue ramping from Sprint through this year and into '07 quarter by quarter?

As for the first question; first of all, yes, we got some addition to the EPS of the year of capital expense, as you mentioned. But on top of that, there are some internal many changes in the numbers that it brings us to the new guidance. But we cannot refer specifically to the impact of Sprint Nextel. It is included in the numbers.

As for the growth of -- the specific quarter-by-quarter growth of the revenue, we will have to wait until the next quarter to get more details.

I just suppose in a general sense as they migrate subscribers, I mean whether more one quarter or another, should it ramp up as a subscriber is converted, whether it finishes earlier or later than the end of '07.

In general, yes.

Okay, great. My second question was -- a couple of your competitors have been talking a lot more about other real-time converged billing in the wireless market, [trumping maybe] a couple of wins. Can you talk about how you believe Amdocs is positioned there, and maybe any case examples you have been successful out there?

Well, we wrote the book on real-time rating and real-time billing. So to this extent, we have today customers that are using both our systems for voice and data, prepaid and postpaid in real-time mode. Several of them are in production, a few of them are in the process of being constructed as we speak. And also, we have a few in the pipeline. So I would imagine that people are reading our book.

Okay, that's it. Thank you.

Tal Liani, Merrill Lynch.

Hi, guys, two follow-ups. Tax rate was 18% versus 20% last quarter. Can you explain this? And also in your guidance, you said 222 in shares. You had 214 this quarter and it went down the last year. Why do you expect it to go up? Thanks.

As for the tax rate, we see a trend over the last several years of a reduction of tax rate, and this a result of our geographic distribution and moving more and more to (indiscernible) in terms of the employee base and intellectual property helps us achieve this and to reduce the tax rate and to maintain activities and to reduce it further.

As for share count, the main reason we guided for Q1 about 220 million shares, which is more -- less than 215; the main reason for that was the relatively low price of the share during the quarter, which affects the Treasury stock method that you -- upon which you calculate the impact of the [pre-stock] option. Now entering Q2 with higher share price and expecting the -- I think all of us expect a higher share throughout the end of the year, that should create some negative impact on the amount of the shares for the basis of the EPS calculation.

One other question. You mentioned that a new contract may impact in the second half the gross margin, but on the operating margin level, no change is expected. Now the question is, is this -- how quick can you really cut expenses to offset the margin pressure? Are we going to see any lag between the quarter where you see gross margin going down and expenses going down, or it's going to be the same quarter?

We don't have necessarily to cut expenses. Since the Company is growing, we have leverage on the R&D and SG&A. Specifically, we had some bump in SG&A this quarter. We have increased, some of which is not going to repeat itself. So we will be able to -- without reducing on R&D, without doing real cut in SG&A, to create some leverage and to offset the pressure on the gross margins.

Thank you.

Daniel Meron, RBC Capital Markets.

Hi. Congrats on the win with Sprint Nextel and good quarter. A couple of questions here. You had a spike in license revenue -- can explain that? Also, Ron, maybe you can refer to the spike in receivables this quarter and the drop in free cash flow?

As for license, license is by its nature is a royalty. We have over the years ups and downs. This quarter, we had some project licenses that we were able to recognize with some subsequent license activity. And you know, we were able to recognize some licenses that we got in the past in the very large deals.

As for the cash flow and the receivables, we had -- you know, over the last couple of years, DSO moved between 48 to 55 days, and we had these kind of up and downs. So we viewed this increase in the quarter as normal. And this is the main reason for the reduction in the cash flow, compared to the previous quarter. Just keep in mind that the previous quarter was a record high cash flow for the quarter, and basically the cash flow this quarter is similar to the quarters before that.

Thanks, Ron. And just to affirm the backlog number that you stated -- it was $1.9 billion, right?

1.8.

Oh, 1.80, okay. I assume that this backlog number does not include anything from Sprint Nextel, so we should see it in the March quarter?

That is exactly.

Thank you, Ron, good luck going forward.

Thank you.

Thank you, that does conclude today's question and answer session, and I would like to turn the conference back over to the Amdocs speakers.

Okay, thank you very much. And on behalf of the Company, thanks to everyone for attending the call tonight and for your support of the Company. This concludes the call.