Amdocs Ltd (DOX) 2007 Q1 法說會逐字稿

Good day, everyone and welcome to this Amdocs first quarter 2007 earnings release conference call. Today's call is being recorded and webcast. At this time I would like to turn the call over to Mr. Tom O'Brien, please go ahead sir.

Thank you, Robbie. I'm Tom O'Brien, Vice President of Investor Relations for Amdocs. Before we begin, I would like to point out that during that call we will discuss certainly financial information that is not prepared in accordance with GAAP. The Company's management uses this financial information in its internal analysis in order to exclude the affect 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 operation of the Company's business and to have a meaningful comparison to prior periods. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's earnings release, which will also be furnished to the SEC on form 6-K.

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 no insurance that expectation 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 and 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 December 13, 2006. 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, Ltd., Eli Gelman, Executive Vice President and Chief Operating Officer, 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 solid results for the first quarter of fiscal 2007. Revenue results for the first quarter of fiscal 2007. Revenue grew 18% and non-GAAP earnings per share grew 26%. We continue to make progress in important projects for customers such as AT&T and Sprint Nextel. Integration of our recent acquisition is going well, with Cramer contributing some important wins in a sensitive quarter.

We see demand in the market and while we know that we face challenges,we are encouraged by our [positive] for fiscal 2007. I would like to spend a minute now and give you our perspective on demand environment. As we said in our press release last week, major service providers around the world continue to embark on transformation and convergence projects. If all goes as evidenced, because of our wide and robust product offering, and the depth of our services capabilities, Amdocs is uniquely positioned to be selected for this project which typically are very large in complex. Therefore, if these projects are rewarded, we believe that we will continue to win more than our fair share of this business.

As we went through the process of evaluating our first quarter results and looking at our projections for the remainder of fiscal 2007, several things were clear to us. First, our existing business remains strong. But second, we also saw that some business which had been projected to materialize this year might be coming in a little more slowly than originally anticipated. As a result, our revenue estimates for fiscal 2007 are slightly lower.

Business transformation projects require major decision by service providers. In our view the demand drivers which have been seen for many quarters now are still in place. The need for service providers to cope with consolidation, convergence and competition remain as great as ever. Third, it's important to note that in the current quarter we continue to sign new business with customers around the world. Some of these wins we will discuss in our press release today, they include wins with our new Amdocs 7 suite and wins in OSS.

We remain very focused on many growth drivers in our industry. These are OSS, content. and [low outlook]. In the OSS area, this was the first full quarter with Cramer as part of Amdocs. We are very pleased with what we are seeing. Post-merger integration has gone very well and Cramer is producing strong results. Indeed we have seen that in some cases service providers are actually starting their transformation projects in the network area. Content, some carriers have announced the growth of content and data revenue is now greater than the loss of revenue from voice. We believe that this is an indication that the content is strong, strong growth catalyst for Amdocs with activity led by [inaudible-heavy accent].

During Q1, we announced our intention to acquire SigValue, a company which supports service providers offering prepaid billing in emerging markets. We made our first investment in SigValue back in 2001, while we evaluated this company, its fabulous technology, and the markets that it serves. We expect SigValue to help Amdocs to execute on our strategy of expanding our business in new emerging markets. The majority of new subscribers worldwide are expected to come from prepaid customers in emerging markets. We believe SigValue expends our ability to win in this market. We operate in challenging and changing environments with much uncertainty. But Amdocs will continue to evolve and adapt as well. We believe that our strategy will continue to bring us success in 2007 and beyond.

Let me now turn the call over to Ron Moskovitz for financial review.

Thank you Dov. Our first quarter revenue was $691 million, representing growth of 18%. Our non-GAAP EPS, which excludes acquisition-related costs and equity based compensation expense net of related tax effects, was up 26% to $0.53 per diluted share. Non-GAAP EPS was positively impacted by a favorable tax rate which I will elaborate on in by favorable tax rate which I will elaborate on in a minute. GAAP EPS was $0.42 per diluted share.

I'll spend a minute now on a few final items. Please note that I am referring to the results excluding acquisition-related items, restructuring charges and equity based compensation expense. License revenue was up this quarter due in part to strong activity related to our OSS business including Cramer. This is the first full quarter with Cramer and we are seeing results from our BSS/OSS strategy ahead of expectations. Operating margins were 17.4% this quarter, down 90 basis points from last quarter. The main drivers of the decrease were as follows. Q1 was the first full quarter of Cramer and as we told you last quarter this put some pressure on margins. We also had higher than expected cost of services as we put some extra effort into some projects.

Finally, there was some negative impact from currency fluctuations in the quarter. When we look at operating margin expectations for the year compared to our previous expectations we see slightly lower margins as we are continuing to invest in R&D and sales and marketing, even though revenue expectations for the year are slightly lower. While we are taking measures to reduce spending in some areas to reflect slightly reduced revenue expectations, we continue to focus our efforts on our strategy of growth even if it has some short-term impact on margins. As these investments pay off they will help to drive growth both in revenue and in profitability. As mentioned in our press release today, we are taking some restructuring and cost containment measures which will result in pretax charge of approximately 6 to $9 million in the second quarter.

Other income increased this quarter due to some positive foreign currency impact. We may see some decrease in this line item next quarter. In the first quarter of fiscal 2007, the Company successfully resolved tax audit of a prior fiscal year that resulted in the release of certain tax results and a decrease in income tax expense for the quarter. The Company expects its non-GAAP effective tax rate for fiscal 2007, excluding the tax effect of acquisition related costs, restructuring charges and equity based compensation expense to be between 14 and 17%.

Free cash flow in the quarter was $49 l million. Included in this line was $50 million in Cap Ex, an increase as we had forecasted. Free cash from the second quarter will be impacted by the annual bonus payment to employees, which are accrued throughout the year and primarily paid in January. DSO at the end of the quarter was 55 days, down slightly from last quarter. Even though our unbilled receivable increased during the quarter. As we reach certain contract milestones over the next few quarters this unbilled balance should decrease.

Deferred revenue was $211 million this quarter, a decrease of $42 million from last quarter. We expect to continue to see fluctuations in this balance as it has been impacted by some very large advance payments from a few customers. As these payments continue to be recognized in revenue, the deferred balance will decrease. It's difficult for us to predict when we will receive large advance payments, so therefore difficult to focus deferred revenue. For Amdocs, deferred revenue is actually a subset of backlog as it represents only a part of the revenue that we expect to recognize over the next 12 months. Our 12 months backlog, which includes contracts, committed revenue for med service contracts, letter of intent, maintenance and estimated ongoing support activities was $2.090 billion at the end of the quarter, an increase in of $40 million from the fourth quarter.

Looking forward, our guidance for the second quarter of fiscal 2007 is for revenue of approximately $705 million and non-GAAP EPS of $0.49 to $0.51, excluding the effect of acquisition-related charges, restructuring charges, and excluding equity-based compensation expense of approximately $0.05 to $0.06 per share, net of related tax effects. Diluted GAAP EPS is expected to be approximately $0.35 to $0.39 per share. Our EPS guidance for Q2 is based on a fully-diluted share count estimated at approximately 223 million shares. We are giving a range for EPS in Q2 as we are still evaluating the timing and impact of some of our cost reduction efforts and also what will be our effective tax rate for the quarter.

For fiscal year 2007, our [inaudible-heavy accent] guidance is for revenue of approximately 2.83 to $2.91 billion, and non-GAAP EPS in the range of $2.02 to $2.12, excluding the effect of acquisition-related charges, restructuring charges and excluding the effect of employee equity based compensation expense of approximately $0.21 to $0.24 per share. Net of related tax effects. Diluted GAAP EPS is expected to be approximately $1.54 to $1.68 per share. Our fiscal 2007 guidance is based on a fully diluted share count estimate of approximately 224 million shares.

With that, let me turn it back to Dov.

Thank you, Ron. The guidance that Ron just gave translates to revenue growth of 14% to 17% and non-GAAP EPS growth from 9 to 15%. This growth is very much in line with the growth outlook strategy of the company and where we are focused. At this time let me open the call to Q&A.

[OPERATOR INSTRUCTIONS]. Our first question from Tom Roderick with Thomas Weisel.

Hi. Good afternoon, thank you. Wanted to dig in a little bit here on the guidance reduction, which you issued last week, and the magnitude of the reduction isn't necessarily tremendous. What gives you comfort when you look at the visibility in your business, and you look at the type of projects out there? What gives you comfort that this isn't the first of many guidance reduction coming forward given that it is a cyclical market, do you feel this reflects the pace of business that you have been undertaking or just a slower demand environment for new wins out there?

Tom, when we are looking forward, first of all, we are encouraged by the fact that the backlog is up by 40 million, that we see a lot of wins in various geographies and especially many wins in the new growth area, like OSS. However, when we do all of our math and try to calculate what is the most probable scenario for the year, we found out that the pace of a transformation project, the growth pace is not as fast as we expected. As we explained it's tough decision for carriers to go through this transformation and the project are coming at a slower pace than what we expected. So that was the main reason for reducing the revenue projection for the year.

Okay, very good. And digging a little bit deeper on the head count reduction, Ron can you give a little bit more, a little bit more detail there as far as what level of head count reduction we're looking at here and how fast those heads will flow off?

We didn't disclose the exact number. It will be a very small percentage of the overall work force of the company. And we expect to execute upon that in the next couple of months. To some extent we are going between 14 to 17% in 2007. Which means that we will increase our expenses. So the cost cuts that we took right now are trimming some expenses, reducing the pace of growth of some of the expenses, and actually will adjust level of expenses to the new level of revenue.

Thank you. We will go next to Liz Grausam with Goldman Sachs.

On the March quarter guidance the revenue is actually a bit weaker even after your profit warning last week than I had expected indicating there might have been deal slippage out of the December quarter or the current quarter we're in. Is that the environment we're in, not only seeing business some deals that you had expected to sign and haven't come through right now and it's not really a back end loaded issue, but a current quarter issue?

I would say that the fact that we see slower pace of growth of transformation projects has affected all our projection for the year. So if we are looking at Q2 in comparison to Q1, the growth rate expected is about 2%. And we might see slight acceleration in Q3, Q3 and Q4. So as I said before, the new projects are coming at a slower pace and we do not expect right now given what we have a huge change that will affect the results of 2007. We see a lot of prospects, we have many opportunities. We talk to many customers, but between now and when the agreement will be signed, and they will start recognizing revenue, probably it will have little impact on 2007.

And how is your consulting division performing in this environment, where your customers may be struggling a bit with signing major software and services contracts, may be looking at different strategic objections, are you seeing an uptick in demand at all for your consulting projects.

Liz, thanks for the question. In terms of the consulting division, as a matter of fact we are growing rapidly in this division. There is a demand for the consulting services and we get the very positive response from projects that we are accomplishing. Mainly due to the reasons that we provide high quality consulting, but the very practical one as well. And opposed to writing binders that will collect dust on shelves, we are coming up with tangible plans how to improve different processes, improve IT operations in some circles, in general we are growing close to 40% year over year in this specific division.

Thank you. We will take our next question from Tal Liani with Merrill Lynch.

Hi guys. I have a question, first just housekeeping question, your operating margin went down to 17.4% before items. Could you maybe just break down the impact of what was the Cramer consolidation impact versus the additional effort to discuss versus currency fluctuations and then looking at the next quarter you said that some of the fluctuation may reverse, so what is sort of the impact associated with that both ways. That's just on the numbers. More about the business, I understand where you're coming from '06 was a great year in terms of huge product, or projects, sorry you won in '07 some of these projects are ending and you're waiting for the follow-on orders, etc.. But this quarter is kind of puzzling, because on one hand you're a little bit more negative on revenues, on the other hand backlog is going up. Would you expect the backlog then to decline a little bit next quarter in the scenario that you don't get the orders that you're talking about or will backlog, do you think there is some kind of, it doesn't have to correlate in the near term.

As to the Cramer impact, I would say that it accounts for about I would say roughly two thirds of the difference between last quarter and this quarter. And the rest as we said there was some project investment that we put, some slight currency impact, which was a minor part. As for the backlog, as you know from the past the backlog is lumpy and we have some difficulties to focus on the quarter by quarter basis. So I cannot give you a guarantee that the backlog is going to grow next quarter, but over time we'd sure expect the backlog to grow as the business is growing. Direction is toward growth with some lumpiness from one quarter to the other.

Maybe let me add, we try all the time to convey the message that backlog is not the only indicator for future growth. Maybe this quarter is an example that, when we are calculating and evaluating the probability of prospects for the rest of the year we came to conclusions TA revenue, revenue projection has to be reduced by 2%, between 14 and 17% growth in comparison to about 2% higher revenue before. Even though the backlog is growing, because we are looking at all the projects and we see all the processes including the pace of materializing some of the prospect.

Maybe just as a follow up, on one hand again you're reducing your guidance for the year just sort of slightly reducing, on the other hand you speak about acceleration in the third and fourth quarters. We know where it's coming from, AT&T BellSouth merger, maybe Cingular system on top of it and some other initiatives. The question I have is do you then think actually your full year numbers could resemble more your original guidance rather than reduced guidance. What is the likelihood that eventually all these orders come in and then numbers actually go up again two quarters out?

There are several scenarios, the fact that we give guidance is that we believe we could fall at any end of the range. So obviously there is some scenario that we get at the higher end of the range. There is also the scenario of a downside. So we believe that this range is reflecting the most probable scenarios and we cannot rule out, you know, doing better.

Just on the comment, no doubt that the slower pace of consummation we see right now may change and specifically may change in some specific customers, including AT&T, which obviously the delay of the closing of their BellSouth acquisition impacted some of the ability to make decisions. They're now looking into what BellSouth has and, and there are very few providers that can help them go through the transformation they are committed to. As a result there is also an option that the actual numbers will be higher than the current guidance. There is such an option, it's not a clear probability, but obviously low probability, because what we are trying to give guidance is the most probable.

We will take your next question from Sterling Auty from J P Morgan.

Yes, hi. I apologize, outside of AT&T BellSouth can you talk geographically where you're seeing some of the slow down in the uptick of the transformation projects.

Well, if you are familiar with Amdocs's business we are mainly dealing with the larger customers, larger projects. So looking at our pipeline, where we hope to get business, it's well spread. It's in Europe, the rest of the world and in North America. So I would say it's everywhere.

But in terms of relative to your prior guidance, when you talk about a slow down, I mean where is the change relative to where you thought you would be, what's different now than a couple weeks ago in terms of geography, is it North America where you're seeing most of the slow down with BellSouth and maybe some others, is any of it it Europe or is it equally spread.

I would say equally spread. You just mentioned AT&T, we talked about it, their slower pace of closing the BellSouth deal. If you're looking at the changes in Europe like Deutsche Telekom and their changes in management and priorities, the pace of the outsourcing project that Vodafone has and you can go on and on. I would say you see slower pace of commitment to transformation all over the world, but I really want to emphasize it's a slower pace. At the end of the day we still grow quarter over quarter.

And maybe to add to what he said, the industry is healthy. And we experience growth. And carriers are going through the transformation and we believe that they will have to transform their BSS and OSS. We see the fastest pace in the OSS area, that explains a lot of the wins we have on the OSS side and we see a growth in the number of transformation projects at the BSS. But the pace is not as fast as we contemplated. So we are pleased with the growth, we are disappointed that it's not as fast as we thought it was going to be.

We will take your next question from Scott Sutherland with Wedbush Morgan. .

Afternoon.

Good afternoon.

First question I had is just kind of looking at, you know, the numbers, seems like depreciation jumped a bit, can you kind of talk about what number without the amortization, what was the causes behind that and what you expect going forward?

Appreciation growth is growth of the company. We are growing the business, in BellSouth and development centers around the world, especially in India in the last year and obviously when you grow the business slight changes in the cost structure. Also you have addition of Cramer this quarter as we have the impact of the full quarter of Cramer, so that adds to the depreciation as well.

What was that exact number and my second question was, looking at your revenue, operating EPS is pretty much flat, is it pretty much to assume that operating margins come down a little bit, then grow the back half of the year, is that driven by gross margins or is it more the OpEx reductions.

As for next quarter we may see some slight reduction of operating margin. Keep in mind we have given some range here, so the range is applicable to correcting margin as well. Going forward for the rest of the year, we don't expect to see significant change in the gross margin compared to our previous expectation, most of the change going to be on the operating expenses.

Thank you. We will take your next question from Ashwin Shirvaikar with Citigroup.

Thank you for taking the question. It's on the cost structure. You mentioned low cost delivery, particularly India, you guys have been building that up, that up quite nicely. My question is could you provide us an update on how many people you have there, whether the layoffs you're doing are a net amount and basically a transfer of jobs from high cost location to low cost location and when you will see the cost benefit from India.

Yes. As for India, today we have slightly above 2,000 people in India. Maybe about close to 2300 people. We grew this amount by in the last four, five months by about 800 people. And obviously we invest a lot in training the people in knowledge transfer and so on. So as we see some benefit from the existing work force there, the growth rate there is going to provide over time, the benefits we expect. So we should see more and more benefits on that front as we move forward. As for the number of people, the layoffs, it's gross amount, this is not net amount we keep on recruiting people in many areas, many geographies based on our business needs. It's not that we explicitly reduce work force, it's higher cost and move work to locals, that's not the case.

One question on unbilled AR going up, are there milestones in the next one or two quarters, if you could go through what those milestones are to bring it down?

The answer for the first part is yes, several milestones in the next couple of quarters. We are talking about specific projects which we cannot give, which projects and which, which areas.

We will go next to Shaul Eyal with CIBC World Markets.

Thank you, hi good afternoon guys. Two quick questions. You indicate a couple of wins on the dock seven platform, how many of those wins were cable related.

At least one cable company that is committed to Amdocs 7 suite. There are several wins not only this quarter of existing customers running on earlier versions, 6.5, 6.7, are going to upgrade. There is a new win altogether that is directly going to Amdocs 7.

Specifically on Vodafone, the win you announced back with IBM and EDS I think back last quarter, how is that unfolding for you guys?

It is progressing well, but as we mentioned, even the transformation in Vodafone after making decision is relatively slower than they anticipated. We have very good working relation with both IBM and EDS. One is going to walk on the southern region of the European operators and one on the north one. IBM on the south, EDS on the north. Obviously we have very good relation with Vodafone. We are a key provider to Vodafone all around Europe. And as such we continue to evolve with them. The plan itself is moving slower than Vodafone expected.

Thank you. We will take our next question from Daniel Meron with RBC Capital Markets.

Thank you. A couple questions here. First, can you give us a sense on how big was the OSS business this quarter and also what kind of business do you expect from value going forward. Then related to that, what kind of or organic growth should we look at for '08 given the fact that some of the project that you expected in '07 kind of got pushed back a bit into '08

The OSS as you recall, we gave some range for the first quarter 20 to $25 million, actually what we did from day one is reintegrated our OSS business, the Amdocs OSS with Cramer, so we don't have exact break down for Cramer, but although it was ahead of our expectations it was slightly larger than the range we gave.

Okay. So it was $125 million combined.

As for SigValue, first of all the deal is not closed yet. We expect to close it sometime around the middle of the quarter. It is not accounted in our guidance and the impact in 2007 supposed to be very small since it's a very small company. As for the '08 growth, maybe Eli would like to reflect.

We basically feel the same thing, the same way we felt a few quarters ago. I think we indicated that the organic growth in the long-term should be in the range of 10 to 14%, which is double the rate of the organic growth of the IT expense in the telecom industry. Our growth for '07 is about 10%, maybe slightly less than 10%, but in this range. And we expect to be in the range of 10 to 14 also in '08.

Okay. And then just a follow up on that, earlier you indicated that you're looking for 20% operating margin. Stand alone basis acquisitions, on the corporate level when do you think that you can get to those 20% margin, operating margin, given set backs you had this quarter and probably next couple quarters.

Basically, I think we indicated that in the previous quarter. In the core business we excluding what we did in the last 18 months, we achieved the target of 20%, driving better margins as we move forward. The 20% for the entire business is still our target. And we try to achieve 20% target for any business that we have. Occasionally when we buy company where we gain new business we bring it with lower margins and corporate leverage and we strife to achieve the 20% and up in each part of the business that we do. So at this point there is some impact on the profitability, but overall we maintain the same targets and obviously at this point we cannot commit to a timeframe.

We will take our next question from Mike Latimore with Raymond James and Associates.

Looking for a few more revenue segments here, maybe Q pass contribution in the quarter as well as DST?

We don't give specific breakdowns for Q pass in this quarter, because it's well integrated into our activity today. As for DST, also I can give you some measure of our overall cable business which around I believe 9%, Tom will verify it in a minute.

Q pass, we very encouraged by the progress of Q pass. We see a lot of interest, we see growth in the content. We see the revenue from digital services and content for wireless carriers are equal or larger than the reduction in [inaudible - heavy accent] voice. So it looks like a substantial growth area for the carriers where we with Q pass are very well positioned to enjoy the growth and help our customer and build a nice business here.

Mike, the cable business accounted for 9% of our business this quarter.

Thanks. Managed services, is that still in the 35% range.

The managed services is slightly above 35%.

Yes. And with regard to, you know, see a little bit of slow down here in your core business, does that make you more likely to try to go after the financial service market in '07 or does that not really change your focus, your eventual interest in financial services?

I would I would say the fact that we have a slightly slow down in the growth rate of the core business doesn't have, doesn't change our view regarding the telecom industry. We think it's a healthy industry, we think that we have substantial growth engine and, we think organic growth moving forward to be 10 to 14%. Now, financial services is an area that we are focusing in 2007, we do not expect substantial revenue in 2007, so I would say it's too early to start seeing it as our future growth engine.

We will go next to Ben Abramovitz with Icap Securities.

Good evening. Quick question, you talked about the carriers basically slowing down their transformation, what would cause the carriers in your discussions with them to slow down some of these transformations even further or on the opposite end of that, what would the carriers need to see in the marketplace to actually accelerate some of their transformations as they have discussions with you?

Well, we indicated that growth rate of the transformation project is not as fast as we expected. So we don't see a slowdown of the activity, that's what we want, we see growth but not as fast as we expected. Now, the reason is that in some cases there is more competition, in some countries the competition is not as fast. For example, in the United States, wireline companies in the United States companies are facing stiff competition from cable companies. It's not the case in Europe. So they experience a reduction in the number of access lines but not to the same, with the same impact as in the United States. The same in some other countries. So some carriers are starting the transformation more in the OSS and later on moving to the BSS. So we feel that moving forward the transformation will occur and we will see the growth happening and we see consolidation in the market. We see a carrier moving to convergence and we will see the transformation appearing in Amdocs is the, the company that is best positioned to help them.

If you want a one liner, there are three seats that cause higher rate of transformation. One is convergence, if the company is moving into more bundled services, they need to modernize the system, they would go through the transformation because the current legacy system can not support a convergence. That's the first C. The second C is the consolidation, when companies are buying each other, Telefonica with 02 and AT&T with everyone around more or less, so on, so forth, they have to conserve the systems as well and that's usually a trigger for transformation projects. The third one is competition. Among the carriers. Either between wireless companies or wireless and wireline companies with the cable companies and any other permutation. Your question, where would we see more, the larger the C's are the more likely that these carriers will go through a transformation.

Okay. And then one second question, which is license revenue has essentially been running flat for about a year on a quarterly basis. With some of the new acquisitions you made, do you expect to see license revenue start to pick up next quarter, and if not then where, what would we have to see in the marketplace to change some of the mix of your revenues to maybe improve some of the margins.

First of all we do expect to see growth in the license, maybe even in the next quarter. And on the other end, this is something we discussed all along, the consolidation by itself is, changes to some extent the mixture between license and services, big consolidators are paying the licenses of less customers, and they are making up services on top of that. However, as part of our strategy we spend the functionality we sell and the variety of products that we have in the marketplace is by far larger. So that overall we expect license to grow, over the years maybe even considerably.

We will take our next question from James Alexander with Jefferies and Company.

Good afternoon. Could you comment on the pipeline of cable opportunities going forward here. I guess most specifically do you think you can grow that 9% number as we go through 2007?

We definitely think so. I'm not sure about the exact timing, so do not quote me in terms of '07, but in terms of the pipeline we see quite a lot of interest and, and we are going through some proof of concepts and some sales cycles and some first initial stages of smaller projects with the cable companies. Their interest is through all the product lines that we have from mediation, all the way through rating, all the way to CRM. We see it it in North America and we also see it in other parts of the world. So, so I would say that in terms of the cable companies and companies we see a good pipeline. Altogether outside the specific cable companies you had, altogether the pipeline includes components of, of different products and different geographies.

Okay, thank you. And sorry if I missed this, but what was the head count at the end of the quarter and where do you see that going over the next couple quarters?

We don't provide the exact head count. It was, it was more than 16,000 people, maybe 16,500 people, which includes administration and some functions as well. Now, going forward we expect that to grow, maybe not on a quarter by quarter basis, but overall we expect that to keep on growing as the company grows.

We will take our next question from Marianne Wolk with Susquehanna.

Hi, I just have a couple very quick follow-ups. When you're speaking to those large transformation prospects are most of them giving you an open ended sense of timing, or any giving you any encouragement this is still a calendar '07 event. And secondly, would you mind just giving us the geographic break down of revenues?

Maybe we should start with the geographic break down.

Yeah, with respect to geography, what we have is about 69% of the North America, 22% in Europe and rest of the world accounts for 9%. Regarding the timing of the transformation project, in some cases there is a delay for maybe a year or two. In some cases it's a few months and in some cases it's going through some processes of replacing management and making decisions. So overall the feelings that we have talking to customers in Canada and in France and in Eastern Europe and in many other places is they are going through the transformation, they need the capabilities to cope with the convergence consolidation and the competition, but it takes more time.

One final question, you mentioned that there's a bonus payment in January. Are you able to disclose how much that is?

It's approximately $50 million.

Next we will go to Tom Roderick from Thomas Weisel for a follow up.

Hi guys, just one quick follow up. I wanted to dig a little deeper here. Ron you mentioned early in the call that there have been some projects where the services costs were higher than expected due to some extra efforts. Can you give us a sense of number one how many projects we're talking about and number two whether we should anticipate this to continue in the coming quarter or two quarters.

Tom, I'll try to provide some, shed some light on this question. First of all need to know that we are dealing with the most complicated projects on earth and we always have one or two projects that are on the tight spot for a few months until we get into production. I would say the current situation maybe we have two or three of them. And it's in different size. It's not something very significant in terms of the volume of it or severity of the gravity of the situation, but we have this mentality of our customers. Sometimes the requirement change in the last moment and they need to accelerate some of the change requests in order to make sure that there is still time, but in order to meet the time with new additional changes, you are adding some people. I would say altogether it's something that would, we will always have. The specifics that Ron mentioned probably will go away within the next couple months.

And would it be, would you be comfortable stating that the projects that you're referencing are in good standing, you're in good standing with those customers and that you anticipate those projects to run to completion?

Yes, absolutely. Nothing of this project is I would say outside the scope of normal number of bugs that you may encounter in the complexity and the size of this project. Just that since we had very good selling year in '06, we are accumulating a lot of delivery projects in '07.

Thank you. At this time that is all the time we do have for questions today. I would like to turn the program back over to the Amdocs speakers for any closing or additional remarks.

On behalf of the company we would like to thank you all for attending our call. This concludes the Q1 conference call.

That does conclude the call, you may disconnect your line at any time.