Amdocs Ltd (DOX) 2007 Q3 法說會逐字稿

Good day, and welcome to the Amdocs third quarter 2007 earnings release conference call. Today's call is being recorded and web cast.

At this time, I'd like to turn the call over to Mr. Tom O'Brien. Please go ahead.

Thank you, Robby. 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 uses this financial information in 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 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 the today's earnings release which will also be furnished to the SEC on Form 6K.

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 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 on our annual report Form 20-F for the fiscal year ended September 30, 2006, and our Form 6-K furnished on May 11, 2007. 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 Chief Operating Officer, 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 solid results for the third quarter of fiscal 2007. Revenue grow 14% to $712 million while non-GAAP earnings per share grew 10%. We are continuing to execute for our customer and are excited about our [posture].

Our excitement is driven in part by very dynamic communication environment. Worldwide wireless user may reach 3 billion by the end of this year according to some estimates. The wireless markets in Russia and Brazil are showing increases in RPU.

The launch of iPhone by AT&T wireless and Apple generated enormous attention from customers and the media. On the wireline side, service providers are seeing revenue and subscriber growth in broadband. In addition, consolidation and carrier market continues. Overall, the atmosphere in the market is good.

This market dynamics are driving demand for our products and services. We are winning projects because Amdocs is the only company to comprehensively address service providers needs for customer experience systems innovation offering the market defining software portfolio combined with services that expands from strategy to the business. We combine ongoing innovation with an unmatched foundation of business processes best practices.

We enjoy a unique competitive advantage steeped in industry expertise and unmatched experience walking with the market leaders. For this reason, we are delivering on complex projects such as (inaudible - highly accented language) for AT&T and consolidation of Sprint and Nextel. This quarter we met key delivering milestones on some very complex projects.

It is our success in delivering mission critical platforms in this competitive and transforming environment that gains the trust of the market leader. One example of our delivery success is by Tmobile, a key subsidiary of China Mobile. We recently completed our first installation of our online charging product handling both prepaid and postpaid subscriber. This was a complex project and one of the first of its kind by (inaudible - highly accented language) in China.

A key complement of our success was that we supplied both the product and the services cooperating with HP, and this is a competitive differentiator. The success of this project opens the door for future growth in the fast growing market in China.

We had a number of wins in the quarter, which illustrate how well we are positioned to win in multiple areas and existing wireline customer who has been using much of our [BSS] offering has committed to the first phase of the comprehensive OSS and BSS products. Several other existing customers have recently chosen Amdocs to support their move to offer next generation services in content and entertainment.

We continue to see growth in cable in the United States and other geographies. In addition, we had numerous other wins in BSS/OSS around the world including emerging market wins for our network business unit. Overall, even though it is difficult to predict the timing of performing projects, the pace of transformation project is similar to what we sold last quarter.

To summarize, we see a healthy market, including transformation projects, which will drive demand for our products and services in 2008 and for years to come. Let me now turn the call over to Ron Moskovitz for the financial review.

Thank you, Dov.

Our third quarter revenue, was $712.1 million, representing growth of 13.7%. Our non-GAAP EPS, which excludes acquisition related costs and equity based compensation expense net of related tax effects was up 10.2% to $0.54 per diluted share. GAAP EPS was $0.40 per diluted share.

I'll spend a minute now on a few P&L items. Please note that I'm referring to the results excluding acquisition related items and equity based compensation expense. License revenue was up this quarter, due in part to strong subscriber growth at our customers and also from OSS sales. It is important to note that revenue and cost of services for Q3 were each impacted by approximately $10 million as a customer decided to move some print and mail activity in-house.

Gross margin is up 40 basis points this quarter as the higher levels of license revenue more than offset the slight decrease in service gross margin, which was impacted by the new (inaudible - highly accented language) services contract with AT&T. Operating margins were 17.4% this quarter, up 20 basis points from last quarter and slightly better than our expectations.

Overall, we expect profitability in Q4 will be similar to what we see this quarter. Other income increased this quarter due to higher earnings on our investment portfolio and foreign exchange gains. Other income might be slightly lower next quarter.

The effective tax rate in Q3 is, again, relatively low at 12.7%. We expect that our 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 at the low end of the 13% to 15% range that I gave last quarter. We believe that this range is sustainable going forward.

Free cash flow in the quarter was $87 million, up from $58 million last quarter. Included in the calculation of this number was approximately $40 million in net CapEx. DSO at the end of the quarter was 62 days, the same as last quarter. Un-billed accounts receivable decreased slightly to $54 million this quarter.

Deferred revenue was $244 million this quarter, a decrease of $21 million from last quarter. We expect to continue to see fluctuations in this balance as it can be impacted by large advance payments from customers among other factors. Our 12 month backlog which includes contracts committed revenue from (inaudible - highly accented language), letter of intent, maintenance, and estimated ongoing support activities was $2.130 billion at the end of the second quarter, an increase of $20 million from the second quarter.

Looking forward, our guidance for the fourth quarter of fiscal 2007 is for revenue of approximately $725 to $735 million and non-GAAP EPS of $0.52 to $0.54, excluding the effect of acquisition related charges and excluding equity based compensation expense of approximately $0.05 to $0.06 per share, net of related taxes. Diluted GAAP EPS is expected to be approximately $0.40 to $0.43 per share. Our EPS guidance for Q4 is based on the fully diluted share count, estimate approximately 225 million shares.

Before I turn the call back to Dov, I want to express my appreciation to all of you for the wonderful experience that I have had as CFO of Amdocs. I've met many great friendships in the analyst and investor community, and I will miss our time together. It is with mixed emotions that I leave Amdocs, but the opportunity that I have accepted will allow for a new phase of growth in my career. In the meantime, I will bring us through Q4 to ensure a smooth transition. Tamar has been an integrate part of our my team for three years and I know that I'm leaving the job in good hands.

Now let me turn the call back to Doug.

Thank you, Ron.

Before I open the call for question, please let me take the time to thank Ron for his years of service and wish him well in his new endeavor. Ron joined Amdocs in 1998 as my VP of Finance and was promoted to CFO in 2002. He has been an instrumental part of our success and he has built one of the best financial organization in the business.

I wish we could keep him, but he's leaving us for a great opportunity. Ron has graciously agreed to stay on through the end of this fiscal year as he complete--as we complete our planning for 2008 and transition to Tamar as our new CFO. Knowing Tamar for the last three years, I have full confidence that she will do a great job carrying on in the great tradition of (inaudible - highly accented language) Amdocs CFO.

At this time, let me open the call to Q&A.

Thank you. (OPERATOR INSTRUCTIONS)

We'll take our first question from Tom Roderick with Thomas Weisel Partners.

Hi, good afternoon, thank you. Ron, first of all congratulations and best of luck in your new endeavors.

Thank you.

Looking at the license line, you had a second straight quarter of really nice sequential growth on the license line. Now, historically when we've seen license growth, that's been a pretty good leading indicator for future services demand down the road. In the light of Cramer here, can you give us a little bit of background or a little bit more detail in terms of should we look at this as a leading indicator for better services demand down the road, or is this a lot of Cramer business that's not yet attached to a lot of services business?

Well, I think it's a combination of several elements. First of all, the momentum that we have in the OSS is supposed to translate into services as we shift the business model to introduce more services based on the Cramer platform, and as we combine our OSS offering with the Cramer offering. So this is a--from our standpoint a very positive.

Secondly, we have some normal fluctuations in the licenses on a quarterly basis. This quarter we had some tail wind with some subsequent license fees. However, we expect the licenses to keep on growing, and not necessarily on the quarter by quarter basis, but overall compared to this level.

Okay. Good. And Ron, you mentioned in your comments, I think that there was one customer here this quarter that had some print and mail business that impacted the quarter by about $10 million. I think you said negatively $10 million. Would this be an ongoing recurring revenue stream so that when we look at your guidance for next quarter it includes some level of negative impact into that number, as well?

No, this was actually a one time impact, and we stabilized at the lower level and from now on we don't expect any erosion on the services line.

Thank you.

(OPERATOR INSTRUCTIONS) Next we'll go to Ashwin Shirvaikar with Citigroup.

Hi, and my congratulations to Ron, as well.

Thank you.

The question is with regards to your revenue guidance for the September quarter. Seems to be a little bit lighter due to expectations that most people had on the street. Any thoughts on what's going on there? Is this a timing issue?

Well, Ashwin, the guidance for the Q4 actually reflects our expectation. It represented nice growth over a Q3. It is in the range that we guided the market, and we see a lot of new project and success with existing customers and a new customer performing on a transformation project, which will bring us substantial growth in activity with customers. So far as you know, the way that we are projecting, we are summarizing all the activity and all the customers, and it looks like we are going to have a healthy growth in the Q4 and moving forward.

Okay, and the flip side of that, obviously the margin improvement this quarter is quite good. Where do you see the margin level going? Not just for next quarter, but thinking a few quarters out in terms of the introduction of the (inaudible - highly accented language) subscribers into your base and so on and so forth, if you could talk about that.

As I said earlier, next quarter we expect to see similar levels of a margin. However, going forward, we expect to see improvements in the mar margin of the Company.

Thank you. We'll take our next question from Liz Grausam with Goldman Sachs.

Great. Just to build on Tom's question around the print and mail business that came off. When you issued guidance last quarter for this--for the third quarter of $710 to $720 million in revenue, did you expect that $10 million to be coming out or was that a surprise during the quarter,and similarly, did your backlog number that you reported last quarter include the anticipation of that print and mail business coming off of your P&L, or was it a surprise?

This was not a surprise. This is something that was planned for a while. The impact was included in the guidance and in the backlog.

Okay. Great. And then we're increasingly seeing a large portion of your earnings generated from your cash balance. I know we talked about it historically a lot in terms of your appetite to buy back shares, but can you help us understand with over $1 billion of cash on your balance sheet what your expectations are for that cash now?

As we said in the past in many occasions, we put this first priority the growth of the Company, and we still see areas where we can expand our capabilities through acquisitions and we keep that as the highest priority. So at this point we don't expect to do any share buyback. We don't actually have any authorization from the board, and we'll keep on looking for opportunities to grow the business.

Thank you. We'll take our next question from Priscilla [Long] with Merrill Lynch.

Hello. This is Priscilla, thanks for taking my call. I had a quick question on the backlog on whether it actually still includes the large (inaudible) projects from Sprint-Nextel or it has that eroded from the backlog and the growth in backlog is due to new business?

Actually as we're getting closer to the conversion so a greater deal of the conversion revenue, the subscriber growth is included in the backlog. So as we move forward, we still expect some growth of the backlog related to Sprint, but not much.

So the integration project is already out? So the growth is mainly based on subscriber's growth from Sprint and Cingular?

It's based on the subscriber growth, but from many other services in the activities that we perform for Sprint.

Okay. Thanks.

Thank you. Next we'll go to Shaul Eyal with CIBC World Markets.

Thank you. Hi. Good afternoon, guys, and Ron congratulations on (inaudible).

Two quick questions. Q pass, how that business has been tracking in the past quarter?

The activity of Q pass is continuing to grow. We see a lot of interest, and to some extent, I would say when we are looking forward and trying to see where we are focusing our R&D effort and our marketing effort is mainly in the content and entertainment area.

The main growth of revenue for the carrier in the years to come will be from digital commerce, from content from digital advertising, and to a lesser extent from the voice, and Q pass is the corner stone in all of our new established, new division of the advertising content and entertainment that will provide the know how, the people, the existing current business with Sprint, with Cingular, excuse me AT&T mobility, with TMO and many other customers, plus the open market, which is growing very fast. So we are very pleased with the asset that we have, and we experience growth.

(Inaudible - highly accented language) an indication this quarter we expand one of the contracts with--one of the largest customers that we have on the mobile side there with Q pass.

Got it. Generally speaking are the numbers coming in line with what you have predicted when you bought the Company?

Well, I would say to start segregating. What is the revenue from Q pass, what are from the services that we provide that aren't Q pass, and the integration of Q pass to other products it's a little bit difficult. Overall, we see Q pass doing well and actually complying with our expectations.

Thank you. We'll go next to Will Power with Robert Baird.

Great, thanks, just a couple of quick questions. First, I know Dov had alluded to some progress in China. I guess I was wondering if there was any way to get a little more color or sense of magnitude of what you're doing there today and how big that opportunity might be?

Will, thanks for the question. The project we are relating to specifically is the project with [BMCC], which is China Mobile operation in Beijing. This is the jewel of the crown of China Mobile.

China Mobile is the largest mobile operator in the world with more than 300 million subscribers, and the scope of the project that we are implementing and that is in production today is serving millions of customers, both on the prepaid and the postpaid space, and it is the first kind of project that is implemented by a western company and (inaudible - highly accented language) project in China. So it is first in many aspects and we are very proud that we had such a success in such a complex project.

Okay, and then my second question relates to IPTV. You all have had success with AT&T here in the U.S. I wonder if you could talk to how--what the outlook is for other opportunities for you to capitalize on the expertise you've built around that universe product?

The extremes that we are gathering working with AT&T on the light speed is I would say very unique. It actually--what AT&T's doing is implementing a full IP business. IP business processes network organization that enables not only IPTV, but all the IP services.

I would say this implementation of product in such a comprehensive way to such a large extent in say just one example of our ability to support the transformation of the carriers, and we see a lot of interest of many carriers in the specific implementation of AT&T and any derivatives of this implementation. So I would say that we see many carriers in different parts of the world that are looking into it and actually talking to us about some implementation of some derivative of full IP and BSS/OSS system.

Thank you. We'll go next to with (inaudible) with Raymond James and Associates.

Hi, good evening. CapEx moved up $6 million sequentially after trending down last quarter. Could you comment on if that's related to Sprint or if you're capitalizing AT&T services cost, and what we should expect going forward?

The growth is there related to the Sprint plans, the expansion of the capacity toward the conversion, and we expect similar level in Q4, and the (inaudible - highly accented language) is trending down. When we discuss the guidance next quarter for--will always give more details about CapEx.

Okay. Great. And could you also provide the geographic breakout for revenue?

Yes. In North America this quarter was 64%, Europe was 23%, and the rest of the world they actually grew to 13%.

Next we'll go to Sterling Auty with JPMorgan.

Yes, thanks, guys. Can you describe to us what you included in the backlog number from the latest AT&T deal that you had signed?

Basically we included the next 12 months revenue.

But can you give us some quantification of it?

Actually not, we discussed when we announced the deal this size of the deal we said several times, the average deal size on an annual basis, most of it was included in the backlog in the previous quarter. So the net addition this quarter was very, very little.

Okay, and within the improvement you talked about the OSS qualitative a little bit, but within the growth that you're seeing in the license revenue, can you give us any additional quantitative around how much of that license revenue improvement s coming from the OSS areas specifically?

Not really. As I said, the growth was coming from the OSS and from subsequent license activity, which actually correlates with the growth out of the industry. So overall we're happy with both.

We'll go next to Jason Kupferberg with UBS.

Good afternoon, thanks for taking the question. I understand you'll be providing fiscal '08 guidance on the next earnings call. But in the past you have generally talked about a 10% to 15% organic growth target, and based on what you see in the backlog and the pipeline right now, I wanted to get a sense if you can give us an idea where within that range you perhaps think you might be more likely to fall given what you see in front of you?

We are intending to give guidance on the next quarter, so that's what we shall do, and the only thing can say we guided the market for growth in Q4, and we expect continuous growth in the '08, as well.

Okay, and just a quick follow-up. On the full year '07, I think as was pointed out earlier the fourth quarter outlook implies that for the full year you'll be probably pretty close to the low end of the full-year range.

Now in the past, I think you've talked about acquisitions contributing about $500 million or so revenues to fiscal '07. At the end of the day being near the low end of the range is that more because acquisitions came up a little bit short or the core business came up a little bit shorter or a combination of both?

We talked about the 500 million in the context of the business we did in the last couple of years, not necessarily what we did recently. Overall, this year we are in the range. When we discuss the range we discuss several scenarios, and unfortunately, we are in the lower end of the range, but we're still pleased with the position of the Company, and we expect the Company keep growing going forward.

Thank you. We'll go next to Daniel Meron with RBC Capital Markets.

Thank you. Hi, guys, and Ron, congrats on the move, all the best on your new endeavors.

My question kind of follows up on the previous question. Can you give us more specific gauge on what is your organic growth right now, and then what kind of dilution you saw from the acquisitions on the bottom line?

We don't explicitly break down the acquisitions this year. I would say that we are in--I would say it's close to 10%. The organic growth in this year slightly below. What was the second part?

And the dilution --?

Maybe let me add here. We guided the market for Q4, and all the growth in Q4, the sequential growth is organic. So that might give you some idea about organic growth of the Company.

Okay. Fair enough, Dov, and then dilution from the acquisition. Looking at the operating income, it pretty much stalled the last few quarters. Obviously this is from the dilution of these acquisitions. Can you give us a sense on where we are right now with the synergies and when should we look for improvement in that operating line item or the EPS for that matter?

So first of all, when we couple of quarters ago when we discussed the situation with acquisitions, when we reduced the guidance. So basically the total of acquisitions became larger by the fact that we reduced the amount of revenue, so there is still a dilutive effect. But if you look at the specifics of this quarter, you see for instance that R&D went down, and this is--some of it has to do with the synergies. We expect as we keep on growing, adding scale to these businesses, and this unit will see more and more synergies, and we expect that will contribute to our margin growth in '08 and going forward.

Thank you. We'll go next to Scott Sutherland with Wedbush Morgan.

Great. Thank you, and good luck in the future, Ron.

Thank you.

Quick housekeeping question, what percentage of revenue was the managed services?

Slightly above 35%.

Okay. Looking at your overall services revenue as flat quarter to quarter, understanding that $10 million was taken out from that (inaudible) business. It still seemed like there was modest growth. I would expect more with the Sprint migrations that you mentioned last quarter. Can you talk about the impact Sprint had on the services revenue, and should we expect more of it in the future, or are we seeing a big chunk of it?

First of all, we expect to keep on showing a very nice growth in the services going forward in Sprint and in other customers. Now Sprint has a lot of moving pieces. There's the subscribers revenue, which is growing as we move subscribers to our platform, and there are so many other activities that we do for them, and it goes up and down from one quarter to the other. So I cannot give you more specifics than that.

Okay. Second question really quickly. You guys haven't talked too much the cable outside your prepared remarks. What would you say the opportunities you're seeing there, and would you say you're seeing migrations from competitive platforms or is it more status quo out there?

I would say that on the cable and satellite what we see is more implementation of components such as mediation, such as CRM and other components at the current time. We see conversion from competitors, and we expect to see more conversion from competitors, mainly due to the fact that we are the only company that invests heavily in new platforms for them, and we expect them to recognize it over time. So we expect in the future some new customers and some conversion from competitors to us.

Next up we'll go to Larry Berlin with First Analysis.

First of all, Ron, congratulations, and best of luck in the new job as the new year begins.

Thank you.

Second of all, just a couple quick things. Did you say what the depreciation and amortization was for the quarter?

The depreciation was $23 million, amortization about $20 million.

Okay, and then what percentage of revenue was directory?

Around 10%.

Okay, and lastly, just slightly bigger, I think Dov in your comments you're talking about a new contract with a wireline provider. Could you give a little bit more characterization about that?

Well, what we just indicated is that we had a win with existing wireline carrier for a first phase of a new project transformation project, comprehensive transformation project, including BSS and OSS. So we--it's not a big one this phase, just at the beginning, but it signals a very important development regarding the decision that this carrier is taking to move forward and be ready for the new world where they have to deliver to their customer a new type of services, and the fact that we were chosen to be their transformation partner. It right now represents to us the trend in the market to continue the transformation of the network, of the business processes, of the organization, and now unique position as the Company that can enable this transformation.

Thank you. We'll take our next question from Ted Jackson with Cantor Fitzgerald .

Thank you very much. Just a few questions. Most of mine have actually been asked, but I'm going back into the directory services and the $10 million of business that was pulled back in house. In the second quarter as I recall, you guys did $68.9 million of revenue in direct republishing. Would it be fair to look at that business this quarter as being down about $10 million sequentially because of that sales pull, or is that a wrong way to look at it?

No, the print and mail revenue that was taking out has nothing to do with the directory business.

No. So it comes out--it's out of the customer experience side of the equation?

Yes.

Okay. The next question is the GAAP tax rate kind of popped up a bit relative to where it's been, and I was curious if you could put a little color as to why that happened?

The GAAP tax had some fluctuation that has to do with the acquisition related charges, and so it fluctuated. As we move forward, basically in the first year of after doing some acquisition, we typically do some adjustment that this will do some estimation that we have, but typically we do not pay much attention to this line item when we have the discussions with our investors.

Thank you. At this time, that is all the questions--that is all the time we do have for questions.

I would like to turn the program back over to Amdocs for any additional or closing comments.

Thank you, Robby. This is Tom, on behalf of the management of the Company, thank you all for participating in this call. This ends the call.

That does conclude today's conference. You may disconnect your lines at any time.