Amdocs Ltd (DOX) 2008 Q3 法說會逐字稿

Good day, everyone. Welcome to this Amdocs third quarter 2008 earnings release conference call. Today's call is being recorded in a webcast. At this time, I will turn the call over to Mr. Tom O'Brien. Please go ahead, sir.

Thank you. 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 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. 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 that 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 and 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 for the fiscal year ended September 30, 2007, as filed on December 3, 2007, and our Forms 6-K furnished on February 11, and May 6, 2008. 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; and Tamar Rapaport-Dagim, Chief Financial Officer. Following our prepared 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 strong results for third quarter of fiscal 2008. With revenue growing 15% to a record of $820 million, exceeding guidance. Non-GAAP earnings per share of $0.61 was at the high end of the guidance. We have seen momentum across the board and we feel good about the future of Amdocs.

So far, we have seen little evidence of challenging economic condition obviously effecting our customers' buying decision. We continue to see strong demand at this time, but there are some micro economic uncertainties which may have an impact on our results in the future. We believe that we have incorporated this into our guidance for fourth fiscal quarter and we believe that we are well positioned for future growth.

Our success in the third quarter was driven by number of different factors. First, we continue to execute on large projects. This was our first full quarter of revenue for the (inaudible - highly accented language) managed services data that we announced in January. At Sprint, we have completed an unprecedented conversion in terms of the timing and scope and we are now providing a solution for prepaid and post paid subscribers we see (inaudible) support for our data center. We will finish the conversion for the (inaudible) activity at later date. he fact that we can execute on such massive projects for service providers like AT&T and Sprint sets us apart from our competition and can drive new business opportunities for Amdocs.

Second, our diversified product and services offering and our geographic reach allow Amdocs to serve customers of all sizes around the world and provide the right solution to build our business needs. The wins that we had in Q3 illustrate these two points and validate the growth engine that these (inaudible). We are continuing to show momentum in the (inaudible) satellite market, with multiple wins for our OSS and mediation offering. One of these wins was a competitive displacement. We are achieving our goal of selling more than just billing to this market, our acquisition of Jacob Rimell is helping us to drive this momentum. We are pleased with our results and our competitive position and expect continued growth in our broadband, cable and satellite business.

We had a breakthrough new logo in North America this quarter for our recently released Amdocs CES Qpass 7.5. This totally unique release has been warmly received by the market. We are pushing hard to leverage this activity as content and data continue to grow in significance for our customers. We continue to grow in emerging markets as well, including sale of our Compact Convergence Suite to Bakcell in Azerbeijan and another large CRM sale in Eastern Europe. We believe that our success this quarter illustrates the strength and the vibrancy of our strategy. We have the offering experience and track record to be selected by the largest service provider in the world to supply and support mission critical system. These kinds of customer are the bedrock of our business, as we can generate both growth and recurring revenue in good economies and when times are more challenging. We continue to see growth while we recognize that there is still economic uncertainty. We believe we are on track for our best year ever. Let me now turn the call over to Tamar for financial review.

Thank you, Dov. Our third quarter revenue was $820.3 million representing growth of 15.2%. Our non-GAAP EPS, which exclude the acquisition-related costs and equity-based compensation expense net of related tax effect increased to $0.61 per diluted share. GAAP EPS was $0.46 per diluted share.

I'll spend a minute now on few P&L items. As we forecasted last quarter, license revenue increased in Q3. We expect an increase in license revenue again next quarter. Operating margins were up slightly compared to Q2, as we continued to benefit from leverage on the operating expense line. We expect to continue to see improvement in operating margins in Q4. Other income decreased as expected this quarter compared to Q2 primarily due to lower interest rates on our investment portfolio. The effective tax rate in Q3 was 13.3%, in line with our guidance of 13 to 15%.

Free cash flow in the quarter was $83 million, included in the calculation of this number was approximately $32 million in CapEx. We expect to see similar strong cash flow in the fourth quarter. DSO at the end of the quarter was 65 days, down slightly from last quarter. The current balance in deferred revenue was $188 million at the end of Q3 and unbilled account receivable was $36 million. We expect fluctuations in these accounts on a quarterly basis.

Our 12-month backlog, which includes contract related revenue from managed services contract letters of intent, maintenance and estimated ongoing support activities was $2.420 billion at the end of the quarter, an increase of $60 million from second quarter. During the quarter ended June 30, we used $50 million to repurchase approximately 1.6 million shares at an average price of $31.92 per share.

Looking forward, our guidance for the fourth quarter of fiscal 2008 is for revenue of approximately 825 million to $835 million, and non-GAAP EPS of $0.61 to $0.63 excluding the effect of acquisition-related charges and excluding the equity-based compensation expense of approximately $0.67 per share, net of related tax effect. Diluted GAAP EPS is expected to be approximately $0.47 to $0.50 per share. Our EPS guidance for Q4 is based on a fully diluted share count estimate of approximately 219 million shares. The forecasted share count that I just gave does not include the effect of any future share repurchases that we may conduct in the fourth quarter. Now let me turn the call back over to Dov.

Thank you Tamar, at this time, let me open the call to Q&A.

(OPERATOR INSTRUCTIONS) And our first question comes from Sterling Auty.

Yes, thanks, hi, guys. Two questions. One, you've shown us the momentum here in the business with the acceleration of the top line. How do you feel the environment looks as you head into the end of the fiscal year and into next year? Is there ample opportunities to keep the business momentum going?

Sterling, we, we feel that we have experienced strong momentum in our business in this quarter with acceleration of our license revenue and maintenance, and however, there are some uncertainties in the market, which were incorporated in our guidance for Q4, which present additional increase in year-over-year. It's going to be quite significant, and regarding the future, we feel that given all the growth engines the Company has in their managed services, in their OSS, in their cable and satellite, in the emerging market, we feel that we will experience growth in 2009.

And then the follow-up question is on the margin front. Can you quantify for us, or give us an idea how much of an impact the first full quarter of the MSSP on the new AT&T business had and how does the leverage then, you mention improvements in operating margins for the fourth quarter, where does the leverage come from? Is it on that part of the business, or is it made up in other parts of the business?

Without going into specific profitability of a unique deal, we see both strong discipline in terms of the business operating expense lines and our ability to plan that going forward, as well as continuation of different initiatives we have in the way we deliver the project, that enable us to do it in a more efficient way taking into the leverage of the bottom line, both the efficient way of doing the project as well as where we actually allocate the sources of doing it, utilizing low cost centers that we have around the world and we've built enough capability to have flexible location of work force. All of that is contributing to the bottom line. It's not necessarily any one unique reason that is generating that.

All right, thank you.

Our next question comes from Liz Grausam from Goldman.

First question, I just wanted -- you've made some more comments on the macro environment than we've heard in past quarters, so wanted to get a sense of the origin of those comments. Are you having conversations with customers now that feel a little bit more tentative? Are you sensing the executives that your customers are getting a little bit more tense about the outlook that caused you to make those comments, or is it just kind of a general risk clause given where we are in the US economy?

I would say, say the second one. We have noticed only, well, almost none, impact on on our customer business and on our business with our customers. That is to say we've not seen any delay in any project, in any decision-making worldwide. However, when you hear all the bad news from the financial crisis on one end and some warning from others, we should better be cautious. And we should take it into consideration.

Great, and building on Sterling's question around kind of pipeline to keep the momentum, are you seeing opportunities similar to the size of projects you have with Sprint, AT&T right now, do you see large transformational deals in your pipeline and are they well diversified globally, or are they still concentrated in North America?

Our pipeline is quite strong with a variety of opportunities, including managed services, including a large transformational deal in emerging markets on one end and in North America, in the different areas, and we see momentum in our OSS activity, where there is a need for our products and services. The cable and satellite, the activity presents another substantial opportunity for us in North America. And in other places. So we are more optimistic now about the cable and satellite than a quarter ago and also in the traditional activity of (inaudible) we see the momentum. So overall, if I refer to what we've seen in the third quarter, we've seen strong momentum and substantial progress in our main growth engines looking forward. And the only things that we hope that we won't have an impact on the overall environment.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our next question from Shyam Patil from Raymond James.

Hi, good evening. Could you talk a little bit about what drove the backlog increase this quarter? Was there, was it mostly comprised of smaller deals?

Actually it's a combination of both types of deals, large and also small. As we said, we have several wins on the OSS side. We had a breakthrough win on the Qpass new 7.5 product version, which was accepted very well by the market. We continued to see new activities in emerging markets. We also had the contribution coming from the newly acquired entity, Jacobs Rimell. That was around $20 million into the backlog, but taking aside that, we continued to see momentum across lines of businesses and geographies.

Okay, and then what are your expectations for CapEx this year? Are you bringing them down a little from what you said previously? And then how should we think about that going forward?

Looking into Q4 in terms of the CapEx, I expect it to be probably a bit higher than what we had this quarter. But overall year-over-year, the CapEx investment should be down this year versus '07. Looking forward as we've said in the past, it's highly dependent on the type of managed service deals that we will sign before taking over overall activity, including data centers that require CapEx investments, that's going to impact and accelerate the CapEx however, f it will just be the regular activities of supporting (inaudible) and IT equipment for the workforce that should go down again.

Thank you. We'll take our next question from Karl Keirstead from Kaufman Brothers.

Hi, good afternoon. A question on the demand backdrop. In terms of CapEx budgets, it seems the carriers are maintaining there are CapEx, but shifting their spending from their legacy fixed line platforms to their wireless and growth initiatives. I'm curious whether you're seeing something similar in terms of spending on your software and services markets, and perhaps you could talk a little bit about your exposure on the wireless fixed line side, or the wire line fixed line side and how comfortable you feel there? Thanks.

I would say that the development in the market and the shift of investment toward wireless and data actually played to our hand. As you know, the majority of our revenue is derived from wireless where -- if you are looking at United States only we serve AT&T mobility. We serve Sprint. And we serve TMO, so most in Canada, it's the three largest carriers there. So I would say here the substantial momentum that we see in data, in data actually is creating a substantial benefit for us.

So as we announced, we had this win of Qpass 7.5 with one of the carriers in North America that is presenting a very warm welcome of our new platform that might lead to substantial growth of our activity in this area exactly where the need there exists. Secondly, regarding wire line, the wire line industry's very transforming, that is to say instead of just setting an access line, the idea is to sell triple play, which actually IPTV and broadband and a variety of services and even to combine everything together with a triple, quadruple play. As you know, we (inaudible) and we serve some other customers worldwide providing this triple play and that is I would say another source of growth for us, given the fact that wire line companies will have to transform and move from traditional voice services to this triple/quadruple play. And our offering this now market-leading offering in this area and the unique customer experience system offerings that we have actually gave us substantial advantage in this market.

Thank you. Our next question comes from Ashwin Shirvaikar from Citigroup.

Hi, nice quarter, guys.

Thank you.

Thank you.

With regards to margins, should we look for steady and modest margin improvement in fourth quarter and also next year?

Looking at the fourth quarter, yes, we continued to see modest improvement continuing. I think it's a bit too early to talk about 2009 as we're going now internally through the process of planning the AOP 409, but we're very focused on continuing this momentum. We have just to remind you managed to improve the bottom line profitability, even though we took upon ourselves the large AT&T managed services and that puts some short-term pressure on the margin. We see many, many other factors that only mitigated that but overcome and generated the improvement trends that you are seeing.

And with regards to the pipeline, could you go into some detail about what's in it, do you have large managed services deals, for example, is it primarily now shifting to Europe, or do you see pretty much broad based demand?

We see broad based demand. We do see managed services deals within the pipeline, both in North America and outside in other regions, as well as transformational deals and in many different aspects as I've said before both from the OSS side, from the cable side. We continue to see it through the pipeline the momentum in emerging markets. So it's quite -- I would say very healthy pipeline in terms of its diversification.

Thank you. Our next question comes from Daniel Meron, from RBC Capital.

Hi. Dov and Tamar, congrats on continued execution here. Quick question on Comcast. Dov, you referred to you were growing the pipeline in the cable industry and you were comfortable with that. Just looking at extended contract with CSG, can you give us a little bit more color on your stance here? Thank you.

As I said, we are -- we feel better regarding the cable and satellite line of business for Amdocs in comparison to what we felt a quarter ago, and Comcast is a very important customer of Amdocs. We experience expansion of our business with Comcast. As you all know, Jacob Rimell is a very important vendor of Comcast. We have several wins with Comcast, so we expand our activity with Comcast and then -- and I believe that Comcast retains their flexibility to standardize their building system in the years to come. And we, and we believe that we have a superior offering and we of course will try to continue and build up our relationship with Comcast and we have (inaudible).

Thank you. Our next question comes from Will Power from Robert Baird.

Yes, thanks. I guess two questions. First on Sprint, with the conversion now largely, I guess complete there, how should we expect revenue to trend there and how have the recent management changes impacted you, if at all?

We continue to have very strong relationship with Sprint, with the new management as well. The fact we continue -- we completed the conversion in a way it added a lot of subscribers to the system that we are serving to and a lot of the revenue that we are actually generating in Sprint is not related just to the managed services, pure baseline activity. There are a lot of ongoing developments and new requirements that are coming up and that we are helping Sprint with, so we continue to generate healthy revenue streams from Sprint going forward. We have seen new opportunities that we are trying to capture. I believe it's continuing to be a healthy relationship.

Okay, great. And then my second question, with the recent, somewhat I guess recently announced restructurings in China on the telecom side of things, any early thoughts on how that might impact, some of your I guess still early relationships with China mobile and China Unicom either positively or negatively?

(Inaudible) it should be very positive at least to us, what everyone says there, that suddenly as they create the three carriers, each one of them is wire line and wireless, which will provide the triple/quadruple play and maybe without video so it will be voice, data and wireless, and so suddenly it will create more competition in the Chinese market. However, the experience so far was that things are moving very slowly there and the competition is not intense as it is in North America, for example, so we are cautiously guarding the potential for revenue growth there as a result of it.

Our next question comes from Tom Roderick from Thomas Weisel Partners.

Hi, guys, good afternoon.

Good afternoon.

Daniel just a couple questions ago asked specifically about Comcast. So maybe just more generically speaking about your cable/satellite business. Last quarter you had talked about some scoping projects that could potentially lead to transformation projects down the line. Can you offer us any update? Have those specific scoping projects progressed? Have they moved to a more advanced stage, or have they sort of fallen out of the pipeline?

I would say that the reason for being so optimistic about the cable and satellite is due to the fact that we see progress everywhere, including the scoping projects that we were talking about moving forward and we feel good about it. There is a decline in the cable and satellite industry to move forward. They are making substantial progress in voice activity. They are determined to increase and improve their data offering in the new services and digitally advertising and even transform their video offering. And I would say more than that, the most successful are wide band and AT&T are rolling out there IPTV offering and the more competition is created and as a result of this there is a higher pressure for getting sophisticated systems, it would support a sophisticated offering to enable the cable satellite companies to be successful. And we see this in the United States, we will see it in North America, in Canada. So we feel that we have the right, the right offering for these customers and we see their interest as a keen interest in the offering and this is the basis for our optimism in this area.

Great, thanks, Dov. Tamar, brief question for you. Could you recap the impact of currency on the quarter and then just offer us a sense as to how the Company--?

Tom?

Maybe you should answer--

Tom Roderick, I apologize, if you could requeue by pressing star-one.

So maybe I'll try to answer just the first part of the question that Tom managed to ask. Regarding foreign currency impact, as always our policy is to remain neutral as much as possible to current currency fluctuations and that is done through an extensive hedging program, which was successful. The proof of the matter is that we had no impact overall on the different fluctuations in the currencies in which we operate. I would say that even though that we continue to see volatility in currencies around the world, we continue to maintain this hedging program going forward and hopefully that will continue to be effective as well as our overall planning of resources that takes into consideration such items, as well as other factors such as wage increase and things like that.

That answers my question. Thanks very much.

Thank you, Tom.

Thank you.

Thank you. Our next question comes from Jacob Kupferberger from UBS.

Thanks. Good afternoon, guys. Nice to see the second straight quarter of top line upside and a higher outlook. Wanted to get a sense of in this quarter specifically what some of the key sources of the revenue upside versus your guidance was? Was it a bunch of small items? Were there a couple of large contracts that just ramped a bit faster than you thought? Any color there would be great.

It was actually a combination of many items, not any one big item that accelerated where we thought it would be. As we said, we saw a very nice swings. I mean you can see some of it converted into backlog, some of it already impacted the revenue recognized within the quarter. So a combination of the different items, not any one unique one.

Okay, and then a follow-up on free cash flow. Tamar, I think you said we should expect fourth quarter free cash flow to be similar to third quarter. If that's the case, it looks like on a full year basis if I look at the free cash flow to non-GAAP net income ratio, you would be up a couple of ticks year-over-year versus fiscal '07, but how should we think about sort of the normalized relationship between those two metrics going forward based on how you guys think about your CapEx profile and your working capital profile?

When we do it internally, we actually take a bottom-up approach, because it's hard to take a normalized statistical approach, given the large size of deals we are assigned, especially around managed services. So when we go into such deals, each one with its unique structure, one of the things we are looking at obviously is what the cash investments would require to be, but also when we plan for stability we take that into consideration because of the cost of capital. It's hard to take that and convert it into a normalized ratio. We may see from time to time differences in terms of the timing of where we actually collect the cash on long-term agreements versus the deliverable that we are providing. Overall, looking into Q4, I believe that we will see a free cash flow at least as strong as Q3.

Thank you. Our next question comes from Scott Sutherland from Wedbush.

Hi, great. Thank you. Good afternoon.

Good afternoon.

Good afternoon.

So you talked about another quarter of momentum in your software and licensing business. Can you talk about if that's from the OSS or CRM and what are you seeing in CRM? You might still have some exposure in the verticals there.

We -- as we said, we see momentum in OSS, in emerging market, in our cable and satellite, and when we talk about the emerging market, for example, and CRM and now CRM is a part of activity and in this regard, we had wins in Eastern Europe and some emerging markets and so we see strong activity in this regard and now I would say that actually the activities there is not, it's not monolithic. It's not cut -- it's -- there are some differences between activity and the self service and the (inaudible) which is maybe -- now we see more activity in this regard and any activities that is related to the digital life-style. So I would say that probably the CRM will continue to be a very strong part of our activity, generating a lot of revenue and actually creating the basis for us to maybe move forward with the growth engines that I mentioned.

Okay. You talked about some opportunities in markets like China. Ca you talk about some of the the brick markets, Russia, India, Brazil, I know you signed a deal in India. Russia, you're working with (inaudible) not much has been talked about that lately. Can you give an update on some of those bigger emerging markets out there? And if you have percentage of managed service revenue, that would be great.

When we are looking at emerging markets, we feel encouraged given I would say variety of successes in different countries, not necessarily only in the break. So we found out that we can generate a nice business not in the (inaudible) and in countries like Vietnam, with 80 million people and countries like in Indonesia with 220 million people and Malaysia and South America there are many other countries. So yes, Brazil is a 180 million people, but there is many other countries in the Latin and South America.

So I would say that our success in the third quarter was (inaudible) we say activity not so much in the brick, yes, we had success in India. We started seeing penetration in India. We continued to do good business in Russia, and we have good business in Brazil. But we -- what actually encouraged us is actually success in the other countries and the potential there is substantial and we are able to leverage our assets, our different product. As you know we have the NBU, which is a compact convergence billing that enjoy high demand by small operators, small operator in different countries, our CES 7.5 gets a lot of demand for the large carriers in many countries and our ability to provide the full solution is also highly appreciated. So we feel that emerging market is picking a speed and we see strong momentum there.

Addressing your second question about managed services, it's approximately 40% of total revenue.

And our next question comes from Peter Jacobson from Brean Murray.

Thanks. Can you provide the share revenue that was Qpass related and how has that trended and how do you expect it to trend over the next year or so?

Well, Qpass is a very important part of our offering in our Ace division, the advertising continental payment, which is the divisions that these will lead our digital -- the growth in Amdocs in the digital lifestyle. So -- and I would say that the wins that we had later that we just announced with the Qpass 7.5 is quite encouraging, given the process that we went through and we are going through with several large carriers where they compare our offering to what is in the marketplace and they found our offering by far a more advanced and actually addressing the future needs. So as a result of it, we feel that we have very good offering. We see growth in activity, growth in the revenue and we expect acceleration of the growth in 2009, given the fact that this is the place where service providers will enjoy from revenue growth.

Okay. That's helpful, but no percentages on that?

Well, I'm afraid I do not have that here.

Thank you. Our next question comes from Ted Jackson from Cantor Fitzgerald.

Thank you very much, (inaudible) my questions. One is I missed what you said CapEx was in the quarter.

It was 32 net CapEx investment.

Okay, and then could you tell me what depreciation and operating cash flow were in the quarter?

Operating cash flow was $115 million. Depreciation was 20-plus. I don't remember the exact amount right now.

And then could you tell me what percentage of revenue came out of publishing?

It's a short 10%.

We have a follow-up question from Sterling Auty from JPMorgan.

Yes, thank you. Now on Sprint now that you've completed the conversion on the big project, does that mean that the September quarter will be the first full quarter that you get kind of full revenue contribution on the things that are kind of tied directly to subscribers?

Yes, but I would like just to remind that there is a sliding scale pricing that is related to the subscriber count, so on the one hand, additional subscribers do not add linearly to the revenue that we're making, as well as the fact that it's alluding subscribers, we're not sensitive to that as well. So I wouldn't expect any large sensitivity to the number of subscribers in the edges.

Okay, and then you talked about emerging markets, North America. I'm just kind of curious, if you did say that, I missed it. Kind of some commentary around some of the larger carriers in the European theater, the Vodafone, the Deutsche Telekoms and such. We've kind of seen kind of back and forth in terms of possible activity levels, maybe some big transformational deals out of some of them. What are your thoughts here around the opportunities on those types of carriers?

We, as you know, have quite good operation in Western Europe. We do not see in Western Europe the same transformation pace we see in North America or the same level of activities we see in the emerging markets. So, and so there I would say we are looking forward to Q4 and maybe the coming two quarter we see quite a stable activity with, with -- I would say growth, but not as one that we expect in the growth engines that we mentioned before. The cable and satellite, the voice, the emerging market, and the cable and satellite. And the managed services. Now, Europe was included, East Europe. And in East Europe, we see substantial activity, and he enjoy the very nice wins that -- and very nice, healthy growth of the business of the service providers and there we -- I would say we enjoy actually a catalyst in our growth.

Thank you. At this time, we have time for one question. We'll take our last question from Daniel Meron from RBC.

Thanks. Just a couple follow-ups. First of all, following on Sterling's question, Europe, can you give us a sense on the breakdown regionally?

It's around 40 -- sorry. 14% rest of the world, around 16% in Europe, and 70% in North America.

Thank you. At this time, we'll turn our call back to our speakers for any additional or closing remarks.

At this time, this concludes the third quarter conference call. Thank you very much for attending and good night.

Thank you. Ladies and gentlemen, that does conclude today's conference. We appreciate your participation, and have a wonderful day.