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Amdocs Limited (NASDAQ:DOX)

F3Q06 Earnings Conference Call

July 19, 2006 5:00 pm ET

Executives

Thomas G. O'Brien - Secretary and Treasurer

Dov Baharav - CEO, President

Ron Moskovitz – CFO

Eli Gelman - EVP

Analysts

Tom Ernst - Deutsche Bank Securities

Tom Roderick - Thomas Weisel Partners

Shaul Eyal - CIBC World Markets

Michael Turits - Prudential

Sterling Auty - J.P. Morgan

Will Power - Robert W. Baird

Julie Santoriello - Morgan Stanley

Ashwin Shirvaikar – Citigroup

Michael Latimore - Raymond James

Julian Bu - Lehman Brothers

Peter Jacobson - Kaufman Bros.

Gil Luria - Wedbush Morgan Securities Inc.

Elizabeth Grausam - Goldman Sachs

Daniel Meron - RBC Capital Markets

Presentation

Operator

Good day, everyone and welcome to this Amdocs third quarter 2006 earning release conference call. (Operator Instructions) At this time I will turn the call over to Mr. Tom O’Brien. Please go ahead, sir.

Thomas G. O'Brien

Thank you, Robbie. I’m Tom O’Brien, Vice President of Investor Relations for Amdocs. I apologize to those of you who had to listen to this yesterday and will listen to it again but 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 to have a meaningful comparison to prior periods.

Also, this call includes information that constitutes forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we give no assurance that our expectations will be obtained or that any deviations will not be materials. 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 are 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 420F filed on December 28, 2005 and in our Form 6K, furnished on May 15, 2006, unless we elect to update these forward-looking statements at some point in the future. However the company’s specifically disclaims any obligation to do so.

Participating in the call today are Dov Baharav, President and Chief Executive Officer of Amdocs Management Limited, Eli Gelman, Executive Vice President and Ron Moskovitz, Chief Financial Officer.

Following Dov and Ron’s comments, we’ll open the call to Q&A. Now, let me turn the call over to Dov Baharav.

Dov Baharav

Thank you, Mr. O’Brien. Good afternoon, ladies and gentlemen. We are pleased to report excellent results for the third quarter. Revenue grew 23%, non GAAP earnings per share grew 32% and we had some very important customer wins.

We continue to execute on our strategy including in the M&A area as we close the Qpass acquisition and just yesterday announced our acquisition of Cramer.

We have positioned Amdocs to be the vendor of choice to the leading communication service providers, supplying solutions that run from BSS through OSS.

We are encouraged by what we see in the market. Industry consolidation and transformation continue and competition among service providers remains intense. Service providers must have BSS and OSS systems that enhance their interaction with their customer and support the rapid introduction of multiple new services.

Amdocs can support an integrated customer management or ICM strategy and with Cramer, we will be uniquely positioned in the VSS and OSS to enable service providers to rapidly introduce new offerings, lower total cost of ownership and focus on their customers.

Our position plus the market dynamics will drive our goals in 2006 and beyond.

In the current quarter we have 11 key wins across all lines of business, geographies and products. We disclosed a few details about some of them in our press release today. After an extensive review of potential solution or just communication, the largest wireless carrier in Canada and a long-time Amdocs customer, chose Amdocs to provide CRM capability across line of business to help them implement an integrated customer management strategy. We see additional opportunities with this customer as they pursue quadruple play offering.

In Australia, we were selected by Telstra to provide an OSS solution. Also, this week we signed an agreement to acquire Cramer, a leading provider of OSS and solutions.

The OSS market is both large and fast growing, and Cramer is the premier company in this space. With this acquisition, Amdocs will become the only company to deliver an end to end solution spanning BSS and OSS, allowing us to take advantage of the growth opportunities presented by the large transformation projects in our industry.

We see this as a strategic goals area for Amdocs. The transformation in our industry and global issues present us with both challenges and opportunities. While activity in our market remains strong, there are risks in the global economy from things such as the high price of oil, political instability and inflation. We are a global company with developing centers around the world and less than one-third of all employees in Israel. The situation there has become volatile in recent days and we have detailed plans in place to ensure uninterrupted service to our customers.

As we analyze these opportunities and challenges, we believe that we will prosper in 2006 and beyond. Our market leading product, which supports integrated customer management, our service organization and delivery record and our customer base of market leaders give us that confidence.

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

Ron Moskovitz

Thank you, Dov.

Our third quarter revenue was $626 million, representing growth of 23%.

Our non GAAP EPS, which excludes acquisition-related costs and equity-based compensation expense, net of related tax effect, was up 32% to $0.49 per diluted share.

GAAP EPS was $0.39 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 compensation expense.

Operating margins were 17.9% this quarter, up slightly from 17.7% last quarter. The main drivers of the increase were higher gross margins on services and proportionately less spending on SG&A offset by higher R&D expense.

Gross margins should be comparable next quarter. We expect operating margins to improve slightly in the fourth quarter. License revenue was down this quarter, as we get more business in consolidating Tier 1 carriers, those projects typically have ever larger service components. Other income was up this quarter due to higher interest rates on our investments as well as foreign exchange benefits related to some balance sheet items.

We expect this line item to decrease next quarter in part due to lower cash balances as we fund acquisitions.

Our effective tax rate in Q3 was 16.6%. The reduction in the effective tax rate in Q3 is due to a continued expansion into countries with lower income tax rates and to slight release of certain tax reserves. Next quarter’s rate should be 17% to 18%.

Free cash flow was strong at $94 million. Included in this number was $26 million in CapEx, a little less than we had forecasted. Next quarter’s CapEx should be in the range of $40 to $50 million.

DSO at the end of the quarter was 60 days, up from last quarter.

Deferred revenue was $243 million this quarter, about the same as last quarter on a net basis. When analyzing this line item, we saw a decrease of around $25 million related to our core business offset by a similar increase related to Qpass.

Our 12-month backlog, which includes contracts, committed revenue for services contracts, letter of intent, maintenance and estimated ongoing support activities was $1.960 billion at the end of the quarter, an increase of $120 million from the March quarter. About $80 million of this increase was organic, with the remainder coming from Qpass.

Looking forward, our guidance for the fourth quarter of fiscal 2006 is for revenue of approximately $657 million and non GAAP EPS of $0.49, excluding the effect of acquisition-related charges and excluding equity-based compensation expense of approximately $4 to $5 per share, net of related tax effects. This EPS number includes dilution resulting from the Qpass acquisition, as expected. Diluted GAAP EPS is expected to be approximately $0.41 to $0.42 per share.

Our EPS guidance for Q4 is based on a fully-diluted share count estimate of approximately 221 million shares. This guidance does not include any impact of the pending Cramer acquisition.

For FY2007, our preliminary guidance is for revenue of approximately $2,880,000 to $2,980,000, and non GAAP EPS in the range of $2.06 to $2.16, excluding the effect of acquisition-related charges and excluding the effect of accruing equity-based compensation expense of approximately $0.19 to $0.22 per share, net of related tax effect.

We will not be able to give 2007 GAAP EPS guidance until after we complete the purchase price accounting for Cramer.

Our FY2007 guidance is based on a fully-diluted share count estimate of approximately 225 million shares.

Just to be clear, our 2007 revenue and non GAAP EPS guidance includes the expected impact of the pending Cramer acquisition. For your reference, we expect the Cramer acquisition to be approximately $0.04 diluted to non GAAP EPS in 2007, and then accretive thereafter.

With that, let me turn it back to Dov.

Dov Baharav

Thank you, Ron. This was a very good quarter for Amdocs and we are excited about opportunities that we see. With that, let me now open the call to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first to Tom Ernst with Deutsche Bank. Please go ahead.

Tom Ernst - Deutsche Bank Securities

Great. Thank you. Good afternoon. Just one point of clarification. I think it’s worded correctly in the press release, but just to be clear. It’s a $0.01 or, excuse me, the dilutive effect is not in the guidance number for Q4 for Cramer but we do have $0.01 dilution from Qpass. Did we hear that right?

Ron Moskovitz

Yes.

Tom Ernst - Deutsche Bank Securities

Okay, great. So very strong quarter behind you. Good business. You’ve made two significant acquisitions. Just a thought on, as you’re rounding out the OSS suite, as you’re heading into the content side of the business, is Amdocs still acquisitive as of this point or do you feel like you’re kept busy with what you’ve got here for the next couple of quarters?

Dov Baharav

Well, the main secret of Amdocs in the last few years was to integrate successfully the companies that we buy, making sure that all the employees that are included in the acquired company find Amdocs as their new home, and that we are able to generate the synergies from this acquisition.

So, no question that our main focus in the near future will be on consolidating and conducting a successful post-merger integration for Qpass and for Cramer.

We have a very clear strategy. All the acquisitions that we’ve made until today were to support our strategy and as we indicated in the past, we consider and would like to see the company growing farther in 2007 and 2008, and probably as part of the growth of the company we will continue in the future to do acquisitions.

Tom Ernst - Deutsche Bank Securities

And one financial follow up, if you’ll permit. It looks like all the metrics quite strong, backlog as a percentage of revenue, but they seem to be divergent. The backlog as a percentage of revenue versus the deferred revenue which is, as we look back over a year ago, say, and the time prior to that. It seems to be a much smaller percentage.

Is there anything changed in the way you’re collecting cash from customers, or how should we view the divergence of those two?

Ron Moskovitz

First of all, deferred revenue is part of the backlog. Now the nature of the deferred revenue that we see there’s some lumpiness and it depends on some specifics of large payments in the term which contain no reflection of the fundamentals of the business.

So I wouldn’t put too much emphasis on deferred revenue.

Operator

Thank you, and as a reminder today, participants are allowed to ask one question plus one follow up.

We’ll go next to Tom Roderick, with Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

Hi, good afternoon. Thank you. Just wanted to dig in a little bit. Sprint is a couple quarters under your belt and to the extent that you can talk about any milestones that you’ve successfully achieved over there, that’d be very helpful.

But digging into the financials, can you confirm for us that at this time there is no element of legacy Sprint subscribers currently in the backlog number?

Dov Baharav

There is some, but most of it is not there yet.

Tom Roderick - Thomas Weisel Partners

Okay. So, just – I’m sorry. Go ahead.

Dov Baharav

In general, to the first part of your question, we are making nice progress with Sprint. We work hard with Sprint in order to achieve all the objectives of both companies and we hope that once we have some milestones that Sprint chooses to report and we will then share it with you.

We expect the backlog in the future to grow as a result of the conversion and addition of new services, and I think that you will see it in the coming quarters. I don’t know that we will be able to go into details and to specify how much money can be added because of each element.

Tom Roderick - Thomas Weisel Partners

Okay. Very good, and looking at Rogers, very nice win on the CRM side this quarter, can you talk about what other systems you have in place at Rogers that interface perhaps with the CRM system and what other opportunities exist at Rogers that you alluded to earlier in the call. Thank you.

Dov Baharav

Well, we are very excited about the Rogers deal. It represents a move by Rogers toward a quadruple play: a full, integrated customer management. Where Rogers is the largest wireless carrier in Canada, a very large cable operator and they own the wire line assets and the first phase of this ICM project is intended to provide consistent customer experience, having this on top of the cable activity, the wireless activity and the wire on activity.

It might serve as a basis for additional phases where Rogers will be able to implement the strategy of integrated customer management where they manage the integrated customer in creating intention customer experience.

Operator

Thank you. We’ll go next with Shaul Eyal with CIBC World Markets.

Shaul Eyal - CIBC World Markets

Thank you. Hi. Good afternoon, everybody. Very quick question. Even when I’m looking at your core profitability, i.e., excluding all the acquisitions, it seems as if, you know, it should be very, very strong. What’s the reason behind it? Is it continued improvement in gross margin, operating margin, neither, or all of the above?

Ron Moskovitz

As we expected and talked about in previous quarters, we see benefits coming from the organizational changes in the alignment of the organization. We see benefits coming from the expansion of our development center in India. We see improvement in quality and a lot of internal activities that I want to spare you the details; that they bring expansion of the gross margin of the services and on top of that, we gained some leverage on the operating expenses.

This quarter we saw some additional from Qpass which we deferred, but we still enjoy this kind of leverage.

Shaul Eyal - CIBC World Markets

Fair enough. And just one final one, what was the contribution from DST, if you can disclose it, this quarter?

Ron Moskovitz

DST, a little above $60 million.

Operator

Thank you. We’ll go next to Michael Turits with Prudential. Please go ahead.

Michael Turits - Prudential

Hi, guys. Good evening.

Ron Moskovitz

Hi, there.

Michael Turits - Prudential

What are the – in the revenue guidance for next year, what are your assumptions for the contribution from Qpass and from Cramer into revenues?

Ron Moskovitz

Could you repeat that?

Dov Baharav

What would be the revenue of Cramer next year?

Michael Turits - Prudential

Yes, in the guidance for revenue for next year, what are your assumptions about the contribution from Cramer and from Qpass?

Dov Baharav

We, at this point would give some initial preliminary guidance for the entire company without breaking down this contribution.

Michael Turits - Prudential

Asked another way, could you give us some sense as to organic growth? I mean, you’ve been guiding to growth of, I think, 10% to 14% or 10% to 15% organically, excluding acquisitions. So can I feel comfortable that you’re getting that into ‘07?

Ron Moskovitz

Yes. Yes.

Michael Turits - Prudential

And then I also wanted to just clarify, I think it’s probably right but, in the current backlog number since Cramer’s closed, Cramer’s definitely not in this backlog number, right?

Ron Moskovitz

It’s not.

Michael Turits - Prudential

Okay. I guess someone else asked about acquisitions. You said you’re going to do more. You know, since you seem to have covered most of the areas that you’ve talked about what – can you tell us a little bit more about directionally where you might want to make acquisitions?

Dov Baharav

Yes. As I said, the first priority that we have right now is to be successful in the [P&I] of Qpass and Cramer. So the idea is to generate the benefits not only to form the acquisition and by the way, we have not yet closed Cramer so it will take some time.

Now, regarding the acquisition, as we said, the company has a very comprehensive strategy how to grow the business, including expanding our services and selling to Taiwan, in Europe and in other places, including expanding our activity in the financial services.

It might be that in order to execute upon our strategy, we will have to do acquisition either to support our penetration to some Taiwan, in Europe, either to increase our presence in financial services, either to do something in the low ARPU countries where we would like to penetrate as well.

However, we do not feel any urgent need to rush and do an acquisition tomorrow morning and the way that we operated until today, setting a strategy and doing an acquisition at the right time, after very diligent and careful due diligence and learning the company and making the right decision, I think that will characterize our activities in the future.

Operator

Thank you. We’ll take our next question from Sterling Auty with J.P. Morgan.

Sterling Auty - J.P. Morgan

Yes, thanks. Can you give us a sense as to how the performance was by geography?

Ron Moskovitz

Yes. We had about 68% in North America, 24% in Europe and 8% in the rest of the world. As far as our performance, actually we had sales in all of the regions.

And in terms of sales, we saw momentum in Europe, in North America; we mentioned Australia as well. So we are very pleased with the progress in all fronts in terms of geography.

Sterling Auty - J.P. Morgan

Okay, and can you update us on some of the progress, maybe, in some of the emerging markets, particularly China?

Dov Baharav

Well, in China we are very pleased from the progress in China. It is a long process of learning a completely different culture and way of doing business. We enjoy growth of the Longshine activities there. We feel that we created a good integration of the company, the Longshine that we acquired there with Amdocs. We’re making progress with our activity with BMCC, Beijing Mobile, implementing our solutions there and we feel that we have great opportunity for next year to grow the business substantially.

Operator

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

Will Power - Robert W. Baird

Thanks. The first question, I guess, was following up on Qpass. I wonder if you could talk about any of the early cross-selling opportunities you’re seeing there. I know you had previously provided guidance for $12 to $15 million in quarterly revenue. Should we expect that to accelerate as we get into ’07?

Dov Baharav

Will, obviously we see Qpass as a growth engine for the company and therefore since we gave some guidance for the initial few quarters we expect it to grow as we go into ’07.

In terms of the opportunities, it’s a little too early to talk about the specifics but we see some very good initial response from customers, both in Europe, in APAC and in North America to the Qpass offering.

One of the limiting factors for Qpass before was the viability and sense of comfort level that the carriers would have in a small company. A lot of the services that Qpass is offering is an amended services mode so people looking for stability and they want to have a positive answer to the question, would they be there in five or ten years from now?

So we see a lot of positive response in carriers all over the world, mobile as well as broadband. I think that they also help Amdocs to build up its image as a leading company that invests in the future of its customers. In a way we have to see if there is someone who is thought leader, or being there ahead of the curve instead of trailing the industry. This is very true about the Qpass acquisition. It is very much true about the Cramer recent acquisition, because the carriers need a lot of help on their transformation, especially when it comes to data, content and OSS. So these two acquisitions contribute dramatically to the reality as well as the perception of Amdocs as a leader in the industry.

Will Power - Robert W. Baird

Okay. Then my second question was on the cable business. You all were, I think, pretty bullish on prospects for cable at the investor day and I know you had a contract extension that you announced here.

Can you update us on when you expect to get new wins in the cable business and what that outlook looks like?

Dov Baharav

Will, it’s actually – again, we would not give specifics but we know for a fact that a few significant players are waiting to see how Amdocs 7, which is a cable and broadband-ready version, that will be available later on this year.

We have a lot of leads in our pipeline in different stages.

On the other hand, we predicted all along that the transformation of cable carriers into completely new building and CRM system would be a cautious move. This industry used to work with two vendors for each carrier, just because they did not have the right suppliers that invested in their future.

We believe that we will see more progress initially maybe on the CRM front and other point solutions, and eventually end-to-end complete transformation of customer care and billing.

Operator

Thank you. We’ll take our next question from Julie Santoriello with Morgan Stanley.

Julie Santoriello - Morgan Stanley

Thanks. Good day. Question on the backlog from Sprint. You said that there’s some in there, but most of it is not in the backlog at all. I’m wondering if that’s because you do not see a large amount of transition happening in the next four quarters, or if it’s just too soon for you to be able to quantify the revenue from those transitions?

Ron Moskovitz

We cannot give much detail but it’s – as we mentioned, we capture in the backlog the next 12 months revenue that we expect and obviously it takes into account some milestones and the progress which we expect to see in the project.

Dov Baharav

Just to add to that, let’ not lose sight of what we are doing for Sprint. Sprint is going through a huge transformation. We are going to help them and we are helping them, transforming the call center front with CRM capability, their managing of these huge accounts, they have post-paid, they have prepaid, they have the joint venture with the cable companies and a few other things that we did not specify.

We are talking about a huge transformation that will take place in the next couple of years and we are their vendor of choice. We are their partner of choice. We are working according to the plan, executing right on the plan. We ramped up other people who were working on Sprint significantly and this is the most important thing for us.

We believe that we will produce good results and a very high quality delivery, as we did with Nextel in the past.

Julie Santoriello - Morgan Stanley

Okay. I guess that’s why I’m surprised that there isn’t a bigger contribution from that customer to backlog.

Dov Baharav

We didn’t say it wasn’t big or small. It is a contribution and we will see additional contribution in the coming quarters.

Ron Moskovitz

Most of the growth of the backlog this quarter is the result of the sales that we had in all fronts of the business, not necessarily from Sprint.

Operator

Thank you. We’ll go ahead and take our next question from Ashwin Shirvaikar with Citigroup. Please go ahead.

Ashwin Shirvaikar - Citigroup

Thank you and congratulations on the quarter.

Dov Baharav

Thank you, Ashwin.

Ashwin Shirvaikar - Citigroup

What I wanted to find out was the range of EPS given the EPS guidance you’ve given seems to be fairly wide, about a $0.10 range over there. Last year you had a $0.05 range.

So can you sort of explain what would lead to the lower end of the range; what might lead to the higher end of the range?

Ron Moskovitz

As we said in the call, this is a preliminary range. You know, we noted it at the beginning of the year and we need to conclude our budget process and there is a lot, you know, moving pieces. So by the time that we give you more accurate numbers next quarter, we’ll be able to narrow the range and maybe to have a range which is comparable to the range that we gave last year.

Ashwin Shirvaikar - Citigroup

Okay, so I guess, I should be looking for $2.11 to $2.16 or something?

Ron Moskovitz

I think we’ll have to discuss it next quarter.

Dov Baharav

Ashwin, I think the intention here was to, due to the backlog and the momentums we have and the plans that we have right now internally, we saw that the analyst community, some kind of a range that we believe would be something that can help you look at the company the way we look at it, even though it’s 15 months ahead of the end of next year.

Ashwin Shirvaikar - Citigroup

Sure. With regards to payment, I have a question. Is the intent with Cramer to sell two standalone products into a common client base or is the intent to eventually have a roadmap to have one product?

Dov Baharav

Ashwin, as we mentioned yesterday and maybe we did not elaborate about it enough, there is no overlap in the product that Cramer has currently and that Amdocs has, and therefore we are going to have a set of products that are complimenting each other and we are going to add to that a lot of services and consulting and therefore we see only synergies from this win.

There are some examples that were quoted by some of our customers such as Telstra. Telstra chose Cramer for their network business management and related services and they chose us for complementary applications and services, and together we’ll have a larger project with Telstra.

Operator

Thank you. We’ll take our next question from Mike Latimore with Raymond James & Associates.

Michael Latimore - Raymond James

Yeah, good afternoon. Can you just go a little more detail? You mentioned the license revenue was down for a reason. I didn’t quite get why the license was down and what’s the outlook for license revenue and the secondly, what tax rate are you assuming in your ’07 guidance?

Ron Moskovitz

The tax rate, as we said, we gave preliminary guidance and we don’t give more details on the tax. Obviously we don’t expect the tax rate to go up, but it’s too early discuss it at this point.

As for license, as they mentioned earlier, there is the nature of our business is to deal with Tier 1 and Tier 2 carriers and recently in a consolidating business when we have more business with the large Tier 1 guys, we encounter more projects where the mix of the license is lower than what we’re used to having in the past. Recently, it’s made some impact on the mix of the revenue and whether we were able to compensate for that on the margin side by better margins on the services.

So, all in all, we feel comfortable that our business is moving forward and that change of mix doesn’t bother us.

Michael Latimore - Raymond James

Thanks.

Dov Baharav

Thank you.

Operator

Thank you. We’ll take our next question from Julian Bu with Lehman Brothers. Please go ahead.

Julian Bu - Lehman Brothers

Hi. Great quarter, guys.

Dov Baharav

Thank you.

Julian Bu - Lehman Brothers

First of all, Ron, I guess I missed the tax rate for next quarter. What’s that number?

Ron Moskovitz

We gave a range of 17% to 18%.

Julian Bu - Lehman Brothers

Okay. Great and also, let me go back to backlog. Suffice to say The Street has had a hard time guessing where the backlog number will be. This quarter, $80 million organic growth is probably the largest in the past, more than a year. You’re talking about, you know, new sales drove that growth. Could you talk a little bit specifically, was that due to Telstra or just how do you come by that number?

Dov Baharav

Julian, let me just shed some light on this question and the hard time we’re having to predict this number.

We have a hard time to predict this number, too, because we are not so much concentrating on this number. It’s only one element, one parameter, that is reflecting the growth of our business and not necessarily the most important one.

This quarter we had 11 wins from all over the world, including wins on the CRM front, on the PRM, on billing, on ICM, from different geographies, and the backlog is a way a calculated result of the results of the company. We are focusing very much and we are enjoying momentum in the last few quarters. Our pipeline remains very strong looking forward.

Again, it’s very diversified from – it includes different applications, different geographies, managed services, and so on. So the backlog is, you know, a good indication or relatively good indication, but it’s definitely only one parameter out of the overall parameters that we are looking into.

As a matter of fact, we are not running the company by the backlog.

Julian Bu - Lehman Brothers

Okay, I got it. So let me follow up, is there one customer accounting for, say, half of the $80 million increase?

Ron Moskovitz

No. Actually, it’s very diversified and the changes in the backlog consist of impact of new sales plus some changes in existing customers. So it’s a barrage of data points from many customers, many projects and we don’t know, we cannot necessarily identify the change with one or two large events.

Dov Baharav

I think that maybe one good indicator for our future performance may be the guidance that we give to the market, that so far we’re quite indicative.

Operator

Thank you. We’ll go next to Peter Jacobson with Kaufman Brothers. Please go ahead.

Peter Jacobson - Kaufman Bros.

Thanks. Yes, this is related to that last question. Is the Telstra deal that you’ve discussed included in the backlog?

Ron Moskovitz

Yes. Yes.

Dov Baharav

Peter Jacobson - Kaufman Bros.

The portion of the next 12 months?

Ron Moskovitz

Yeah.

Peter Jacobson - Kaufman Bros.

Okay. Thank you, and with respect to the spending environment for billing systems and CRM, do you see any changes with consolidation? Do you see any evidence of delayed decision cycles, particularly with larger billing deals that you’re overcoming, or would you say that the spending patterns and decision cycles are similar to recent quarters? And then secondly, do you see, perhaps any shift more towards CRM as opposed to the billing systems? Thank you.

Dov Baharav

What we see in the market actually is a quite positive environment where carriers are ready to move forward and to update their system. So, and of course, everything that they say is from our position. It might be that some of our competitors see a different market.

What we see that the carriers are starting move toward a transformation and need it in order to take them from the old era of network provider to marketer of digital services.

So they have to change their network and they have to change their BSS system. When they change the network, they have to change their OSS system and as a result of it, they will have product as Telstra announced lately, and we see a demand for an OSS system as a result of the transformation.

Now, we do not see any lengthening of the selling process regarding CRM and regarding billing and we are very much pleased with the centric role of the CRM in all the integrated customer management activity.

The effort by carriers to generate and to improve the customer experience, is focusing first of all on the CRM and later on, on all the back office systems.

Peter Jacobson - Kaufman Bros.

Okay. Thank you.

Dov Baharav

Thank you.

Operator

Thank you. We’ll go next to Daniel Meron with RBC Capital Markets. Please go ahead.

Daniel Meron - RBC Capital Markets

Thanks. Congrats on the good performance.

Dov Baharav

Thank you.

Daniel Meron - RBC Capital Markets

Maybe you can touch a bit on the progress with the IPTV. Do you see the same levels of interest where your projects are at this point?

Eli Gelman

Daniel, in terms of the IPTV, obviously different carriers have different approaches to IPTV, AT&T being the early adopter in North America in a big way.

We see a lot of progress in our project with AT&T around IPTV and around IPTV as an infrastructure for data services that’s under the Lightspeed and general name. But even this quarter we had some progress in additional services and support of this project.

So AT&T’s moving full steam ahead and we see a lot of progress there.

In Europe, we see a lot of interest but we could not provide any, you know, specifics in terms of timing or whether they’re going to jump into this wagon. I would say they are more in a trial mode. They show a lot of interest in our offering there.

The most important thing for us is that IPTV is only one application and not necessarily the winning application in the future that carriers are going to – we are talking about transformation to digital networks, IP network, and it could be that the application would be different in the future. They are using the same infrastructure for VOIP. They are using the same infrastructure for other video services, and we believe that we have the right solution to support the IP networks of the carriers as they move forward with them. And IPTV is one example of it.

Daniel Meron - RBC Capital Markets

Thanks, Eli. Maybe just tying into that, did you start any discussions with wire-line carriers with cable companies on ways to port the Qpass capabilities into that domain, or is it too far off right now?

Eli Gelman

No, we started this discussion along with - Qpass revenue comes mainly today from mobile content but this product is 100% capable to support broadband and other. We have some customers today on the broadband side and we’ve seen interest from other fixed-line or wire-line companies to this type of product and services.

Dov Baharav

And let me addition to what Eli said that, given the convergence, for example, AT&T, they are looking to provide the quadruple play, at some point, the advantages of the implementation of Qpass in the wireless might be at high demand with the wire-line carriers given the convergence everywhere.

Operator

Thank you. We have time for one final question and we’ll go to Gil Luria with Wedbush Morgan Securities. Please go ahead.

Gil Luria - Wedbush Morgan Securities Inc.

Good afternoon.

Dov Baharav

Good afternoon.

Gil Luria - Wedbush Morgan Securities Inc.

I just had a question on Cramer. How many additional customers that don’t overlap with you do you see them adding, beyond the product set that doesn’t seem to overlap with your product set?

Dov Baharav

It’s quite a few. In Europe, Western Europe, Eastern Europe, the rest of the world, APAC, could be a dozen. They have 80 plus customers and we overlap with in some cases. Luckily, or smartly, they are concentrating on the T1/T2 space as well. So we see a lot of cross-sale and up-sale opportunities once we close this deal and linking, as to Daniel’s question, their product is capable to handle and is handling today wireless as well as wire-line companies as well as cable companies in the future. So we think that as we see wire-line companies, fixed-line companies, willing to spend more money to protect their customer base and to grow, we think Cramer product will also be a good door opening for us, too. Additional carriers, wired and wireless alike.

Gil Luria - Wedbush Morgan Securities Inc.

Great. Have you been approaching some of those customers with Cramer since you started the partnership or are you going to wait for the close to do that?

Dov Baharav

Well, as we have one indication that we, not only that we approached, it actually succeeded, which is Telstra. In Telstra, as part of our alliance with Cramer, we aligned our activity there. Obviously it was part of an alliance so it’, you know, a relatively harmless type of engagement. Needless to say as soon as we close we are going to have a campaign to many more customers. We are very enthusiastic about this deal. Cramer people are very enthusiastic about this deal, and I think the market altogether is really seeing the value that we can now bring to the market.

Operator

Thank you. Actually, we do have one last question. We’ll go to Liz Grausam with Goldman Sachs. Please go ahead.

Elizabeth Grausam - Goldman Sachs

Hi, guys. Thanks for taking the question. I’m just wondering about the European market. We’ve seen very large transformational projects launched in North America, both Canada and the United States, and also Telstra, from a very large cross-product project.

Have you seen that start to emerge in Europe yet and, if not, you know, is it something that we can see on the near-term time horizon to get the European market to start spending more materially?

Dov Baharav

Liz, the difference between North America and Europe, the competitive environment among carriers in North America is by far more intense in comparison to Europe. As a result of it, we see the transformation in much more advanced stage in North American in comparison to Europe.

So, talking to the European carriers, to the leadership there, they are convinced that they have to go through their own formation. The timeline is a little bit different.

So we see some preparation, we see them talking about it, we see them preparing for it but we assume there will be a lag of maybe two or three years.

Eli Gelman

And Liz, in the meantime, we do not see the large transformation project as Dov mentioned, but they buy components from our ICM portfolio. A few good wins, quite a few of the wins that we have this quarter came from Europe and from other parts of the world. So it’s not as though they are frozen there by any stretch of imagination. We keep growing there. There is a big demand for our product and services there.

Elizabeth Grausam - Goldman Sachs

Is there any difference in Europe that you could characterize between wireless versus wire-line spending patterns? Is one more aggressive at this point in time?

Dov Baharav

Not really. Actually, both are – look, Telstra is a wire-line project and in the win list we have a few wireless wins. No, I don’t think that’s so.

Everybody eventually is going to triple or quadruple plays so it’s just a matter of when do they start and what is their strategy to get to banding and conversion. So I would say we see demands from both ends. In terms of big transformation project, I don’t know.

Eli Gelman

It looks like that Europe is going through the same pattern of the United States: consolidation and convergence. And once they go through the transformation, we believe and based on our discussion with them, that Amdocs might be a very natural choice for such converging, consolidating, mega carriers to help them go through the transformation, helping them with thought leadership, helping them with our set of product, the OSS that is needed in the initial stage, the BSS later on, business processes and services.

So we feel that Europe is a big potential that we have not yet enjoyed from.

Operator

Thank you. That concludes today’s question-and-answer session. At this time, I’d like to turn the program back over the Amdocs for any additional or closing remarks.

Thomas G. O'Brien

Okay, thank you very much for joining us on the call today. This concludes the call.

Operator

This concludes today’s conference. You may disconnect your line at any time.

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Source: Amdocs Limited, F3Q06 (Qtr Ending June 30, 2006) Earnings Conference Call Transcript (DOX)
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