Amdocs: Long-Term Appeal After Strategic Addition Of Actix

| About: Amdocs Ltd (DOX)

Shares of Amdocs Limited (NYSE:DOX) hardly moved after the provider of software and related services to the telecommunications sector announced the strategic acquisition of Actix.

The deal is fair and supports the long-term growth prospects of the firm. Given the strong financial position, fair valuation and strong growth performance, I'm quite optimistic about the long-term prospects.

The Deal

Amdocs announced that it has entered into a definitive agreement to acquire privately-held Actix for $120 million in cash. With the deal, Amdocs will expand its customer experience portfolio into the network domain.

Actix delivers independent software for mobile network optimization solutions. This positions the company to offer network optimization services for customer experiences across both business and operational support systems. Actix's geographical located information is added into Amdoc's customer data allowing the company's customers to optimize networks in terms of costs, while boosting the customer experience.

Actix has based its employees at offices around the world and its solutions are deployed at over 350 mobile service providers. No additional financial details were released. The only numbers I could find are in this press release which states that Actix generated annual revenues of $52 million for the calendar year of 2011, and the fact that the firm was profitable.

Amdocs does not expect a material impact on non-GAAP earnings per share. GAAP earnings might incur acquisition-related expenses in the fiscal year of 2013 and 2014 to accommodate the deal.

The deal is expected to close as soon as the end of this month. The board of directors of both companies have already approved the transaction.


Amdocs ended its third quarter of fiscal 2013 with $1.09 billion in cash, equivalents and short-term investments. The company operates without the assumption of debt, for a generous cash position, allowing the firm to easily finance the deal within existing means.

Revenues for the first nine months of the year came in at $2.50 billion, up 3.1% on the year before. At the same time net income rose by 10.3% to a little over $323 million. At this pace, full year revenues are seen around $3.35 billion on earnings of little above the $400 million mark.

Trading around $37 per share, the market values Amdocs at $5.9 billion, or its operating assets around $4.8 billion. This values operating assets of the firm at some 1.4 times annual revenues and 12 times earnings.

Amdocs pays a quarterly dividend of $0.13 per share for an annual dividend yield of 1.4%.

Some Historical Perspective

Amdocs has been a relative boring stock over the past decade, yielding very modest returns to its shareholders. Shares doubled from lows of $20 in 2004 to highs of $40 in the years before the large 2009 recession.

Shares fell to lows of $15 during the crisis, but have recovered to current levels in their high-thirties. Shares remain far-fetched from all time highs set around $90 in 2000.

Between its fiscal 2009 and 2013, Amdocs has increased its annual revenues by a cumulative 17% to an expected $3.35 billion. Earnings are expected to rise a cumulative 25% to just North of $400 million. Earnings per share growth has been even more spectacular as the company retired nearly a quarter of its shares outstanding.

Investment Thesis

Investors have hardly reacted to the news about the deal. The acquisition of Actix is a highly strategic deal which will fortify the company's offerings by reducing costs for the company's customers.

The $120 million price tag represents just 3.5% of Amdocs' own market capitalization and will have a non-meaningful impact on revenues and earnings, but would increase the long-term competitive position of the firm.

The rapid developments in both the US and European telecom carrier markets is creating a bit of uncertainty for the company's outlook. The latest move is the a transformational deal as Verizon Communications (NYSE:VZ) is in the process of finalizing the acquisition of a 45% stake in Verizon Wireless from Vodafone (NASDAQ:VOD).

AT&T's (NYSE:T) mobile unit is a key customer as well, as seen in the company's customer profile. AT&T uses the company's services to arrange their customer life cycle management processes. All of AT&T's 35,000 service professionals at the customer service business use the Amdocs CRM application to manage every incoming call.

As such Amdocs is still a bit uncertain about the short- to medium prospects as its customers are consolidating. Still, Amdocs is one of the few firms which can supply great services to these large carriers. Yet the current backlog at $2.83 billion, or roughly 10 months worth of revenues, should be comforting for investors.

The strategic deal, the strong financial cash position and the appealing valuation at 12 times earnings make me quite optimistic, especially as the company has used the strong cash flow generation to expand the business, pay out dividends and repurchase shares at a fairly aggressive pace.

I'm quite optimistic about the company's prospects and would attach a long-term price tag of $50 on the business.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.