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Amdocs Limited (NASDAQ:DOX)

Q1 2006 Earnings Conference Call

January 18th 2006, 5:00 PM.

Executives:

Thomas G. O'Brien, Vice President, Investor Relations

Dov Baharav, President and Chief Executive Officer

Eli Gelman, Executive Vice President

Ron Moskovitz, Chief Financial Officer

Analysts:

Ashwin Shirvaikar, Citigroup

Michael Turits, Prudential Securities

Elizabeth Grausam, Goldman Sachs

Tom Ernst, Deutsche Bank

Tom Roderick, Thomas Weisel Partners

Mike Latimore, Raymond James

Julie Santoriello, Morgan Stanley.

Julian Bu, Lehman Brothers

Peter Jacobson, Kaufman Brothers

Shaul Eval, CIBC World Markets

Scott Sutherland, Wedbush Morgan Securities

Tal Liani, Merrill Lynch

Operator

Good day everyone and welcome to this Amdocs First Quarter 2006 Earnings Release Conference Call. Today’s call is being recorded and webcast. At this time I will turn the call over to Mr. Tom O'Brien, please go ahead sir.

Thomas G. O'Brien, Vice President of Investor Relations

Thank you Sherry, I am 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, its not prepared in accordance with GAAP. The company’s management uses this financial information and 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, the management believes that isolating the effects of such events enables the 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 can give no assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future results to differ from those anticipated. These risks conclude but are not limited to the effects of general economic conditions and such other risks as discussed in our earnings release today at a greater length in the company’s filings with the Securities and Exchange Commission including in our Annual Report on Form 20-F filed in December 28, 2005. 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 Ron Moskovitz, Chief Financial Officer. Following Dov and Ron’s comments we will open the call to Q&A. Now let me turn the call over to Dov Baharav.

Dov Baharav, President and Chief Executive Officer

Thank you Tom. Good afternoon ladies and gentlemen. Fiscal 2006 is off to a great start for Amdocs, its earnings per share excluding certain items grew 24%, and revenue grew 25% as the momentum that we enjoyed last year continues. These excellent numbers are the result of success with our customer as well as our ability to execute on our market operating and financial strategies. We expect our success to continue, and let me explain why. From a market perspective we continue to benefit from trends that we have seen in recent quarter. The customers that we serve are going through transformation. Service providers are coping with the challenges of consolidation while also offering new IP-based products and services with innovative business models. Wireline carrier such as AT&T and ourselves around the world are pushing ahead with IP-based services including IPTV. Competition among service providers is intensifying, which increases the need for differentiation. These needs drive demand for Amdocs product and services. Amdocs is uniquely positioned to enable service providers to rapidly introduce new offerings, lower total cost of ownership, and focus on real customers. These demands and our ability to address them has fuelled our growth this quarter and will be the driver of our growth in 2006 and beyond.

In the current quarter, we translated this demand into 9 key wins, and we disclosed a few details about some of them in our press release today. These wins were across a line of business and geographies and include significant expansion of several existing customer relationship. The wins are also the direct result of our belief that customer prefer to get best of the three integrated offering from a single vendor. This strategy allows our customer to leverage their existing investment and say add functionality necessary to offer new product and services to their subscribers. The fact that we continue to expand our business with the market leaders is also a testament to our delivery result and high customer satisfaction.

On top of these wins, I am delighted to say that Sprint Nextel has selected Amdocs to provide a single billing and customer care platform to enable a fully integrated customer management strategy. The system will support Sprint Nextel’s customer base of over 46 million wireless subscribers, and will provide Sprint Nextel customer care representatives real time access to account information for all subscriber on both the nationwide Sprint PCS network and the national Nextel network, creating an enhanced customer experience while enabling the realization of operational efficiencies. We have reached a preliminary agreement with Sprint Nextel and expect to sign a definitive services agreement. These wins strengthened our leadership position in this industry. Operationally we are happy with the progress we have made on integrating these three novices and Longshine into Amdocs. These integrations have gone smoothly and we feel even more confident that this acquisition will deliver value to our shareholders in 2006 and in the future.

Now our excellent results, in the first quarter Amdocs position to achieve our goals for 2006. There is tremendous amount of activity as service providers are changing their way of doing business in order to compete for customers. These changes present challenges for our customers and for Amdocs as we navigate these changes but there are also tremendous opportunity, and we can turn these opportunities into goals. We have a strong demand for our product and services and we have a substantiated track record of delivery, excellence, and the leading companies in the market is our customers. Let me now turn the call over to Ron Moskovitz for financial review and then I will come back with some concluding remarks.

Ron Moskovitz, Chief Financial Officer

Thank you Dov. Our first quarter revenue was $587 million, representing growth of 25%. Our EPS excluding acquisition-related costs and equity-based compensation expense, net of related tax effect was up 24% to $0.42 per diluted share. GAAP EPS was $0.36 for diluted share. Our EPS benefited from an increase in operating income, strong investment earnings, and continuing improvement in our effective tax rate as I will discuss in a minute. On the revenue side, license was up this quarter, we are projecting that license may renew this level or maybe slightly low for the next few quarters. We are pleased to report that operating margins were 17.3%, up from 17% last quarter. While gross margin overall was stable this quarter, we did see a decrease in the gross margin on services. This was due in part to investment in our system made in anticipation of the productive decision at Sprint Nextel prior to receiving a commitment from the customers.

Looking at operating expenses you can see a significant saving in R&D costs this quarter. The year for better execution using measures such as a shift to lower cost geographies as well as the reduction in the subcontractor supporting our broadband, cable and satellite business. Also seeing the R&D benefit is an increase in SG&A expenses, partly due to increased selling cost related to the signing of some recent deal. Other income was up this quarter mainly due to higher interest rate on our investments. We expect to see similar level in the coming quarters. Our effective tax rate in Q1 was reduced to 18% compared to 20% in 2005. We may see some fluctuations in the quarterly tax rates this year but we are using a 10% rate in our annual guidance. DSO at the end of the quarter was 53 days, up from last quarter’s 48 days. Deferred revenue decreased slightly this quarter in the normal course of business. We had been focusing deferred revenue to decrease for a number of quarters. As we have mentioned for sometime now we had some usual contracts with several customers wanted to prepay. Just take over a period of time for some of these deferred benefits to walk the way through revenue.

Our 12-month backlog which includes contracts, committed revenue for managed services contract, letters of intent, maintenance and estimated ongoing support activities was $1.800 billion at the end of the quarter, an increase of $20 million from the September quarter. This balance does not reflect any impact of the Sprint and Nextel decision as this occurred after the quarter end. Beginning this quarter Amdocs accounted for in equity grand under the new FASB 123R. This requires that we show an expense for the cost of increased stock option and restricted stock and the effect on our GAAP EPS was $0.04 per share. Our best estimate is that the impact of equity-based compensation expense on EPS would be in the range of $0.04 to $0.05 for the quarter for the remainder of the fiscal 2006.

Looking forward, our guidance for the second quarter of fiscal 2006 is for revenue of approximately $600 million, and EPS for $0.42 excluding the effect of acquisition-related charges, net of related tax effects and excluding equity-based compensation expense of approximately $0.04 to $0.05 per share. Diluted GAAP EPS is expected to be approximately $0.75 to $0.76 per share. Our EPS guidance for Q2 is based on fully diluted share comp estimate of approximately $220 million shares. For fiscal year 2006 our operated guidance is for revenue of approximately $2.42 billion to $2.47 billion, and EPS in the range of $1.68 to $1.72, excluding the effect of equity-based compensation expense of approximately $0.16 to $0.19 per share, and excluding the effect of acquisition-related charges, net operated tax effects.

This guidance is based on the fully diluted share comp estimates of approximately $222 million. On the GAAP basis, 2006 diluted EPS is expected to be approximately $1.40 to $1.47. This guidance includes the impact of the Sprint and Nextel deal, which is expected to put some pressure on margins. We believe that we can report stable operating margins in 2006 by offsetting the pressure on the growth margin with leverage on the operating expense line. With that let me now turn it back to Dov.

Dov Baharav, President and Chief Executive Officer

Thank you Ron. We are pleased with our results this quarter, we are looking forward to additional success in coming quarters. And with that let me now open the call to Q&A.

Question-and-Answer Session

Operator

Thank you, the question and answer session will be conducted electronically today. If you would like to ask a question, please do so by pressing the “*” key followed by the digit “1” on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment, we will proceed in the order that you signal it, and we will take as many questions as time permits. Once again please press “*” “1” to ask a question. We will pause for a moment to assemble our queue. We will take our first question from Ashwin Shirvaikar from Citigroup.

Q - Ashwin Shirvaikar

Hi, very nice results, congratulations on those as well as on the Sprint contract.

A - Dov Baharav

Thank you.

Q - Ashwin Shirvaikar

On the Sprint contract, can you provide us some comments on the pricing for the deal and also, I mean get into a little bit more detail on what kind of investments you need and how long it might affect the gross margin line?

A – Dov Baharav

Well let me start that the guidance that Ron mentioned for the year of $2.42 billion to $2.47 billion, and the EPS of $1.68 to $1.72 represent our guidance taking into consideration the Sprint Nextel deal. So as you can notice we waived the guidance for the EPS for the year, and we are very encouraged by the Sprint deal, we think it’s a great vindication of our superiority of our platform on one end and the quality services that we deliver to Nextel over the year, and the fact that we can be their strategic partners to achieve the goal, so I think that I cannot go further than that to describe the pricing for this year.

A - Ron Moskovitz

Now prior to that, I mentioned few points in the – before that. As Dov mentioned, 2006 guidance includes total impact of the deal, we would say some pricing impact that put some pressure on the gross margin, though we are able to compensate by other factors and to basically provide throughout the year a flat operating margin. Following 2006 we expect this deal to improve the profitability. So a typical pressure that we see in managed services deal in the first period say will help us to serve it down towards to improve the margin.

A - Dov Baharav

Thank you Ron, I just wanted to, I had maybe one more point, not necessarily direct related to the Sprint deal but I think that Amdocs over the years has been known for the validity provide for our customer, for our products on CRM and the billing. And I would maybe say that we are not known for winning bids because we come up with a lowest price possible. So I think that we demonstrated the value over the years, we believe that in the case of Sprint they saw the value, which is significant to them.

Q - Ashwin Shirvaikar

Thanks and I expect to have a follow-on. During the year, you know solid cash for the performance in the cash on the balance sheet, could you review the uses of cash going forward and what’s in your opinion is the optimal amount of cash you need on the balance sheet?

A - Ron Moskovitz

As we said many times in the past we have a strong balance sheet, which is derived from the fact that we need, to have a strong balance sheet in order to support our growth, to support the largest customer and the largest managed services deal, so recently the deal that’s just for now Sprint and Nextel is an indication of the strategy. Further than that, we may expect to do some M&A as a top priority in order to bring additional growth drivers to the company.

Q - Ashwin Shirvaikar

Should I assume the M&A maybe now, you know, known in the financial services to build up that factors or are there, you know, I think those products has a reasonably complete product as expanse, so where would you do the M&A?

A - Ron Moskovitz

Well Ashwin as we have said before, we are looking in different ways to expand the capabilities of the company in terms of complimenting technology, generating new growth engines and we are not done with the telecom industry by all owns or by any space of your imagination.

Q - Ashwin Shirvaikar

Okay great thank you.

A - Ron Moskovitz

Thank you.

Operator

Once again hit “*” “1” to ask a question, we do ask you to limit yourself today to one question and one follow-up question. We will take our next question from Michael Turits.

Q – Michael Turits

Hi guys, how are you?

A - Ron Moskovitz

Good.

Q – Michael Turits

Very glad to see the Sprint deal got down in your favor. The impression I’ve got from your product guidance of about 65 to about 70 was that the low end of the range would have been the results if you had won the deal, you are suggesting that there was a little bit of dilution from the deal. Now you are raising the guidance slightly, first question is it looks as if this quarter’s upside as well as the lower tax rate that I have sent that about $0.02 dilution, is that correct? And the second part of that question is what should we expect for 2007, will this Sprint deal be dilutive, neutral or accretive in 2007?

A - Ron Moskovitz

As we said, Michael, this is Ron, the guidance that we gave for the EPS is inclusive, which means that it includes the impact of the Sprint and Nextel deal, we have some other changes like the tax rate, say in others, you know we are having a dynamic business so there are some changes in other businesses and bills that we want or didn’t we. Else for 2007 as we expect after the initial pressure that we are in the margins in large managed services deals we may see some improvement, so our internal plans is to improve 2007 over 2006.

Q – Michael Turits

Okay sir, once again just to be specific, does that mean the Sprint deal will be accretive to your earnings in 2007?

A – Ron Moskovitz

We cannot say, Michael, discuss the specifics of the deal in that regard.

Q – Michael Turits

And is there a cash component to the investment that we don’t see on the income statement and about what might that be, is that a CapEx investment?

A – Ron Moskovitz

We are going to see from a cash investment in the form of some CapEx in some working capital and we are going to show, would give more information in the next quarter.

Q – Michael Turits

Okay thanks gentlemen.

A - Dov Baharav

And let me just maybe one comment, we should not lose sight of the importance in the gravity of this deal. For the position of Amdocs in the M&A services area for position in the market for customer care and billing, for our ability to serve the largest possibly carriers in the world with only about 46.5 million subscriber eventually, and the future businesses will have with Sprint group. So the financials are as we have reflected in the guidance and the overall picture is very very positive.

Operator

Our next question comes from Liz Grausam with Goldman Sachs.

Q – Elizabeth Grausam

Hi, first question I had is just on the cable industry if you could give us any update on the integration of ASP and how your response from customers so far and also if the Sprint transaction you feel may help your positions in the cable industry, and the relationship that they would have?

A – Dov Baharav

Thank you Liz. We are quite pleased with the product that we have in the integration of these three. We feel now more confident that we can achieve the goal that we have setup, we are experiencing very positive reaction of customers, and to the trend that we have to upgrade our customers with Amdocs platform, and this win with Sprint actually represent completely new opportunity for the company. The fact that the recent alliance between Sprint and the cable company Comcast and Warner and Cox, hence there is a, and therefore say that will be realized to offer quadruple play. In the segment Amdocs will serve on one end Sprint and on the other end the Comcast and other cable company will enable us to offer to our customer the ability to launch this quadruple play and enable us to go our business.

Q – Elizabeth Grausam

Great, and then Ron maybe more specifically on the services gross margin as we move through this year, where do you see the services gross margin going over the next few quarters and when did subscribers actually start cutting over from Sprint system on to your systems that you make through revenue coming on?

A – Ron Moskovitz

With respect to the subscribers as we mentioned in the Sprint announcement the conversion is going to start in 2006 and end by the end of 2007. As for the gross margins we expect the gross margins to go down more so in the second half of the year, and but we do have given a specific number, but in order to complete the picture, we said that operating margin is going to remain flat.

Q – Elizabeth Grausam

And that’s flat from the 17.03 you reported this quarter?

A – Ron Moskovitz

Yes.

Q – Elizabeth Grausam

Okay, thank you very much.

A – Ron Moskovitz

Thanks Liz.

Operator

We will take our next question from Tom Ernst with Deutsche Bank.

Q – Tom Ernst

Good afternoon, thank you. A real quick question then a second part too, first you mentioned that the contract with Sprint, you expect to be a fully integrated customer management, are we to assume that that’s our four platform billing across retail prepaid, wholesale etc., and then abstract and back a little bit. This deal really is very significant to the industry, I am wondering from your perspective now how do you see its changing competition, you do not worry more about other companies perhaps with younger technology like Converse more than you do about some of the older competitors?

A - Ron Moskovitz

Tom, thanks for the question. As for the first part of it, we cannot relate specifically to the type of publication we are going to support, we can just reiterate the Sprint announcement that they are looking about using as a single billing and customer care platform for all the entire 46.5 million subscribers, you can look at the Nextel numbers and the Sprint wireless numbers and the wholesale customers and you can make up the calculations. And but we are talking about our call center and billing, it’s a full system. In terms of the competition, we do not account on the competition and we invest more than anyone else in keep developing our product, we have a better traction with the leading customers where you can trial and exercise new technologies and new applications, and therefore we are quite confident that we are better than any younger or new competitors in the industry, so we are watching our competitors very carefully and we are trying to be ahead of them in all times.

Q – Tom Ernst

Is there anybody you can point to that you think is rising on the competitive map relative to the ones that obviously have been falling a bit in terms of resources?

A - Dov Baharav

Tom, let me – Amdocs always operated in competitive environment, and I can assure you that moving forward there will be always a competition, a very large carrier, when it configures to modernize the system, he is looking for several alternatives, and I would say that we compete with Accenture in several places and there are many product providers like Siebel as it is now becoming (indiscernible) with our Convergys and Intech and total to some extent and maybe some others models.

A - Eli Gelman

And Convergys on the cable.

A - Dov Baharav

And Convergys on the cable, so I would say we would continue to add competition and we think the competition gives us wholeness, and we will force us to be better moving forward.

Q – Tom Ernst

Alright, thank you again.

A – Dov Baharav

Thank you.

Operator

And our next question comes from Tom Roderick with Thomas Weisel Partners.

Q – Tom Roderick

Hi good afternoon, thank you. I wanted to ask – my first question here just a little bit more around the migration task, Dov, you have mentioned obviously what we think 46.5 million subs here on the Sprint network will be migrated, do you anticipate that the full amount of those subs will be migrated over to your system by the end of ’07 as such the timeframe that you have waived out for migration period?

A – Dov Baharav

Well, I would say that looking at this quote from the Sprint press release that it is expected that the conversion will be complete in 2007, so we trust the publication of Sprint.

Q - Tom Roderick

And as far as your existing data center goes for the managed services, do you anticipate moving these subs to the systems in place at the Champaign, Illinois data center?

A – Dov Baharav

Today we are walking out of Champaign, Illinois for the Nextel business, we will see how we expand, probably we need to expand it.

Q - Tom Roderick

Okay very good. And just on my last question here, I wanted to ask you a little bit about the trends and some of the bigger customers that you signed last year, you had Fize & Dash (Ph) you had STC IPTV, where are these projects in their lifecycle? How much do you anticipate that there is for work left to be done? And then just speaking generally about IPTV, can you offer some sense of what the pipeline of opportunities looks like there?

A – Dov Baharav

Tom I would say that in order, the dynamics of the business is that we have many new products starting and many of them going into what they call the OGS: Ongoing Support Mode throughout the year. So we usually do not provide specifics but we move into production and go into OGS in the quarter with several projects and we open up new projects this quarter obviously we will start working on that, Sprint Nextel we will continue walking on Sprint Nextel. We delivered last quarter significant portions of the Lightspeed project and so on so forth. In terms of the IPTV, one of the users is AT&T and they are Lightspeed project and then we see some demand on other carriers as well in Europe and in North America.

A - Eli Gelman

To add to that without getting to the project specific information, usually when we have a large project with very large customers, we were working in phases so we may have some drops of softer in Phase I and then we are getting additional orders to face through and so on and so forth, usually in these type of customers we may see additional growth of business throughout the years.

Q - Tom Roderick

Very good, thank you very much.

A – Dov Baharav

Thank you.

Operator

We will go to Mike Latimore with Raymond James.

Q – Mike Latimore

Thanks. Can you report the percent of revenue that relate to managed services in the quarter, and then what do you think it will be for the year?

A - Ron Moskovitz

We can provide the number for the year but in the last quarter it was slightly above 35%.

Q – Mike Latimore

Okay. And then on DST, can you break that revenue out still as a percent and then when do you think you will start seeing some sequential growth in that business?

A - Dov Baharav

We have some sequential growth, the cable business this quarter was around approximately 10% of the business.

Q - Mike Latimore

And you did see some sequential growth in this quarter?

A - Dov Baharav

Yes.

A - Ron Moskovitz

Mike, I just wanted to add to the question on the cable, as Dov mentioned, we see a great traction and receptiveness of the customers to revise a roadmap that Amdocs can offer today, as you know in North America specifically, this it has some gain, so it takes some time to gain new customers but we believe that with the superior offering that we will have, we will start generating new business, significantly business in the future and we have in the pipeline today several opportunities that we are walking on.

Q - Mike Latimore

Just on that point within North America market, is the receptivity to new applications or is it you know for you guys to take over certain additional regions?

A - Dov Baharav

Potentially both.

Q - Mike Latimore

Okay thanks.

Operator

And Julie Santoriello for Morgan Stanley has her next question.

Q - Julie Santoriello

Thank you. I am wondering about revenue generally on the Sprint Nextel contract, if we were to look at the original the Nextel contract, roughly $250 million in revenue per year. If we were to look at that on a first-come first-serve basis, do we imply that type of pricing to the new deal? And what may have changed with this new larger arrangement?

A – Dov Baharav

Julie, we cannot disclose the specific pricing of this deal, as we said that you know the impact is included in our numbers for 2006 and 2007 and going forward we expect increase in the revenue and the earnings coming from this business.

Q - Julie Santoriello

Okay from modelling purposes then we should be looking at fiscal 2008 as a year when you are out of full run rate in terms of revenue and profitability on that contract?

A – Dov Baharav

Not necessarily, we are going to see, we are talking about 46 million subscribers customer and growing, so this business is growing, and we expect to see additional activity and with the excellent delivery that we expect to bring Sprint and Nextel, we expect to see a further growth in the business, but for me subscribers’ viewpoint we expect starting 2008 with the entire subscriber base on our systems.

A - Julie Santoriello

Okay, if I can get just one more general question, Amdocs is only serving itself as a company, at times it goes to companies for the carriers in consolidation. I know that the two big ones had been wireless customers but there are two out there on the wireline side that maybe you are looking to do some integration, now you are seeing Verizon and CI an STC, AT&T, are there specific opportunities for Amdocs with any of those carriers and consolidation?

A - Dov Baharav

Julie, we cannot provide a lot of data but I can assure you that the other opportunity that we were talking about in some way in our pipeline.

A - Julie Santoriello

Okay thank you.

Operator

Once again ladies and gentlemen, we ask that you limit your questions to one question with a follow-up question. Our next question comes from Julian Bu with Lehman Brothers.

Q – Julian Bu

Hi thanks. First question, on the Sprint contract, does that cover also the CRM part?

A – Dov Baharav

That the call center is what referred to is the CRM part yes.

Q – Julian Bu

So Sprint will use the Amdocs CRM?

A - Dov Baharav

Across their line of businesses, yes.

Q – Julian Bu

Okay. And also the second question, the backlog increase is 20 million this quarter, it seems it is relatively small, I guess you know you had been talking about you know in our wins each quarter, how come we are not seeing, do you see the increase in backlog?

A - Dov Baharav

You know we are getting the first quarter with $1.8 billion backlog for the next 12 months, which positions us well and for the growth in achieving those numbers in 2006. In addition to that we are very strong in the next set of opportunities in our pipeline, so we expect that you know reasonable number of opportunities we translate into wins and into backlogs. Now the way we are crossing our focus are based on many factors and backlog is only one of them, so its bottomline forces and when we provide the guidance, then we provide the expectation for growth, we take into account what we see in the business and the profit level of our business leaders.

Q – Julian Bu

Okay if I could get into the last one, on the MA front, I know you had been looking at the OSS space for sometime, I guess are you not finding anything interesting or you know is the evaluations not right, what’s kind of holding you back?

A – Dov Baharav

Julian, we are looking at quite large number of areas including OSS, and the only thing I can tell you is that we will be more than happy as we did in the past to share with you targets so that it is appropriate for Amdocs to support its strategy.

Q – Julian Bu

Okay thanks a lot, congratulations in the quarter.

A – Dov Baharav

Thank you Julian.

A - Ron Moskovitz

Thank you.

Operator

Our next question comes from Peter Jacobson with Kaufman Brothers.

Q – Peter Jacobson

Thank you. Just a little more in terms of the market opportunity commented on a tremendous amount of activity, can you review what you see as far as the size of the addressable market, and maybe the characteristics of what’s happening with Legacy System conversions? And additionally there are only so many Sprints and Bell Canada’s and Telstar is out there, do you see any signs in the foreseeable future of maybe its getting more challenging to find these large deals?

A – Dov Baharav

Peter, we see that the market is growing through substantial consummation. The wireline companies feel that they have to find an alternative revenue sources to their traditional growth revenue. As a result we see Telstar unfortunately we chose Accenture, trying to grow through a full transformation and as we see which turn to be AT&T, its going through a full transformation, actually moved to the Lightspeed project that based on Amdocs platform, and British Telecom is new in completely in the business model. And then we have a substantial presence there. So and we have in our pipeline several prospects of wireline companies and wireless companies that claiming to go through transformation to be able to be successful in these IP-based eon. We are set to launch many new services in very short time for a very low cost, so some of the wins this quarter was the result of it, some of them in Europe, and looking forward we are encouraged in our pipeline that this trend of the industry of moving to IP broadband services for consolidation and conversions is positioning Amdocs in a unique place where we have a unique capability to support these consolidated converging large carriers.

Q – Peter Jacobson

Okay thank you.

A – Dov Baharav

Thank you.

Operator

The next question comes from Shaul Eval with CIBC World Markets.

Q – Shaul Eval

Thank you, good evening Dov, congratulations on the Sprint and Nextel good quarter and guidance.

A – Dov Baharav

Thank you.

Q – Shaul Eval

One quick question from me, Eli, if you look into your robust pipeline of opportunities, can you share with us kind of the geographic breakdown to some extent, are the opportunities for ’06 coming mainly from Europe or feel that the majority is coming from the US?

A – Eli Gelman

Well I would say that from both, unfortunately and maybe actually fortunately, Sprint moved from the pipeline to the reality, so we lost in the pipeline but we do have…

Q – Shaul Eval

And we like it.

A – Eli Gelman

And we like it this way, the purpose of the whole selling process and but seriously we have in North America significant opportunities and some of the carriers that are converging some carriers that are looking for modernizing the systems both on the wireline and the wireless, on the cable and satellite industry so we have quite a few prospects in our pipeline from North America. We have many prospects in the rest of the world, Western Europe, Eastern Europe, Russia, Asia Pacific, and on top of it we have quite a few opportunities in the directories business. So it is diversified and coming from different geographies and for different type of applications.

Q – Shaul Eval

Fair enough, and just quickly if I may a final question with Longshine specifically on China, have you seen actual progress since you have acquired the company?

A – Dov Baharav

Yes we feel and much more confident today that we can achieve our goals in China in comparison to what we feel before we acquired Longshine. I personally think that China met some of the leaders of our customers, talk to our people and we feel that we have a good company there, and it is aligned already with Amdocs activity. Customers express a lot of interest in Amdocs offering and reinforced strengths of Longshine with the help of Amdocs, so we are to a good start in China. Now it is not going to be so easy, there is a lot of differences in culture, in the way business is conducted in China, and with the help of 900 people of Longshine and external presence of Longshine in the Chinese market, and with Amdocs offering the products and services we believe that we can grow the business successfully in China.

Q – Shaul Eval

Alright, thank you very much, good luck again, congratulations.

A – Dov Baharav

Thank you.

A - Ron Moskovitz

Thank you.

Operator

And Scott Sutherland with Wedbush Morgan Securities have your next question.

Q – Scott Sutherland

Thank you, good afternoon and congratulations on the Sprint deal and the quarter.

A – Dov Baharav

Thank you.

A - Ron Moskovitz

Thank you.

Q – Scott Sutherland

Talking on the Sprint deal, given that you had some upside this quarter, your tax rates helping you by couple of cents, you know I have raised the topline by a couple of pennies, are you assuming like few pennies of dilution that you ramp-up for the Sprint deals this year, and getting quite a deal as you add subscribers over the next year and a half, should you see revenue ramping from Sprint, you know through this the earnings ’07 quarter-by-quarter?

A – Dov Baharav

As for the first question, first of all yes we have got some, you know, in addition to the EPS of the year of couple of expense as you mentioned but on top of that from, you know, internal many changes in the numbers that it brings us to the new guidance, but we cannot refer specifically today to the impact of Sprint and Nextel, it is included in the numbers. As for the growth of the specific quarter-by-quarter growth of the revenue, we will have to wait through the next quarter to get more details.

Q – Scott Sutherland

I just suppose in a general sense as they migrate subscribers, I mean you know whether more part or another should have ramp-up as the subscribers converted, whether it finishes earlier or later than the end of ’07?

A - Dov Baharav

In general yes.

Q – Scott Sutherland

Okay great, my second question was a couple of your competitors have been talking about more about the real-time converged billing, the wireless market accompanied with a couple of wins, can you talk about how you believe Amdocs is positioned there and maybe any you know case examples you have been successful out there?

A – Dov Baharav

Well, you know we wrote the book on real-time rating and real-time billing, so for this extent we have today customers that are using both our systems for voice and data, prepaid and postpaid in real-time mode, several of them are in production, few of them are in process of being constructed as we speak, and also we have few in the pipeline, so I would imagine that people are reading our book.

Q – Scott Sutherland

Okay that’s it, thank you.

A – Dov Baharav

Thank you

A - Ron Moskovitz

Thank you.

Operator

Tal Liani with Merrill Lynch has the next question.

Q – Tal Liani

Hi guys two follow-ups. Tax rate was 18%, this is 20% last quarter, can you explain this, and also in your guidance, you have said 222 in shares, you had 214 this quarter, and its going down the last year, when do you expect it to go up? Thanks.

A - Ron Moskovitz

As for the tax rate, we see a trend over the last several years over the reduction of tax rate, and this is a result of our geographic distribution and moving more and more to low tax jurisdictions in terms of the employee base and intellectual property help us to achieve this and to reduce the tax rate, and then we tended to believe into to reduce it further. As for share count, the main reason we guided for Q1 about 120 medium shares we achieved more less than 215, the main reason for that was the relatively low price of the share that during the quarter which effect the treasury a stock method that you – upon which you calculate the impact of this the employee stock option. Now entering Q2 with higher share price than expecting, as I think all of us expect our share price throughout the end of the year and that should create some negative impact on the amount of the shares for the basis of the EPS facilitation.

Q – Tal Liani

One other question, you mentioned that the new contract may impact the second half of the gross margin, but on the operating margin level no changes expected. Now the question is, how quick can you really cut expenses to offset the margin pressure, are we going to see any lag between the quarter where you see gross margin going down and expenses going down, or it is going to be the same quarter?

A - Ron Moskovitz

We broke down necessarily to cut expenses since the company is growing, we have leveraged on the R&D and SG&A. Specifically we had some ramp in SG&A this quarter, we have increased, some of which is not going to repeat itself, so we will be able to without reducing some R&D, without doing real task in SG&A to create some leverage and to offset the pressure on the gross margin.

Q – Tal Liani

Thank you.

A - Ron Moskovitz

Thank you Tal.

Operator

And our next question comes from Daniel Meron with RBC Capital Markets.

Q – Daniel Meron

Hi, congrats on winning the Sprint Nextel this quarter, couple of questions here. You had a spike in license revenue, can you explain that, also Ron maybe you can refer to the spike in receivables this quarter, and the drop in free cash flow?

A – Ron Moskovitz

For license say, you know license is by its nature is relatively we had over the years ups and downs, this quarter we had some, you know some project licenses that we were able to recognize with some subsequent licensing activity. And you know we were able to recognize some licenses that we got in the past in the very large deals. As for the cash flow and the receivables, we had you know although the last couple of years, say DSO moved between 48 to 55 days, and we had this kind of ups and downs, so we view this increase in the quarter as normal. And this is the main reason for the reduction in the cash flow compared to the previous quarters, just keep in mind that the previous quarter was a record high cash flow for the quarter, and basically the cash flow of this quarter were in similar to the quarters before that.

Q – Daniel Meron

Thanks Ron. And just to affirm the backlog number that you gave was $1.9 billion, right?

A – Ron Moskovitz

1.8.

Q – Daniel Meron

1.8, okay. And, does this – it seems that’s why this quarter number does not include anything from Sprint and Nextel, so we should see it in the March quarter?

A – Ron Moskovitz

That’s exactly.

Q – Daniel Meron

Okay thank you Ron, good luck going forward.

A – Ron Moskovitz

Thank you.

A – Dov Baharav

Thank you.

Operator

Thank you, that does concludes today’s question and answer session and I would like to turn the conference back over to the Amdocs speakers.

Thomas G. O'Brien, Vice President of Investor Relations

Okay thank you very much, and on behalf of the company thanks to everyone for attending the call today and for your support in the company. This concludes the call.

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Source: Amdocs F1Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (DOX)
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