Amdocs Offers Long-Term Opportunity

| About: Amdocs Ltd (DOX)
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Amdocs Limited (NYSE:DOX) is a global provider of integrated revenue and customer management solutions to telecom service providers. The customer base ranges from America Movil to XL Axiata and includes both AT&T and Verizon Communications.

The company is based in Missouri, but it has a significant presence in both Israel and India. In Israel, the R&D centers are located in three different sites throughout the country, and approximately 24% of the company's software and information technology, sales and marketing workforce is located in Israel. Additionally, Amdocs has placed another 36% of their software and technology, sales and marketing workforce at multiple sites in India.


Amdocs has a fiscal year ending September 30th. The fourth quarter saw revenues rise to $822.1 million or 1.2% year-over-year and 1.6% sequentially. Earlier in the year, the company had provided guidance of $815-$835 million. Revenues for F12 were $3,246.9 million compared to $3,177.7 million in F11 or 2.2% higher.

In the quarter, service revenue was $798.1 million, up 2.24% year-over-year. License revenue was down 24% to $24.0 million.

By product line, the CES product revenue was $783.1 million, up 4.9% and Directory revenue was $39.0 million.

Most of the company's sales are to North America. In the fourth quarter,

North America $570.4 million 69.4%
Europe $113.1 million 13.8%
Rest of World $ 99.9 million 12.2%

In comparison,

FY2011 FY2010 FY2009
North America 73.4% 75.8% 75.3%
Europe 12.7% 11.8% 13.8%
Rest of World 13.9% 12.4% 10.9%

We are seeing a slow but perceptible realignment in sales from North America to the developing world. We can expect this trend to continue with greater telecom penetration in the developing world. This shift is a positive development as Amdocs is overly dependent on AT&T, Bell Canada and Sprint Nextel.

In 4Q12, operating income was $113.5 million, up 8.6% year-over-year and net income was $98.0 million, up 12.1% compared to the year earlier period. EPS continuing-diluted was $0.60 or 22.4% higher year-over-year. For the year, EPS continuing-diluted grew by 24.2% to $2.31 per share.

The gross margin for F12 expanded by 90 basis points to 35.8%; and the operating margin also expanded by 90 basis points to 13.6%. The five year average gross margin is 35.7% and the five year average operating margin is 13.1%.

In a press release, the company stated that it had a $2.79 billion backlog at the end of 4Q12, up $30 million from the end of 3Q12. Amdocs provides the following guidance:

1Q13 Revenue $810-$840 million

1Q13 Non-GAAP Diluted EPS $0.68-$0.74

Analyst estimates for FY2013 revenue run from $3,338.22 million to $3,381.68 million and average $3,357.52 million. The consensus revenue number represents a 3.4% increase over FY12. The FY14 range is $3,437.25 to $3,533.86 and average $3,490.94.

The analysts also forecast EPS of $2.91 for 2013 and $3.13 for 2014.


At the end of FY12, the company reported cash of $1,118.2 million and no long term debt. In prior years, it also reported no off-balance sheet liabilities. Accounts receivable jumped $21.45 million to $687.2 million. Receivables turnover slipped to 5.2X from 5.5X. Book value increased by 1.5% to $18.03 per share.


The company authorized an open ended share repurchase program of an additional $500 million. This is on top of the existing repurchase authorization which has $203 million remaining. Since FY11, the company repurchased 16.938 million shares or 8.3% of common shares outstanding.

The company also has an indicated dividend of $0.52 per share producing, at the current share price, a 1.6% yield.

In total, the company is producing a shareholder return of 9.9%.


The company's Return on Equity of 13.0% is above the industry's median of 9.0%. Amdocs has a Return on Invested capital of 14.58% which is twice as high as the industry median of 7.3%. The company's Cash return on Invested Capital, at 12.92%, is shy of the industry median of 13.21%.

Amdocs has a trailing PE of 14.5X which is a 34% discount to the industry median and a forward PE of 11.5X which is 37% less than the industry median. The industry median PSR is 1.89X whereas Amdocs is trading at 1.68X sales. The market is assigning a 27% discount to Amdocs based on Price-to-Book.

The discount is also evident when looking at enterprise value based metrics. The EV/EBITDA ratio for Amdocs is 7.57 when the industry median is 12.69. Amdocs has an EV/Sales ratio of 1.4 and the industry median is 1.86.

Analyst long term EPS growth estimates range from 7.8% to 10.0% and average 9.3%. The industry median long term EPS growth estimate is 17.5%.


Amdocs runs a very substantial amount of its business from some very nasty neighborhoods. The Middle East and India pose certain geopolitical risks that other venues do not.

On the other hand, the company is decreasing its dependence on just a few large customers and diversifying out of North America and Europe and into the Third World, where growth opportunities abound. The company is financially very sound.

The deep discount the market is giving to Amdocs now creates a buying opportunity for a long term holding. If the company were to trade at its five year average PE of 15.5 times next year's estimated earnings, the share price would be about $45 or 35% higher than it is today. With share buy backs, a nice dividend and potential PE expansion, Amdocs looks like a good investment.

Disclosure: I am long DOX. 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.