Amdocs: Healthy Financials, Robust Pipeline Make It A Buy

| About: Amdocs Ltd (DOX)
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Amdocs Ltd (NYSE:DOX), is a leading provider of customer relationship management [CRM] and billing software to communications service providers. The company began as a manufacturer of telephone directory publishing technologies in Israel.

It has since completed several well-timed acquisitions including ITDS (in 1999), Solect (in 2000), Clarify (from Nortel (NT) in 2001) and Certen (from its partner, Bell Canada, in 2003). All of these acquisitions complemented its original business. Most importantly, Amdocs has successfully combined its core billing and rating technology with Clarify s customer relationship management software to emerge as a leader in business support systems. The company also acquired XACCT (in 2004), DST Innovis (in July 2005) and Longshine Information Technology (in August 2005).

On April, 2006, the company purchased QPass, which established Amdocs as the market leader in the digital content segment. In August, 2006, Amdocs acquired Cramer Systems Group Ltd, a well known provider of Operating Support System solutions with more than 80 large customers, worldwide. Through this acquisition, Amdocs became a unique vendor as it can provide both end-to-end business support solutions and operating support solutions to the carrier marketplace. The company derives approximately 60% of its revenue from wireless carriers, 20% from wireline carriers, and 20% from broadband Internet Service Providers [ISPs].

Investment Thesis
Innovative Strategy: Amdocs is a beneficiary of the long-term trend toward information technology [IT] outsourcing. The firm's principle marketing efforts continue to be targeted towards leading companies in the communications sector. By offering a total systems solution, consisting of its integrated customer management products along with its specialized services, Amdocs has been able to steadily gain market share against a handful of competitors. Armed with a healthy backlog of contracts and a solid pipeline of potential deals, the company has continued to foster robust growth since 2005. Favorable

Industry Trend:
Amdocs is well positioned in the market as carriers sell bundled and converged IP-based network solutions to their subscribers. These services include cable, wireline, wireless, and high-speed Internet access solutions. As order sizes became larger, carriers started spending more on customer care and billing software.

Implementation of integrated customer management systems is essential in order to prevent customer churn at carriers. Amdocs has the largest customer base and the broadest product line in the industry, including a full suit of end-to-end solutions for both Business Support Systems [BSS] and Operations Support Systems [OSS]. Amdocs is also winning more than its fair share of contracts as carriers portentously deploy 3G wireless technology.

Consolidated Position: While industry consolidation can frequently have an unpleasant ripple effect on suppliers, Amdocs could actually benefit from the recent wave of telecom mergers. The reason is that the company already has relationships with most of the acquiring companies. This puts the company in a visible position to displace smaller vendors when the various disparate billing systems are ultimately combined.

Large carriers, including AT&T (NYSE:T) and Sprint-Nextel (NYSE:S), remain customers of Amdocs even after their continued mergers with other established carriers. Beyond consolidation, the company also has been successful with extending contracts at Bell Canada, DIRECTV, and Alltel Wireless.

Continued Growth: During the second quarter, Amdocs was awarded a series of new key contracts in several international markets. In the U.S., Amdocs entered into a seven-year managed services agreement with AT&T, the largest telecom service provider in North America, to provide application management services in support of AT&T s legacy ordering and wholesale platforms. Furthermore, the company won contracts for broadband cable and satellite deployments, non-telecom CRM solutions, and license and services projects for OSS business segments in several countries.

New Vertical Market Segments:
Amdocs has established its leadership position in the digital-content market through the acquisition of Qpass. This segment has more than 180 million customers and processed more than 400 million downloads of games, ring-tones, and videos. The acquisition of Cramer System has also made the company the only service provider in the industry that provides end-to-end service fulfillment solutions to the telecom carriers for efficient and cost effective OSS delivery.

Cramer has a long list of clients, which includes Vodafone, Bell Canada, and TDC. Amdocs is aiming to support large-scale OSS transformation projects with the help of Cramer s product portfolio. Its other acquisition of SigValue has significantly expanded Amdocs presence in the emerging markets of Eastern Europe, Africa, Latin America and Asia, where the telecommunications customer base is predominantly composed of mobile pre-paid subscribers. Beyond telecom opportunities, the company has successfully entered the financial services sector, where it expects to generate $30 million to $60 million of incremental revenue within the first year.


The 2007 outlook for the telecommunications industry has become more favorable. The fundamental downturn may have reached a bottom, as telecommunication companies reduced spending and improved operating performance over the past several quarters. In addition, telecommunications companies continue to be the largest group in terms of Mergers and Acquisitions.

Consolidation among the largest telecommunications services-focused companies has created an environment where equipment-focused companies now interact, on a relative basis, with less customers and reduced selling opportunities. This has incubated consolidation among equipment companies as well to enhance marketing value by broadening product offerings for converged wireless and wireline networks.

Nevertheless, the economic scale of consolidated telecom service companies is creating pricing pressure and margin erosion potential as equipment companies contend for contracts based on pricing and features. Long-term growth prospects for the sector are not nearly as favorable as in the early part of 2000, but are more attractive than in 2006, with continued consolidation expected.

While telecom carriers plan to increase capital expenditures in 2007, they will be more selective on technology choices and identify cost savings synergies, such as streamlining purchasing arrangements and limiting the number of preferred vendors. In addition, shareholders continue to foster an environment where executives are held accountable to focus more on balance sheet improvements, financial discipline and improving free cash flow. This promotes greater diligence in investment decisions for long
term growth initiatives.

Unfortunately for the equipment vendors, the conservative nature of tightened capital outlay remains the method of choice for improving free cash flow. In recognition of spending constraints by carriers, telecom equipment vendors have already prepared by slashing expenses also in response to the previous protracted industry downturn. Now that expenses are under control and productivity is at higher levels, profit margins, in general, are expected to respond rapidly even with a modest pickup in demand. Companies that offer the most opportunities are focused on third-generation [3G] wireless, broadband [DSL] and fiber-to-the-home/node networking. There are also a few market leaders that have proven able to survive the sometimes turbulent opportunity swings in the industry. Presently, the telecommunications equipment industry has a Zacks Industry Rank of 3.14, which places it 150th out of more than 200 industries.

Amdocs is the dominant provider of customer care and billing systems to the telecom industry. However, the company is a relatively minor supplier of billing systems for the cable industry. It also lags Siebel Systems and several others in non-telecom customer relationship management software.

Amdocs competes with several independent providers of information systems and services, including Convergys (NYSE:CVG), CSG Systems International (NASDAQ:CSGS), Portal Software (PRSF), and Siebel Systems (SEBL), as well as with system integrators and providers of managed services solutions, such as EDS. The company also contends, in some cases, with its customers internal information systems departments of large communication companies.

Second Quarter of Fiscal 2007 Highlights: On April 26, Amdocs announced impressive fiscal second quarter 2007 earnings results. Total revenue of $706 million was up 18% from the year ago quarter and up 2.2% sequentially. The company mostly benefited from continued telecom carrier consolidation which is directing service providers to move towards converged networks. Gross margin, on a GAAP basis was 36.6% compared to 35.2% in the prior year quarter.

On a GAAP basis, net income was approximately $87.2 million or an income of $0.40 per diluted share in the reported quarter, compared to a net income of $81.8 million or an income of $0.38 per diluted share in the prior-year quarter. The solid results were driven by stable recurring revenue from existing clients, as well as a number of important contract extensions and new business wins. In the reported quarter, Amdocs incurred a charge of $18.9 million as amortization of purchased intangibles, and another $6.8 million related to restructuring charges for in-process R&D activities.

Adjusted diluted EPS was $0.50. Operating cash flow in the third quarter was $91.2 million. Capital expenditure in the same quarter was $33.3 million, resulting in a free cash flow of $57.9 million. Segment wise, License revenue was $37.53 million, up 23.9% over prior year quarter. Service revenue was $668.84 million, up 17.2% over prior year quarter. Management Outlook for the Third Quarter of 2007 Amdocs management is expecting third quarter 2007 revenue to be within the range of $710 million -$720 million.

Diluted non-GAAP EPS, excluding acquisition-related cost and equity based compensation, is forecasted within the range of $0.50-$0.52. Equity based compensation is expected at approximately $0.05-$0.06 per diluted share. On a GAAP basis, diluted EPS of $0.38-$0.41 has been guided. Management Outlook for the Full Year 2007 For full year 2007, management is expecting total revenue to be within the range of $2.83 billion-$2.91 billion. Diluted non-GAAP EPS, excluding acquisition related cost and equity based compensation, is approximated at $2.02-$2.12. After including equity based compensation expenses of $0.21-$0.24 per diluted share and other items, EPS is expected to be approximately $1.54-$1.68.

Amdocs is currently trading at 17.9x our estimate for fiscal year 2007 earnings. This is at a premium to the forward P/E of the S&P 500 average, but mostly in line with the peer group average. However, with respect to other selected valuation metrics, the stock is trading at a premium. According to our assessment, a modest reduction in orders from some large carriers is a temporary setback and may represent a compelling buying opportunity. The long-term fundamentals of the company are quite strong. The business software & services market remains robust as a pickup in spending by large carriers, to prevent customer churn, will ultimately translate into higher revenue for Amdocs. Therefore, we raised our target price to $42 which is based on a forward P/E ratio of 20.5x to our estimate for fiscal 2007 earnings.

Since Amdocs is already the leading supplier in the telecom billing and customer care market, additional market share gains may be difficult to achieve as other vendors compete on price. Delays in related OSS transformation projects by leading carriers may result in revenue that may deviate from our projections. The company s entrance into other business segments, such as financial services outsourcing and non-telecom customer relationship management software, may be less successful than anticipated. Amdocs is dependent on a handful of large customers such as, Sprint/Nextel and its subsidiaries, AT&T and Bell Canada. If it loses any of these customers, the company s earnings may be impacted.

Macroeconomic factors, including increased budget deficits, higher interest rates, and other fiscal and monetary conditions, may have a negative impact on the valuations of public companies in the equity markets.

According to SEC filings and NASDAQ links, there have been no insider trading transactions listed for this security over the past one year.


  • As the leading supplier of billing and customer care software to the telecom industry, Amdocs is likely to benefit from the telecom carrier industry s long-term trend towards more consolidated and convergence projects.
  • Amdocs has become the market leader in the digital-content management market. In addition, the acquisition of Cramer Systems Group Ltd has positioned the company as a unique vendor who can provide end-to-end solutions for both business support and operations support systems.
  • During the second quarter, the company was awarded a series of major contracts including a managed service contract for 7 years with AT&T. In addition, OSS and non-telecom customer relationship management [CRM] businesses are getting more market traction in both the U.S. and Europe.
  • Recent acquisition of SigValue has significantly expanded Amdocs presence in the emerging markets of Eastern Europe, Africa, Latin America and Asia.
  • The company generates healthy profit margins and strong cash flow, while efficiently managing capital intensive operations. The balance sheet remains strong, with $1,039 million of cash and cash equivalent and $450 million of mostly low-cost convertible debt. At the end of the second quarter, the company had more than $2.11 billion in order back-log.

    Amdocs Ltd, a leading provider of CRM and billing software to telecom carriers, announced better than expected financial results for the second quarter (ended March) of fiscal 2007. As carriers started implementing large transformation projects to provide converged and consolidated network solutions, Amdocs is expected to benefit significantly. Demand for the company's customer care software remains buoyant as carriers increasingly provide bundled IP-based communications solutions.

    Amdocs maintains its leadership position in the digital-content and Operating Support System markets for the carrier segment. We maintain our Buy recommendation in recognition of the company's healthy financial position, strong order backlog, robust pipeline, and major new contracts recently consummated on a global basis.

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