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Why Amdocs (DOX) Is Now In Financial Decline, Using Aggressive Methods To Obscure Its Problems, And Has 25%-50% Downside Risk

|About: Amdocs Ltd (DOX), Includes: CSGS, S, T, TMUS, VOD
Summary

DOX, a provider of teleco billing solutions, has AT&T as a 30% customer. Industry pressures are causing organic growth to decline, margins to be strained, and cash flow to contract.

DOX collapsed years ago after the dotcom bust under allegations of financial impropriety. We see see many similarities to the charges then vs. now.

Margins are unusually stable. DOX appears to be overcapitalizing software development costs and using aggressive PoC and tax accounting to inflate results.

Insiders own 1.5% of the stock and are selling through an entity named in the panama papers/tax dodge. It appears mgmt is concealing granting itself ITM options, a bearish sign.

We see 25%-50% downside risk on our normalized results, and when applying a multiple commensurate with DOX being a declining BPO to.

In 2019, Spruce Point is celebrating its 10 year anniversary. By adding fresh and unique forensic research perspectives that challenged the traditional "Buy" conclusion for every public equity, we have worked hard to democratize investment research, and hold overly bullish analysts, lax auditors, and greedy corporate managers accountable for their actions. We are extremely pleased to have delivered alpha-generating research that has resulted in the resignation or departure of 14 CEOs of multibillion dollar companies following our critical research investigations. We would like to thank all our loyal readers and Seeking Alpha for helping us change the game for investors for investment research. We look forward with cheerful optimism about what the next 10 years will bring. 

Report Entitled "Re-DOX of Dot.com Stock Collapse?"

Spruce Point is pleased to issue a critical forensic "Strong Sell" report on Amdocs, Ltd. (NYSE: DOX or “the Company”) - an opaque company incorporated in the dodgy tax haven of Guernesy, founded in Israel, and headquartered in the United States. Given the Company's significant exposure to AT&T (T) and the troubled telecom industry (S, VOD, TMUS, TEF) we believe its unusually margin stability and growing Non-GAAP earnings belie the fact that it is now struggling to generate cash flow, as evidenced by its non-transparent factoring of accounts receivables and joint venture loans.

Our report will unravel DOX's wasteful M&A strategy to bolster sales and earnings with aggressive use of percentage-of-completion and software development cost capitalization, and repeated one-off net tax benefits. With insider ownership at an all-time low, evidence that management is milking DOX’s cash through aggressive option comp schemes, and past allegations of improprieties by various Board members tied to option back-dating and software cost capitalization, we believe shareholders should be increasingly vigilant about the means with which DOX has gone to engineer consistent financial results, and its decision to construct a new Israeli headquarters, while providing inconsistent disclosures about the true cost.

As a result, we see 25%-50% intermediate downside risk to $30.00-$45.00 per share, as investors come to terms with the fact that DOX is at best a no growth company, and at worst in its decline. We believe that DOX should not trade at a material premium to midcap technology and business process outsourcing peers (eg. G, WNS, EXLS, CSGS, TTEC, SYKE) as a result of its cryptic and complex structure, below average growth, questionable accounting methods, and heightened governance concerns.

Our detailed research report is available on our website. We also encourage all of our readers to follow us on Twitter @sprucepointcap for regular updates. Please review our disclaimer at the bottom.

Thank you very much for your continued interest in our investment research. 

This research presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation Amdocs, Ltd. (“DOX”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Spruce Point Capital Management does not undertake to update this report or any information contained herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.

This research presentation expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence, with assistance from professional financial, legal and tax experts, before making any investment decision with respect to securities covered herein. All figures assumed to be in US Dollars, unless specified otherwise.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of DOX or other insiders of DOX that has not been publicly disclosed by DOX. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.

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Disclosure: I am/we are short DOX.