Amdocs Ltd.
/
(DOX-NYSE)
/ $36.25

Note: All new or revised material since the last report ishighlighted.

Reason for Report: 2Q13 Earnings Update

Prev. Ed.Feb12, 2013; 1Q13Earnings Update

Brokers’ Recommendations: Positive: 30.0% (3 analysts); Neutral: 70.0% (7); Negative: 0.0% (0) Prev. Ed.:5; 6, 0

Brokers’ Target Price:$38.29(↑ $0.91 from the last edition; 7 analysts)Brokers’ Avg. Expected Return: 5.63%

Portfolio Manager Executive Summary

Formed in 1982, Amdocs Limited (DOX or the company) is a leading provider of customer relationship management (CRM) and is involved in billing software to communications service providers. The company began as a manufacturer of telephone directory publishing technologies in Israel. 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.

Key factors for evaluating an investment strategy for DOX are as follows:

  • Amdocsis the market leader in the digital-content management market.The recent acquisition of MX Telecom has further strengthened its position in the segment. In addition, the company has positioned itself as a unique vendor providing end-to-end solutions for both business support and operations support systems.
  • Amdocs demonstrates momentum in key markets including broadband, licensed software,OSS (operations support systems), managed services, and emerging markets.
  • Amdocs has a robust pipeline targeting both wireline and wireless carriers, cable TV operators, and satellite communications service providers.

Amdocs is also the largest provider of services to Yellow Page directory companies.

  • Recent acquisitions and internal developments (including the new platform Amdocs CES 8) have collectively broadened Amdocs' product line so that it could offer billing, CRM, operations support systems, and digital content-related products and services.
  • Amdocs maintains a good customer retention strategy with its big clients such as AT&T, Sprint-Nextel, andBellCanada,etc.
  • Amdocs is significantly benefiting from its market leading position amid the current transformational phase in the telecom and cable sectors.

Competitive Position: Amdocs is a leading provider of customer care and billing systems to the telecom industry. However, the company is a relatively small supplier of billing systems for the cable industry. Amdocs competes with several independent suppliers of information systems and services, including Convergys (CVG), CSG Systems International (CSGS), Portal Software (PRSF), and Siebel Systems (SEBL).

Analysts’ Opinion: Out of the 10 analysts,30.0% of theanalysts arepositive while the remaining70.0% remainneutral on the stock.Target priceranges from a low of $35.00 to a high of $40.00, with the average at $38.29.Theanalystsexpect a return of 5.63%from the stock based on the current price.

Bullish Stance – (Equivalent ratings: Buy, Outperform and Overweight) – 3analysts or 30.0% –

These analystsexpect the stock to perform wellbased on itsleadershipposition in the BSS and OSS segments encouraging performances in North America and continued progress in emerging markets. They remain optimistic about the strong deal flow from the emerging market, improvementof spending at AT&T and higher usage of mobile data leading to increased demand for the company’s billing products.Furthermore, DOX’s strong cashflowcoupled with its focus on increasing theshareholders’ return through dividend payouts and share buybackscompel the analysts to maintain their bullish stance.

Neutral Stance – (Equivalent ratings: Hold, Market Perform and Neutral) –7analysts or 70.0% –

These analysts remain skeptical about the macroeconomic weakness in Europe and expect growth to remain restrained in FY13. They do not expect any margin expansion from the emerging markets until the large carrier deals materializes. However, the analysts remain optimistic about improved IT spending from its largest customer AT&T Inc. (T), new service capacities, improved macroeconomic fundamentals in North America and solid demand trend in the emerging markets and thus prefer to remain neutral.

General Long-TermOutlook: Amdocs is expected to sustain its leading position in the industry with a number of projects in the pipeline from wireless, wireline, broadband and cable carriers. The company’s bottomline is also expected to improve based on its ongoing buyback strategy, which will enable it to trade at a premium relative to the other service providers in the industry.

May 15, 2013

Overview

Based in Chesterfield, Mo., Amdocs Limited (DOX or the company) provides software and services solutions to service providers worldwide. It offers customer relationship management, order management, service fulfillment, mediation, and content revenue management products, collectively known as integrated customer management (ICM) enabling systems. These ICM enabling systems support various lines of businesses, including wireline, wireless, cable, and satellite, as well as a range of communications services, such as voice, video, data, Internet protocol, broadband, content, electronic, and mobile commerce.

Amdocs also supports companies, which offer bundled or convergent service packages. In addition, it provides directory sales and publishing systems for publishers of both traditional printed yellow page and white page directories, and electronic Internet directories. The company’s information technology services comprise consulting, business strategy, system implementation, training, integration, and modification. Further, DOX provides managed services that include system modernization and consolidation, operation of data centers, ongoing support, maintenance services, system modification, provision of rating and billing services, and communications facility management services. Amdocs has over 19,000 employees and serves customers in more than 60 countries around the world. For more information about the company, please visit its website at .

Key investment considerations as identified by the brokerage firms are as follows:

Key Positive Arguments / Key Negative Arguments
  • The company is the largest provider of services to the yellow page directory companies.
  • Amdocs has one of the top billing products in the market, highlighted by the breadth of its solution. The company's customer relationship management (CRM) offering provides an additional competitive advantage.
  • Acquisitions and internal development have broadened DOX's product line, thus including billing, CRM, operations support system (OSS), and digital content related products and services.
  • In the case of Xacct, Amdocs acquired additional adjacent OSS technology of a long-standing partner with the acquisition of Cramer. The acquisition provides further disintermediation of systems integrators from Amdocs’s platform, and will also result in better utilization of Amdocs’ internal R&D, systems integration, and consulting staff.
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  • Amdocs’ foray into new areas, such as financial services outsourcing and non-telecom customer relationship management software, may be less successful than anticipated.
  • The company earns a substantial part of its revenues from customers like AT&T, Sprint-Nextel and BellCanada, losing any one of which might affect earnings.
  • Most of Amdocs’ customers are from the telecom industry, which is viewed as a risk.
  • Owing to the competitive position in the OSS and billing segment, the company could make aggressive pricing strategies, which could affect its operating margins.
  • Any violence in the Middle East and Israel could negatively impact the company as a healthy portion of its software and IT employees are based in Israel.
  • The company’s competitors might go for acquisitions to challenge the company’s leadership position.
  • Forex impact might hamper the near-term revenue outlook for the company.

Note: Amdocs’ Fiscal Year ends on Sep 30.

May 15, 2013

Long-Term Growth

The analysts expect DOX to perform reasonably well in North America,the emerging markets (Particularly Centraland Latin America) and the Asia-Pacific region, which will likely offset the temporary uncertainty in Europe.Mergers and acquisitions in the U.S. market are expected to create some short-term uncertainties, but will be beneficial for the company over the long haul. The analysts expect Europe to be a primary cause of concern for the company as the macroeconomic crisis is weighing heavily on the carriers as they are slowing down their spending. Management also cited that Europeis the biggest concern for DOX and does not expect any growth in 2013. However, analyst’s remain optimistic that DOX will get new business opportunities in Europe for its various products and services over the long term.

Amdocs is the market leader in Customer Experience System (CES) and has successfully launched CES version 9,which further adds to its already impressive product portfolio. The reason for its future success is its best-in-suite approach and ability to deliver fully-integrated services, which include BSS, OSS and network control domains.Additionally, the company has introduced Amdocs Compact Convergence (ACC) on the cloud, which meets the needs of small service providers and could be a significant growth driver for DOX’s BSS segment. Amdocs is expected to get leverage from the introduction of ‘Shared’ data plans from the large carriers particularly in policy management and the usage-based data service business. The customers are highly satisfied with the company’s integrated service offerings,compared to its peers.

The analysts believe that DOX merged well with Bridgewater and successfully launched the Data Experience Solution (DES),which supports the telecom carrier’smobile data growth.The company has signed a 5-year agreement with TIM Brazil, which is the first managed service contract for DOX in Latin America. Moreover, Telefonica SA (TEF) has selected DOX to implement its transformational program across Argentina which strengthens its managed service business in Latin America. According to management, these deals along with the signing of a 7-year agreement with Globe Telecom of Philippines and Claro of Chile will augment the long-term prospect of the company’s professional and managed service business. ]

Management believes that successful implementation of the Claro deal will allow DOX to expand its presence within the other group companies of America Movil.Recently, the company renewed a contract with Sprint Nextel Corp. (S) for the next seven years, providing solid long-term revenue visibility for DOX in North America.The analysts believe that good project backlog and execution of managed service in multiple markets auger well for the company.The company is well positioned to benefit from the recent convergence in the telecom, cable and satelliteindustry.

May 15, 2013

Target Price/Valuation

Provided below is a summary of target price and rating as compiled by Zacks Research Digest:

Rating Distribution
Positive / 30.0%
Neutral / 70.0%↑
Negative / 0.0%
Max Target Price / $40.00
Min Target Price / $35.00
Avg. Target Price / $38.29↑
Analysts w. Target Price/Total / 8/11

Risks to the price target are as follows:

  • Amdocs’ business is heavily dependent on a small group of leading serviceproviders such as BellCanada, Sprint-Nextel and AT&T.
  • The timing and postponement of major deals may impact DOX’s numbers and investor’s sentiment.
  • Acquiring and retaining skilled IT personnel and management are major issues with employee-intensive companies, such as Amdocs.
  • Other potential impediments to the price target are competition, strategy, execution, M&A integration risks and technological change.

May 15, 2013

Recent Events

On Apr 30, 2013, DOX announced its 2Q13 earnings results. In 2Q13, the total revenue was $832.9 million versus $808.9million in 2Q12butslightly belowthe Zacks Consensus Estimateof $836 million. 2Q13gross margin was 35.3% compared with 35.9% in 2Q12. 2Q13 EPS on a GAAP basis was $0.64compared with $0.60 in 2Q12.Pro forma EPS of $0.68was ahead of the Zacks Consensus Estimateof $0.66.

On Jan 30, 2013, Claro Chile, a subsidiary of America Movil S.A.B. de C.V., selected DOX to consolidate its business and operational support systems to speed up delivery of new services, enhance operational efficiency and improve customer experience.

On Nov 6, 2012, DOX announced that it has extended its managed service contract with Sprint-Nextel Corp. (S), the third-largest U.S. carrierfor the next seven years.

May 15, 2013

Revenue

As per the company press release and the Zacks Digest model, the total revenue was $832.9 million in 2Q13, up 3.0% y/y.The upside in revenues was on the back of solidperformancesinthe emerging markets, particularlyin Latin Americaand North America.

At the end of 2Q13, total order backlog was $2,810million compared with $2,725million at the end of2Q12.

Amdocs has two major revenue generating segments: License and Services.

Services(97.4% of2Q13 total revenue): Services revenuesin2Q13were $811.0million;up 3.6% y/y.

License (2.6% of 2Q13 total revenue): License revenues in 2Q13were $21.9 million;down16.5% y/y.

Customer Experience Systems revenues were $789.3 million, up 4% y/y. Directory revenues were $43.6 million, down 12.8% y/y. The company’s core Managed Services revenues came in at $439.8 million, up 6.1% y/y.

Geographically, North America generated $601.3 million, up6.8% y/y; Europe generated $99.3 million, down 11.2% y/y; while the rest of the world contributed the remaining $132.3 million, down1.2% y/y. Revenues from the emerging markets came in at $98.1 million, up by9.7% y/y.

Outlook

For 3Q13, management expects total revenueof $825–$855million.

According to management, despite the macroeconomic uncertainty, the company remains on track to deliver growth in 2013 based on improving market conditions in North America. However, they believe that growth will remain subduedto some extent in Europe as they expect the carriers to remain cautious in their spending given the tight economicsituation. Reiterating management’s view, the analysts expect Europe to remain challenging for the company in FY13, where the growth is mainly project oriented and some of the large deals by the telecom carriers have already been paused.

Amdocs continues to see strong momentum across Southeast Asia and Latin Americawith continued demand from both the new and existing carriers. Unprecedented data demand and the increasing adaptation of smartphonesare forcing emerging market carriers to upgrade their systems, which brings meaningful business opportunity for DOX. The analysts also believe that as competition intensifies among service providers they will look to improve their services, which in turn will driveDOX’s billing and customer service business. Management noted that DOX’s emerging market strategy to penetrate new customers and then expand the relationship with them is deriving significant growth for the company.

The multi-year deal with TIM Brazil in the managed service segment and the BSS contract with Claro of Chile will provide growth for the company, going forward. Additionally, DOX plans to update Globe’s BSS data warehouse systems and business process to support the latter’s Wireless, wireline and broadband operations. Some analysts believe that as it is difficult for managed service customers to switch, signing of more managed service deal provides additional stability to DOX.

According to management,the company’s relationship with its biggest client, AT&T (T), is improving and has started to win new business from this large carrier particularly for data monetization products.Rollout of LTE by AT&T will also provide significant growth opportunity for DOX in its OSS segment. AT&T continues to see steady demand in the usage-based plans, which in turn increases the market traction of DOX’s converged billing system. Additionally, many North American carriers are offering no contract plans apart from the traditional postpaid plans, which provide a new revenue stream for DOX.

The analysts are of the opinion that the company faces certain headwinds pertaining to theincreased level of sales period as DSOs (Days Sales Outstanding) gets elongated. Furthermore, directory business continues to remain a headwind for the company in the future.Over the near term,they expect revenues to improve in North Americabased on improved carrier activity. Nevertheless, the analysts expect an extension of relationship with Sprint, if the carrier’s deal with Dishcloses.

The acquisition of MX Telecom will further strengthen the company’s digital content segment, where the company is expecting more growth in 2013. DOX’s dominant position in the market along with its strong relationship with some of the big telecom carriers confer it the opportunity to capitalize on the recent transitions in the telecom and cable sectors.

Margins

As reported by the company, gross profit was $294.2 million in 2Q13 versus $290.4 million in 2Q12.Gross margin was 35.3%in 2Q13versus 35.9% in 2Q12.

R&D expensewas $60.1 million in 2Q13 versus $60.3 million in 2Q13.SG&A expensewas$102.7 million in 2Q13 versus $106.8 million in 2Q12.

EBITDA for the company was $131.5 million in 2Q13 versus $123.2 million in 2Q12. EBITDA margin was 15.8% in 2Q13versus 15.3% in 2Q12.

Operating incomewas $122.9 million in 2Q13 versus $109.9million in 2Q12. Operating margin was 14.8% in 2Q13 versus 13.6% in 2Q12.

Net income was $104.9 million in 2Q13 versus $101.9 million in 2Q12.Net margin was 14.8% in 2Q13flat as compared to2Q12.

Outlook

The company expects operating margin to remain in the range of 16–17%. Strengthening the company’s operations is envisioned to lead to stable margins in the forthcoming quarters. Furthermore, DOX expects the foreign currency fluctuation to reduce its interest and other expenditures, which may enhance its margin in the near future. However, DOX is investing heavily in the emerging markets to boost sales, which may lead to margin contraction in 2013.