================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 2006
Commission File Number 1-14840
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
FORM 20-F [X] FORM 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule
101(b)(1):____
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule
101(b)(7):____
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
YES [ ] NO [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-___
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AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED DECEMBER 31, 2006
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 1. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 2. Reports on Form 6-K
SIGNATURES
This report on Form 6-K shall be incorporated by reference into the Registration
Statements on Form F-3 (File Nos. 333-114079 and 333-114344) and any other
Registration Statement filed by the Registrant that by its terms automatically
incorporates the Registrant's filings and submissions with the SEC under
Sections 13(a), 13(c) or 15(d) of the Securities Exchange Act of 1934.
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(dollar and share amounts in thousands, except per share data)
AS OF
-------------------------------
DECEMBER 31, SEPTEMBER 30,
2006 2006
----------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 565,295 $ 607,187
Short-term interest-bearing investments 453,235 372,194
Accounts receivable, net 419,438 425,805
Deferred income taxes and taxes receivable 135,534 136,044
Prepaid expenses and other current assets 90,724 97,476
----------- -----------
Total current assets 1,664,226 1,638,706
Equipment, vehicles and leasehold improvements, net 227,644 220,290
Deferred income taxes 146,378 133,690
Goodwill 1,467,726 1,461,606
Intangible assets, net 338,237 347,716
Other noncurrent assets 166,482 160,820
----------- -----------
Total assets $ 4,010,693 $ 3,962,828
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 125,983 $ 148,398
Accrued expenses and other current liabilities 244,412 270,268
Accrued personnel costs 196,609 178,441
Short-term portion of financing arrangements 1,985 1,963
Deferred revenue 211,212 253,376
Deferred income taxes and taxes payable 173,557 179,241
----------- -----------
Total current liabilities 953,758 1,031,687
Convertible notes 450,000 450,000
Deferred income taxes 129,393 129,339
Noncurrent liabilities and other 196,861 197,637
----------- -----------
Total liabilities 1,730,012 1,808,663
----------- -----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; (pound)0.01 par value; 0 shares
issued and outstanding -- --
Ordinary Shares - Authorized 550,000 shares; (pound)0.01 par value; 234,857 and
233,932 issued and 207,718 and 206,793 outstanding, respectively 3,781 3,763
Additional paid-in capital 2,066,904 2,035,309
Treasury stock, at cost - 27,139 Ordinary Shares (602,392) (602,392)
Accumulated other comprehensive income 4,284 2,723
Retained earnings 808,104 714,762
----------- -----------
Total shareholders' equity 2,280,681 2,154,165
----------- -----------
Total liabilities and shareholders' equity $ 4,010,693 $ 3,962,828
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollar and share amounts in thousands, except per share data)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
2006 2005
-------- --------
Revenue:
License $ 31,744 $ 31,661
Service 659,288 555,367
-------- --------
691,032 587,028
-------- --------
Operating expenses:
Cost of license 1,069 1,062
Cost of service 435,121 374,051
Research and development 60,468 43,114
Selling, general and administrative 89,170 78,550
Amortization of purchased intangible
assets 17,698 7,572
-------- --------
603,526 504,349
-------- --------
Operating income 87,506 82,679
Interest income and other, net 11,739 8,414
-------- --------
Income before income taxes 99,245 91,093
Income taxes 5,903 15,759
-------- --------
Net income $ 93,342 $ 75,334
======== ========
Basic earnings per share $ 0.45 $ 0.38
======== ========
Diluted earnings per share $ 0.42 $ 0.36
======== ========
Basic weighted average number of shares
outstanding 206,450 200,525
======== ========
Diluted weighted average number of shares
outstanding 222,718 214,871
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMDOCS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(dollar and share amounts in thousands)
Accumulated
Ordinary Shares Additional Other Total
--------------------------- Paid-in Treasury Comprehensive Retained Shareholders'
Shares Amount Capital Stock Income Earnings Equity
----------- ----------- ----------- ----------- ------------- ----------- -------------
BALANCE AS OF SEPTEMBER 30,
2006 206,793 $ 3,763 $ 2,035,309 $ (602,392) $ 2,723 $ 714,762 $ 2,154,165
Comprehensive income:
Net income -- -- -- -- -- 93,342 93,342
Unrealized gain on
foreign currency
hedging contracts, net
of $825 tax -- -- -- -- 1,667 -- 1,667
Unrealized loss on
short-term
interest-bearing
investments, net of
$(9) tax -- -- -- -- (106) -- (106)
-----------
Comprehensive income -- -- -- -- -- -- 94,903
-----------
Employee stock options
exercised 804 16 15,484 -- -- -- 15,500
Issuance of restricted
stock, net of
cancellations 121 2 -- -- -- -- 2
Tax benefit of stock
options exercised -- -- 774 -- -- -- 774
Equity-based compensation
expense related to
employees -- -- 15,325 -- -- -- 15,325
Equity-based compensation
expense related to non
employee stock options -- -- 12 -- -- -- 12
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AS OF DECEMBER 31,
2006 207,718 $ 3,781 $ 2,066,904 $ (602,392) $ 4,284 $ 808,104 $ 2,280,681
=========== =========== =========== =========== =========== =========== ===========
As of December 31, 2006 and September 30, 2006, accumulated other comprehensive
income is comprised of unrealized gain on foreign currency hedging contracts,
net of tax, of $4,509 and $2,841, respectively, and unrealized loss on
short-term interest-bearing investments, net of tax, of $(225) and $(118),
respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollar in thousands)
THREE MONTHS ENDED DECEMBER 31,
------------------------------
2006 2005
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 93,342 $ 75,334
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 38,042 28,632
(Gain) loss on sale of equipment (171) 73
Equity-based compensation expense 15,325 11,060
Deferred income taxes (2,928) 5,827
Excess tax benefit from equity-based compensation (154) (610)
Realized gain from short-term interest-bearing
investments (1,255) (2,355)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable 7,113 (39,250)
Prepaid expenses and other current assets 7,280 (3,641)
Other noncurrent assets (6,091) (2,433)
Accounts payable and accrued expenses 11,390 26,240
Deferred revenue (46,986) (14,066)
Income taxes payable (19,884) (953)
Noncurrent liabilities and other 4,058 (384)
--------- ---------
Net cash provided by operating activities 99,081 83,474
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 450 1,143
Payments for purchase of equipment, vehicles and
leasehold improvements (50,568) (14,059)
Proceeds from sale of short-term interest-bearing
investments 216,001 173,727
Purchase of short-term interest-bearing investments (295,903) (419,803)
Net cash paid for acquisition (26,595) (1,406)
--------- ---------
Net cash used in investing activities (156,615) (260,398)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised 15,500 8,146
Excess tax benefit from equity-based compensation 154 610
Principal payments under financing arrangements and
other -- (3,708)
Principal payments on capital lease obligations (12) (1,288)
--------- ---------
Net cash provided by financing activities 15,642 3,760
--------- ---------
Net decrease in cash and cash equivalents (41,892) (173,164)
Cash and cash equivalents at beginning of period 607,187 707,552
--------- ---------
Cash and cash equivalents at end of period $ 565,295 $ 534,388
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 22,754 $ 10,644
Interest 441 282
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
1. BASIS OF PRESENTATION
Amdocs Limited (the "Company") is a leading provider of software
products and services primarily to the communications industry. The Company
and its subsidiaries operate in one segment offering products and services that
enable their customers to move toward an integrated approach to customer
management. The Company designs, develops, markets, supports, operates, and
provides managed services for information system solutions primarily for leading
communications companies throughout the world.
The unaudited consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting principles
("GAAP"). In the opinion of the Company's management, all adjustments considered
necessary for a fair presentation of the unaudited interim consolidated
financial statements have been included herein and are of a normal recurring
nature.
The preparation of financial statements during interim periods
requires management to make numerous estimates and assumptions that impact the
reported amounts of assets, liabilities, revenue and expenses. Estimates and
assumptions are reviewed periodically and the effect of revisions is reflected
in the results of operations of the interim periods in which changes are
determined to be necessary.
The results of operations for the interim periods presented herein
are not necessarily indicative of the results to be expected for the full fiscal
year. These statements do not include all information and footnotes necessary
for a complete presentation of financial position, results of operations and
cash flows in conformity with GAAP. These statements should be read in
conjunction with the Company's consolidated financial statements for the fiscal
year ended September 30, 2006, set forth in the Company's Annual Report on Form
20-F filed on December 13, 2006 with the U.S. Securities and Exchange Commission
(the "SEC").
Reclassification
Certain immaterial amounts in prior year financial statements have
been reclassified to conform to the current year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements. SFAS
157 will be effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating
the effect that the application of SFAS 157 will have on its consolidated
results of operations and financial condition.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Financial Statements - Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB
108 requires companies to quantify the impact of all correcting misstatements,
including both the carryover and reversing effects of prior year misstatements,
on the current year financial statements. SAB 108 is effective for fiscal years
ending after November 15, 2006. The
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
Company applied the provisions of SAB 108 in the first quarter of fiscal 2007
and there was no impact to the consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," An Interpretation of SFAS No. 109, ("FIN 48"). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return that results in a tax
benefit. Additionally, FIN 48 provides guidance on de-recognition, income
statement classification of interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
effect that the application of FIN 48 will have on its consolidated results of
operations and financial condition.
In February 2006, the FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments," an amendment of FASB Statement No. 133
and 140 ("SFAS 155"), which permits fair value measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise, would
require bifurcation, with changes in fair value recognized in earnings. The
fair-value election will eliminate the need to separately recognize certain
derivatives embedded in hybrid financial instruments under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. In January
2007, the FASB issued Statement 133 Implementation Issue No. B40 "Application of
Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets", which
provides a possibility of an exemption from bifurcation analysis in paragraph
13(b) of Statement 133 for certain securitized interests in prepayable financial
assets. The Company applied the provisions of SFAS 155 and Statement 133
Implementation Issue No. B40 in the first quarter of fiscal 2007 and there was
no impact to the consolidated financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
------------------------------
DECEMBER 31, SEPTEMBER 30,
2006 2006
------------ -------------
Accounts receivable - billed $ 373,520 $ 383,763
Accounts receivable - unbilled 60,866 54,117
Less - allowances (14,948) (12,075)
---------- ----------
Accounts receivable, net $ 419,438 $ 425,805
========== ==========
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
4. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity except those resulting from
investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income to
comprehensive income for the following periods:
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
2006 2005
------------ ------------
Net income $ 93,342 $ 75,334
Other comprehensive income (loss):
Unrealized gain on foreign
currency hedging contracts, net
of tax 1,667 2,653
Unrealized (loss) gain on
short-term interest-bearing
investments, net of tax (106) 50
---------- ----------
Comprehensive income $ 94,903 $ 78,037
========== ==========
5. INCOME TAXES
The provision for income taxes for the following periods consisted
of:
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
2006 2005
------------ ------------
Current $ 3,744 $ 9,932
Deferred 2,159 5,827
---------- ----------
$ 5,903 $ 15,759
========== ==========
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The effective income tax rate varied from the statutory Guernsey tax rate
as follows for the following periods:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2006 2005
--------- ---------
Statutory Guernsey tax rate 20% 20%
Guernsey tax-exempt status (20) (20)
Foreign taxes (1) 11 18
---------------------
Income tax rate before effect of
acquisition-related costs, and
equity-based compensation
expense 11 18
Effect of acquisition-related
costs and stock based
compensation expense (5) (1)
---------------------
6% 17%
---------------------
(1) The three months ended December 31, 2006 includes the Company's net
release of $8,748 of tax reserves attributable to a resolved tax audit of
a prior year, as well as changes in the Company's tax reserves made during
the quarter in the ordinary course of business.
As a Guernsey corporation with tax-exempt status, the Company's overall
effective tax rate is attributable to foreign taxes.
As of December 31, 2006, deferred tax assets of $30,340, derived from net
capital and operating loss carry forwards related to some of the Company's
subsidiaries, were offset by valuation allowances related to the uncertainty of
realizing tax benefit for such losses. When realization of the tax benefits
associated with such net capital and operating losses is deemed more likely than
not, the valuation allowance will be released through income taxes or through
goodwill when it relates to a business combination.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2006 2005
--------- ---------
Numerator:
Numerator for basic earnings per
share $ 93,342 $ 75,334
Effect of assumed conversion of
convertible notes 985 1,000
-------- --------
Numerator for diluted earnings per
share $ 94,327 $ 76,334
======== ========
Denominator:
Denominator for basic earnings per
share - weighted average number
of shares outstanding 206,450 200,525
Effect of assumed conversion of
convertible notes 10,436 10,436
Effect of dilutive stock options
granted 5,522 3,870
Effect of restricted stock issued 310 40
-------- --------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 222,718 214,871
======== ========
Basic earnings per share $ 0.45 $ 0.38
======== ========
Diluted earnings per share $ 0.42 $ 0.36
======== ========
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
7. ACQUISITIONS
CRAMER
On August 14, 2006, the Company acquired all of the capital stock of
Cramer Systems Group Limited, or Cramer, a privately-held leading provider of
operations support systems (OSS) solutions. The Company expects that this
acquisition will enable it to leverage and greatly enhance its current assets in
the BSS (business support systems) and OSS market.
The aggregate purchase price for Cramer was $421,182, which
consisted of $412,775 in cash (including cash on hand), $2,228 related to the
assumption of stock options and restricted shares held by Cramer employees and
$6,179 of transaction costs. The purchase price was adjusted in the first
quarter of fiscal 2007 as a result of post closing adjustments which were not
material. The fair value of the stock options was estimated using the
Black-Scholes option pricing model and the fair value of the restricted shares
was valued based on the market value of the underlying shares at the date of
grant.
The following is the allocation of the purchase price:
Assets acquired $ 93,797
Liabilities assumed (72,748)
---------
Net assets acquired 21,049
Core technology 88,690
Customer arrangements 69,043
Trademark 2,160
In-process research and development 17,310
Deferred taxes resulting from the difference
between the assigned value of certain assets
and their respective tax bases and loss carry
forward, net (31,816)
Goodwill 254,746
---------
$ 421,182
=========
QPASS
On May 31, 2006, the Company acquired all of the capital stock of
Qpass Inc., or Qpass, a leading provider of digital commerce software and
solutions. The Company expects that this acquisition will allow it to support
service providers and media companies seeking to launch and monetize digital
content, and believes that this acquisition positions it as the leader in the
emerging digital content market.
The aggregate purchase price for Qpass was $282,015, which consisted
of $274,024 in cash, $2,405 related to the assumption of stock options held by
Qpass employees and $5,586 of transaction costs. The fair value of the stock
options was estimated using the Black-Scholes option pricing model.
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
DST INNOVIS
On July 1, 2005, the Company acquired from DST Systems, Inc., or
DST, all of the common stock of DST's wholly owned subsidiaries, DST Innovis,
Inc. and DST Interactive, Inc. The Company refers to these acquired subsidiaries
together as DST Innovis, a leading provider of customer care and billing
solutions to broadband cable and satellite companies. The purchase price for DST
Innovis was $237,461, which included $3,150 of transaction costs.
In addition, the Company commenced integration activities with
respect to the DST Innovis business based on a plan to exit specific research
and development activities and to terminate employees associated with these
activities. The liabilities associated with this plan, which were recorded as
part of the purchase accounting, are presented in the following table:
CONTRACTUAL
OBLIGATIONS OTHER TOTAL
----------- ---------- ----------
Balance as of October 1, 2006 $ 6,875 $ 112 $ 6,987
Cash payments (314) -- (314)
--------- -------- --------
Balance as of December 31,
2006 $ 6,561 $ 112 $ 6,673
========= ======== ========
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
8. EMPLOYEE BENEFITS
The Company maintains non-contributory defined benefit plans that provide
for pension, other retirement and post-employment benefits for employees of a
Canadian subsidiary based on length of service and rate of pay. Contributions by
the Company are based on various generally accepted actuarial methods and
reflect actuarial assumptions concerning future investment returns, salary
projections and future service benefits. Plan assets consist primarily of
Canadian and other equities, government and corporate bonds, debentures and
secured mortgages, which are held in units of the BCE Master Trust Fund, a trust
established by Bell Canada for the collective investment of registered pension
plan assets.
The net periodic benefit costs under these plans for the three months
ended December 31, 2006 and 2005, were as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
------------------------ ------------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
---------- ---------- ---------- ----------
Service costs $ 308 $ 50 $ 769 $ 102
Interest on benefit obligations 700 128 956 166
Expected return on plan assets (666) -- (796) --
Curtailment and other -- (168) -- --
-------- -------- -------- --------
$ 342 $ 10 $ 929 $ 268
======== ======== ======== ========
In the three months ended December 31, 2006, the Company made
contributions of $744 to the pension plan and $113 for other benefits. The
Company expects to make contributions for the fiscal year ending September 30,
2007 of approximately $1,700 to the pension plan and $200 for other benefits.
9. STOCK OPTION AND INCENTIVE PLAN
In January 1998, the Company adopted the 1998 Stock Option and Incentive
Plan (the "Plan"), which provides for the grant of restricted stock awards,
stock options and other equity-based awards to employees, officers, directors
and consultants. The purpose of the Plan is to enable the Company to attract and
retain qualified personnel and to motivate such persons by providing them with
an equity participation in the Company. Since its adoption, the Plan has been
amended on several occasions to, among other things, increase the number of
Ordinary Shares issuable under the Plan. In January 2006, the maximum number of
Ordinary Shares authorized to be granted under the Plan was increased from
38,300 to 46,300. Awards granted under the Plan generally vest over a period of
four years and stock options have a term of ten years. In the fourth quarter of
fiscal 2005, the Company commenced routinely granting restricted shares and the
Company's equity-based grant package may be comprised of restricted stock awards
and a fewer number of stock options.
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The following table summarizes information about options to purchase the
Company's Ordinary Shares, as well as changes during the three month period
ended December 31, 2006:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF EXERCISE CONTRACTUAL
OPTIONS PRICE TERM
--------- -------- -----------
Outstanding as of October 1, 2006 22,794 $ 29.02
Granted 882 38.97
Exercised (804) 19.28
Forfeited (189) 35.71
---------
Outstanding as of December 31, 2006 22,683 $ 29.70 6.39
========= ======== ===========
Exercisable on December 31, 2006 14,100 $ 30.68 5.05
========= ======== ===========
The following table summarizes information relating to awards of
restricted shares, as well as changes to such awards during the three month
period ended on December 31, 2006:
WEIGHTED
NUMBER OF AVERAGE GRANT
SHARES DATE FAIR VALUE
--------------- ---------------
Outstanding unvested shares as of October 1, 2006 780 $ 32.89
Granted 126 38.94
Vested (82) 29.16
Forfeited (5) 40.69
--------------- ---------------
Outstanding unvested shares as of
December 31, 2006 819 $ 34.15
=============== ===============
As of December 31, 2006, there was $62,554 of unrecognized compensation
expense related to unvested stock options and unvested restricted stock awards.
The Company recognizes compensation costs using the graded vesting attribution
method which results in a weighted average period of approximately one year over
which the unrecognized compensation expense is expected to be recognized.
On October 1, 2005, the Company adopted FASB Statement No. 123 (revised
2004), "Share-Based Payment," a revision of SFAS No. 123 ("SFAS 123(R)"). SFAS
123(R) requires all equity-based payments to employees, including grants of
employee stock options, to be recognized in the income
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
statement based on their fair values. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 ("SAB 107"), which provides supplemental
implementation guidance on SFAS 123(R). The Company has applied the provisions
of SAB 107 in its adoption of SFAS 123(R).
Employee equity-based compensation pre-tax expense under SFAS 123(R) for
the three months ended December 31, 2006 and 2005 was as follows:
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2006 2005
------------ ------------
Cost of service $ 6,322 $ 4,355
Research and development 1,778 1,089
Selling, general and administrative 7,225 5,616
------------ ------------
Total $ 15,325 $ 11,060
The total income tax benefit recognized in the income statement for
stock-based compensation (including restricted shares) for the three months
ended December 31, 2006 and 2005 was $2,392 and $1,403, respectively.
The Company selected the Black-Scholes option pricing model as the most
appropriate fair value method for its equity-based awards and recognizes
compensation costs using the graded vesting attribution method. The
Black-Scholes option pricing model assumptions used are noted in the following
table (all in weighted averages for options granted during the period):
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2006 2005
------------ ------------
Risk-free interest rate (1) 4.46% 4.45%
Expected life of stock options (2) 4.36 4.50
Expected volatility (3) 0.33 0.35
Expected dividend yield (4) None None
Fair value per option $ 13.14 $ 9.69
(1) Risk-free interest rate is based upon U.S. Treasury yield curve
appropriate for the term of the Company's employee stock options.
(2) Expected life of stock options is based upon historical experience.
(3) Expected volatility for the three months ended December 31, 2006 and 2005
is based on a combination of implied volatility of the Company's traded
options and historical stock price volatility ("blended volatility"). The
selection of the blended volatility approach was based upon the
availability of traded options on the Company's shares and the Company's
assessment that blended volatility is more representative of future share
price trends than historical volatility.
(4) Expected dividend yield is based on the Company's history and future
expectation of dividend payouts.
15
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
Equity-based compensation recognized is reduced for estimated
forfeitures and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
10. CONTINGENCIES
Legal Proceedings
The Company is involved in various legal proceedings arising in the
normal course of its business. Based upon the advice of counsel, the Company
does not believe that the ultimate resolution of these matters will have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
The Company generally sells its products with a limited warranty for
a period of 90 days. The Company's policy is to account for warranty costs, if
needed, based on historical trends in product failure. Based on the Company's
experience, only minimal warranty services have been required and, as a result,
the Company did not accrue any amounts for product warranty liability during the
three months ended December 31, 2006 and 2005.
The Company generally indemnifies its customers against claims of
intellectual property infringement made by third parties arising from the use of
the Company's software. To date, the Company has incurred only minimal costs as
a result of such obligations and has not accrued any liabilities related to such
indemnification in its consolidated financial statements.
11. SUBSEQUENT EVENT
On January 3, 2007, the Company signed an agreement to acquire
SigValue Technologies, Inc. ("SigValue"), a provider of an integrated billing,
customer care, and service control platform designed for telecommunications
service providers in high-growth emerging markets around the world, where the
customer base is predominantly composed of mobile pre-paid subscribers. Prior to
the acquisition the Company owned 14% of SigValue's outstanding capital stock.
Under the terms of the agreement, the Company will acquire all of SigValue's
remaining share capital for approximately $54,000 in cash, net of cash on hand.
The Company expects to complete this acquisition during the second quarter of
fiscal 2007, subject to regulatory approvals and other conditions customary to
such transactions. The Company expects that this acquisition will expand its
offering for the fast growing emerging markets.
16
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
FORWARD LOOKING STATEMENTS
This section contains forward-looking statements (within the meaning
of the United States federal securities laws) that involve substantial risks and
uncertainties. You can identify these forward-looking statements by words such
as "expect", "anticipate", "believe", "seek", "estimate", "project", "forecast",
"continue", "potential", "should", "would", "could", and "may", and other words
that convey uncertainty of future events or outcome. Statements that we make in
this document that are not statements of historical fact also may be
forward-looking statements. Forward-looking statements are not guarantees of
future performance, and involve risks, uncertainties and assumptions that may
cause our actual results to differ materially from the expectations that we
describe in our forward-looking statements. There may be events in the future
that we are not accurately able to predict, or over which we have no control.
You should not place undue reliance on forward-looking statements. We do not
promise to notify you if we learn that our assumptions or projections are wrong
for any reason. We disclaim any obligation to update our forward-looking
statements, except where applicable law may otherwise require us to do so.
Important factors that may affect these projections or expectations
include, but are not limited to: changes in the overall economy; changes in
competition in markets in which we operate; changes in the demand for our
products and services; consolidation within the industries in which our
customers operate; the loss of a significant customer; changes in the
telecommunications regulatory environment; changes in technology that impact
both the markets we serve and the types of products and services we offer;
financial difficulties of our customers; losses of key personnel; difficulties
in completing or integrating acquisitions; litigation and regulatory
proceedings; and acts of war or terrorism. For a discussion of these important
factors and other risks, please read the information set forth under the caption
"Risk Factors" in our Annual Report on Form 20-F for fiscal 2006 that we filed
on December 13, 2006 with the United States Securities and Exchange Commission
("SEC").
INTRODUCTION
In this section, we discuss the general financial condition and the
results of operations for Amdocs Limited and its subsidiaries including:
- the factors that affect our business,
- our revenue and costs for the three months ended December 31, 2006
and 2005,
- the reasons why such revenue and costs were different from period to
period,
- the sources of our revenue,
- how all of this affects our overall financial condition,
- our capital expenditures for the three months ended December 31, 2006
and 2005,
- the changes in our business, including those resulting from
acquisitions of other businesses, and
- the sources of our cash to pay for future capital expenditures and
possible acquisitions.
In this section, we also analyze and explain the changes in the
specific line items in our consolidated statements of income between the three
months ended December 31, 2006 and 2005. You should read this section in
conjunction with our consolidated financial statements.
17
OVERVIEW OF BUSINESS AND TREND INFORMATION
Consolidation in the communications industry is continuing, and
competition among incumbent and new entrant service providers is intensifying.
At the same time, convergence is accelerating, with consumers
expecting continuous access to next-generation, bundled voice, data and video
services through any device. We believe service providers are responding to this
challenge and are seeking to develop new revenue streams that take advantage of
ubiquitous connectivity and convergence.
In this changing environment, we believe service providers will
succeed if they differentiate themselves by delivering a customer experience
that is simple, personal, and valuable at every point of service. We believe
this will require service providers to adopt the strategy of integrated customer
management, or ICM.
We refer to Amdocs systems as ICM-Enabling Systems because they
allow many of the world's leading service providers to deliver an intentional,
integrated and innovative customer experience:
- an intentional experience by offering consistency and
simplicity across any device, channel or network;
- an integrated experience by providing integrated business and
operational service support, maximizing operational excellence
for a total cost of service advantage for service providers;
- innovative experience by supporting sophisticated multi-play,
internet protocol (IP) and digital content services for a
unique time-to-leadership advantage.
We provide software, services and industry expertise to help our
customers execute ICM strategies and achieve service, operational and financial
excellence.
Our market focus is primarily tier one and tier two companies in the
communications industry, including leading wireline and wireless
telecommunications, broadband cable and satellite companies. In fiscal 2006, we
acquired Qpass Inc. and Cramer Systems Group Limited - which we refer to as
Qpass and Cramer - to further enhance our portfolio of products offerings,
provide a complete end-to-end offering (combined business support and operations
support systems, or BSS/OSS) and meet the growing demand for the delivery of
next-generation services.
We believe that the digital content space promises to be a key
growth area. Our acquisition of Qpass allows us to offer a broader set of
solutions to service providers and media companies seeking to launch and
monetize new IP-based services and content. With this acquisition, we believe
that Amdocs is now well positioned to be the leader in this emerging market.
We also have strengthened our presence in the OSS area by acquiring
Cramer, a leading provider of OSS solutions. It is critical for service
providers to automate and integrate the BSS and OSS business processes in order
to offer provisioning, immediate activation and service assurance. We believe
that this acquisition will enable us to offer service providers the ability to
integrate those business processes and, as a result, rapidly introduce new
offerings, significantly reduce cost of operations and focus on customers.
We operate in a challenging and changing environment. We believe
service providers are responding to the challenges they face by seeking to
develop new revenue streams that take advantage of ubiquitous connectivity and
convergence. Although the pace at which service providers are embarking on
transformation projects is not at the same pace as we expected, we continue to
regard these projects as a long-term industry trend that will continue to drive
the demand for our ICM-Enabling Systems. We estimate that the increasing need
for our customers to achieve integrated customer management, and our ability to
address this demand, will continue to drive our growth in fiscal year 2007.
18
OFFERINGS
Amdocs provides a broad portfolio of integrated, modular software
products, with proven functionality and scalability, accompanied by a
comprehensive range of business consulting, system implementation and
integration services. Our portfolio of product offerings includes revenue
management (including billing, mediation and partner settlement), customer
management (including ordering, customer relationship management, or CRM and
self-service), service and resource management (including planning, fulfillment
and customer-centric assurance) and digital commerce management (including
content revenue management). We refer to these offerings collectively as ICM
Enabling Systems.
Our portfolio also includes a full range of directory sales and
publishing systems, which we refer to as Directory Systems, for publishers of
both traditional printed yellow page and white page directories and electronic
Internet directories.
We have designed the Amdocs ICM Enabling Systems to meet the
mission-critical needs of leading communications service providers throughout
the entire customer lifecycle. We support different lines of business, including
wireline, wireless, cable and satellite, and a wide range of communications
services, including voice, video, data, IP, broadband, content, electronic and
mobile commerce. We also support companies that offer multiple service packages,
commonly referred to as bundled or convergent service packages. Due to the
complexity of our customers' projects and the expertise required for systems
support, we also provide information technology, or IT, services, including
extensive consulting, business strategy, system implementation, training,
integration, modification, ongoing support, enhancement and maintenance
services. In addition, we offer Managed Services, which include services such as
system modernization and consolidation, the operation of data centers, ongoing
support, maintenance services, system modification, the provision of rating and
billing services and communications facility management services. All IT and
Managed Services are provided to our customers on a fixed or unit charge basis
or a combination of the two.
We are also leveraging our experience by working with service
providers in the financial services sector, because some of the challenges faced
by companies in this sector are similar to those encountered by communications
service providers.
We conduct our business globally, and, as a result we are subject to
the effects of global economic conditions and, in particular, market conditions
in the communications industry. We maintain development facilities in Canada,
China, Cyprus, India, Ireland, Israel and the United States.
We believe that demand for our ICM Enabling Systems is primarily
driven by the following key factors:
- Industry transformation, including:
- global use of communications and content services,
- increase in digital and mobile commerce,
- ongoing consolidation within the communications industry, and
- continued convergence of communications, broadband cable and
satellite industries.
- Technology advances, such as:
- emergence of new communications products and services,
especially video, broadband, data and content services,
including IP-based services, such as Internet Protocol
Television (IPTV) and Voice over IP (VoIP),
- evolution to next generation networks such as IP Multimedia
Subsystem (IMS), that enable truly converged services
offerings like fixed-mobile convergence, and
- technological changes, such as the introduction of 3G wireless
technology, next-generation content systems and WiFi- and
WiMax- based access technologies.
19
- Customer focus, such as:
- the desire of service providers to focus on their customers in
order to build profitable customer relationships,
- the "authority shift" toward the consumer, with customers
demanding new, innovative services that can be accessed anytime
and anywhere, as well as higher levels of customer service, and
- the need for service providers to differentiate themselves by
creating a unique and mutually valuable customer experience.
- The need for operational efficiency, including :
- the shift from in-house management to vendor solutions,
- business needs of service providers to reduce costs and lower
total cost of ownership while retaining high value customers in
a highly competitive environment,
- automating and integrating business processes that span across
business support systems (BSS) and operations support systems
(OSS), and
- OSS transformation projects, designed to transform fragmented
legacy OSS systems that can make it difficult to introduce new
services in a timely and cost-effective manner.
As part of our strategy, we have pursued and may continue to pursue
acquisitions and other initiatives in order to offer new products or services or
otherwise enhance our market position or strategic strengths. For example, on
January 3, 2007, we signed an agreement to acquire SigValue Technologies, Inc.,
which we refer to as SigValue, a provider of an integrated billing, customer
care and service control platform designed for telecommunication service
providers in high-growth emerging markets around the world, where the customer
base is predominantly composed of mobile pre-paid subscribers. Prior to the
acquisition we owned 14% of SigValue's outstanding capital stock. Under the
terms of the agreement, we will acquire all of SigValue's remaining share
capital for approximately $54 million in cash, net of cash on hand. We expect to
complete this acquisition during the second quarter of fiscal 2007, subject to
regulatory approvals and other conditions customary to such transactions. We
expect that this acquisition will expand our offering for the fast growing
emerging markets.
We derive our revenue principally from:
- the initial sales of licenses to use our products and related services,
including modification, implementation and integration services,
- providing Managed Services and other related IT services, and
- recurring revenue from ongoing support, maintenance and enhancements
provided to our customers, and from incremental license fees resulting
from increases in a customer's business volume.
Revenue is recognized only when all of the following conditions have
been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has
occurred; (iii) the fee is fixed and determinable; and (iv) collectability of
the fee is reasonably assured. We usually sell our software licenses as part of
an overall solution offered to a customer that combines the sale of software
licenses with a broad range of services, which normally include significant
customization, modification, implementation and integration. As a result, we
generally recognize combined license and service revenue over the course of
these long-term projects, using the percentage of completion method of
accounting. Initial license fee revenue is recognized as work is performed,
using the percentage of completion method of accounting. Subsequent license fee
revenue is recognized upon completion of specified conditions in each contract,
based on a customer's subscriber or transaction volume or other measurements
when greater than the level specified in the contract for the initial license
fee. Service revenue that involves significant ongoing obligations, including
fees for software customization, implementation and modification, also is
recognized as work is performed, under the percentage of completion method of
accounting. Revenue from software solutions that do not require significant
customization and modification is recognized upon delivery or as services are
provided. In
20
Managed Services contracts, we typically recognize revenue from the operation of
a customer's system either ratably over the service period or as services are
performed. Revenue from ongoing support services is recognized as work is
performed. Revenue from third-party hardware sales is recognized upon delivery
and installation, and revenue from third-party software sales is recognized upon
delivery. Maintenance revenue is recognized ratably over the term of the
maintenance agreement. As a result of a significant portion of our revenue being
subject to the percentage of completion accounting method, the size and timing
of customer projects and our progress in completing such projects may
significantly affect our annual and quarterly operating results.
Revenue from Managed Services arrangements (from the sale of ICM
Enabling Systems and Directory Systems) is included in both license and service
revenue. Managed Services projects are a significant part of our business,
accounting for approximately 40% and 35% of our total revenue in the first
quarters of fiscal 2007 and 2006, respectively, and generating substantial,
long-term revenue streams, cash flow and operating income. In the initial period
of our Managed Services projects, we generally invest in modernization and
consolidation of the customer's systems. Invoices are usually structured on a
periodic fixed or unit charge basis. As a result, Managed Services projects can
be less profitable in the initial period. Margins tend to improve over time as
we benefit from the operational efficiencies provided by system modernization
and consolidation.
RECENT ACCOUNTING STANDARDS
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements. SFAS
157 will be effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We are currently evaluating the
effect that the application of SFAS 157 will have on our consolidated results of
operations and financial condition.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Financial Statements - Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB
108 requires companies to quantify the impact of all correcting misstatements,
including both the carryover and reversing effects of prior year misstatements,
on the current year financial statements. SAB 108 is effective for fiscal years
ending after November 15, 2006. We applied the provisions of SAB 108 in the
first quarter of fiscal 2007 and there was no impact to the consolidated
financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," An Interpretation of SFAS No. 109, ("FIN 48"). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return that results in a tax
benefit. Additionally, FIN 48 provides guidance on de-recognition, income
statement classification of interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. We are currently evaluating the effect
that the application of FIN 48 will have on our consolidated results of
operations and financial condition.
In February 2006, the FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments," an amendment of FASB Statement No. 133
and 140 ("SFAS 155"), which permits fair value measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise, would
21
require bifurcation, with changes in fair value recognized in earnings. The
fair-value election will eliminate the need to separately recognize certain
derivatives embedded in hybrid financial instruments under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. In January
2007, the FASB issued Statement 133 Implementation Issue No. B40 "Application of
Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets", which
provides a possibility of an exemption from bifurcation analysis in paragraph
13(b) of Statement 133 for certain securitized interests in prepayable financial
assets. We applied the provisions of SFAS 155 and Statement 133 Implementation
Issue No. B40 in the first quarter of fiscal 2007 and there was no impact to the
consolidated financial statements.
22
RESULTS OF OPERATIONS
The following table sets forth for the three months ended December 31,
2006 and 2005 certain items in our consolidated statements of income reflected
as a percentage of total revenue:
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
2006 2005
------------ ------------
Revenue:
License......................................... 4.6% 5.4%
Service......................................... 95.4 94.6
------------ ------------
100.0 100.0
------------ ------------
Operating expenses:
Cost of license................................. 0.2 0.2
Cost of service................................. 63.0 63.7
Research and development........................ 8.7 7.3
Selling, general and administrative............. 12.9 13.4
Amortization of purchased intangible assets..... 2.5 1.3
------------ ------------
87.3 85.9
------------ ------------
Operating income.................................. 12.7 14.1
Interest income and other, net.................... 1.7 1.4
------------ ------------
Income before income taxes........................ 14.4 15.5
Income taxes...................................... 0.9 2.7
------------ ------------
Net income........................................ 13.5% 12.8%
============ ============
23
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
The following is a tabular presentation of our results of operations for
the three months ended December 31, 2006 compared to the three months ended
December 31, 2005. Following the table is a discussion and analysis of our
business and results of operations for such periods.
THREE MONTHS ENDED
DECEMBER 31, INCREASE (DECREASE)
--------------------------- ---------------------------
2006 2005 AMOUNT %
------------ ------------ ------------ ------------
(in thousands)
------------------------------------------
Revenue:
License............................................. $ 31,744 $ 31,661 $ 83 0.3%
Service............................................. 659,288 555,367 103,921 18.7
------------ ------------ ------------
691,032 587,028 104,004 17.7
------------ ------------ ------------
Operating expenses:
Cost of license..................................... 1,069 1,062 7 0.7
Cost of service..................................... 435,121 374,051 61,070 16.3
Research and development............................ 60,468 43,114 17,354 40.3
Selling, general and administrative................. 89,170 78,550 10,620 13.5
Amortization of purchased intangible assets......... 17,698 7,572 10,126 133.7
------------ ------------ ------------
603,526 504,349 99,177 19.7
------------ ------------ ------------
Operating income....................................... 87,506 82,679 4,827 5.8
Interest income and other, net......................... 11,739 8,414 3,325 39.5
------------ ------------ ------------
Income before income taxes............................. 99,245 91,093 8,152 8.9
Income taxes........................................... 5,903 15,759 (9,856) (62.5)
------------ ------------ ------------
Net income............................................. $ 93,342 $ 75,334 $ 18,008 23.9%
============ ============ ============
REVENUE. Total revenue increased by $104.0 million, or 17.7%, in the three
months ended December 31, 2006 to $691.0 million from $587.0 million in the
three months ended December 31, 2005. Approximately 46% of the increase was
attributable to revenue contributed by acquisitions made during fiscal 2006, and
the remainder was primarily attributable to additional revenue from
consolidation projects for tier one customers.
License and service revenue attributable to the sale of ICM-Enabling
Systems was $619.4 million in the three months ended December 31, 2006, an
increase of $100.5 million, or 19.4%, over the three months ended December 31,
2005. Approximately 48% of the increase was attributable to revenue contributed
by acquisitions made during fiscal 2006, and the remainder was primarily
attributable to additional revenue from consolidation projects for tier one
customers. License and service revenue resulted from the sale of ICM-Enabling
Systems represented 89.6% and 88.4% of our total revenue in the three months
ended December 31, 2006 and 2005, respectively. We believe the demand for our
ICM-Enabling Systems is primarily driven by the need of communications service
providers to develop new revenue streams, to rapidly introduce new offerings and
to focus on their customers. Although the pace at which service providers are
embarking on transformation projects is not as we expected, we continue to
regard these projects as a long term industry trend that will continue to drive
the demand for our ICM-Enabling Systems.
24
License and service revenue attributable to the sale of Directory Systems
was $71.6 million in the three months ended December 31, 2006, an increase of
$3.5 million, or 5.1%, over the three months ended December 31, 2005. The
increase in Directory Systems revenue in the three months ended December 31,
2006 was attributable to an increase in business related to Managed Services
customers. License and service revenue from the sale of Directory Systems
represented 10.4% and 11.6% of our total revenue in the three months ended
December 31, 2006 and 2005, respectively. We believe that we are a leading
provider of Directory Systems in most of the markets we serve. We expect that
our revenue from Directory Systems in absolute amount will increase slightly in
fiscal 2007.
In the three months ended December 31, 2006, revenue from customers in
North America, Europe and the rest of the world accounted for 68.6%, 21.9% and
9.5%, respectively, of total revenue compared to 73.1%, 18.4% and 8.5%,
respectively, in the three months ended December 31, 2005. Revenue from
customers in North America increased in absolute amounts, but the increase was
less than the 17.7% increase in our total revenue which resulted in a decrease
in revenue from customers in North America as a percentage of total revenue.
Approximately 56% of the increase in revenue from customers in Europe, in
absolute amount, was attributable to revenues contributed by acquisitions made
during fiscal 2006, and the remainder was primarily attributable to projects for
tier one and tier two customers. The increase in revenue from customers in the
rest of the world in the three months ended December 31, 2006 was attributable
primarily to revenue contributed in Asia Pacific.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the three months ended December 31, 2006 and 2005, cost of license as a
percentage of license revenue was 3.4%.
COST OF SERVICE. Cost of service consists primarily of costs associated
with providing services to customers, including compensation expense, warranty
expense and costs of third-party products. The increase in cost of service in
the three months ended December 31, 2006 was 16.3%, which is less than the
increase in our total revenue in the three months ended December 31, 2006. As a
percentage of revenue, cost of service was 63.0% in the three months ended
December 31, 2006, compared to 63.7% in the three months ended December 31,
2005. Our cost of service and gross margin may vary depending on the types and
geographic locations of projects that we undertake.
RESEARCH AND DEVELOPMENT. Research and development expense is primarily
comprised of compensation expense. Research and development expense increased by
$17.4 million, or 40.3%, in the three months ended December 31, 2006 to $60.5
million from $43.1 million in the three months ended December 31, 2005. Research
and development expense increased as a percentage of revenue from 7.3% in the
three months ended December 31, 2005 to 8.7% in the three months ended December
31, 2006. The increase in research and development expense was attributable
mainly to research and development activities related to our fiscal 2006
acquisitions, as well as to an increase in research and development efforts to
support our growth strategy. We believe that our research and development
efforts are a key element of our strategy and are essential to our success.
However, an increase or a decrease in our total revenue would not necessarily
result in a proportional increase or decrease in the levels of our research and
development expenditures, which could affect our operating margin.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased by $10.6 million, or 13.5%, in the three months ended December
31, 2006 to $89.2 million, from $78.6 million in the three months ended December
31, 2005. Selling, general and administrative expense is primarily comprised of
compensation expense. Despite the increase in selling, general and
administrative expense related to acquisitions made during fiscal 2006, the
total increase in the three months ended December 31, 2006 was less than the
increase in our revenue which resulted in a decrease of selling, general and
administrative expense as a percentage of total revenue.
25
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended December 31, 2006 was $17.7 million,
compared to $7.6 million in the three months ended December 31, 2005. The
increase in amortization of purchased intangible assets was due to purchased
intangible assets acquired in our fiscal 2006 acquisitions.
OPERATING INCOME. Operating income increased by $4.8 million, or 5.8%, in
the three months ended December 31, 2006, to $87.5 million, or 12.7% of revenue,
from $82.7 million, or 14.1% of revenue, in the three months ended December 31,
2005. The decrease in operating income as a percentage of revenue was
attributable to a 19.7% increase in operating expense which grew at a greater
rate than the 17.7% increase in revenue during the three months ended December
31, 2006. The increase in operating expense is primarily attributable to the
increases in amortization and operating expense related to our fiscal 2006
acquisitions offset by a decrease in our ongoing operating expenses.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
by $3.3 million in the three months ended December 31, 2006 to $11.7 million
from $8.4 million in the three months ended December 31, 2005. The increase in
interest income and other, net, is primarily attributable to the impact of
foreign exchange benefits as well as to the increase in market interest rates on
our cash and short-term interest-bearing investments.
INCOME TAXES. Income taxes for the three months ended December 31, 2006
were $5.9 million on pretax income of $99.2 million, resulting in an effective
tax rate of 5.9% compared to 17.3% in the three months ended December 31, 2005.
Of the reduction in our effective tax rate, approximately 9.5% was attributable
to release of tax reserves as a result of the resolution of a prior year tax
audit, as well as changes in the Company's tax reserves made in the ordinary
course of business, approximately 4% was attributable to the net effect of
acquisition-related costs and equity-based compensation expense and the
remaining difference was primarily attributable to the geographical distribution
of earnings from global operations. Our effective tax rate for fiscal year 2007
is expected to be between 10% to 14% on an annualized basis compared to 14.8% in
fiscal year 2006. Our effective tax rate may fluctuate between quarters as a
result of discrete items that may affect a specific quarter.
NET INCOME. Net income was $93.3 million in the three months ended
December 31, 2006, compared to net income of $75.3 million in the three months
ended December 31, 2005. The increase in net income is attributable to the
increase in our operating income, the increase in interest income and other,
net, and the decrease of our effective tax rate.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.06,
or 16.7%, in the three months ended December 31, 2006 to $0.42 from $0.36 in the
three months ended December 31, 2005. The increase in diluted earnings per share
resulted from the increase in net income, partially offset by the increase in
diluted weighted average numbers of shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,018.5 million as of December 31, 2006, compared to $979.4 million as of
September 30, 2006. The increase is mainly attributable to positive cash flows
from operations of $99.1 million, proceeds from employee stock options exercised
of $15.5 million, partially offset by $50.6 million of capital expenditures and
$26.6 million cash paid for acquisitions. Net cash provided by operating
activities amounted to $99.1 million and $83.5 million for the three months
ended December 31, 2006 and 2005, respectively.
Our policy is to retain substantial cash balances in order to support the
growth of the Company. We believe that our current cash balances, cash generated
from operations and our current lines of credit will provide sufficient
resources to meet our operational needs for at least the next fiscal year.
26
As of December 31, 2006, $450.0 million and $0.2 million aggregate
principal amount of our 0.50% Convertible Senior Notes due 2024 and 2%
Convertible Notes due 2008 were outstanding, respectively. As of December 31,
2006, we had available short-term general revolving lines of credit totaling
$31.0 million, none of which was outstanding, and outstanding letters of credit
and bank guarantees from various banks totaling $8.3 million. As of December 31,
2006, we had outstanding short term loans totalling $1.8 million secured by
specified pledges and guaranties.
We have contractual obligations for our convertible notes, financing
arrangements and non-cancelable operating leases that were summarized in a table
of contractual obligations in our Annual Report on Form 20-F for fiscal 2006.
Since September 30, 2006, there have been no material changes in contractual
obligations outside the ordinary course of our business.
Our capital expenditures were approximately $50.6 million in the three
months ended December 31, 2006. Approximately 55% of these expenditures
consisted of purchases of computer equipment, and the remainder to leasehold
improvements. The capital expenditures in the three months ended December 31,
2006 were mainly attributable to investments in our operating facilities and our
development centers around the world. We funded our capital expenditures
principally from operating cash flows. We do not anticipate any changes to this
policy in the foreseeable future.
CURRENCY FLUCTUATIONS
We manage our foreign subsidiaries as integral direct components of our
operations. The U.S. dollar is our functional currency. According to the salient
economic factors indicated in SFAS No. 52, "Foreign Currency Translation", our
cash flow, sale price, sales market, expense, financing and intercompany
transactions and arrangement indicators are predominately denominated in the
U.S. dollar. The operations of our foreign subsidiaries provide the same type of
services with the same type of expenditure throughout the Amdocs group.
During the three months ended December 31, 2006 and 2005, approximately
70% of our revenue and approximately 50% to 60% of our operating expenses were
in U.S. dollars or linked to the U.S. dollar. As a result of long-term contracts
in currencies other than the U.S. dollar and more customers seeking contracts
that are denominated in currencies such as the Euro, the percentage of our
revenue and operating expenses in U.S. dollar or linked to the U.S. dollar may
decrease slightly over time. Historically, the effect of fluctuations in
currency exchange rates on our consolidated operations was not material. As more
of our customers seek contracts that are denominated in currencies other than
the U.S. dollar, our exposure to fluctuations in currency exchange rates could
increase. In managing our foreign exchange risk, we enter from time to time into
various foreign exchange hedging contracts. We do not hedge all of our exposure
in currencies other than the U.S. dollar, but rather our policy is to hedge
significant net exposures in the major foreign currencies in which we operate.
We periodically assess the applicability of the U.S. dollar as our functional
currency by reviewing the salient indicators.
27
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Not applicable
28
ITEM 2. REPORTS ON FORM 6-K
(a) Reports on Form 6-K
The Company furnished or filed the following reports on Form 6-K during
the three months ended December 31, 2006:
(1) Form 6-K dated December 14, 2006.
(2) Form 6-K dated December 13, 2006.
(3) Form 6-K dated November 2, 2006.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMDOCS LIMITED
/s/ Thomas G. O'Brien
-------------------------------
Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
Date: February 6, 2007