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 June 30, 2007
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-_____
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED JUNE 30, 2007
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
---------------------------
JUNE 30, SEPTEMBER 30,
2007 2006
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 623,643 $ 607,187
Short-term interest-bearing investments 528,006 372,194
Accounts receivable, net 480,433 425,805
Deferred income taxes and taxes receivable 130,876 136,044
Prepaid expenses and other current assets 93,991 97,476
---------- ----------
Total current assets 1,856,949 1,638,706
Equipment, vehicles and leasehold improvements, net 258,272 220,290
Deferred income taxes 189,477 133,690
Goodwill 1,481,010 1,461,606
Intangible assets, net 323,067 347,716
Other noncurrent assets 175,025 160,820
---------- ----------
Total assets $4,283,800 $3,962,828
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 153,101 $ 148,398
Accrued expenses and other current liabilities 216,803 270,268
Accrued personnel costs 178,222 178,441
Short-term portion of financing arrangements 2,029 1,963
Deferred revenue 243,917 253,376
Deferred income taxes and taxes payable 209,635 179,241
---------- ----------
Total current liabilities 1,003,707 1,031,687
Convertible notes 450,000 450,000
Deferred income taxes 125,975 129,339
Noncurrent liabilities and other 189,241 197,637
---------- ----------
Total liabilities 1,768,923 1,808,663
---------- ----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; L0.01
par value; 0 shares issued and outstanding -- --
Ordinary Shares - Authorized 550,000 shares; L0.01
par value; 237,263 and 233,932 issued and 210,124 and
206,793 outstanding, respectively 3,828 3,763
Additional paid-in capital 2,137,494 2,035,309
Treasury stock, at cost - 27,139 Ordinary Shares (602,392) (602,392)
Accumulated other comprehensive (loss) income (7,509) 2,723
Retained earnings 983,456 714,762
---------- ----------
Total shareholders' equity 2,514,877 2,154,165
---------- ----------
Total liabilities and shareholders' equity $4,283,800 $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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2007 2006 2007 2006
-------- -------- ---------- ----------
Revenue:
License $ 43,821 $ 23,220 $ 113,091 $ 85,172
Service 668,270 603,228 1,996,393 1,729,433
-------- -------- ---------- ----------
712,091 626,448 2,109,484 1,814,605
-------- -------- ---------- ----------
Operating expenses:
Cost of license 960 995 3,045 2,973
Cost of service 448,795 402,626 1,330,776 1,165,010
Research and development 56,727 46,455 174,929 131,392
Selling, general and administrative 94,445 74,940 274,895 227,289
Amortization of purchased intangible
assets 19,175 8,547 55,785 23,588
Restructuring charges, in-process
research and development and other -- 8,415 6,761 8,415
-------- -------- ---------- ----------
620,102 541,978 1,846,191 1,558,667
-------- -------- ---------- ----------
Operating income 91,989 84,470 263,293 255,938
Interest income and other, net 14,290 14,938 36,928 33,659
-------- -------- ---------- ----------
Income before income taxes 106,279 99,408 300,221 289,597
Income taxes 18,098 13,823 31,527 46,916
-------- -------- ---------- ----------
Net income $ 88,181 $ 85,585 $ 268,694 $ 242,681
======== ======== ========== ==========
Basic earnings per share $ 0.42 $ 0.42 $ 1.30 $ 1.20
======== ======== ========== ==========
Diluted earnings per share $ 0.40 $ 0.39 $ 1.22 $ 1.13
======== ======== ========== ==========
Basic weighted average number of shares
outstanding 208,262 204,404 207,332 202,474
======== ======== ========== ==========
Diluted weighted average number of shares
outstanding 223,775 220,109 222,997 217,633
======== ======== ========== ==========
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 (Loss) 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 -- -- -- -- -- 268,694 268,694
Unrealized loss on
foreign currency
hedging contracts,
net of $(1,961) tax -- -- -- -- (9,831) -- (9,831)
Unrealized loss on
short-term
interest-bearing
investments, net of
$(37) tax -- -- -- -- (401) -- (401)
----------
Comprehensive income -- -- -- -- -- -- 258,462
----------
Employee stock options
exercised 3,056 60 58,208 -- -- -- 58,268
Issuance of restricted
stock, net of
forfeitures 275 5 -- -- -- -- 5
Issuance of stock options
related to acquisition -- -- 768 -- -- -- 768
Tax benefit of stock
options exercised and
restricted stock vested -- -- 3,216 -- -- -- 3,216
Equity-based compensation
expense related to
employees -- -- 39,970 -- -- -- 39,970
Equity-based compensation
expense related to non
employee stock options -- -- 23 -- -- -- 23
------- ------ ---------- --------- ------- -------- ----------
BALANCE AS OF JUNE 30,
2007 210,124 $3,828 $2,137,494 $(602,392) $(7,509) $983,456 $2,514,877
======= ====== ========== ========= ======= ======== ==========
As of June 30, 2007 and September 30, 2006, accumulated other comprehensive
(loss) income is comprised of unrealized (loss) gain on foreign currency hedging
contracts, net of tax, of $(6,990) and $2,841, respectively, and unrealized loss
on short-term interest-bearing investments, net of tax, of $(519) 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)
NINE MONTHS ENDED JUNE 30,
--------------------------
2007 2006
--------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 268,694 $ 242,681
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 120,581 83,151
In-process research and development and other 750 8,415
(Gain) loss on sale of equipment (973) 925
Equity-based compensation expense 39,970 31,948
Deferred income taxes (17,779) 25,118
Excess tax benefit from equity-based compensation (437) (2,301)
Realized gain from short-term interest-bearing
investments (2,084) (5,392)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (53,597) (105,002)
Prepaid expenses and other current assets (16) 1,399
Other noncurrent assets (14,517) (12,671)
Accounts payable and accrued expenses (7,950) 39,633
Deferred revenue (27,008) (10,060)
Income taxes payable 6,200 (8,114)
Noncurrent liabilities and other 4,929 11,687
--------- -----------
Net cash provided by operating activities 316,763 301,417
--------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 3,184 3,736
Payments for purchase of equipment, vehicles and
leasehold improvements (126,259) (53,617)
Proceeds from sale of short-term interest-bearing
investments 628,167 851,868
Purchase of short-term interest-bearing investments (782,333) (1,131,159)
Net cash paid for acquisitions (81,751) (271,930)
--------- -----------
Net cash used in investing activities (358,992) (601,102)
--------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised
and issuance of restricted stock 58,273 83,195
Excess tax benefit from equity-based compensation 437 2,301
Principal payments under financing arrangements and other -- (4,774)
Principal payments on capital lease obligations (25) (3,131)
--------- -----------
Net cash provided by financing activities 58,685 77,591
--------- -----------
Net increase (decrease) in cash and cash equivalents 16,456 (222,094)
Cash and cash equivalents at beginning of period 607,187 707,552
--------- -----------
Cash and cash equivalents at end of period $ 623,643 $ 485,458
========= ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 35,016 $ 27,996
Interest 2,601 2,182
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 with the U.S. Securities and Exchange Commission (the "SEC").
2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board ("FASB")
issued Statement No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities" including an amendment of FASB Statement No. 115 ("SFAS
159"), which allows an entity the irrevocable option to elect fair value for the
initial and subsequent measurement for certain financial assets and liabilities
under an instrument-by-instrument election. If the fair value option is elected
for an instrument, subsequent changes in fair value for that instrument will be
recognized in earnings. SFAS 159 also establishes additional disclosure
requirements and is effective for fiscal years beginning after November 15,
2007, with early adoption permitted provided that the entity also adopts
Statement No. 157, "Fair Value Measurements" ("SFAS 157"). The Company is
currently evaluating the effect that the application of SFAS 159 will have on
its consolidated results of operations and financial condition.
In September 2006, the FASB issued 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, with
early adoption permitted. The Company is currently evaluating the effect that
the application of SFAS 157 will have on its consolidated results of operations
and financial condition.
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
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 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. In May 2007, the FASB published FASB Staff
Position No. FIN 48-1, "Definition of Settlement of FASB Interpretation No. 48"
("FSP FIN 48-1"). FSP FIN 48-1 is an amendment to FIN 48. It clarified how an
enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is
effective upon the initial adoption of FIN 48. These interpretations are
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the effect that the application of FIN 48 and FSP FIN 48-1
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.
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
-------------------------
JUNE 30, SEPTEMBER 30,
2007 2006
--------- -------------
Accounts receivable - billed $449,877 $383,763
Accounts receivable - unbilled 54,243 54,117
Less-allowances (23,687) (12,075)
-------- --------
Accounts receivable, net $480,433 $425,805
======== ========
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2007 2006 2007 2006
-------- ------- -------- --------
Net income $ 88,181 $85,585 $268,694 $242,681
Other comprehensive income (loss):
Unrealized (loss) gain on
foreign currency hedging
contracts, net of tax (11,330) 3,644 (9,831) 7,802
Unrealized loss on short-term
interest-bearing investments,
net of tax (816) (280) (401) (537)
-------- ------- -------- --------
Comprehensive income $ 76,035 $88,949 $258,462 $249,946
======== ======= ======== ========
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
5. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2007 2006 2007 2006
------- ------- -------- -------
Current $27,567 $ 86 $ 50,735 $22,518
Deferred (9,469) 13,737 (19,208) 24,398
------- ------- -------- -------
$18,098 $13,823 $ 31,527 $46,916
======= ======= ======== =======
The effective income tax rate varied from the statutory Guernsey tax
rate as follows for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2007 2006 2007 2006
---- ---- ---- ----
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 17 14 11 16
--- --- --- ---
Effective income tax rate 17% 14% 11% 16%
=== === === ===
As a Guernsey company with tax-exempt status, the Company's overall
effective tax rate is attributable to foreign taxes.
As of June 30, 2007, deferred tax assets of $29,881, 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. During the quarter ended
June 30, 2007, the Company released certain valuation allowances in connection
with the Company's estimation that carry forward losses related to one of its
subsidiaries will be realized through future taxable earnings. The decrease in
the valuation allowance was partially offset by an increase in tax reserves to
this same subsidiary.
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Numerator:
Numerator for basic earnings per
share $ 88,181 $ 85,585 $268,694 $242,681
Effect of assumed conversion of
0.50% convertible notes 985 985 2,955 2,964
-------- -------- -------- --------
Numerator for diluted earnings per
share $ 89,166 $ 86,570 $271,649 $245,645
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share - weighted average number
of shares outstanding 208,262 204,404 207,332 202,474
Effect of assumed conversion of
0.50% convertible notes 10,436 10,436 10,436 10,436
Effect of dilutive stock options
granted 4,665 5,080 4,879 4,609
Effect of restricted stock issued 412 189 350 114
-------- -------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 223,775 220,109 222,997 217,633
======== ======== ======== ========
Basic earnings per share $ 0.42 $ 0.42 $ 1.30 $ 1.20
======== ======== ======== ========
Diluted earnings per share $ 0.40 $ 0.39 $ 1.22 $ 1.13
======== ======== ======== ========
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
7. ACQUISITIONS
SIGVALUE
On February 7, 2007, the Company acquired 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 comprised 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 acquired all of SigValue's
remaining share capital. The Company expects that this acquisition will
expand its offering for the fast growing emerging markets.
The aggregate purchase price for the remaining 86% of SigValue's
outstanding capital stock was $71,872, which consisted of $70,428 in cash
(including cash on hand), $768 related to the assumption of stock options
held by SigValue employees and $676 of transaction costs. The fair value of
the stock options was estimated using the Black-Scholes option pricing
model.
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 $420,985, which consisted
of $412,403 in cash (including cash on hand), $2,228 related to the
assumption of stock options and restricted shares held by Cramer employees
and $6,354 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. During the nine months ended June 30, 2007, within the one
year allocation period, the Company revised the allocation of the purchase
price as it obtained more information and changed its estimates related to
the tax basis of assumed liabilities and related to certain other acquired
assets and assumed liabilities. The revised purchase price allocation
resulted in a decrease of $10,870 and $5,786 in goodwill during the three
and nine months ended June 30, 2007, respectively.
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 $280,983, which consisted
of $274,024 in cash, (including cash on hand), $2,405 related to the
assumption of stock options held by Qpass employees and $4,554 of
transaction costs. The fair value of the stock options was estimated using
the Black-Scholes option pricing model. During the nine months ended June
30, 2007, within the one year allocation period, the Company revised the
allocation of the purchase price as it obtained more information and
changed its estimates related to certain acquired assets and assumed
liabilities. The revised purchase price allocation
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
resulted in a decrease of $3,274 and $4,377 in goodwill during the three
and nine months ended June 30, 2007, respectively.
8. 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
stock options.
The following table summarizes information about options to purchase
the Company's Ordinary Shares, as well as changes during the nine month
period ended June 30, 2007:
WEIGHTED
WEIGHTED AVERAGE
NUMBER AVERAGE REMAINING
OF EXERCISE CONTRACTUAL
OPTIONS PRICE TERM
------- -------- -----------
Outstanding as of October 1, 2006 22,794 $29.02
Granted 2,434 35.70
Exercised (3,056) 19.07
Forfeited (925) 33.87
------
Outstanding as of June 30, 2007 21,247 $31.01 6.16
====== ====== ====
Exercisable on June 30, 2007 12,500 $31.90 4.56
====== ====== ====
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The following table summarizes information relating to awards of restricted
shares, as well as changes to such awards during the nine month period ended on
June 30, 2007:
WEIGHTED
NUMBER AVERAGE GRANT
OF SHARES DATE FAIR VALUE
--------- ---------------
Outstanding unvested shares as of
October 1, 2006 780 $32.89
Granted 307 36.72
Vested (137) 31.27
Forfeited (31) 35.55
---- ------
Outstanding unvested shares as of
June 30, 2007 919 $34.32
==== ======
As of June 30, 2007, there was $54,346 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 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 and nine months ended June 30, 2007 and 2006 was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2007 2006 2007 2006
-------- -------- -------- --------
Cost of service $ 6,587 $ 4,165 $18,914 $12,237
Research and development 1,734 1,232 5,099 3,041
Selling, general and
administrative 4,358 5,551 15,957 16,670
------- ------- ------- -------
Total $12,679 $10,948 $39,970 $31,948
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The total income tax benefit recognized in the income statement for
stock-based compensation (including restricted shares) for the three months
ended June 30, 2007 and 2006 was $2,161 and $1,281, respectively, and for the
nine months ended June 30, 2007 and 2006 was $6,467 and $3,815, respectively.
The Company selected the Black-Scholes option pricing model as the most
appropriate fair value method for its equity-based awards. 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 NINE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
--------------- ---------------
2007 2006 2007 2006
------ ------ ------ ------
Risk-free interest rate (1) 4.67% 5.00% 4.61% 4.54%
Expected life of stock options (2) 4.50 3.74 4.54 4.38
Expected volatility (3) 0.29 0.30 0.315 0.327
Expected dividend yield (4) None None None None
Fair value per option $12.14 $22.75 $12.72 $11.66
(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 is based on a combination of implied volatility of the
Company's traded options and historical stock price volatility ("blended
volatility").
(4) Expected dividend yield is based on the Company's history and future
expectation of dividend payouts.
Equity-based compensation recognized is reduced for estimated forfeitures
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates.
9. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAMS
In the quarter ended March 31, 2007, the Company commenced a series of
measures designed to align its operational structure to its expected future
growth and to improve efficiency. As part of this plan, the Company recorded a
charge of $6,011, consisting primarily of employee separation costs in
connection with the termination of the employment of software and information
technology specialists and administrative professionals at various locations
around the world and for facility related costs. Approximately $4,411 of the
total charge had been paid in cash as of June 30, 2007. The facility related
costs are expected to be paid through May 2013, and the remaining separation
costs are expected to be paid by September 30, 2007.
Each of these expenses related to our operational efficiency and cost
reduction program is included in restructuring charges and in-process research
and development and other.
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The restructuring accrual for this cost reduction program is comprised of
the following as of June 30, 2007:
EMPLOYEE
SEPARATION
COSTS FACILITIES TOTAL
---------- ---------- -------
Balance as of January 1, $ -- $ -- $ --
2007
Charge in second quarter of
fiscal 2007 4,935 1,076 6,011
Cash payments (4,317) (94) (4,411)
Non-cash (151) (48) (199)
------- ------ -------
Balance as of June 30, 2007 $ 467 $ 934 $ 1,401
In connection with the acquisition of DST Innovis, Inc. and DST
Interactive, Inc (collectively, "DST Innovis") in fiscal 2005, 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 (1,869) -- (1,869)
------- ---- -------
Balance as of June 30, 2007 $ 5,006 $112 $ 5,118
======= ==== =======
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
nine months ended June 30, 2007 and 2006.
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.
15
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
with the United States Securities and Exchange Commission ("SEC").
16
OVERVIEW OF BUSINESS AND TREND INFORMATION
Amdocs is a leading provider of software and services for
communications service providers. 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.
We develop, implement and manage software and services associated with
the business support systems and operations support systems (BSS and OSS) that
enable service providers to deliver a better customer experience, by, for
example, introducing products quickly, understanding their customers more
deeply, processing orders efficiently and solving problems productively. We
refer to these systems as Customer Experience Systems.
We believe the demand for our Customer Experience Systems is primarily
driven by the need for communications service providers to achieve a business
strategy we call integrated customer management. The goal of this strategy is to
transform service providers' systems so they can deliver a better, integrated,
and differentiated customer experience. We believe we comprehensively address
these communications service providers' needs, offering a market-defining
software portfolio and services that extend from strategy to execution. Although
the pace at which service providers were embarking on transformation projects at
the beginning of the year was 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 Customer Experience Systems.
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 product 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. During the second
quarter of fiscal 2007 we acquired SigValue Technologies, Inc., which we refer
to as SigValue. We believe this acquisition will expand our offering for fast
growing emerging markets, where the customer base is predominantly comprised of
mobile pre-paid subscribers. As part of our strategy, we 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.
OFFERINGS
Amdocs' Customer Experience Systems offerings consist of:
- a complete, modular portfolio of software across BSS and OSS
including revenue management (billing, mediation and partner
settlement), customer management (ordering, customer relationship
management or CRM, and self-service), service and resource
management (planning and fulfillment ) and digital commerce
management (content revenue management). In the past, we referred
to these systems as ICM Enabling Systems.
- a comprehensive line of services, from strategy to execution.
Because our customers' projects are complex and require systems
support expertise, 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.
We have designed our Customer Experience 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
17
packages. In addition, 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 also offer a full range of directory sales and publishing systems
and related line of services, which we refer to as Directory Systems, for
publishers of both traditional printed yellow page and white page directories
and electronic Internet directories.
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 Customer Experience 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.
- 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.
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
18
- 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 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 Customer
Experience 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
nine months ended June 30, 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 February 2007, the Financial Accounting Standards Board ("FASB")
issued Statement No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities" including an amendment of FASB Statement No. 115 ("SFAS
159"), which allows an entity the irrevocable option to elect fair value for the
initial and subsequent measurement for certain financial assets and liabilities
under an instrument-by-instrument election. If the fair value option is elected
for an instrument, subsequent changes in fair value for that instrument will be
recognized in earnings. SFAS 159 also establishes additional disclosure
requirements and is effective for fiscal years beginning after November 15,
2007, with early adoption permitted provided that the entity also adopts
Statement No. 157, "Fair Value Measurements" ("SFAS 157"). We are currently
evaluating the effect that the application of SFAS 159 will have on our
consolidated results of operations and financial condition.
In September 2006, the FASB issued 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
19
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. In May 2007, the FASB published FASB Staff
Position No. FIN 48-1, "Definition of Settlement of FASB Interpretation No. 48"
("FSP FIN 48-1"). FSP FIN 48-1 is an amendment to FIN 48. It clarified how an
enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is
effective upon the initial adoption of FIN 48. These interpretations are
effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the effect that the application of FIN 48 and FSP FIN 48-1 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
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.
20
RESULTS OF OPERATIONS
The following table sets forth for the three and nine months ended June 30,
2007 and 2006 certain items in our consolidated statements of income reflected
as a percentage of total revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2007 2006 2007 2006
----- ----- ----- -----
Revenue:
License ................................. 6.2% 3.7% 5.4% 4.7%
Service ................................. 93.8 96.3 94.6 95.3
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license ......................... 0.1 0.2 0.1 0.2
Cost of service ......................... 63.0 64.3 63.1 64.2
Research and development ................ 8.0 7.4 8.3 7.2
Selling, general and administrative ..... 13.3 12.0 13.0 12.5
Amortization of purchased intangible
assets ............................... 2.7 1.3 2.7 1.3
Restructuring charges, in-process
research and development and other ... -- 1.3 0.3 0.5
----- ----- ----- -----
87.1 86.5 87.5 85.9
----- ----- ----- -----
Operating income ........................... 12.9 13.5 12.5 14.1
Interest income and other, net ............. 2.0 2.4 1.7 1.9
----- ----- ----- -----
Income before income taxes ................. 14.9 15.9 14.2 16.0
Income taxes ............................... 2.5 2.2 1.5 2.6
----- ----- ----- -----
Net income ................................. 12.4% 13.7% 12.7% 13.4%
===== ===== ===== =====
21
NINE MONTHS ENDED JUNE 30, 2007 AND 2006
The following is a tabular presentation of our results of operations for
the nine months ended June 30, 2007 compared to the nine months ended June 30,
2006. Following the table is a discussion and analysis of our business and
results of operations for the mentioned periods.
NINE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
----------------------- -------------------
2007 2006 AMOUNT %
---------- ---------- -------- -----
(in thousands)
-----------------------------------
Revenue:
License ............................. $ 113,091 $ 85,172 $ 27,919 32.8%
Service ............................. 1,996,393 1,729,433 266,960 15.4
---------- ---------- --------
2,109,484 1,814,605 294,879 16.3
---------- ---------- --------
Operating expenses:
Cost of license ..................... 3,045 2,973 72 2.4
Cost of service ..................... 1,330,776 1,165,010 165,766 14.2
Research and development ............ 174,929 131,392 43,537 33.1
Selling, general and
administrative ................... 274,895 227,289 47,606 20.9
Amortization of purchased
intangible assets ................ 55,785 23,588 32,197 136.5
Restructuring charges,
in-process research and
development and other ............ 6,761 8,415 (1,654) (19.7)
---------- ---------- --------
1,846,191 1,558,667 287,524 18.4
---------- ---------- --------
Operating income ....................... 263,293 255,938 7,355 2.9
Interest income and other, net ......... 36,928 33,659 3,269 9.7
---------- ---------- --------
Income before income taxes ............. 300,221 289,597 10,624 3.7
Income taxes ........................... 31,527 46,916 (15,389) (32.8)
---------- ---------- --------
Net income ............................. $ 268,694 $ 242,681 $ 26,013 10.7%
========== ========== ========
REVENUE. Total revenue increased by $294.9 million, or 16.3%, in the nine
months ended June 30, 2007 to $2,109.5 million from $1,814.6 million in the nine
months ended June 30, 2006. Approximately 50% of the increase was attributable
to revenue contributed by acquisitions made during fiscal 2006 and 2007, and the
remainder was primarily attributable to additional revenue from consolidation
and transformation projects for tier one customers.
License and service revenue attributable to the sale of Customer Experience
Systems was $1,896.8 million in the nine months ended June 30, 2007, an increase
of $289.6 million, or 18.0%, over the nine months ended June 30, 2006.
Approximately 51% of the increase was attributable to revenue contributed by
acquisitions made during fiscal 2006 and 2007, and the remainder was primarily
attributable to additional revenue from consolidation and transformation
projects for tier one customers. License and service revenue resulted from the
sale of Customer Experience Systems represented 89.9% and 88.6% of our total
revenue in the nine months ended June 30, 2007 and 2006, respectively. We
believe the demand for our Customer Experience Systems is primarily driven by
the need for communications service providers to achieve integrated customer
management. Although the pace at which service providers were embarking on
transformation projects at the beginning of the year was 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 Customer Experience Systems.
22
License and service revenue from the sale of Directory Systems was $212.7
million in the nine months ended June 30, 2007, an increase of $5.3 million, or
2.5%, over the nine months ended June 30, 2006. The increase in Directory
Systems revenue in the nine months ended June 30, 2007 was primarily
attributable to increase in revenue from customers in Europe. License and
service revenue from the sale of Directory Systems represented 10.1% and 11.4%
of our total revenue in the nine months ended June 30, 2007 and 2006,
respectively. We believe that we are a leading provider of Directory Systems in
most of the markets we serve.
In the nine months ended June 30, 2007, revenue from customers in North
America, Europe and the rest of the world accounted for 66.4%, 22.6% and 11.0%,
respectively, of total revenue compared to 70.3%, 21.5% and 8.2%, respectively,
in the nine months ended June 30, 2006. Revenue from customers in North America
increased in absolute amounts, but the increase was less than the 16.3% increase
in our total revenue which resulted in a decrease in revenue from customers in
North America as a percentage of total revenue . Approximately 81% of the
increase in revenue from customers in Europe, in absolute amount, was
attributable to revenues contributed by acquisitions made during fiscal 2006 and
2007, and the remainder was primarily attributable to projects for tier one
customers. The increase in revenue from customers in the rest of the world in
the nine months ended June 30, 2007 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 nine months ended June 30, 2007, cost of license as a percentage of
license revenue was 2.7%, compared to 3.5% in the nine months ended June 30,
2006.
COST OF SERVICE. Cost of service consists primarily of costs associated
with providing services to customers, including compensation expense and costs
of third-party products. The increase in cost of service in the nine months
ended June 30, 2007 was $165.8 million or 14.2%, which is less than the increase
in our total revenue in the nine months ended June 30, 2007. As a percentage of
revenue, cost of service was 63.1% in the nine months ended June 30, 2007,
compared to 64.2% in the nine months ended June 30, 2006. The decrease in cost
of service in the nine months ended June 30, 2007 as a percentage of revenue was
attributable to a decrease in cost of service expense related to our core
business, partially offset by cost of service expense related to our fiscal 2006
and 2007 acquisitions. 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
$43.5 million, or 33.1%, in the nine months ended June 30, 2007 to $174.9
million from $131.4 million in the nine months ended June 30, 2006. Research and
development expense increased as a percentage of revenue from 7.2% in the nine
months ended June 30, 2006 to 8.3% in the nine months ended June 30, 2007. The
increase in research and development expense as a percentage of revenue was
attributable primarily to research and development activities related to our
fiscal 2006 and 2007 acquisitions. 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 $47.6 million, or 20.9%, in the nine months ended June 30,
2007 to $274.9 million, from $227.3 million in the nine months ended June 30,
2006. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense in absolute amount is attributable to selling, general and
administrative expense related to our fiscal 2006 and 2007 acquisitions.
23
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the nine months ended June 30, 2007 was $55.8 million,
compared to $23.6 million in the nine months ended June 30, 2006. The increase
in amortization of purchased intangible assets was due to purchased intangible
assets acquired in our fiscal 2006 and 2007 acquisitions.
RESTRUCTURING CHARGES, IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER.
Restructuring charges, in-process research and development and other in the nine
months ended June 30, 2007 consisted of a $6.0 million restructuring charge
related to our restructuring plan in the second quarter of fiscal 2007, and a
charge of $2.7 million for the write-off of purchased in-process research and
development related to our acquisition of SigValue, offset by the cumulative
effect of our 14% share in SigValue's pre-acquisition results of $1.9 million.
OPERATING INCOME. Operating income increased by $7.4 million, or 2.9%, in
the nine months ended June 30, 2007, to $263.3 million, or 12.5% of revenue,
from $255.9 million, or 14.1% of revenue, in the nine months ended June 30,
2006. The decrease in operating income as a percentage of revenue was
attributable to an 18.4% increase in operating expense which grew at a greater
rate than the 16.3% increase in revenue during the nine months ended June 30,
2007. The increase in operating expense as a percentage of revenue is primarily
attributable to the increases in amortization of purchased intangible assets,
and to operating expense related to our fiscal 2006 and 2007 acquisitions,
partially offset by a decrease in our core operating expenses as a percentage of
revenue.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased by
$3.3 million in the nine months ended June 30, 2007 to $36.9 million from $33.6
million in the nine months ended June 30, 2006. The increase in interest income
and other, net, is primarily attributable to the impact of foreign exchange
benefits.
INCOME TAXES. Income taxes for the nine months ended June 30, 2007 were
$31.5 million on pretax income of $300.2 million, resulting in an effective tax
rate of 10.5% compared to 16.2% in the nine months ended June 30, 2006. Of the
reduction in our effective tax rate, 3.2% was attributable to the net effect of
acquisition-related costs (which include amortization of purchased intangible
assets and other), restructuring charges and equity-based compensation expense,
2.8% was attributable to the net change in valuation allowances and tax
reserves, offset by 2.8% attributable to adjustments to deferred tax
liabilities related to two fiscal 2006 acquisitions, 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% and 13% 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 as well as changes
in the Company's tax reserves in the ordinary course of business.
NET INCOME. Net income was $268.7 million in the nine months ended June 30,
2007, compared to net income of $242.7 million in the nine months ended June 30,
2006. The increase in net income is attributable to the increase in operating
income and interest income and other, net and to the decrease of our effective
tax rate in the nine months ended June 30, 2007.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.09,
or 8.0%, in the nine months ended June 30, 2007 to $1.22 from $1.13 in the nine
months ended June 30, 2006. The increase in diluted earnings per share resulted
from the increase in net income partially offset by the increase in diluted
weighted average number of shares outstanding.
24
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
The following is a tabular presentation of our results of operations for
the three months ended June 30, 2007 compared to the three months ended June 30,
2006. Following the table is a discussion and analysis of our business and
results of operations for such periods.
THREE MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
------------------- -----------------
2007 2006 AMOUNT %
-------- -------- ------ ------
(in thousands)
-----------------------------
Revenue:
License...................... $ 43,821 $ 23,220 $20,601 88.7%
Service...................... 668,270 603,228 65,042 10.8
-------- -------- -------
712,091 626,448 85,643 13.7
-------- -------- -------
Operating expenses:
Cost of license.............. 960 995 (35) (3.5)
Cost of service.............. 448,795 402,626 46,169 11.5
Research and development..... 56,727 46,455 10,272 22.1
Selling, general and
administrative............ 94,445 74,940 19,505 26.0
Amortization of purchased
intangible assets......... 19,175 8,547 10,628 124.3
Restructuring charges,
in-process research and
development and other..... -- 8,415 (8,415) (100.0)
-------- -------- -------
620,102 541,978 78,124 14.4
-------- -------- -------
Operating income................ 91,989 84,470 7,519 8.9
Interest income and other, net.. 14,290 14,938 (648) (4.3)
-------- -------- -------
Income before income taxes...... 106,279 99,408 6,871 6.9
Income taxes.................... 18,098 13,823 4,275 30.9
-------- -------- -------
Net income...................... $ 88,181 $ 85,585 $ 2,596 3.0%
======== ======== =======
REVENUE. Total revenue increased by $85.6 million, or 13.7%, in the three
months ended June 30, 2007 to $712.1 million from $626.4 million in the three
months ended June 30, 2006. Approximately 57% of the increase was attributable
to revenue contributed by acquisitions made during fiscal 2006 and 2007, and the
remainder was primarily attributable to additional revenue from consolidation
and transformation projects for tier one customers.
License revenue was $43.8 million in the three months ended June 30, 2007,
an increase of $20.6 million, or 88.7%, over the three months ended June 30,
2006. The increase in license revenue was attributable primarily to license
revenue contributed by acquisitions made during fiscal 2006, and to subscriber
growth at our customers.
License and service revenue attributable to the sale of Customer Experience
Systems was $639.9 million in the three months ended June 30, 2007, an increase
of $83.4 million, or 15.0%, over the three months ended June 30, 2006.
Approximately 58% of the increase was attributable to revenue contributed by
acquisitions made during fiscal 2006 and 2007, and the remainder was primarily
attributable to additional revenue from consolidation and transformation
projects for tier one customers. License and service revenue resulted from the
sale of Customer Experience Systems represented 89.9% and 88.8% of our total
revenue in the three months ended June 30, 2007 and 2006, respectively. We
believe the demand for our Customer Experience
25
Systems is primarily driven by the need of communications service providers to
achieve integrated customer management. Although the pace at which service
providers were embarking on transformation projects at the beginning of the year
was 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 Customer
Experience Systems.
License and service revenue attributable to the sale of Directory Systems
was $72.2 million in the three months ended June 30, 2007, compared to $69.9
million in the three months ended June 30, 2006, an increase of $2.3 million, or
3.3%, over the three months ended June 30, 2006. License and service revenue
from the sale of Directory Systems represented 10.1% and 11.2% of our total
revenue in the three months ended June 30, 2007 and 2006, respectively. We
believe that we are a leading provider of Directory Systems in most of the
markets we serve.
In the three months ended June 30, 2007, revenue from customers in North
America, Europe and the rest of the world accounted for 64.1%, 22.7% and 13.2%,
respectively, of total revenue compared to 68.1%, 24.0% and 7.9%, respectively,
in the three months ended June 30, 2006. Revenue from customers in North America
increased in absolute amounts, but the increase was less than the 13.7% increase
in our total revenue which resulted in a decrease in revenue from customers in
North America as a percentage of total revenue. The increase in revenue from
customers in the rest of the world in the three months ended June 30, 2007 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 June 30, 2007 and 2006, cost of license as a
percentage of license revenue was 2.2% and 4.3%, respectively.
COST OF SERVICE. Cost of service consists primarily of costs associated
with providing services to customers, including compensation expense and costs
of third-party products. The increase in cost of service in the three months
ended June 30, 2007 was 11.5%, which is less than the increase in our total
revenue in the three months ended June 30, 2007. As a percentage of revenue,
cost of service was 63.0% in the three months ended June 30, 2007, compared to
64.3% in the three months ended June 30, 2006. The decrease in cost of service
in the three months ended June 30, 2007 as a percentage of revenue was
attributable to a decrease in cost of service expense related to our core
business, partially offset by cost of service expense related to our fiscal 2006
and 2007 acquisitions. 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
$10.3 million, or 22.1%, in the three months ended June 30, 2007 to $56.7
million from $46.5 million in the three months ended June 30, 2006. Research and
development expense increased as a percentage of revenue from 7.4% in the three
months ended June 30, 2006 to 8.0% in the three months ended June 30, 2007. The
increase in research and development expense as a percentage of revenue was
attributable to research and development activities related to our fiscal 2006
and 2007 acquisitions partially offset by a decrease in research and development
expense, as a percentage of revenue, related to our core activities following
the release of Amdocs 7 (as some of the resources were moved to production
support). 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 $19.5 million, or 26.0%, in the three months ended June 30,
2007 to $94.4 million, from $74.9 million in the three months ended June 30,
2006. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense as a percentage of revenue is attributable to selling, general and
administrative expense related to our fiscal 2006 and 2007 acquisitions.
26
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended June 30, 2007 was $19.2 million,
compared to $8.5 million in the three months ended June 30, 2006. The increase
in amortization of purchased intangible assets was due to purchased intangible
assets acquired in our fiscal 2006 and 2007 acquisitions.
OPERATING INCOME. Operating income increased by $7.5 million, or 8.9%, in
the three months ended June 30, 2007, to $92.0 million, or 12.9% of revenue,
from $84.5 million, or 13.5% of revenue, in the three months ended June 30,
2006. The decrease in operating income as a percentage of revenue was
attributable to a 14.4% increase in operating expense which grew at a greater
rate than the 13.7% increase in revenue during the three months ended June 30,
2007. The increase in operating expense as a percentage of revenue is primarily
attributable to the increase in amortization of purchased intangible assets and
to operating expense related to our fiscal 2006 and 2007 acquisitions, partially
offset by a decrease in our core operating expenses as a percentage of revenue
as well as to a decrease in restructuring charges, in-process research and
development and other.
INTEREST INCOME AND OTHER, NET. Interest income and other, net decreased by
$0.6 million in the three months ended June 30, 2007 to $14.3 million from $14.9
million in the three months ended June 30, 2006.
INCOME TAXES. Income taxes for the three months ended June 30, 2007 were
$18.1 million on pretax income of $106.3 million, resulting in an effective tax
rate of 17.0% compared to 13.9% in the three months ended June 30, 2006. Of the
increase in our effective tax rate, 8.5% was attributable to the adjustments to
deferred tax liabilities related to two fiscal 2006 acquisitions, 1.3% was
attributable to the net change in valuation allowances and tax reserves,
partially offset by 1.2% net effect of acquisition-related costs (which include
amortization of purchased intangible assets), 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% and 13% 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 as well as changes in the Company's tax reserves in the
ordinary course of business.
NET INCOME. Net income was $88.2 million in the three months ended June 30,
2007, compared to net income of $85.6 million in the three months ended June 30,
2006. The increase in net income is attributable to the increase in our
operating income partially offset by the increase in our effective tax rate in
the three months ended June 30, 2007.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.01,
or 2.6%, in the three months ended June 30, 2007 to $0.40 from $0.39 in the
three months ended June 30, 2006. The increase in diluted earnings per share
resulted from the increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,151.6 million as of June 30, 2007, compared to $979.4 million as of September
30, 2006. The increase is mainly attributable to positive cash flows from
operations of $316.8 million, proceeds from employee stock options exercised of
$58.3 million, partially offset by $126.3 million of capital expenditures and
$81.8 million in net cash paid for acquisitions. Net cash provided by operating
activities amounted to $316.8 million and $301.4 million for the nine months
ended June 30, 2007 and 2006, respectively.
Our policy is to retain substantial cash balances in order to support our
growth. 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. We may seek to
establish a credit facility in order to have the flexibility to increase our
capital resources, if needed for general corporate purposes as well as for
future possible strategic opportunities, including acquisitions.
27
As of June 30, 2007, $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 June 30, 2007, 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 $7.2 million. As of June 30, 2007, 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 $126.3 million in the nine
months ended June 30, 2007. Approximately 67% of these expenditures consisted of
purchases of computer equipment, and the remainder primarily to leasehold
improvements. The capital expenditures in the nine months ended June 30, 2007
were mainly attributable to invetsments 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 and nine months ended June 30, 2007 and 2006,
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 and options.
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.
28
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Not applicable
29
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 June 30, 2007:
(1) Form 6-K dated May 11, 2007.
(2) Form 6-K dated April 27, 2007.
30
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: August 6, 2007