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 March 31, 2008
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 MARCH 31, 2008
INDEX
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements 2
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statement of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Operating and Financial Review and Prospects 15
PART II OTHER INFORMATION 27
Item 1. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 27
Item 2. Reports on Form 6-K 28
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
---------------------------
MARCH 31, SEPTEMBER 30,
2008 2007
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 680,670 $ 615,501
Short-term interest-bearing investments 501,127 563,779
Accounts receivable, net 568,503 473,847
Deferred income taxes and taxes receivable 108,959 117,623
Prepaid expenses and other current assets 113,463 98,746
---------- -----------
Total current assets 1,972,722 1,869,496
Equipment, vehicles and leasehold improvements, net 296,288 283,839
Deferred income taxes 201,626 192,761
Goodwill 1,487,626 1,489,132
Intangible assets, net 284,720 303,456
Other noncurrent assets 262,421 206,666
---------- -----------
Total assets $4,505,403 $ 4,345,350
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 186,138 $ 192,395
Accrued expenses and other current liabilities 222,970 222,616
Accrued personnel costs 172,329 177,926
Short-term portion of financing arrangements 2,178 2,055
Deferred revenue 209,226 174,526
Deferred income taxes and taxes payable 35,882 205,960
---------- -----------
Total current liabilities 828,723 975,478
Convertible notes 450,000 450,000
Deferred income taxes and taxes payable 289,259 122,983
Noncurrent liabilities and other 213,727 196,646
---------- -----------
Total liabilities 1,781,709 1,745,107
---------- -----------
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; 239,426 and 238,312 issued and
207,050 and 209,762 outstanding, respectively 3,871 3,850
Additional paid-in capital 2,212,700 2,168,234
Treasury stock, at cost -32,376 and
28,550 Ordinary Shares, respectively (774,670) (652,229)
Accumulated other comprehensive income 6,571 689
Retained earnings 1,275,222 1,079,699
---------- -----------
Total shareholders' equity 2,723,694 2,600,243
---------- -----------
Total liabilities and shareholders' equity $4,505,403 $ 4,345,350
========== ===========
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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -----------------------
2008 2007 2008 2007
-------- -------- ---------- ----------
Revenue:
License $ 32,109 $ 37,526 $ 58,326 $ 69,270
Service 742,172 668,835 1,458,205 1,328,123
-------- -------- ---------- ----------
774,281 706,361 1,516,531 1,397,393
-------- -------- ---------- ----------
Operating expenses:
Cost of license 938 1,016 1,712 2,085
Cost of service 493,956 446,860 964,697 881,981
Research and development 56,088 57,734 112,103 118,202
Selling, general and administrative 98,666 91,280 196,331 180,450
Amortization of purchased intangible assets 21,753 18,912 43,506 36,610
Restructuring charges, in-process research and
development and other -- 6,761 -- 6,761
-------- -------- ---------- ----------
671,401 622,563 1,318,349 1,226,089
-------- -------- ---------- ----------
Operating income 102,880 83,798 198,182 171,304
Interest income and other, net 8,822 10,899 17,638 22,638
-------- -------- ---------- ----------
Income before income taxes 111,702 94,697 215,820 193,942
Income taxes 11,843 7,526 20,297 13,429
-------- -------- ---------- ----------
Net income $ 99,859 $ 87,171 $ 195,523 $ 180,513
======== ======== ========== ==========
Basic earnings per share $ 0.48 $ 0.42 $ 0.94 $ 0.87
======== ======== ========== ==========
Diluted earnings per share $ 0.46 $ 0.40 $ 0.89 $ 0.82
======== ======== ========== ==========
Basic weighted average number of shares outstanding 206,759 207,293 207,437 206,867
======== ======== ========== ==========
Diluted weighted average number of shares outstanding 219,786 222,499 220,912 222,608
======== ======== ========== ==========
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, 2007 209,762 $3,850 $2,168,234 $(652,229) $ 689 $1,079,699 $2,600,243
Comprehensive income:
Net income - - - - - 195,523 195,523
Unrealized gain on
foreign currency
hedging contracts,
net of $2,282 tax - - - - 7,416 - 7,416
Unrealized loss on
short-term
interest-bearing
investments, net of
$(325) tax - - - - (1,534) - (1,534)
----------
Comprehensive income 201,405
----------
Employee stock options
exercised 790 15 15,715 - - - 15,730
Repurchase of shares (3,826) (122,441) - - (122,441)
Issuance of restricted
stock, net of
forfeitures 324 6 - - - - 6
Tax benefit of stock
options exercised - - 1,122 - - - 1,122
Equity-based compensation
expense related to
employees - - 27,629 - - - 27,629
------- ------ ---------- --------- ------- ---------- ----------
BALANCE AS OF MARCH 31,
2008 207,050 $3,871 $2,212,700 $(774,670) $ 6,571 $1,275,222 $2,723,694
======= ====== ========== ========= ======= ========== ==========
As of March 31, 2008 and September 30, 2007, accumulated other comprehensive
income is comprised of unrealized gain (loss) on foreign currency hedging
contracts, net of tax, of $6,837 and $(579), respectively, unrealized (loss)
gain on cash equivalents and short-term interest-bearing investments, net of
tax, of $(993) and $541, respectively and adjustment to accumulated other
comprehensive income upon adoption of statement 158, net of tax, of $727.
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollar amounts in thousands)
SIX MONTHS ENDED MARCH 31,
--------------------------
2008 2007
--------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 195,523 $ 180,513
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 94,202 77,805
In-process research and development and other -- 750
Loss (gain) on sale of equipment 65 (278)
Equity-based compensation expense 27,629 27,291
Deferred income taxes (4,255) (8,674)
Excess tax benefit from equity-based compensation (87) (265)
Loss (gain) from short-term interest-bearing
investments 1,755 (1,289)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (125,634) (54,825)
Prepaid expenses and other current assets (4,624) (695)
Other noncurrent assets (24,963) (11,666)
Accounts payable and accrued expenses (11,079) 933
Deferred revenue 30,817 78
Income taxes payable (4,694) (22,671)
Noncurrent liabilities and other 15,790 3,271
--------- ---------
Net cash provided by operating activities 190,445 190,278
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 673 1,347
Payments for purchase of equipment, vehicles and
leasehold improvements (69,126) (84,889)
Proceeds from sale of short-term interest-bearing
investments 360,297 440,440
Purchase of short-term interest-bearing investments (301,260) (484,753)
Net cash paid for acquisitions (9,242) (77,598)
--------- ---------
Net cash used in investing activities (18,658) (205,453)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised 15,736 28,953
Excess tax benefit from equity-based compensation 87 265
Repurchase of shares (122,441) --
--------- ---------
Net cash (used in) provided by financing activities (106,618) 29,218
--------- ---------
Net increase in cash and cash equivalents 65,169 14,043
Cash and cash equivalents at beginning of period 615,501 607,187
--------- ---------
Cash and cash equivalents at end of period $ 680,670 $ 621,230
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 26,121 $ 38,351
Interest 1,508 2,011
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, 2007, set forth in the Company's
Annual Report on Form 20-F filed with the U.S. Securities and Exchange
Commission (the "SEC").
Reclassification
Certain amounts in prior year financial statements have been
reclassified to conform to the current year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the Financial Accounting Standards Board ("FASB")
issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 ("SFAS 161").
SFAS 161 applies to all derivative instruments and nonderivative
instruments that are designated and qualify as hedging instruments and
related hedged items accounted for under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities ("Statement 133"). SFAS
161 requires entities to provide greater transparency through additional
disclosures about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
under Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. Although SFAS 161 requires the Company to make
additional disclosures, it does not affect the underlying accounting policy
or the application thereof.
In December 2007, the FASB issued Statement No. 141 (revised),
Business Combinations ("SFAS 141(R)"). SFAS 141(R) significantly changes
the accounting for business combinations and establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and
any noncontrolling interest in the acquiree and
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
recognizes and measures the goodwill acquired in the business combination
or a gain from a bargain purchase. SFAS 141(R) applies to the Company
prospectively for business combinations for which the acquisition date is
on or after October 1, 2009.
In December 2007, the FASB issued Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
("SFAS 160"). SFAS 160 changes the accounting for noncontrolling (minority)
interests in consolidated financial statements including the requirements
to classify noncontrolling interests as a component of consolidated
stockholders' equity, the elimination of "minority interest" accounting in
results of operations and changes in the accounting for both increases and
decreases in a parent's controlling ownership interest. SFAS 160 is
effective for fiscal years beginning after December 15, 2008, and early
adoption is prohibited. The Company is currently evaluating the effect that
the application of SFAS 160 will have on its consolidated results of
operations and financial condition.
In February 2007, the 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 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 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position No. SFAS 157-b,
Effective Date of FASB Statement No. 157, which provides a one year
deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in
the financial statements at fair value on a recurring basis (at least
annually). The Company is currently evaluating the effect that the
application of SFAS 157 will have on its consolidated results of operations
and financial condition.
3. ADOPTION OF NEW ACCOUNTING STANDARD
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. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 in the first quarter of fiscal 2008. The adoption of FIN 48
did not result in a change to retained earnings. See Note 6 for additional
information regarding the Company's provision for income taxes, including
the effects of adoption of FIN 48 on its consolidated financial statements.
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
-------------------------
MARCH 31, SEPTEMBER 30,
2008 2007
--------- -------------
Accounts receivable - billed $564,384 $457,393
Accounts receivable - unbilled 41,300 43,870
Less-allowances (37,181) (27,416)
-------- --------
Accounts receivable, net $568,503 $473,847
======== ========
5. 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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
2008 2007 2008 2007
-------- ------- -------- --------
Net income $ 99,859 $87,171 $195,523 $180,513
Other comprehensive income:
Unrealized gain (loss) on
foreign currency hedging
contracts, net of tax 3,354 (168) 7,416 1,499
Unrealized (loss) gain on
short-term interest-bearing
investments, net of tax (1,996) 521 (1,534) 415
-------- ------- -------- --------
Comprehensive income $101,217 $87,524 $201,405 $182,427
======== ======= ======== ========
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
6. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2008 2007 2008 2007
------- -------- ------- -------
Current $ 6,963 $ 19,424 $25,351 $23,168
Deferred 4,880 (11,898) (5,054) (9,739)
------- -------- ------- -------
$11,843 $ 7,526 $20,297 $13,429
======= ======== ======= =======
The effective income tax rate varied from the statutory Guernsey tax
rate as follows for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ---------------
2008 2007 2008 2007(1)
---- ---- ---- -------
Statutory Guernsey tax rate 0% 20% 0% 20%
Guernsey tax-exempt status -- (20) -- (20)
Foreign taxes 11 8 9 7
--- --- --- ---
11% 8% 9% 7%
--- --- --- ---
(1) Includes the Company's net release of $11,924 of tax reserves attributable
to a resolved tax audit of a prior year, as well as changes in the
Company's tax reserves in the ordinary course of business. The changes in
the Company's tax reserves are recognized through income taxes or through
other balance sheet items.
As a Guernsey company subject to a corporate tax rate of zero percent,
the Company's overall effective tax rate is attributable to foreign taxes.
Tax legislation recently enacted in Guernsey with effect from January 1,
2008 repealed the exemption that the Company previously utilized, and
subjects the Company to a corporate tax rate of zero percent, which has not
affected the Company's overall effective tax rate.
As of March 31, 2008, deferred tax assets of $33,371, 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.
On October 1, 2007, the Company adopted FIN 48 which prescribes a
comprehensive model for the financial statement recognition, measurement,
classification and disclosure of uncertain tax positions. The adoption of
FIN 48 did not result in a change to the Company's retained earnings. The
total amount of gross unrecognized tax benefits as of the date of adoption,
which includes interest and penalties, was $108,929, of which $104,762
would affect the Company's effective tax rate if realized. The Company
historically classified unrecognized tax benefits in current income taxes
payable. In implementing FIN 48, the Company has reclassified unrecognized
tax benefits for which the Company does not anticipate making payment
within one year to long-term income taxes payable.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The total amount of unrecognized tax benefits, which includes interest
and penalties, was $109,677 as of March 31, 2008, of which $105,281 would
affect the effective tax rate if realized. As a result of the settlement of
certain tax matters during the first quarter of fiscal 2008, the amount of
gross unrecognized tax benefits was reduced by approximately $11,750
(including interest), of which $4,688 was recorded as a reduction in tax
receivable.
The Company's policy of including interest and penalties related to
income taxes, including unrecognized tax benefits, within the provision for
income taxes on the consolidated statements of income did not change as a
result of implementing FIN 48. As of the date of adoption of FIN 48, the
Company had accrued $17,530 in income taxes payable for interest and
penalties relating to unrecognized tax benefits. As of March 31, 2008, the
Company has accrued $19,742 in income taxes payable for interest and
penalties relating to unrecognized tax benefits.
The Company is currently under audit in several jurisdictions for the
tax years 2001 and onwards. Timing of the resolution of audits is highly
uncertain and therefore the Company cannot estimate the change in
unrecognized tax benefits resulting from these audits within the next 12
months.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
Numerator:
Numerator for basic earnings per
share $ 99,859 $ 87,171 $195,523 $180,513
Effect of assumed conversion of
0.50% convertible notes 985 985 1,970 1,970
-------- -------- -------- --------
Numerator for diluted earnings per
share $100,844 $ 88,156 $197,493 $182,483
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share- weighted average number
of shares outstanding 206,759 207,293 207,437 206,867
Effect of assumed conversion of
0.50% convertible notes 10,436 10,436 10,436 10,436
Effect of dilutive stock options
granted 2,253 4,442 2,677 4,986
Effect of restricted stock issued 338 328 362 319
-------- -------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 219,786 222,499 220,912 222,608
======== ======== ======== ========
Basic earnings per share $ 0.48 $ 0.42 $ 0.94 $ 0.87
======== ======== ======== ========
Diluted earnings per share $ 0.46 $ 0.40 $ 0.89 $ 0.82
======== ======== ======== ========
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
8. REPURCHASE OF SECURITIES
In August 2007, the Company announced that its board of directors had
authorized a share repurchase plan allowing the repurchase of up to $400
million of its outstanding ordinary shares. The authorization permits the
Company to purchase its ordinary shares in open market or privately
negotiated transactions at times and prices that it considers appropriate.
During the six months ended March 31, 2008, the Company repurchased 3,826
ordinary shares under this repurchase program, at an average price of
$31.98 per share (excluding broker and transaction fees).
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 2008, the maximum number of ordinary shares authorized
to be granted under the Plan was increased from 46,300 to 55,300. Awards
granted under the Plan generally vest over a period of four years and stock
options have a term of ten years.
The following table summarizes information about options to purchase
the Company's ordinary shares, as well as changes during the six month
period ended March 31, 2008:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF EXERCISE CONTRACTUAL
OPTIONS PRICE TERM
--------- -------- -----------
Outstanding as of October 1, 2007 20,457 $31.62
Granted 4,692 33.64
Exercised (790) 19.92
Forfeited (875) 34.94
------
Outstanding as of March 31, 2008 23,484 $32.30 6.28
------ ------ ----
Exercisable on March 31, 2008 13,510 $32.16 4.42
====== ====== ====
The following table summarizes information relating to awards of
restricted shares, as well as changes to such awards during the six month
period ended on March 31, 2008:
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
WEIGHTED
AVERAGE
NUMBER OF GRANT DATE
SHARES FAIR VALUE
--------- ----------
Outstanding unvested shares as of
October 1, 2007 955 $34.50
Granted 407 33.90
Vested (197) 33.13
Forfeited (83) 35.18
----- ------
Outstanding unvested shares as of
March 31, 2008 1,082 $34.47
===== ======
As of March 31, 2008, there was $75,142 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.
Equity-based payments to employees, including grants of employee stock
options, are recognized in the statements of income based on their fair
values in accordance with FASB Statement No. 123 (revised 2004),
"Share-Based Payment," a revision of SFAS No. 123 ("SFAS 123(R)") and Staff
Accounting Bulletin No. 107 ("SAB 107"), which provides supplemental
implementation guidance on SFAS 123(R).
Employee equity-based compensation pre-tax expense under SFAS 123(R)
for the three and six months ended March 31, 2008 and 2007 was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
MARCH 31, 2008 MARCH 31, 2007 MARCH 31, 2008 MARCH 31, 2007
-------------- -------------- -------------- --------------
Cost of service $ 5,431 $ 6,005 $11,713 $12,327
Research and development 1,146 1,587 2,522 3,365
Selling, general and
administrative 6,836 4,374 13,394 11,599
------- ------- ------- -------
Total $13,413 $11,966 $27,629 $27,291
======= ======= ======= =======
The total income tax benefit recognized in the income statement for
stock-based compensation (including restricted shares) for the three months
ended March 31, 2008 and 2007 was $1,434 and $1,914, respectively, and for
the six months ended March 31, 2008 and 2007 was $2,830 and $4,306,
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):
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2008 2007 2008 2007
------ ------- ------ -------
Risk-free interest rate (1) 2.67% 4.70% 3.23% 4.61%
Expected life of stock options (2) 4.50 4.65 4.28 4.54
Expected volatility (3) 0.35 0.31 0.33 0.32
Expected dividend yield (4) None None None None
Fair value per option $10.64 $12.50 $10.58 $12.74
(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.
10. 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 expense 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 $5,238 of the total expense had been paid in cash as of March
31, 2008, the reminder is primarily attributable to facility related costs
which are expected to be paid through May 2013.
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, 2007 $ 4,247 $112 $ 4,359
Cash payments (552) -- (552)
------- ---- -------
Balance as of March 31, 2008 $ 3,695 $112 $ 3,807
======= ==== =======
11. 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
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
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 six months ended March 31, 2008 and 2007.
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.
14
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 2007 that we filed
on December 3, 2007 with the United States Securities and Exchange Commission
("SEC").
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 1 and Tier 2
communications companies, including leading wireline and wireless
telecommunications, broadband cable and satellite service providers. In
addition, Amdocs also supports lower tier communication service providers.
We develop, implement and manage software and services associated with the
business support systems and operational support systems (BSS and OSS) that
enable service providers to deliver a better, differentiated, and intentional
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 several needs:
- Consolidation in the communications industry is continuing, and
competition among incumbent and new entrant service providers is
intensifying.
- Convergence is accelerating, with consumers expecting continuous
access to voice, data and video services anywhere, through any device.
- Service providers need to develop new revenue streams that take full
advantage of ubiquitous connectivity and convergence lifestyle.
In this changing environment, we believe service providers will succeed by
differentiating their offerings in order to deliver a customer experience that
is simple, personal, and valuable at every point of service. Service providers
can do this by adopting our customer experience systems (Amdocs CES) which are
designed to help deliver an intentional customer experience. While we recognize
that there are some macro-
15
economic indicators that cause uncertainty in our industry, we continue to see
demand for Amdocs products and services, and currently expect that we will
continue to expand our business in fiscal 2008.
Offerings
Amdocs offerings of software and related services consist of:
- A complete, modular portfolio of BSS and OSS software, including
revenue management (billing, mediation and partner settlement),
customer management (ordering, customer relationship management
or CRM, and self-service), service and resource management
(network management, planning and fulfillment ) digital commerce
management (content revenue management, search and digital
advertising) and foundation products (such as enterprise product
catalog). In January 2008, we introduced our most current version
of the portfolio, Amdocs CES 7.5.
- 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, rating and billing services and communications
facility management services.
We have designed our customer experience systems to meet the
mission-critical needs of leading service providers around the world. We support
their various lines of business, including wireline, wireless, cable and
satellite, and a wide range of communication services, including voice, video,
data, IP, broadband, content, electronic and mobile commerce applications. We
also support companies that offer multiple service packages, commonly referred
to as bundled or convergent service packages. We have also applied our
experience to assist service providers in the financial services sector to meet
operational challenges that are similar to those experienced by communications
companies.
Amdocs also offers a full range of directory sales and publishing systems
and related 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 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:
- Consolidation & industry transformation, including:
- ubiquitous use of communications and content services,
- increases in digital and mobile commerce,
- ongoing consolidation among incumbent communications
providers,
- increased competition from new entrants,
- continued convergence of communications, broadband cable and
satellite industries, and
- continued commoditization and pricing pressure.
- Convergence & 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 (IP)
Television (IPTV) and Voice over IP (VoIP),
- evolution to next generation networks such as IP Multimedia
Subsystem (IMS), that enable converged services offerings
like fixed-mobile convergence, and
16
- technological changes, such as the introduction of 3G and 4G
wireless technology, next-generation content systems and
WiFi- and WiMax- based access technologies.
- Customer focus, such as:
- the need for 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 personalized,
that are timely and relevant to them, that they can
participate in creating, and that can be accessed anytime
and anywhere,
- ever-increasing expectation of customer service and support,
including access to self service options, 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
service providers' BSS and OSS systems and create a simple,
one-company face to customers,
- integrating and implementing new next-generation networks
(and retiring legacy networks) to deploy new technologies,
and
- transforming fragmented legacy OSS systems 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
- the sale of high-level business consulting that includes services that
advise, transform, integrate and optimize technology and business
processes;
- 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 as services are performed based on time
elapsed, output produced or volume of data processed, depending on the specific
contract terms of the managed services arrangement. Revenue from ongoing support
services is recognized as work is performed or based on straight line over the
service period.
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.
17
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 (for customer experience systems
and directory systems) is included in both license and service revenue. Revenue
generated in connection with managed services arrangements are a significant
part of our business, accounting for approximately 40% of our total revenue in
the six months ended March 31, 2008 and 2007, and generating substantial,
long-term revenue streams, cash flow and operating income. In the initial period
of our managed services projects, we may invest in modernization and
consolidation of the customer's systems. Invoices are usually structured on a
periodic fixed or unit charge basis. Managed services projects can be less
profitable in the initial period. Margins tend to improve over time as we derive
benefit from the operational efficiencies and from changes in the geographical
mix of our resources.
RECENT ACCOUNTING STANDARDS
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 ("SFAS 161")". SFAS 161
applies to all derivative instruments and nonderivative instruments that are
designated and qualify as hedging instruments and related hedged items accounted
for under FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities ("Statement 133"). SFAS 161 requires entities to provide
greater transparency through additional disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, results of operations, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Although SFAS 161 requires us
to make additional disclosures, it does not affect the underlying accounting
policy or the application thereof.
In December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations ("SFAS 141(R)"). SFAS 141(R) significantly changes the accounting
for business combinations and establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS 141(R) applies to us
prospectively for business combinations for which the acquisition date is on or
after October 1, 2009.
In December 2007, the FASB issued Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
("SFAS 160").SFAS 160 changes the accounting for noncontrolling (minority)
interests in consolidated financial statements including the requirements to
classify noncontrolling interests as a component of consolidated stockholders'
equity, the elimination of "minority interest" accounting in results of
operations and changes in the accounting for both increases and decreases in a
parent's controlling ownership interest. SFAS 160 is effective for fiscal years
beginning after December 15, 2008, and early adoption is prohibited. We are
currently evaluating the effect that the application of SFAS 160 will have on
our consolidated results of operations and financial condition.
In February 2007, the 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
18
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 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 No.157 applies under
other accounting pronouncements that require or permit fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. In February 2008, the FASB issued
FASB Staff Position No. SFAS 157-b, Effective Date of FASB Statement No. 157,
which provides a one year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value on a recurring
basis (at least annually). We are currently evaluating the effect that the
application of SFAS 157 will have on our consolidated results of operations and
financial condition.
ADOPTION OF NEW ACCOUNTING STANDARD
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. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We adopted FIN 48 in the first quarter of
fiscal 2008. The adoption of FIN 48 did not result in a change to retained
earnings. See Note 6 to our consolidated financial statements for additional
information on our provision for income taxes, including the effects of adoption
of FIN 48 on our consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended March 31,
2008 and 2007 certain items in our consolidated statements of income reflected
as a percentage of total revenue:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2008 2007 2008 2007
------ ----- ----- -----
Revenue:
License ............................ 4.1% 5.3% 3.8% 5.0%
Service ............................ 95.9 94.7 96.2 95.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license .................... 0.1 0.1 0.1 0.1
Cost of service .................... 63.8 63.3 63.6 63.1
Research and development ........... 7.2 8.2 7.4 8.5
Selling, general and
administrative .................. 12.8 12.9 12.9 12.9
Amortization of purchased intangible
assets .......................... 2.8 2.7 2.9 2.6
Restructuring charges, in-process
research and development and
other ............................. -- 0.9 -- 0.5
19
----- ----- ----- -----
86.7 88.1 86.9 87.7
----- ----- ----- -----
Operating income ...................... 13.3 11.9 13.1 12.3
Interest income and other, net ........ 1.1 1.5 1.1 1.6
----- ----- ----- -----
Income before income taxes ............ 14.4 13.4 14.2 13.9
Income taxes .......................... 1.5 1.1 1.3 1.0
----- ----- ----- -----
Net income ............................ 12.9% 12.3% 12.9% 12.9%
===== ===== ===== =====
SIX MONTHS ENDED MARCH 31, 2008 AND 2007
The following is a tabular presentation of our results of operations for
the six months ended March 31, 2008 compared to the six months ended March 31,
2007. Following the table is a discussion and analysis of our business and
results of operations for such periods.
SIX MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
----------------------- -------------------
2008 2007 AMOUNT %
---------------------------------- -----
(in thousands)
Revenue:
License ........................ $ 58,326 $ 69,270 $(10,944) (15.8)%
Service ........................ 1,458,205 1,328,123 130,082 9.8
---------- ---------- --------
1,516,531 1,397,393 119,138 8.5
---------- ---------- --------
Operating expenses:
Cost of license ................ 1,712 2,085 (373) (17.9)
Cost of service ................ 964,697 881,981 82,716 9.4
Research and development ....... 112,103 118,202 (6,099) (5.2)
Selling, general and
administrative .............. 196,331 180,450 15,881 8.8
Amortization of purchased
intangible assets ........... 43,506 36,610 6,896 18.8
Restructuring charges,
in-process research and
development and other ....... -- 6,761 (6,761) (100)
---------- ---------- --------
1,318,349 1,226,089 92,260 7.5
---------- ---------- --------
Operating income .................. 198,182 171,304 26,878 15.7
Interest income and other, net .... 17,638 22,638 (5,000) (22.1)
---------- ---------- --------
Income before income taxes ........ 215,820 193,942 21,878 11.3
Income taxes ...................... 20,297 13,429 6,868 51.1
---------- ---------- --------
Net income ........................ $ 195,523 $ 180,513 $ 15,010 8.3%
========== ========== ========
REVENUE. Total revenue increased by $119.1 million, or 8.5%, to $1,516.5
million in the six months ended March 31, 2008, from $1,397.4 million in the six
months ended March 31, 2007. The increase was primarily attributable to revenue
from consolidation and transformation projects for Tier One customers as well as
from revenue related to the expansion of our managed services activities.
License revenue decreased by $10.9 million, or 15.8%, to $58.3 million in
the six months ended March 31, 2008, from $69.3 million in the six months ended
March 31, 2007. The decrease was primarily due to timing of projects, as we
completed some projects and others are expected to begin in the near future.
20
License and service revenue attributable to the sale of Customer Experience
Systems was $1,380.9 million in the six months ended March 31, 2008, an increase
of $124.0 million, or 9.9%, over the six months ended March 31, 2007. The
increase was primarily attributable to revenue from consolidation and
transformation projects for Tier One customers as well as from revenue related
to the expansion of our managed services activities. License and service revenue
resulting from the sale of Customer Experience Systems represented 91.1% and
89.9% of our total revenue in the six months ended March 31, 2008 and 2007,
respectively.
License and service revenue from the sale of Directory Systems was $135.6
million in the six months ended March 31, 2008, a decrease of $4.9 million, or
3.5%, as compared to the six months ended March 31, 2007. License and service
revenue from the sale of Directory Systems represented 8.9% and 10.1% of our
total revenue in the six months ended March 31, 2008 and 2007, respectively. We
believe that we are a leading provider of Directory Systems in most of the
markets we serve.
In the six months ended March 31, 2008, revenue from customers in North
America, Europe and the rest of the world accounted for 68.7%,17.4% and 13.9%,
respectively, of total revenue compared to 67.5%, 22.5% and 10.0%, respectively,
in the six months ended March 31, 2007. The decrease in revenue from customers
in Europe was attributable partially to timing of projects as we completed some
projects and some are expected to start in the near future. The increase in
revenue from customers in the rest of the world in the six months ended March
31, 2008 was attributable primarily to revenue contributed in Asia Pacific as
well as to customers in emerging markets.
COST OF LICENSE AND SERVICE. Cost of license mainly includes royalty
payments to software suppliers. 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 license and service
in the six months ended March 31, 2008 was $82.3 million or 9.3%, which is
slightly higher than the increase in our total revenue in the six months ended
March 31, 2008. As a percentage of revenue, cost of license and service was
63.7% in the six months ended March 31, 2008, compared to 63.2% in the six
months ended March 31, 2007. Our cost of service in the six months ended March
31, 2008 increased as a result of expansion of our Managed Services activities,
partially offset by cost savings resulting from our expansion into lower cost
jurisdictions and increased efficiencies in our overall operations. Margins from
Managed Services tend to improve over time as we realize synergies, create cost
efficiencies and improve business processes.
RESEARCH AND DEVELOPMENT. Research and development expense is primarily
comprised of compensation expense. Research and development expense decreased by
$6.1 million, or 5.2%, in the six months ended March 31, 2008 to $112.1 million
from $118.2 million in the six months ended March 31, 2007. Research and
development expense decreased as a percentage of revenue from 8.5% in the six
months ended March 31, 2007 to 7.4% in the six months ended March 31, 2008. We
believe that our research and development efforts are a key element of our
strategy and are essential to our success and we intend to maintain our level of
commitment to research and development. The decrease in research and development
expense was attributable to increased efficiency as well as to changes in the
geographical mix of our research and development resources. 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 $15.9 million, or 8.8%, in the six months ended March 31,
2008 to $196.3 million, from $180.4 million in the six months ended March 31,
2007. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense was attributable to an overall increase in our operations.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the six months ended March 31, 2008 was $43.5 million,
compared to $36.6 million in the six months ended March 31, 2007. The increase
in amortization of purchased intangible assets was due to purchased intangible
assets acquired in our fiscal 2006 and 2007 acquisitions.
21
OPERATING INCOME. Operating income increased by $26.9 million, or 15.7%, in
the six months ended March 31, 2008, to $198.2 million, or 13.1% of revenue,
from $171.3 million, or 12.3% of revenue, in the six months ended March 31,
2007. The increase in operating income as a percentage of revenue was
attributable to the 8.5% increase in revenue compared to the 7.5% increase in
operating expense that we experienced during the six months ended March 31,
2008.
INTEREST INCOME AND OTHER, NET. Interest income and other, net decreased by
$5.0 million in the six months ended March 31, 2008, to $17.6 million from $22.6
million in the six months ended March 31, 2007. The decrease in interest income
and other, net, is primarily attributable to the impact of foreign exchange
losses, and to lower income on our short-term interest-bearing investments due
to current market conditions.
INCOME TAXES. Income taxes for the six months ended March 31, 2008 were
$20.3 million on pretax income of $215.8 million, resulting in an effective tax
rate of 9.4% compared to 6.9% in the six months ended March 31, 2007. Of the
increase in our effective tax rate, approximately 6.1% was attributable to the
changes in our tax reserves and approximately 1.7% 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, which were partially offset by decrease of approximately
2.1% attributable to changes in the valuation allowances and by an approximately
3.2% decrease in effective tax rate attributable to the geographical
distribution of earnings from global operations. We expect that our effective
tax rate for fiscal year 2008 will be between 9% and 12% on an annualized basis,
compared to 10.6% in fiscal year 2007. 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 $195.5 million in the six months ended March 31,
2008, compared to net income of $180.5 million in the six months ended March 31,
2007. The increase in net income was attributable to the increase in our
operating income offset by the decrease in interest income and other, net, and
the increase of our effective tax rate.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.07,
or 8.5%, to $0.89 in the six months ended March 31, 2008, from $0.82 in the six
months ended March 31, 2007. The increase in diluted earnings per share resulted
primarily from the increase in net income.
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
The following is a tabular presentation of our results of operations for
the three months ended March 31, 2008 compared to the three months ended March
31, 2007. Following the table is a discussion and analysis of our business and
results of operations for such periods.
THREE MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
------------------- -------------------
2008 2007 AMOUNT %
-------- -------- -------- --------
(in thousands)
------------------------------
Revenue:
License ...................... $ 32,109 $ 37,526 $(5,417) (14.4)%
Service ...................... 742,172 668,835 73,337 11.0
-------- -------- -------
774,281 706,361 67,920 9.6
-------- -------- -------
Operating expenses:
Cost of license .............. 938 1,016 (78) (7.7)
Cost of service .............. 493,956 446,860 47,096 10.5
Research and development ..... 56,088 57,734 (1,646) (2.9)
Selling, general and
administrative ............ 98,666 91,280 7,386 8.1
Amortization of purchased
intangible assets ......... 21,753 18,912 2,841 15.0
22
Restructuring charges,
in-process research and
development and other ....... -- 6,761 (6,761) (100)
-------- -------- -------
671,401 622,563 48,838 7.8
-------- -------- -------
Operating income .................. 102,880 83,798 19,082 22.8
Interest income and other, net .... 8,822 10,899 (2,077) (19.1)
-------- -------- -------
Income before income taxes ........ 111,702 94,697 17,005 18.0
Income taxes ...................... 11,843 7,526 4,317 57.4
-------- -------- -------
Net income ........................ $ 99,859 $ 87,171 $12,688 14.6%
======== ======== =======
REVENUE. Total revenue increased by $67.9 million, or 9.6 %, to $ 774.3
million in the three months ended March 31, 2008, from $706.4 million in the
three months ended March 31, 2007. The increase was primarily attributable to
revenue from consolidation and transformation projects for Tier One customers as
well as from revenue related to the expansion of our managed services
activities.
License revenue decreased by $5.4 million, or 14.4%, to $32.1 million in
the three months ended March 31, 2008, from $37.5 million in the three months
ended March 31, 2007. The decrease was primarily due to timing of projects, as
we completed some projects and others are expected to begin in the near future.
License and service revenue attributable to the sale of Customer Experience
Systems was $708.2 million in the three months ended March 31, 2008, an increase
of $70.7 million, or 11.1 %, over the three months ended March 31, 2007. The
increase was primarily attributable to revenue from consolidation and
transformation projects for Tier One customers as well as from revenue related
to the expansion of our managed services activities. License and service revenue
resulted from the sale of Customer Experience Systems represented 91.5% and
90.2% of our total revenue in the three months ended March 31, 2008 and 2007,
respectively.
License and service revenue from the sale of Directory Systems was $66.1
million in the three months ended March 31, 2008, an increase of $2.8 million,
or 4.1%, as compared to the three months ended March 31, 2007. License and
service revenue from the sale of Directory Systems represented 8.5% and 9.8% of
our total revenue in the three months ended March 31, 2008 and 2007,
respectively.
In the three months ended March 31, 2008, revenue from customers in North
America, Europe and the rest of the world accounted for 69.9%, 17.6 % and 12.5%,
respectively, of total revenue compared to 66.5%, 23.0% and 10.5%, respectively,
in the three months ended March 31, 2007. The decrease in revenue from customers
in Europe was attributable partially to timing of projects as we completed some
projects and some are expected to start in the near future. The increase in
revenue from customers in the rest of the world in the three months ended March
31, 2008 was attributable primarily to revenue contributed in Asia Pacific as
well as to customers in emerging markets.
COST OF LICENSE AND SERVICE. Cost of license mainly includes royalty
payments to software suppliers. 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 license and service
in the three months ended March 31, 2008 was $47.0 million or 10.5%, which is
slightly higher than the increase in our total revenue in the three months ended
March 31, 2008. As a percentage of revenue, cost of license and service was
63.9% in the three months ended March 31, 2008, compared to 63.4% in the three
months ended March 31, 2007. Our cost of service in the six months ended March
31, 2008 increased as a result of expansion of our Managed Services activities,
partially offset by cost savings resulting from our expansion into lower cost
jurisdictions and increased efficiencies in our overall operations. Margins from
Managed Services tend to improve over time as we realize synergies, create cost
efficiencies and improve business processes.
23
RESEARCH AND DEVELOPMENT. Research and development expense is primarily
comprised of compensation expense. Research and development expense decreased by
$1.6 million, or 2.9%, in the three months ended March 31, 2008 to $56.1 million
from $57.7 million in the three months ended March 31, 2007. Research and
development expense decreased as a percentage of revenue from 8.2% in the three
months ended March 31, 2007 to 7.2% in the three months ended March 31, 2008.
The decrease in research and development expense was attributable to increased
efficiency as well as to changes in the geographical mix of our research and
development resources.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense is primarily comprised of compensation expense. The increase in selling,
general and administrative expense in the three months ended March 31, 2008 was
$7.4 million, or 8.1%, which is slightly lower than the increase in our total
revenue in the three months ended March 31, 2008.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended March 31, 2008 was $21.8 million,
compared to $18.9 million in the three months ended March 31, 2007. 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 $19.1 million, or 22.8%, in
the three months ended March 31, 2008, to $102.9 million, or 13.3% of revenue,
from $83.8 million, or 11.9% of revenue, in the three months ended March 31,
2007. The increase in operating income as a percentage of revenue was
attributable to the 9.6% increase in revenue compared to the 7.8% increase in
operating expense that we experienced during the three months ended March 31,
2008.
INTEREST INCOME AND OTHER, NET. Interest income and other, net decreased by
$2.1 million in the three months ended March 31, 2008 to $8.8 million from $10.9
million in the three months ended March 31, 2007. The increase in interest
income and other, net, is primarily attributable to lower income on our
short-term interest-bearing investments due to current market conditions, which
was partially offset by an increase in foreign exchange gains.
INCOME TAXES. Income taxes for the three months ended March 31, 2008 were
$11.8 million on pretax income of $111.7 million, resulting in an effective tax
rate of 10.6 % compared to 7.9% in the three months ended March 31, 2007. Of the
increase in our effective tax rate, approximately 3.7% was attributable to the
changes in our tax reserves and approximately 2.5% was attributable to the
effect of acquisition-related costs (which include amortization of purchased
intangible assets and other), restructuring charges and equity-based
compensation expense, which were partially offset by decrease of approximately
3.5% attributable to changes in the valuation allowances. We expect that our
effective tax rate for fiscal year 2008 will be between 9 % and 12% on an
annualized basis, compared to 10.6% in fiscal year 2007. 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 $99.9 million in the three months ended March
31, 2008, compared to net income of $87.2 million in the three months ended
March 31, 2007. The increase in net income was attributable to the increase in
our operating income offset by the decrease in interest income and other, net,
and the increase of our effective tax rate.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.06,
or 15.8 %, to $0.46 in the three months ended March 31, 2008, from $0.40 in the
three months ended March 31, 2007. The increase in diluted earnings per share
resulted from the increase in net income and a reduction in the number of
ordinary shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,181.8 million as of March 31, 2008, compared to $1,179.3 million as of
September 30, 2007. The increase is mainly attributable to $190.4 million in
positive cash flows from operations and by $15.7 million in proceeds from the
exercise of employee stock options partially offset by $122.4 million used to
repurchase ordinary shares pursuant to our share repurchase program, $69.1
million of capital expenditures and $9.2 million in net cash paid for
24
acquisitions. Net cash provided by operating activities amounted to $190.4
million and $190.3 million for the six months ended March 31, 2008 and 2007,
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.
Our short-term interest-bearing investments are classified as
available-for-sale securities. Unrealized gains or losses are reported as a
separate component of accumulated other comprehensive income, net of tax. Such
short-term interest-bearing investments consist primarily of commercial paper,
certificates of deposit, U.S. government treasuries, U.S. agency securities,
corporate bonds, asset backed obligations and mortgages, which are stated at
fair value. The estimated fair values of the investments are based on quoted
market prices and on observable market inputs as of the end of the reporting
period. We generally have conservative investment policy guidelines and
consistent with these guidelines, we purchase only AAA asset-backed obligations
and mortgages. We review various factors in determining whether we should
recognize an impairment charge for our short-term interest-bearing investments,
including the length of time and extent to which the fair value has been less
than our cost basis, the credit ratings of the securities, the financial
condition and near-term prospects of the issuers and our intent and ability to
hold the investment for a period of time sufficient to allow for any anticipated
recovery in market value. Based on our considerations of these factors the
other-than-temporary impairment on our short-term interest-bearing investments
was immaterial during the first six months of fiscal 2008 and fiscal 2007.
As of March 31, 2008, $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 March 31, 2008, we had available
an unsecured $500 million five-year revolving credit facility, none of which was
outstanding, and which we may use for general corporate purposes, including
acquisitions and repurchases of our ordinary shares that we may consider from
time to time. As of March 31, 2008, we also had a $0.9 million short-term
general revolving line of credit, none of which was outstanding. In addition, we
had outstanding letters of credit and bank guarantees from various banks
totaling $7.2 million. As of March 31, 2008, we had outstanding short-term loans
totalling $2.0 million secured by specified pledges and guaranties.
We have contractual obligations for our convertible notes, financing
arrangements, non-cancelable operating leases and purchase obligations
summarized in the tabular disclosure of contractual obligations in our Annual
Report on Form 20-F for fiscal year ended September 30, 2007. Since September
30, 2007, there have been no material changes in our contractual obligations
other than in the ordinary course of our business.
Our capital expenditures were approximately $69.1 million in the six months
ended March 31, 2008. Approximately 80% of these expenditures consisted of
purchases of computer equipment, and the remainder to leasehold improvements.
The capital expenditures in the six months ended March 31, 2008 were mainly
attributable to invetsments in our operating facilities and our development
centers around the world. We fund 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.
25
During the three and six months ended March 31, 2008 and 2007,
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.
26
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
ISSUER PURCHASES OF EQUITY SECURITIES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides information about purchases by us and our
affiliated purchasers during the quarter ended March 31, 2008 of equity
securities that are registered by us pursuant to Section 12 of the Exchange Act:
Ordinary Shares
(C)
TOTAL NUMBER OF (D)
(A) SHARES MAXIMUM NUMBER (OR
TOTAL PURCHASED AS PART APPROXIMATE DOLLAR VALUE)
NUMBER OF (B) OF PUBLICLY OF SHARES THAT
SHARES AVERAGE PRICE ANNOUNCED PLANS MAY YET BE PURCHASED UNDER
PERIOD PURCHASED PAID PER SHARE (2) OR PROGRAMS THE PLANS OR PROGRAMS(1)
------ --------- ------------------ ----------------- --------------------------
1/1/08-1/31/08 ... 405,448 $32.06 405,448 $264,725,486
2/1/08-2/29/08 ... 359,000 $31.27 359,000 $253,500,920
3/1/08-3/31/08 ... 886,100 $28.97 886,100 $227,826,473
--------- ---------
Total ............ 1,650,548 $30.23 1,650,548 $227,826,473
========= =========
(1) In August 2007, our board of directors authorized a share repurchase plan
allowing the repurchase of up to $400 million of our outstanding ordinary
shares. The authorization permits us to purchase our ordinary shares in
open market or privately negotiated transactions at times and prices that
we consider appropriate.
(2) The average price per share excludes broker and transaction fees.
27
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 March 31, 2008:
(1) Form 6-K dated February 11, 2008.
(2) Form 6-K dated January 22, 2008.
28
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: May 6, 2008