Amdocs confident of position ahead of earnings

A big factor in the Amdocs growth potential lies in the implications of the recent merger between US companies Nextel and Sprint.

By AVI KRAWITZ
amdocs logo88 (photo credit: )
amdocs logo88
(photo credit: )
With the prospect of strong end-of-year results in the cards when they're released Wednesday, Ra'anana-based Amdocs hopes to spur even stronger growth in 2006. "Over the last two and a half years we've put a lot of effort into crystallizing our strategy as there were many perceptions out there as to what Amdocs was and is trying to be," said Michael Matthews, chief marketing officer of the billing services company. "So one of the things that we did was to define ourselves and make it clear that our job is to help our customers build stronger, more profitable relationships with their customers." It's also our job, he added, to grow the company and bring return to investors. In pursuit of this, Amdocs rounded off its 2005 financial year with two strategic acquisitions in as many months, giving clear indications as to where it sees its growth opportunities - both geographically and sectorally. In July, Amdocs purchased the billing units of cable and satellite TV company DST Systems Group for $286m., and followed that up in August by acquiring Chinese company Longshine Information Technology for $30 million. "We achieved several important milestones in the fourth quarter," said Dov Baharav, chief executive officer of Amdocs Management Limited in a company statement last week. "Our acquisitions of DST Innovis and Longshine strengthened Amdocs strategically." While the revenue effects of the two purchases are yet to be seen, they have stronger strategic significance for Amdocs, giving it access to the cable and satellite TV market for the first time, and a physical presence in the ever-growing Chinese market. "Amdocs is very strong in the wireless and wireline market, but their portfolio was lacking a presence in cable and satellite TV," said Daniel Meron, a research analyst at RBC Capital Markets. "The acquisition was a good move and one which will show more revenue significance in 2006." In its preliminary fourth-quarter results released last week the company said it expected its diluted earnings per share for the quarter to slightly exceed a previous guidance of $0.38, excluding acquisition-related costs and other charges net of related tax effects. It said that revenues rose 27 percent for the three months ending September 30 to $573 million, compared to $452.5m in the same period in 2004. For the first nine months of the year (October 1, 2004 to June 30, 2005) Amdocs had revenues of $1.47 billion, an increase of 11% on the same period a year earlier, and net income of $220.8m., up 27% on the 2004 three-quarter period. "Strategically, the company is well positioned," Meron said. "Of greater concern is the extent to which it can continue to gain market share, and how it can adjust to price pressures typical in the industry." Meron has a "sector outperform" recommendation on the stock. In September, Merrill Lynch downgraded its rating on Amdocs from buy to neutral due to a "diminishing pipeline, margin risk and valuation." "Despite the positives of a strong cash flow and major contract wins, the stock, in our view, will be more impacted in the intermediate term by the expected margin pressure and deteriorating growth outlook," Merrill Lynch said in the September report. "The big revenue opportunities have materialized and beyond next year's benefits from carrier consolidation, we see limited growth potential of Amdocs's backlog." Amdocs shares have remained fairly stable in 2005, starting the year at $25.78 and traded at $27.27 in Monday afternoon activity on the New York Stock Exchange. A big factor in the Amdocs growth potential lies in the implications of the recent merger between US telecommunications companies Nextel and Sprint. While Nextel is a client of Amdocs for billing services, Sprint works with its biggest competitor Convergys. Both contracts were significant revenue winners for the two companies and while no official announcement has yet been made as to which the combined company will work with, the market expects the contract to go to Amdocs. Either way, Meron said, the merger will hurt the bottom line and will lead to a decline in the price it receives for its services as Sprint was paying Convergys significantly less than Amdocs got from Nextel. HAVING ESTABLISHED itself as a provider of customer care and billing solutions to the telecommunications industry, Amdocs's purchase of DST is indicative of its attempts to keep abreast of the ever changing trends in the sector. "We learned our business in the telecom sector, and think that the systems are applicable firstly to a sub-sector of telecom, being the cable and satellite TV - and the investment in DST is a result of that," Matthews said. "Secondly we think it's applicable to another major services industry being the financial services industry." The commonality of these sectors, Matthews explained, is the challenge of dealing with customer turnover, and that each has a growing variety of products which companies can offer their customers. One company, for example, may offer land-line phone service, cellular, Internet and cable TV to customers through its various units. "The ability of a company to bundle those services, to treat the client as one customer, rather than as separate for each service, has the single greatest impact on customer loyalty and his long-term value to the company - even more so than brand and price," Matthews said. "We know that companies don't want to do business in a way that their systems treat you as four different customers and we're positioning ourselves as the ones who can provide the right billing solution to allow for effective bundling of services." Matthews added that Amdocs recognized the opportunities for bundling approximately 18 months ago and that following an initial contract with Dutch-based bank ABN AMBRO in September 2004, the company has embarked on a recruiting campaign to bring about growth in that sector. While the company has been aggressive in financial services, Meron said that it is still very much in the initial stages and a while away from making a substantial impact there. For Matthews, however, it's not a question of immediate results. The application of its systems in financial services and cable and satellite TV fits the company's philosophy to address growth patterns appropriately. In a similar vane!!!!!vein, the company looks to its acquisition of Longshine to gain a presence in China. "We want to be able to do business in China as a Chinese company," said Matthews. "There are over 400 million cellphone users in China and growing continually, so we need to adapt to provide an appropriate solution there." Unlike in North America, where the growth is driven by new applications and services, Matthews explained that the Chinese market still relies on competition for new customers. He identified Russia as another region which is influenced by the same factors and which has potential for "spectacular growth." "We're operating in a global market and have adopted a global attitude to doing business," Matthews said. With 13,000 employees, of whom approximately 3,500 are in Israel and another 1,400 to be incorporated from the DST and Longshine mergers, Matthews stressed the point. While not too many surprises are expected from Wednesday's earnings report, the company is confident it's on the right path to maintain its position as a leading player in its field. "Growth is happening at different stages, in different disciplines, in different parts of the world," he said. "We are addressing this growth as we see fit, all based on the philosophy that we are helping our customers build and manage relationships with their customers."