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, 2005
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 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]
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED MARCH 31, 2005
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
(in U.S. dollars, unless otherwise stated)
(in thousands, except per share data)
AS OF
----------------------------
MARCH 31, SEPTEMBER 30,
2005 2004
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 546,700 $ 550,352
Short-term interest-bearing investments 785,634 640,347
Accounts receivable, net 260,397 254,779
Deferred income taxes and taxes receivable 93,993 62,284
Prepaid expenses and other current assets 76,583 80,229
----------- -----------
Total current assets 1,763,307 1,587,991
Equipment, vehicles and leasehold improvements, net 174,123 181,121
Deferred income taxes 121,983 113,589
Goodwill 796,983 806,874
Intangible assets, net 40,405 47,512
Other noncurrent assets 138,307 126,797
----------- -----------
Total assets $ 3,035,108 $ 2,863,884
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 91,874 $ 104,415
Accrued expenses and other current liabilities 115,294 137,664
Accrued personnel costs 110,070 124,284
Short-term portion of financing arrangements 983 1,604
Deferred revenue 251,117 223,122
Short-term portion of capital lease obligations 13,831 19,706
Deferred income taxes and taxes payable 186,274 163,648
----------- -----------
Total current liabilities 769,443 774,443
Deferred income taxes 45,557 40,530
0.50% Convertible notes 450,000 450,000
Noncurrent liabilities and other 172,935 154,721
----------- -----------
Total liabilities 1,437,935 1,419,694
----------- -----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; (Pound)0.01 par value;
0 shares issued and outstanding - -
Ordinary Shares - Authorized 550,000 shares; (Pound)0.01 par value;
225,975 and 224,947 issued and 202,361 and 201,334 outstanding,
respectively 3,620 3,601
Additional paid-in capital 1,849,415 1,837,608
Treasury stock, at cost - 23,613 Ordinary Shares (502,416) (502,416)
Accumulated other comprehensive loss (4,591) (1,919)
Unearned compensation (85) (174)
Retained earnings 251,230 107,490
----------- -----------
Total shareholders' equity 1,597,173 1,444,190
----------- -----------
Total liabilities and shareholders' equity $ 3,035,108 $ 2,863,884
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Revenue:
License $ 27,344 $ 18,107 $ 47,710 $ 34,728
Service 461,072 424,651 910,238 836,325
--------- --------- --------- ---------
488,416 442,758 957,948 871,053
--------- --------- --------- ---------
Operating expenses:
Cost of license 998 1,227 2,153 2,359
Cost of service 310,291 278,258 605,238 550,361
Research and development 33,263 30,084 66,174 60,582
Selling, general and administrative 54,592 53,836 109,552 106,333
Amortization of purchased intangible
assets 2,079 3,769 5,797 8,865
--------- --------- --------- ---------
401,223 367,174 788,914 728,500
--------- --------- --------- ---------
Operating income 87,193 75,584 169,034 142,553
Interest income and other, net 5,680 1,711 10,639 2,778
--------- --------- --------- ---------
Income before income taxes 92,873 77,295 179,673 145,331
Income taxes 18,576 17,005 35,933 31,973
--------- --------- --------- ---------
Net income $ 74,297 $ 60,290 $ 143,740 $ 113,358
========= ========= ========= =========
Basic earnings per share $ 0.37 $ 0.29 $ 0.71 $ 0.53
========= ========= ========= =========
Diluted earnings per share $ 0.34 $ 0.28 $ 0.67 $ 0.52
========= ========= ========= =========
Basic weighted average number of shares
outstanding 202,168 209,977 201,933 212,556
========= ========= ========= =========
Diluted weighted average number of shares
outstanding (1) 218,807 219,643 218,127 220,119
========= ========= ========= =========
(1) Diluted weighted average number of shares outstanding for the three and
six months ended March 31, 2004 have been restated, due to the adoption of
EITF 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share", which requires that prior period earnings per share
computations be restated to show the effect on weighted average shares of
the conversion of the contingently convertible debt into equity. The
restatement had no material impact on diluted earnings per share for the
three and six months ended March 31, 2004.
The accompanying notes are an integral part of these
consolidated financial statements.
3
AMDOCS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
Accumulated
Ordinary Shares Additional Other Total
------------------ Paid-in Treasury Comprehensive Unearned Retained Shareholders'
Shares Amount Capital Stock Loss Compensation Earnings Equity
------- -------- ---------- ---------- ------------- ------------ -------- -------------
BALANCE AS OF SEPTEMBER
30, 2004 201,334 $ 3,601 $1,837,608 $ (502,416) $ (1,919) $ (174) $107,490 $ 1,444,190
Comprehensive income:
Net income - - - - - - 143,740 143,740
Unrealized loss on
foreign currency
hedging contracts,
net of $173 tax
benefit - - - - (851) - - (851)
Unrealized loss on
short-term
interest-bearing
investments, net of
$433 tax benefit - - - - (1,821) - - (1,821)
-----------
Comprehensive income 141,068
-----------
Employee stock options
exercised 1,027 19 10,351 - - - - 10,370
Tax benefit of stock
options exercised - - 1,358 - - - - 1,358
Expense related to vesting
of stock options - - 98 - - - - 98
Amortization of unearned
compensation - - - - - 89 - 89
------- -------- ---------- ---------- ----------- --------- -------- -----------
BALANCE AS OF MARCH 31,
2005 202,361 $ 3,620 $1,849,415 $ (502,416) $ (4,591) $ (85) $251,230 $ 1,597,173
======= ======== ========== ========== =========== ========= ======== ===========
As of March 31, 2005 and September 30, 2004, accumulated other comprehensive
loss is comprised of unrealized loss on foreign currency hedging contracts, net
of tax, of $(2,083) and $(1,232), respectively, and unrealized loss on
short-term interest-bearing investments, net of tax, of $(2,508) and $(687),
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
SIX MONTHS ENDED MARCH 31,
--------------------------
2005 2004
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 143,740 $ 113,358
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 43,245 49,447
Gain on sale of equipment (549) (86)
Gain on repurchase of 2% convertible notes - (13)
Deferred income taxes 14,289 7,762
Tax benefit of stock options exercised 1,358 2,406
Realized gain from short-term interest-bearing
investments (794) (305)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (5,617) (46,709)
Prepaid expenses and other current assets 4,408 460
Other noncurrent assets (12,318) (24,121)
Accounts payable and accrued expenses (45,197) 23,808
Deferred revenue 49,686 51,029
Income taxes payable (16,241) 817
Noncurrent liabilities and other 501 4,086
----------- -----------
Net cash provided by operating activities 176,511 181,939
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 2,510 470
Payments for purchase of equipment, vehicles, leasehold
improvements (36,140) (23,373)
Proceeds from sale of short-term interest-bearing
investments 321,098 587,180
Purchase of short-term interest-bearing investments (467,846) (913,216)
Net cash paid for acquisition (18) (10,386)
----------- -----------
Net cash used in investing activities (180,396) (359,325)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised 10,370 9,789
Net proceeds from issuance of long-term 0.50%
convertible notes - 442,075
Repurchase of ordinary shares - (307,471)
Repurchase of 2% convertible notes - (4,987)
Principal payments under financing arrangements (619) (1,090)
Principal payments on capital lease obligations (9,518) (12,212)
----------- -----------
Net cash provided by financing activities 233 126,104
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,652) (51,282)
Cash and cash equivalents at beginning of period 550,352 847,600
----------- -----------
Cash and cash equivalents at end of period $ 546,700 $ 796,318
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 36,558 $ 16,190
Interest 3,090 5,290
NON-CASH INVESTING AND FINANCING ACTIVITIES
In the six months ended March 31, 2004, the Company issued 561 ordinary shares
in connection with the acquisition of XACCT Technologies Ltd.
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 to the communications industry. The Company and its subsidiaries
operate in one segment offering products and services that enable its
customers to move toward an integrated approach to customer management. The
Company designs, develops, markets, supports and operates, and provides
Managed Services for, information system solutions primarily to 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, 2004, set forth in the Company's Annual
Report on Form 20-F filed on December 30, 2004 with the Securities and
Exchange Commission.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. SIGNIFICANT ACCOUNTING POLICY
Accounting for Stock-Based Compensation
The Company follows Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations in accounting for its employee stock options. Pursuant to
these accounting standards, the Company records deferred compensation for
share options granted to employees at the date of grant based on the
difference between the exercise price of the options and the market value of
the underlying shares at that date. Deferred compensation is amortized to
compensation expense over the vesting period of the underlying options in
accordance with the accelerated expense attribution method.
As presented below, the Company determined pro forma net income and
earnings per share information as if the fair value method described in
Statements of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
Financial Accounting Standards Board Statement No. 123", had been applied to
its employee stock-based compensation. The Company utilized the Black-Scholes
option-pricing model to estimate fair value,
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
which is one of several methods that can be used under SFAS No. 123. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Option valuation models require the input of highly subjective
assumptions, including the expected share price volatility. The Company's
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimates.
The fair value of options granted was estimated at the date of grant using
the Black-Scholes pricing model with the following assumptions for the presented
periods (all in weighted averages):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Risk-free interest rate 3.66% 2.91% 3.33% 3.02%
Expected life of options 4.30 4.50 4.50 4.50
Expected annual volatility 0.616 0.693 0.636 0.693
Expected dividend yield None None None None
Fair value per option $ 13.67 $ 14.35 $ 12.58 $ 13.09
The following table sets forth the pro forma effect of applying SFAS No. 123
on net income and earnings per share for the three and six months ended March
31, 2005 and 2004:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income, as reported $ 74,297 $ 60,290 $ 143,740 $ 113,358
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 92 20 150 25
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (9,723) (9,246) (17,263) (20,094)
----------- ----------- ----------- -----------
Pro forma net income $ 64,666 $ 51,064 $ 126,627 $ 93,289
=========== =========== =========== ===========
Basic earnings per share:
As reported $ 0.37 $ 0.29 $ 0.71 $ 0.53
=========== =========== =========== ===========
Pro forma $ 0.32 $ 0.24 $ 0.63 $ 0.44
=========== =========== =========== ===========
Diluted earnings per share:
As reported $ 0.34 $ 0.28 $ 0.67 $ 0.52
=========== =========== =========== ===========
Pro forma $ 0.30 $ 0.23 $ 0.59 $ 0.43
=========== =========== =========== ===========
The pro forma results for the three and six months ended March 31, 2004 have
been revised due to the correction of the stock-based compensation amount for
such periods made during fiscal 2004. The correction resulted in a decrease in
pro forma net income of $757 and $890 in the three and six months ended March
31, 2004, respectively, and a decrease in pro forma diluted earnings per share
of $0.01 in the three and six months ended March 31, 2004, respectively.
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
3. ADOPTION OF NEW ACCOUNTING STANDARDS
The Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share
In September 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 04-8, "The Effect of Contingently Convertible
Instruments on Diluted Earnings Per Share" ("Issue 04-8"). Issue 04-8 relates
to contingently convertible debt instruments, which are generally convertible
into common shares of the issuer after the common stock price has exceeded a
predetermined threshold for a specified time period (market price trigger).
According to the accounting treatment in effect prior to the first quarter of
fiscal 2005, the potential dilutive effect of the conversion feature was
excluded from diluted earnings per share until the market price contingency
was met. Under Issue 04-8, all instruments that have embedded conversion
features that are contingent on market conditions indexed to an issuer's
share price are required to be included in diluted earnings per share
computations, if dilutive, regardless of whether the market conditions have
been met. The effective date of Issue 04-8 is for reporting periods ending
after December 15, 2004. The consensus is required to be applied
retroactively to instruments outstanding at the date of adoption. Diluted
earnings per share of all prior periods presented for comparative purposes
have been restated to conform to the consensus guidance.
The Company adopted Issue 04-8 in the first quarter of fiscal 2005, which
required the addition of 10,436 ordinary shares issuable upon conversion of
the Company's 0.50% Convertible Senior Notes due 2024 (the "0.50% Notes") to
the diluted earnings per share calculation. The adoption of Issue 04-8 did
not materially affect the Company's previously reported quarterly diluted
earnings per share for the three and six months ended March 31, 2004 as the
effect of the then outstanding contingently convertible debt instruments was
immaterial during those periods.
New Accounting Standard for Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment", which is
a revision of SFAS No. 123. SFAS 123(R) supersedes APB No. 25, and amends
FASB Statement No. 95, "Statement of Cash Flows". Generally, the approach in
Statement 123(R) is similar to the approach described in Statement 123.
However, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative.
The Company shall adopt SFAS 123(R) by no later than the beginning of the
first fiscal year beginning after June 15, 2005, i.e. the Company's fiscal
year ended September 30, 2006. Early adoption will be permitted in periods in
which financial statements have not yet been issued.
SFAS 123(R) permits public companies to adopt its requirements using one
of two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS 123(R) for all share-based payments granted after
the effective date and (b) based on the requirements of SFAS No. 123
for all awards granted to employees prior to the effective date of SFAS
123(R) that remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
recognized under SFAS No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of
the year of adoption.
As permitted by SFAS No.123, the Company currently accounts for
share-based payments to employees using APB No. 25's intrinsic value method
and, as such, generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of the SFAS 123(R) fair value method will
have a significant impact on the Company's consolidated results of
operations, although it will have no impact on its overall consolidated
financial position or consolidated cash flows. The impact of adoption of SFAS
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
SFAS 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share in Note 2 above. SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows in periods
after adoption. While the Company cannot estimate what those amounts will be
in the future (because they depend on, among other things, when employees
exercise stock options), the amount of operating cash flows recognized in
prior periods for such excess tax deductions were $3,094, $262, and $6,808 in
fiscal years 2004, 2003 and 2002, respectively.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
---------------------------
MARCH 31, SEPTEMBER 30,
2005 2004
---------- -------------
Accounts receivable -billed $ 242,270 $ 242,254
Accounts receivable -unbilled 27,779 24,696
Less - allowances (9,652) (12,171)
---------- ----------
Accounts receivable, net $ 260,397 $ 254,779
========== ==========
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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,
--------------------- -----------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
Net income $ 74,297 $ 60,290 $ 143,740 $ 113,358
Other comprehensive (loss) income:
Unrealized loss on foreign currency hedging contracts, net of tax (1,352) (2,363) (851) (5,562)
Unrealized (loss) gain on short-term interest-bearing investments, net of tax (1,137) 925 (1,821) 460
-------- -------- --------- ---------
Comprehensive income $ 71,808 $ 58,852 $ 141,068 $ 108,256
======== ======== ========= =========
6. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
Current $ 1,754 $ 7,589 $21,644 $24,211
Deferred 16,822 9,416 14,289 7,762
------- ------- ------- -------
$18,576 $17,005 $35,933 $31,973
======= ======= ======= =======
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,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 20 22 20 22
--- --- --- ---
Effective income tax rate 20% 22% 20% 22%
=== === === ===
As a Guernsey corporation with tax-exempt status, the Company's overall
effective tax rate is attributable solely to foreign taxes and for fiscal
year 2005 is expected to approximate 20%.
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
As of March 31, 2005, deferred tax assets of $12,829, 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 such 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.
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,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Numerator:
Numerator for basic earnings per share - net income available to shareholders $ 74,297 $ 60,290 $143,740 $113,358
Effect of assumed conversion of 0.50% convertible notes 983 320 1,967 320
-------- -------- -------- --------
Numerator for diluted earnings per share - net income available to shareholders
and assumed conversions $ 75,280 $ 60,610 $145,707 $113,678
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share - weighted average number of shares
outstanding 202,168 209,977 201,933 212,556
Effect of assumed conversion of 0.50% convertible notes 10,436 3,479 10,436 1,740
Effect of dilutive stock options granted 6,203 6,187 5,758 5,823
-------- -------- -------- --------
Denominator for diluted earnings per share - adjusted weighted average shares
and assumed conversions 218,807 219,643 218,127 220,119
======== ======== ======== ========
Basic earnings per share $ 0.37 $ 0.29 $ 0.71 $ 0.53
======== ======== ======== ========
Diluted earnings per share $ 0.34 $ 0.28 $ 0.67 $ 0.52
======== ======== ======== ========
The weighted average effect of the repurchase of ordinary shares by the
Company has been included in the calculation of basic earnings per share.
The effect of the 2% Convertible Notes due June 1, 2008 issued by the
Company in May 2001 (the "2% Notes") on diluted earnings per share was
anti-dilutive for the three and six months ended March 31, 2005 and 2004,
and, therefore, was not included in the above calculation.
The effect of the 0.50% Notes on diluted earnings per share was included
in the above calculation. See Note 3. The adoption of Issue 04-8 did not
materially affect the Company's previously reported quarterly diluted
earnings per share for the three and six months ended March 31, 2004 as the
effect of the then outstanding contingently convertible debt instruments was
immaterial during those periods.
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
8. REPURCHASE OF SECURITIES
Ordinary Shares
On December 20, 2004, the Company announced that its Board of Directors
had extended the Company's share repurchase program for the additional
repurchase of up to $100,000 of the Company's ordinary shares in the open
market or privately negotiated transactions and at times and prices the
Company deems appropriate. In accordance with this extension, as of May 13,
2005, the Company had repurchased approximately 3.5 million ordinary shares,
at an average price of 28.33 per share.
9. ACQUISITION
CERTEN INC.
On July 2, 2003, the Company acquired from Bell Canada ("Bell") its 90%
ownership interest in Certen (renamed Amdocs Canada Managed Services, Inc.)
for approximately $66,000 in cash. In addition, the Company had related
transaction costs of approximately $3,000. In the six months ended March 31,
2005, the Company corrected the allocation of the purchase price and
recalculated deferred tax assets related to the fair value of an acquired
pension liability and to a change in tax rate estimation at realization. The
corrected purchase price allocation resulted in a decrease of $9,893 in
goodwill.
The following is the corrected allocation of the purchase price and
deferred tax liability:
Purchase price $ 65,887
Estimated transaction costs 2,925
---------
Total purchase price 68,812
Write-off of deferred revenue and allowance on Amdocs books, net of tax (33,666)
---------
Net amount for purchase price allocation $ 35,146
=========
Allocation of purchase price:
90% tangible assets acquired, net of capitalized Amdocs system on
Certen's books $ 80,929
90% liabilities assumed (241,460)
---------
Net liabilities acquired (160,531)
Customer arrangement 36,385
Adjustment to fair value of pension and other post-employment benefit
liabilities (12,605)
EITF 95-3 and other liabilities (2,857)
Deferred taxes resulting from the difference between the assigned
value of certain assets and liabilities and their respective tax
bases 83,566
---------
Net fair value of liabilities acquired (56,042)
Goodwill 91,188
---------
$ 35,146
=========
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
10. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAMS
In the fiscal years ended September 30, 2002 and 2003, the Company
implemented a series of cost reduction programs designed to reduce operating
costs and improve productivity. As part of these programs, the Company
reduced its workforce, vacated facilities in different centers around the
world and implemented other cost reduction measures, including travel cuts
and reduction in other discretionary costs.
The restructuring accrual balance for these cost reduction programs is
comprised of the following as of March 31, 2005:
FACILITIES
----------
Balance as of September 30, 2004 $10,280
Cash payments (844)
Adjustments (1) (1,675)
-------
Balance as of March 31, 2005 (2) $ 7,761
=======
(1) Reflects adjustments of $1,675 due to changes in previous estimates. These
adjustments resulted in a decrease of restructuring liabilities related to
facilities of $1,675, which was credited to "cost of service" and
"selling, general and administrative" expenses in the six months ended
March 31, 2005.
(2) The remainder of the accrual is expected to be paid out through April
2012.
11. EMPLOYEE BENEFITS
The Company maintains non-contributory defined benefit plans that provide
for pension, other retirement and post-employment benefits for some of its
Canadian employees based on length of service and rate of pay. Contributions
by the Company are based on various generally accepted actuarial methods and
reflect actuarial assumptions concerning future investment returns, salary
projections and future service benefits. Plan assets consist primarily of
Canadian and other equities, government and corporate bonds, debentures and
secured mortgages, which are held in pooled fund units established by Bell
Canada Enterprises for the collective investment of registered pension plan
assets.
The net periodic benefit cost under these plans for the three months
ended March 31, 2005 and 2004, was as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
------------------- -------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 548 $ 66 $ 478 $ 87
Interest on benefit obligations 836 120 624 90
Expected return on plan assets (683) - (533) -
----- ---- ----- ----
$ 701 $186 $ 569 $177
===== ==== ===== ====
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
The net periodic benefit cost under these plans for the six months ended
March 31, 2005 and 2004, was as follows:
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
------------------- -------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 1,095 $132 $ 973 $177
Interest on benefit obligations 1,673 241 1,271 183
Expected return on plan assets (1,369) - (1,086) -
------- ---- ------- ----
$ 1,399 $373 $ 1,158 $360
======= ==== ======= ====
In the six months ended March 31, 2005, the Company made contributions of
$1,825 to the pension plan and $79 for other benefits. The Company expects that
contributions for the fiscal year ending September 30, 2005 will approximate
$3,285 to the pension plan and $89 for other benefits.
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
12. 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.
Securities and Exchange Commission Investigation
In August 2003, the Company was informed that the Midwest Regional Office
of the SEC is conducting a private investigation into the events leading up
to the Company's announcement in June 2002 of revised projected revenue for
the third and fourth quarters of fiscal 2002. The investigation appears to
be focused on, but is not explicitly limited to, the Company's forecasting
beginning with its April 23, 2002 press release. Although the Company
believes that it will be able to satisfy any concerns the SEC staff may have
in this regard, the Company is unable to predict the duration, scope, or
outcome of the investigation. The Company is cooperating fully with the SEC
staff.
Guarantor's Accounting and Disclosure Requirements for Guarantees
The Company is a party to an agreement entered into prior to December 31,
2002 that includes an indemnification of one of its customers for any
withholding tax that might be required under the customer's local tax laws
from certain payments made to the Company under this agreement. The
indemnification under this agreement expires in December 2005. As of March
31, 2005 and September 30, 2004, the maximum potential amount of the
Company's future exposure under this guarantee as determined in accordance
with Financial Accounting Standards Board Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was $4,717.
The Company generally sells its ClarifyCRM products with a limited
warranty for a period of 90 days. The Company's policy is to accrue 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, 2005 and
2004.
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, please read the
information set forth under the caption "Risk Factors" in our Annual Report on
Form 20-F for fiscal 2004 that we have filed with the United States Securities
and Exchange Commission ("SEC").
INTRODUCTION
In this section, we discuss the general financial condition and the results
of operations for Amdocs and its subsidiaries including:
- the factors that affect our business,
- our revenue and costs for the three and six months ended March 31, 2005
and 2004,
- the reasons why such revenue and costs were different from period to
period,
- the sources of our revenue,
- how all of this affects our overall financial condition,
- our capital expenditures for the three and six months ended March 31,
2005 and 2004, and
- the sources of our cash to pay for future capital expenditures and
possible acquisitions.
In this section, we also analyze and explain the changes in the specific line
items in our consolidated statements of income between the three and six month
periods ended March 31, 2005 and 2004. You should read this section in
conjunction with our consolidated financial statements.
16
OVERVIEW OF BUSINESS AND TREND INFORMATION
Our market focus is primarily the communications industry, and we are a
leading provider of software products and services to that industry. Our
products and services help our customers move toward an integrated approach to
customer management, which we refer to as "Integrated Customer Management", or
"ICM". Our portfolio of product offerings include billing, customer relationship
management ("CRM"), order management, self service, service fulfillment,
mediation, and content revenue management products, which we refer to,
collectively, as "Integrated Customer Management Enabling Systems", or "ICM
Enabling Systems" (previously known as CC&B Systems).
Our portfolio also includes a full range of directory sales and publishing
systems, which we refer to as "Directory Systems", for publishers of both
traditional printed yellow page and white page directories and electronic
Internet directories.
Our ICM Enabling Systems are designed to meet the mission-critical needs of
leading communications service providers throughout the entire customer
lifecycle. We support a wide range of communications services, including
wireline, wireless, cable, voice, video, data, broadband, content, electronic
and mobile commerce and Internet Protocol ("IP") based services. We also support
companies that offer multiple service packages, commonly referred to as bundled
or convergent service packages.
Due to the complexity of our customers' projects and the expertise required
for system support, we also provide information technology, or "IT", services,
including extensive IT consulting, strategy, system implementation, 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 billing services and
communications facility management services, in all cases on either or a
combination of a fixed or unit charge basis to our customers.
Our business is conducted on a global basis. We maintain six development
facilities located in Canada, Cyprus, India, Ireland, Israel and the United
States. We expect our new development center in India to grow and support the
overall activity of our business worldwide at comparatively lower operating
costs.
As part of our strategy, we may pursue acquisitions and other initiatives in
order to offer new products or services or otherwise enhance our market position
or strategic strengths.
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 services for our
solutions, and
- recurring revenue from ongoing support and maintenance 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
17
recognized upon completion of specified conditions in each contract, based on a
customer's subscriber level or number of users 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.
Our business is subject to the effects of general global economic conditions
and, in particular, market conditions in the communications industry. As a
result of the slowdown in the communications industry during fiscal years 2003
and 2002, the market value, financial results and prospects, and capital
spending levels of communications companies declined or degraded. During fiscal
2004, several communications service providers demonstrated a greater readiness
to commit to new projects, and in the first half of fiscal 2005, we observed
continued demand for our offerings. The telecommunications industry is being
transformed by the trend of continued consolidation which we believe accelerates
the needs for a carrier to operate its system while simultaneously reducing the
total cost of ownership. We believe we are well positioned to take advantage of
this trend. As a result, and despite the uncertainties that still exist in the
market, including those associated with consolidation, we expect continued
growth in the coming quarters.
We believe that we are a leading global provider of ICM Enabling Systems. We
provide a broad set of products, with proven functionality and scalability,
accompanied by a comprehensive range of business consulting, system
implementation and integration services.
We believe that demand for our ICM Enabling Systems is driven by, among other
key factors:
- the global use of communications services,
- the emergence of new communications products and services, especially
IP, video, broadband, data and content services and IPTV (Internet
Protocol Television),
- technological changes, such as the introduction of wireless Internet
services via GPRS (General Packet Radio Services) and UMTS (Universal
Mobile Telecommunications System) technology,
- the ongoing consolidation within the communications industry,
- the business needs of communications service providers to reduce costs
and retain high value customers in a highly competitive environment,
and
- a shift from in-house management to vendor solutions.
We also believe that additional drivers of demand are the continuing trend
for communications service providers to offer their subscribers multiple service
packages, commonly referred to as bundled or convergent services (combinations
of voice, broadband, electronic and mobile commerce and IP services), and the
ability of our ICM Enabling Systems to improve productivity.
18
Revenue from Managed Services arrangements is included in both license and
service revenue from the sale of ICM Enabling Systems and Directory Systems.
Managed Services projects are a significant part of our business, and generate
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. We expect that our Managed Services
relationships will generate margins comparable to sales of our other products
and related license and services over the entire relationships. Revenue related
to Managed Services agreements in each of the six-month periods ended March 31,
2005 and 2004 was approximately 40% of total revenue.
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended March 31,
2005 and 2004 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,
------------------ ----------------
2005 2004 2005 2004
------ ------ ------ ------
Revenue:
License ........................................ 5.6% 4.1% 5.0% 4.0%
Service ........................................ 94.4 95.9 95.0 96.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license ................................ 0.2 0.3 0.2 0.3
Cost of service ................................ 63.5 62.8 63.2 63.1
Research and development ....................... 6.8 6.8 6.9 7.0
Selling, general and administrative ............ 11.2 12.2 11.4 12.2
Amortization of purchased intangible assets .... 0.4 0.9 0.6 1.0
----- ----- ----- -----
82.1 83.0 82.3 83.6
----- ----- ----- -----
Operating income ................................. 17.9 17.0 17.7 16.4
Interest income and other, net ................... 1.1 0.4 1.1 0.3
----- ----- ----- -----
Income before income taxes ....................... 19.0 17.4 18.8 16.7
Income taxes ..................................... 3.8 3.8 3.8 3.7
----- ----- ----- -----
Net income ....................................... 15.2% 13.6% 15.0% 13.0%
===== ===== ===== =====
19
SIX MONTHS ENDED MARCH 31, 2005 AND 2004
The following is a tabular presentation of our results of operations for the
six months ended March 31, 2005 compared to the six months ended March 31, 2004.
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)
---------------------------- ----------------------
2005 2004 AMOUNT %
----------- ----------- --------- -----
(in thousands)
------------------------------------------
Revenue:
License........................ $ 47,710 $ 34,728 $ 12,982 37.4%
Service........................ 910,238 836,325 73,913 8.8
----------- ----------- ---------
957,948 871,053 86,895 10.0
----------- ----------- ---------
Operating expenses:
Cost of license................ 2,153 2,359 (206) (8.7)
Cost of service................ 605,238 550,361 54,877 10.0
Research and development....... 66,174 60,582 5,592 9.2
Selling, general and
administrative............... 109,552 106,333 3,219 3.0
Amortization of purchased
intangible assets............ 5,797 8,865 (3,068) (34.6)
----------- ----------- ---------
788,914 728,500 60,414 8.3
----------- ----------- ---------
Operating income.................. 169,034 142,553 26,481 18.6
Interest income and other, net.... 10,639 2,778 7,861 283.0
----------- ----------- ---------
Income before income taxes........ 179,673 145,331 34,342 23.6
Income taxes...................... 35,933 31,973 3,960 12.4
----------- ----------- ---------
Net income........................ $ 143,740 $ 113,358 $ 30,382 26.8
=========== =========== =========
REVENUE. Total revenue increased by $86.9 million, or 10.0%, in the six
months ended March 31, 2005 to $957.9 million from $871.1 million in the six
months ended March 31, 2004. Approximately 60% of the increase in total revenue
was due to an increase in business related to Managed Services customers, and
the remainder was attributable to revenue from existing and new customers.
Revenue related to Managed Services customers in the six months ended March 31,
2005 and 2004 was approximately 40% of total revenue. In the six months ended
March 31, 2005, approximately $7.0 million of the increase in total revenue was
a result of the significant weakening of the U.S. dollar, (primarily during the
first quarter of fiscal 2005).
License and service revenue from the sale of ICM Enabling Systems was $832.3
million for the six months ended March 31, 2005, an increase of $75.6 million,
or 10.0%, over the six months ended March 31, 2004. Approximately 60% of the
increase is attributable to an increase in business related to Managed Services
customers, and the remainder was attributable to revenue from existing and new
customers. License and service revenue from the sale of ICM Enabling Systems
represented 86.9% of our total revenue in the six months ended March 31, 2005
and 2004. The demand for our ICM Enabling Systems is primarily driven by the
need for communications companies to continue to integrate their billing, CRM
and order management systems into an Integrated Customer Management approach.
During fiscal 2004, several communications service providers demonstrated a
greater readiness to commit to new projects, and in the first half of fiscal
2005, we observed continued demand for our offerings.
License and service revenue from the sale of Directory Systems was $125.7
million for the six months ended March 31, 2005, an increase of $11.3 million,
or 9.9%, over the six months ended March 31, 2004. Approximately 90% of the
increase in Directory Systems revenue in the six months ended March 31, 2005 was
attributable to an increase in business related to Managed Services customers,
and the remainder was attributable to additional revenue from existing and new
customers. License and service revenue from the sale of Directory Systems
represented 13.1% of our total revenue in the six months ended March 31, 2005
and
20
2004. We believe that we are a leading provider of Directory Systems in most of
the markets we serve. We expect that our revenue from Directory Systems will
slightly increase in fiscal 2005.
In the six months ended March 31, 2005, revenue from customers in North
America, Europe and the rest of the world accounted for 66.4%, 24.9% and 8.7%,
respectively, of total revenue compared to 67.2%, 26.6% and 6.2%, respectively,
for the six months ended March 31, 2004. The increase in revenue from customers
in North America in the six months ended March 31, 2005 was less than the 10.0%
increase in our total revenue, which resulted in a decrease in its percentage of
total revenue. The increase in revenue from customers in North America in the
six months ended March 31, 2005 is attributable to an increase in business
related to Managed Services customers. The increase in revenue from customers in
Europe in the six months ended March 31, 2005 was less than the 10.0% increase
in our total revenue, which resulted in a decrease in its percentage of total
revenue. The increase in revenue from customers in Europe in the six months
ended March 31, 2005 was attributable to an increase in revenue from existing
and new customers. The increase in revenue and the increase as a percentage of
revenue from customers in the rest of the world in the six months ended March
31, 2005 was attributable to the expansion of relationships with existing and
new customers in the rest of the world.
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 six months ended March 31, 2005, cost of license, as a percentage of
license revenue, was 4.5%, compared to 6.8% in the six months ended March 31,
2004.
COST OF SERVICE. The increase in cost of service in the six months ended
March 31, 2005 was 10.0%, same as the increase in our total revenue in the six
months ended March 31, 2005, which resulted in no change in our gross margin as
a percentage of revenue. In the six months ended March 31, 2005, approximately
$7.0 million of the increase in cost of service was a result of the significant
weakening of the U.S. dollar, (primarily during the first quarter of fiscal
2005).
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense attributed to research and development
activities, which involve the development of new software modules and product
offerings, either in conjunction with customer projects or as part of our
internal product development program. Research and development expense increased
by $5.6 million, or 9.2%, in the six months ended March 31, 2005 to $66.2
million from $60.6 million in the six months ended March 31, 2004. Such increase
in research and development expense was proportionally less than the increase in
our total revenue, and research and development expense decreased, as a
percentage of revenue, from 7.0% of revenue in the six months ended March 31,
2005 to 6.9% of revenue in the six months ended March 31, 2005. While we
continue to upgrade our existing systems, in the first half of fiscal 2005, we
focused significant research and development efforts on the integration between
our products and a unified user interface in order to enable our customers to
adopt an ICM approach. As part of these efforts we launched a comprehensive
portfolio of products, which we refer to as Amdocs 6, in February 2005. Amdocs 6
is a pre-integrated portfolio of modular, billing, CRM, self-service, order
management, mediation and content revenue management software products. The
majority of our research and development expenditures are directed to our ICM
Enabling Systems, and the remainder to directory solutions. Although we intend
to continue to devote resources to research and development, our research and
development spending, like all of our costs, is sensitive to our overall
financial condition. 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 $3.2 million, or 3.0%, in the six months ended March 31,
2005 to $109.6 million, from $106.3 million in the six
21
months ended March 31, 2004. Selling, general and administrative expense is
primarily comprised of compensation expense. The increase in selling, general
and administrative expense in the first half of fiscal 2005 was attributable to
an overall increase in our operations, as well as to the increase in our selling
and marketing compensation, although the 3.0% increase was significantly less
than the 10.0% increase in our total revenue.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the six months ended March 31, 2005 was $5.8 million,
compared to $8.9 million in the six months ended March 31, 2004. The decrease in
amortization of purchased intangible assets was due to purchased intangible
assets that were fully amortized in fiscal 2004.
OPERATING INCOME. Operating income increased by $26.5 million, or 18.6%, in
the six months ended March 31, 2005, to $169.0 million, or 17.7% of revenue,
from $142.6 million, or 16.4% of revenue, in the six months ended March 31,
2004. The increase in operating income in the first half of fiscal 2005 resulted
from the 10.0% increase in our total revenue, offset by the 8.3% increase in
operating expense.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased by
$7.8 million in the six months ended March 31, 2005 to $10.6 million from $2.8
million in the six months ended March 31, 2004. The increase in interest income
and other, net, in the first half of fiscal 2005 is primarily attributable to
the increase in market interest rates on our short-term interest-bearing
investments, and to the decrease in our interest expense due to the redemption
of our 2% Notes in June 2004, which was partially offset by interest expense on
our 0.50% Notes issued in March 2004.
INCOME TAXES. Income taxes for the half of fiscal 2005 were $35.9 million on
pretax income of $179.7 million, an effective tax rate of 20% compared to 22% in
the six months ended March 31, 2004. Our effective tax rate for fiscal year 2005
is expected to be approximately 20% due to the corporate income tax rates in the
various countries in which we operate and the relative magnitude of our business
in those countries. The reduction in our effective tax rate is due to our
continued expansion into countries with lower effective tax rates.
NET INCOME. Net income was $143.7 million in the first half of fiscal 2005,
compared to a net income of $113.4 million in the six months ended March 31,
2004. The increase in net income is primarily attributable to the 10.0% increase
in our total revenue offset by the increase in operating expenses and income
taxes.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.67 for the six
months ended March 31, 2005, compared to $0.52 in the six months ended March 31,
2004.
The shares issuable upon conversion of the 0.50% Notes were included in the
diluted earnings per share calculation for the six months ended March 31, 2005
following the adoption of Issue 04-8, which required the addition of 10.4
million ordinary shares issuable upon conversion of our 0.50% Notes, to the
diluted earnings per share calculation. The adoption of Issue 04-8 did not
materially affect our previously reported quarterly diluted earnings per share
for the six months ended March 31, 2004, as the effect of the then outstanding
0.50% Notes was immaterial during that period.
22
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
The following is a tabular presentation of our results of operations for the
three months ended March 31, 2005 compared to the three months ended March 31,
2004. 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)
---------------------------- ----------------------
2005 2004 AMOUNT %
----------- ----------- --------- -----
(in thousands)
------------------------------------------
Revenue:
License........................ $ 27,344 $ 18,107 $ 9,237 51.0%
Service........................ 461,072 424,651 36,421 8.6
----------- ----------- ---------
488,416 442,758 45,658 10.3
----------- ----------- ---------
Operating expenses:
Cost of license................ 998 1,227 (229) (18.7)
Cost of service................ 310,291 278,258 32,033 11.5
Research and development....... 33,263 30,084 3,179 10.6
Selling, general and
administrative............... 54,592 53,836 756 1.4
Amortization of purchased
intangible assets............ 2,079 3,769 (1,690) (44.8)
----------- ----------- ---------
401,223 367,174 34,049 9.3
----------- ----------- ---------
Operating income.................. 87,193 75,584 11,609 15.4
Interest income and other, net.... 5,680 1,711 3,969 232.0
----------- ----------- ---------
Income before income taxes........ 92,873 77,295 15,578 20.0
Income taxes...................... 18,576 17,005 1,571 9.2
----------- ----------- ---------
Net income........................ $ 74,297 $ 60,290 $ 14,007 23.2
=========== =========== =========
REVENUE. Total revenue increased by $45.7 million, or 10.3%, in the three
months ended March 31, 2005 to $488.4 million from $442.8 million in the three
months ended March 31, 2004. Approximately 60% of the increase in total revenue
was due to an increase in business related to Managed Services customers, and
the remainder was attributable to revenue from existing and new customers.
Revenue related to Managed Services customers in the three months ended March
31, 2005 and 2004 was approximately 40% of total revenue.
License and service revenue from the sale of ICM Enabling Systems was $424.8
million for the three months ended March 31, 2005, an increase of $43.5 million,
or 11.4%, over the three months ended March 31, 2004. Approximately 50% of the
increase is attributable to an increase in business related to Managed Services
customers, and the remainder was attributable to revenue from existing and new
customers. License and service revenue from the sale of ICM Enabling Systems
represented 87.0% and 86.1% of our total revenue in the three months ended March
31, 2005 and 2004, respectively. The demand for our ICM Enabling Systems is
primarily driven by the need for communications companies to continue to
integrate their billing, CRM and order management systems into an Integrated
Customer Management approach. During fiscal 2004, several communications service
providers demonstrated a greater readiness to commit to new projects, and in the
second quarter of fiscal 2005, we observed continued demand for our offerings.
License and service revenue from the sale of Directory Systems was $63.6
million for the three months ended March 31, 2005, an increase of $2.2 million,
or 3.6%, over the three months ended March 31, 2004. The increase in Directory
Systems revenue in the three months ended March 31, 2005 was attributable to an
increase in business related to Managed Services customers. License and service
revenue from the sale of Directory Systems represented 13.0% and 13.9% of our
total revenue in the three months ended March 31, 2005 and 2004 respectively. We
believe that we are a leading provider of Directory Systems in most of the
markets we serve. We expect that our revenue from Directory Systems will
slightly increase in fiscal 2005.
23
In the three months ended March 31, 2005, revenue from customers in North
America, Europe and the rest of the world accounted for 64.9%, 26.3% and 8.8%,
respectively, of total revenue compared to 68.0%, 26.4% and 5.6%, respectively,
for the three months ended March 31, 2004. The increase in revenue from
customers in North America in the three months ended March 31, 2005 was less
than the 10.3% increase in our total revenue. The increase in revenue from
customers in North America in the three months ended March 31, 2005 is
attributable to an increase in business related to Managed Services customers
.The increase in revenue from customers in Europe in the three months ended
March 31, 2005 was attributable to an increase in revenue from existing and new
customers. The increase in revenue and the increase as a percentage of revenue
from customers in the rest of the world in the three months ended March 31, 2005
was attributable to the expansion of relationships with existing and new
customers in the rest of the world.
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 March 31, 2005, cost of license, as a percentage of
license revenue, was 3.6%, compared to 6.8% in the three months ended March 31,
2004.
COST OF SERVICE. The increase in cost of service in the three months ended
March 31, 2005 was 11.5%, which is greater than the increase in our total
revenue in the three months ended March 31, 2005, and resulted in 0.6% decrease
in our gross margin, as a percentage of revenue.
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense attributed to research and development
activities, which involve the development of new software modules and product
offerings, either in conjunction with customer projects or as part of our
internal product development program. Research and development expense increased
by $3.2 million, or 10.6%, in the three months ended March 31, 2005 to $33.3
million from $30.1 million in the three months ended March 31, 2004. Such
increase in research and development expense was proportionally the same as the
increase in our total revenue, which resulted in no change in the percentage of
development expense of revenue in the three months ended March 31, 2005 and
March 31, 2004. While we continue to upgrade our existing systems, in the first
half of fiscal 2005, we focused significant research and development efforts on
the integration between our products and a unified user interface in order to
enable our customers to adopt an ICM approach. As part of these efforts we
launched Amdocs 6 in February 2005. The majority of our research and development
expenditures are directed to our ICM Enabling Systems, and the remainder to
directory solutions. Although we intend to continue to devote resources to
research and development, our research and development spending, like all of our
costs, is sensitive to our overall financial condition. 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 $0.8 million, or 1.4%, in the three months ended March 31,
2005 to $54.6 million, from $53.8 million in the three months ended March 31,
2004. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense in the second quarter of fiscal 2005 was attributable to an overall
increase in our operations, as well as to the increase in our selling and
marketing compensation, although the 1.4% increase was significantly less than
the 10.3% increase in our total revenue.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended March 31, 2005 was $2.1 million,
compared to $3.8 million in the three months ended March 31, 2004. The decrease
in amortization of purchased intangible assets was due to purchased intangible
assets that were fully amortized in fiscal 2004.
OPERATING INCOME. Operating income increased by $11.6 million, or 15.4%, in
the three months ended March 31, 2005, to $87.2 million, or 17.9% of revenue,
from $75.6 million, or 17.0% of revenue, in the three
24
months ended March 31, 2004. The increase in operating income in the second
quarter of fiscal 2005 resulted from the 10.3% increase in our total revenue,
offset by the 9.3% increase in operating expense.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased by
$4.0 million in the three months ended March 31, 2005 to $5.7 million from $1.7
million in the three months ended March 31, 2004. The increase in interest
income and other, net, in the osecond quarter of fiscal 2005 is primarily
attributable to the increase in market interest rates on our short-term
interest-bearing investments, and to the decrease in our interest expense due to
the redemption of our 2% Notes in June 2004, which was partially offset by
interest expense on our 0.50% Notes issued in March 2004.
INCOME TAXES. Income taxes for the second quarter of fiscal 2005 were $18.6
million on pretax income of $92.9 million, an effective tax rate of 20% compared
to 22% in the three months ended March 31, 2004. Our effective tax rate for
fiscal year 2005 is expected to be approximately 20% due to the corporate income
tax rates in the various countries in which we operate and the relative
magnitude of our business in those countries. The reduction in our effective tax
rate is due to our continued expansion into countries with lower effective tax
rates.
NET INCOME. Net income was $74.3 million in the second quarter of fiscal
2005, compared to a net income of $60.3 million in the three months ended March
31, 2004. The increase in net income is primarily attributable to the 10.3%
increase in our total revenue, offset by increases in operating expenses and
income taxes.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.34 for the
three months ended March 31, 2005, compared to $0.28 in the three months ended
March 31, 2004.
The shares issuable upon conversion of the 0.50% Notes were included in the
diluted earnings per share calculation for the three months ended March 31, 2005
following the adoption of Issue 04-8, which required the addition of 10.4
million ordinary shares issuable upon conversion of our 0.50% Notes, to the
diluted earnings per share calculation. The adoption of Issue 04-8 did not
materially affect our previously reported quarterly diluted earnings per share
for the three months ended March 31, 2004 as the effect of the then outstanding
0.50% Notes was immaterial during that period.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,332.3 million as of March 31, 2005, compared to $1,190.7 million as of
September 30, 2004. The increase is attributable to positive cash flows from
operations. Net cash provided by operating activities amounted to $176.5 million
and $181.9 million for the six months ended March 31, 2005 and 2004,
respectively. We currently intend to retain our future operating cash flows to
support the further expansion of our business, including investments related to
Managed Services projects and acquisitions. We may also use a portion of our
cash balances for future repurchases of our outstanding shares, as described
below.
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 liquidity needs for at least the next fiscal year.
As of March 31, 2005, $0.3 million and $450.0 million aggregate principal
amount of our 2% Notes and 0.50% Notes were outstanding, respectively.
On December 20, 2004, we announced that our Board of Directors had extended
our share repurchase program for the additional repurchase of up to $100 million
of our ordinary shares in the open market or privately negotiated transactions
and at times and prices we deem appropriate. In accordance with this extension,
as of May 13, 2005, the Company had repurchased approximately 3.5 million
ordinary shares, at an average price of 28.33 per share.
25
As of March 31, 2005, we had available short-term general revolving lines of
credit totaling $31.0 million, pursuant to which $1.0 million of loans were
outstanding. In addition, as of March 31, 2005 we had outstanding letters of
credit and bank guarantees from various banks totaling $13.5 million.
As of March 31, 2005, we had outstanding long-term obligations of $14.4
million in connection with leasing arrangements.
We have contractual obligations for our convertible notes, financing
arrangements, capital leases and non-cancelable operating leases that were
summarized in a table of contractual obligations in our Annual Report on Form
20-F for the year ended September 30, 2004. Since September 30, 2004, there have
been no material changes in contractual obligations outside the ordinary course
of our business.
Our capital expenditures were approximately $36.1 million in the six months
ended March 31, 2005. Approximately 75% of these expenditures consisted of
purchases of computer equipment and, the remainder, leasehold improvements. 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 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 six months ended March 31, 2005, approximately 70% of our revenue
and approximately 50% of our operating expenses were in U.S. dollars or linked
to the U.S. dollar. Historically, the effect of fluctuations in currency
exchange rates has had a minimal impact on our consolidated operations. As more
of our customers seek contracts that are denominated in currencies other than
the U.S. dollar, our exposure to fluctuations in currency exchange rates could
increase. In managing our foreign exchange risk, we enter from time to time into
various foreign exchange hedging contracts. We do not hedge all of our exposure
in currencies other than the U.S. dollar, but rather our policy is to hedge
significant net exposures in the major foreign currencies in which we operate.
We periodically assess the applicability of the U.S. dollar as our functional
currency by reviewing the salient indicators.
26
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(b) Issuer Purchases of Equity Securities
The following table provides information about purchases by the Company and
its affiliated purchasers during the quarter ended March 31, 2005 of equity
securities that are registered by the Company pursuant to Section 12 of the
Securities Exchange Act of 1934:
ISSUER PURCHASES OF EQUITY SECURITIES
Ordinary Shares
(c)
TOTAL NUMBER OF (d)
SHARES (OR UNITS) MAXIMUM NUMBER (OR
(a) (b) PURCHASED AS PART APPROXIMATE DOLLAR VALUE)
TOTAL NUMBER OF AVERAGE PRICE OF PUBLICLY OF SHARES (OR UNITS) THAT MAY
SHARES (OR UNITS) PAID PER SHARE ANNOUNCED PLANS YET BE PURCHASED UNDER THE
PERIOD PURCHASED (OR UNIT) OR PROGRAMS PLANS OR PROGRAMS (1)
----------------- ----------------- -------------- ----------------- -----------------------------
01/01/05-01/31/05 - $ - - $100 million
02/01/05-02/28/05 - - - $100 million
03/01/05-03/31/05 - - - $100 million
---- -----
Total - - $100 million
==== =====
(1) On December 20, 2004, the Company announced that its Board of Directors
had extended the Company's share repurchase program for the additional
repurchase of up to $100 million of our ordinary shares in the open market
or privately negotiated transactions and at times and prices we deem
appropriate. See note 8.
Convertible Notes
(d)
(c) MAXIMUM NUMBER (OR
(b) TOTAL NUMBER OF APPROXIMATE DOLLAR
AVERAGE PRICE PRINCIPAL AMOUNT OF VALUE) OF PRINCIPAL
(a) PAID PER $1,000 CONVERTIBLE NOTES AMOUNT OF CONVERTIBLE
TOTAL PRINCIPAL AMOUNT PRINCIPAL AMOUNT PURCHASED AS PART OF NOTES THAT MAY YET BE
OF CONVERTIBLE NOTES OF CONVERTIBLE PUBLICLY ANNOUNCED PURCHASED UNDER THE PLANS
PERIOD PURCHASED NOTES PLANS OR PROGRAMS OR PROGRAMS (1)
----------------- ---------------------- ---------------- -------------------- -------------------------
01/01/05-01/31/05 $ - $ - $ - $ 272,000
02/01/05-02/28/05 - - - 272,000
03/01/05-03/31/05 - - - 272,000
----- --------
Total $ - - $ - 272,000
===== ========
(1) In April 2004, the Company's board of directors authorized the Company to
repurchase the outstanding amount of the 2% Notes.
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, 2005:
(1) Form 6-K dated January 20, 2005.
(2) Form 6-K dated February 14, 2005.
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 16, 2005