SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 JUNE 30, 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
----------------------------
JUNE 30, SEPTEMBER 30,
2005 2004
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 639,424 $ 550,352
Short-term interest-bearing investments 650,394 640,347
Accounts receivable, net 293,097 254,779
Deferred income taxes and taxes receivable 98,771 62,284
Prepaid expenses and other current assets 69,200 80,229
----------- -------------
Total current assets 1,750,886 1,587,991
Equipment, vehicles and leasehold improvements, net 173,402 181,121
Deferred income taxes 115,327 113,589
Goodwill 796,983 806,874
Intangible assets, net 37,671 47,512
Other noncurrent assets 138,876 126,797
----------- -------------
Total assets $ 3,013,145 $ 2,863,884
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 91,729 $ 104,415
Accrued expenses and other current liabilities 135,094 137,664
Accrued personnel costs 124,914 124,284
Short-term portion of financing arrangements 989 1,604
Deferred revenue 236,316 223,122
Short-term portion of capital lease obligations 6,376 19,706
Deferred income taxes and taxes payable 181,186 163,648
----------- -------------
Total current liabilities 776,604 774,443
Deferred income taxes 47,409 40,530
0.50% Convertible notes 450,000 450,000
Noncurrent liabilities and other 163,479 154,721
----------- -------------
Total liabilities 1,437,492 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; 226,377 and
224,947 issued and 199,239 and 201,334 outstanding, respectively 3,628 3,601
Additional paid-in capital 1,853,692 1,837,608
Treasury stock, at cost - 27,138 and 23,613 Ordinary Shares, respectively (602,392) (502,416)
Accumulated other comprehensive loss (7,561) (1,919)
Unearned compensation (41) (174)
Retained earnings 328,327 107,490
----------- -------------
Total shareholders' equity 1,575,653 1,444,190
----------- -------------
Total liabilities and shareholders' equity $ 3,013,145 $ 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenue:
License $ 27,199 $ 17,298 $ 74,909 $ 52,026
Service 480,156 432,926 1,390,394 1,269,251
---------- ---------- ---------- ----------
507,355 450,224 1,465,303 1,321,277
---------- ---------- ---------- ----------
Operating expenses:
Cost of license 1,125 1,448 3,278 3,807
Cost of service 324,249 283,109 929,487 833,470
Research and development 31,393 31,665 97,567 92,247
Selling, general and administrative 56,448 52,745 166,000 159,078
Amortization of purchased intangible assets 2,078 4,558 7,875 13,423
---------- ---------- ---------- ----------
415,293 373,525 1,204,207 1,102,025
---------- ---------- ---------- ----------
Operating income 92,062 76,699 261,096 219,252
Interest income and other, net 4,305 121 14,944 2,899
---------- ---------- ---------- ----------
Income before income taxes 96,367 76,820 276,040 222,151
Income taxes 19,270 16,900 55,203 48,873
---------- ---------- ---------- ----------
Net income $ 77,097 $ 59,920 $ 220,837 $ 173,278
========== ========== ========== ==========
Basic earnings per share $ 0.38 $ 0.29 $ 1.10 $ 0.82
========== ========== ========== ==========
Diluted earnings per share $ 0.36 $ 0.27 $ 1.03 $ 0.79
========== ========== ========== ==========
Basic weighted average number of shares
outstanding 200,494 206,093 201,453 210,409
========== ========== ========== ==========
Diluted weighted average number of shares
outstanding (1) 216,570 222,237 217,608 220,825
========== ========== ========== ==========
(1) Diluted weighted average number of shares outstanding for the three and
nine months ended June 30, 2004 have been restated, due to the adoption of
Emerging Issue Task Force Issue No. 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share" ("EITF 04-8"),
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 reduced
diluted earnings per share by $0.01 per share for the three and nine
months ended June 30, 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)
Ordinary Shares Additional Accumulated 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 - - - - - - 220,837 220,837
Unrealized loss on
foreign currency
hedging contracts,
net of $1,220 tax
benefit - - - - (5,037) - - (5,037)
Unrealized loss on
short-term
interest-bearing
investments, net of
$129 tax benefit - - - - (605) - - (605)
----------
Comprehensive income 215,195
----------
Employee stock options
exercised 1,430 27 14,026 - - - - 14,053
Tax benefit of stock
options exercised - - 1,934 - - - - 1,934
Repurchase of ordinary
shares (3,525) - - (99,976) - - - (99,976)
Expense related to vesting
of stock options - - 124 - - - - 124
Amortization of unearned
compensation - - - - - 133 - 133
------- ------ ---------- --------- ----------- -------- -------- ----------
BALANCE AS OF JUNE 30, 2005 199,239 $3,628 $1,853,692 $(602,392) $ (7,561) $ (41) $328,327 $1,575,653
======= ====== ========== ========= =========== ======== ======== ==========
As of June 30, 2005 and September 30, 2004, accumulated other comprehensive loss
is comprised of unrealized loss on foreign currency hedging contracts, net of
tax, of $(6,268) and $(1,232), respectively, and unrealized loss on short-term
interest-bearing investments, net of tax, of $(1,293) 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)
NINE MONTHS ENDED JUNE 30,
--------------------------
2005 2004
---------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 220,837 $ 173,278
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 64,835 76,944
Loss (gain) on sale of equipment 117 (444)
Gain on repurchase of 2% convertible notes - (13)
Deferred income taxes 3,527 (8,093)
Tax benefit of stock options exercised 1,934 2,738
Realized (gain) loss from short-term
interest-bearing investments (1,154) 1,039
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (38,316) (69,503)
Prepaid expenses and other current assets 8,779 14,879
Other noncurrent assets (8,757) (41,941)
Accounts payable and accrued expenses (15,719) 32,947
Deferred revenue 29,271 46,968
Income taxes payable (6,095) 27,735
Noncurrent liabilities and other (2,615) 1,133
---------- -----------
Net cash provided by operating activities 256,644 257,667
---------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 4,140 1,841
Payments for purchase of equipment, vehicles, leasehold
improvements (53,812) (33,532)
Proceeds from sale of short-term interest-bearing
investments 648,238 863,304
Purchase of short-term interest-bearing investments (657,865) (1,158,407)
Net cash paid for acquisitions (4,609) (10,567)
---------- -----------
Net cash used in investing activities (63,908) (337,361)
---------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised 14,053 11,364
Net proceeds from issuance of long-term 0.50%
convertible notes - 441,736
Repurchase of ordinary shares (99,976) (307,471)
Redemption of 2% convertible notes (395,110)
Repurchase of 2% convertible notes - (4,987)
Borrowings under financing arrangements - 910
Principal payments under financing arrangements (656) (1,651)
Principal payments on capital lease obligations (17,085) (20,251)
---------- -----------
Net cash used in financing activities (103,664) (275,460)
---------- -----------
Net increase (decrease) in cash and cash equivalents 89,072 (355,154)
Cash and cash equivalents at beginning of period 550,352 847,600
---------- -----------
Cash and cash equivalents at end of period $ 639,424 $ 492,446
========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 55,875 $ 22,734
Interest 3,590 9,733
NON-CASH INVESTING AND FINANCING ACTIVITIES
In the nine months ended June 30, 2004, the Company issued 561 ordinary shares
in connection with the acquisition of XACCT Technologies Ltd.
5
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
6
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,
7
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 for options granted during the period):
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2005 2004 2005 2004
------- ------- ------- -------
Risk-free interest rate 3.79% 3.68% 3.35% 3.05%
Expected life of options 4.50 4.50 4.50 4.50
Expected annual volatility 0.603 0.682 0.635 0.691
Expected dividend yield None None None None
Fair value per option $ 13.92 $ 13.99 $ 12.63 $ 13.13
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 nine months ended
June 30, 2005 and 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income, as reported $ 77,097 $ 59,920 $ 220,837 $ 173,278
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 56 276 206 301
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (9,732) (7,834) (26,995) (27,927)
----------- ----------- ----------- -----------
Pro forma net income $ 67,421 $ 52,362 $ 194,048 $ 145,652
=========== =========== =========== ===========
Basic earnings per share:
As reported $ 0.38 $ 0.29 $ 1.10 $ 0.82
=========== =========== =========== ===========
Pro forma $ 0.34 $ 0.25 $ 0.96 $ 0.69
=========== =========== =========== ===========
Diluted earnings per share:
As reported $ 0.36 $ 0.27 $ 1.03 $ 0.79
=========== =========== =========== ===========
Pro forma $ 0.32 $ 0.24 $ 0.91 $ 0.67
=========== =========== =========== ===========
The pro forma results for the three and nine months ended June 30, 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 $703 and $1,592 in the three and nine months ended
June 30, 2004, respectively, and had no material impact on pro forma diluted
earnings per share in the three and nine months ended June 30, 2004. The
decrease in pro forma diluted earning per share of
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
$0.01 in the three and nine months ended June 30, 2004, resulted from the
adoption of EITF 04-8. See Notes 3 and 7.
9
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" ("EITF 04-8"). EITF 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 EITF 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 EITF 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 EITF 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 EITF 04-8 reduced the Company's previously reported quarterly diluted
earnings per share by $0.01 per share for the three and nine months ended
June 30, 2004.
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 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.
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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
--------------------------
JUNE 30, SEPTEMBER 30,
2005 2004
--------- -------------
Accounts receivable -billed $ 273,062 $ 242,254
Accounts receivable -unbilled 24,789 24,696
Less - allowances (4,754) (12,171)
--------- -------------
Accounts receivable, net $ 293,097 $ 254,779
========= =============
11
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net income $ 77,097 $ 59,920 $ 220,837 $ 173,278
Other comprehensive (loss) income:
Unrealized (loss) gain on
foreign currency hedging
contracts, net of tax (4,186) 2,716 (5,037) (2,846)
Unrealized gain (loss) on
short-term interest-bearing
investments, net of tax 1,216 (1,687) (605) (1,227)
--------- --------- --------- ---------
Comprehensive income $ 74,127 $ 60,949 $ 215,195 $ 169,205
========= ========= ========= =========
6. INCOME TAXES
The provision for income taxes for the following periods consisted
of:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2005 2004 2005 2004
-------- -------- -------- --------
Current $ 30,018 $ 32,755 $ 51,662 $ 56,966
Deferred (10,748) (15,855) 3,541 (8,093)
-------- -------- -------- --------
$ 19,270 $ 16,900 $ 55,203 $ 48,873
======== ======== ======== ========
The effective income tax rate varied from the statutory Guernsey tax
rate as follows for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
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%
=== === === ===
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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%.
As of June 30, 2005, deferred tax assets of $13,757, 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2005 2004 2005 2004
-------- -------- -------- --------
Numerator:
Numerator for basic earnings per
share $ 77,097 $ 59,920 $220,837 $173,278
Effect of assumed conversion of
0.50% convertible notes 988 981 2,955 1,301
-------- -------- -------- --------
Numerator for diluted earnings per
share $ 78,085 $ 60,901 $223,792 $174,579
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share - weighted average number
of shares outstanding 200,494 206,093 201,453 210,409
Effect of assumed conversion of
0.50% convertible notes 10,436 10,436 10,436 4,639
Effect of dilutive stock options
granted 5,640 5,708 5,719 5,777
-------- -------- -------- --------
Denominator for diluted earnings
per share 216,570 222,237 217,608 220,825
======== ======== ======== ========
Basic earnings per share $ 0.38 $ 0.29 $ 1.10 $ 0.82
======== ======== ======== ========
Diluted earnings per share $ 0.36 $ 0.27 $ 1.03 $ 0.79
======== ======== ======== ========
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 nine months ended June 30, 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 EITF 04-8
reduced the Company's previously reported quarterly diluted earnings per
share by $0.01 per share for the three and nine months ended June 30,
2004.
13
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,
during the three months ended June 30, 2005, the Company had repurchased
approximately 3.5 million ordinary shares, at an average price of $28.33
per share.
9. ACQUISITIONS
CERTEN INC.
On July 2, 2003, the Company acquired from Bell Canada 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.
DST INNOVIS
On July 1, 2005 the Company acquired from DST Systems, Inc. ("DST")
all of the common stock of DST's wholly owned subsidiaries, DST Innovis
Inc. and DST Interactive, Inc., (collectively, "DST Innovis"), a leading
provider of customer care and billing solutions to broadband media
companies, for approximately $238,000 in cash. The purchase price is
subject to upward or downward adjustment based upon the working capital of
DST Innovis.
In addition, the Company signed a long-term agreement with a
subsidiary of DST, pursuant to which the DST subsidiary will continue to
support the printing and mailing of bills for the DST Innovis customer
base. Under the terms of that agreement, the DST subsidiary will be a
preferred vendor of billing printing and mailing for projects that combine
those services with billing support, and the DST subsidiary is expected to
be selected as the provider of these services for additional Amdocs
customers in North America. With this acquisition the Company is in a
position to offer comprehensive set of solutions to help broadband media
and satellite companies transition to integrated customer management, or
ICM. The Company has not yet completed the purchase price allocation. The
preliminary allocation is expected be completed during the fourth quarter
of fiscal 2005.
LONGSHINE
On August 3, 2005, the Company acquired all of the outstanding
shares of Longshine Information Technology Company Ltd. ("Longshine"), a
privately-held, leading vendor of customer care and billing software in
China, for approximately $30,000 in cash with the possibility of
additional cash consideration up to approximately $16,000 to be paid later
based on the achievement of certain performance targets. With this
acquisition the Company is able to offer set of products and services to
Chinese service providers and expand its presence in China. The Company
has not yet completed the purchase price allocation. The preliminary
allocation is expected be completed during the fourth quarter of fiscal
2005.
14
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 June 30, 2005:
FACILITIES
----------
Balance as of September 30, 2004 $ 10,280
Cash payments (1,108)
Adjustments (1) (1,675)
----------
Balance as of June 30, 2005 (2) $ 7,497
==========
(1) Reflects adjustments due to changes in previous estimates. These
adjustments resulted in a decrease of restructuring liabilities related to
facilities, which was credited to "cost of service" and "selling, general
and administrative" expenses in the nine months ended June 30, 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 June 30, 2005 and 2004, was as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
----------------------- -----------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 537 $ 65 $ 515 $ 94
Interest on benefit obligations 821 119 673 97
Expected return on plan assets (673) - (575) -
-------- -------- -------- --------
$ 685 $ 184 $ 613 $ 191
======== ======== ======== ========
15
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 nine months ended June
30, 2005 and 2004, was as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
----------------------- -----------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 1,632 $ 197 $ 1,488 $ 271
Interest on benefit obligations 2,494 360 1,944 280
Expected return on plan assets (2,042) - (1,661) -
-------- -------- -------- --------
$ 2,084 $ 557 $ 1,771 $ 551
======== ======== ======== ========
In the nine months ended June 30, 2005, the Company made contributions of
$2,495 to the pension plan and $125 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 $150 for other benefits.
16
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 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
June 30, 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 nine months ended June 30, 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.
17
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 nine months ended June 30,
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 nine months ended June
30, 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 nine
month periods ended June 30, 2005 and 2004. You should read this section in
conjunction with our consolidated financial statements.
18
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
addressable market has recently been expanded to include the broadband industry,
as a result of the acquisition of DST Innovis. The acquisition not only enlarges
our customer base, but also allows us to offer a broader set of customer care
and billing solutions to customers in the broadband, satellite and
communications services industries. Our products and services help our
customers, including broadband cable and satellite companies, 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. (In the past, we referred to ICM Enabling Systems 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 different lines of business, including wireline, wireless,
cable and satellite, and a wide range of communications services, including
voice, video, data, Internet Protocol ("IP") broadband, content, electronic and
mobile commerce and 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 systems 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 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 have pursued and may continue to pursue
acquisitions and other initiatives in order to offer new products or services or
otherwise enhance our market position or strategic strengths.
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)
19
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 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.
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. At the same time, we
believe the acquisitions of DST Innovis and Longshine have expanded our
addressable markets and propelled us into a leadership position in the broadband
industry, as well as in the Chinese market. 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 continued convergence of communications services, broadband
cable and satellite industries,
- 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.
20
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 customer satisfaction, loyalty,
profitability and overall productivity.
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 nine month periods ended June 30,
2005 and 2004 was approximately 40% of total revenue.
RESULTS OF OPERATIONS
The following table sets forth for the three and nine months ended June
30, 2005 and 2004 certain items in our consolidated statements of income
reflected as a percentage of total revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------- -------- ------- --------
Revenue:
License................................. 5.4% 3.8% 5.1% 3.9%
Service................................. 94.6 96.2 94.9 96.1
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license......................... 0.2 0.3 0.2 0.3
Cost of service......................... 63.9 62.9 63.4 63.1
Research and development................ 6.2 7.0 6.7 7.0
Selling, general and
administrative........................ 11.1 11.7 11.3 12.0
Amortization of purchased
intangible assets..................... 0.4 1.0 0.6 1.0
----- ----- ----- -----
81.8 82.9 82.2 83.4
----- ----- ----- -----
Operating income.......................... 18.2 17.1 17.8 16.6
Interest income and other, net............ 0.8 0.0 1.1 0.2
----- ----- ----- -----
Income before income taxes................ 19.0 17.1 18.9 16.8
Income taxes.............................. 3.8 3.8 3.8 3.7
----- ----- ----- -----
Net income................................ 15.2% 13.3% 15.1% 13.1%
===== ===== ===== =====
21
NINE MONTHS ENDED JUNE 30, 2005 AND 2004
The following is a tabular presentation of our results of operations for
the nine months ended June 30, 2005 compared to the nine months ended June 30,
2004. Following the table is a discussion and analysis of our business and
results of operations for such periods.
NINE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------------- -------------------
2005 2004 AMOUNT %
----------- ----------- ---------- -----
(in thousands)
---------------------------------------
Revenue:
License................................. $ 74,909 $ 52,026 $ 22,883 44.0%
Service................................. 1,390,394 1,269,251 121,143 9.5
----------- ----------- ----------
1,465,303 1,321,277 144,026 10.9
----------- ----------- ----------
Operating expenses:
Cost of license......................... 3,278 3,807 (529) (13.9)
Cost of service......................... 929,487 833,470 96,017 11.5
Research and development................ 97,567 92,247 5,320 5.8
Selling, general and
administrative........................ 166,000 159,078 6,922 4.4
Amortization of purchased
intangible assets..................... 7,875 13,423 (5,548) (41.3)
----------- ----------- ----------
1,204,207 1,102,025 102,182 9.3
----------- ----------- ----------
Operating income........................... 261,096 219,252 41,844 19.1
Interest income and other, net............. 14,944 2,899 12,045 415.5
----------- ----------- ----------
Income before income taxes................. 276,040 222,151 53,889 24.3
Income taxes............................... 55,203 48,873 6,330 13.0
----------- ----------- ----------
Net income................................. $ 220,837 $ 173,278 $ 47,559 27.4
=========== =========== ==========
REVENUE. Total revenue increased by $144.0 million, or 10.9%, in the nine
months ended June 30, 2005 to $1,465.3 million from $1,321.3 million in the nine
months ended June 30, 2004. Approximately 40% of the increase in total revenue
was due to an increase in business related to Managed Services customers.
Revenue related to Managed Services customers in the nine months ended June 30,
2005 and 2004 was approximately 40% of total revenue.
License and service revenue from the sale of ICM Enabling Systems was
$1,272.3 million for the nine months ended June 30, 2005, an increase of $127.6
million, or 11.1%, over the nine months ended June 30, 2004. Approximately 30%
of the increase is attributable to an increase in business related to Managed
Services customers. License and service revenue from the sale of ICM Enabling
Systems represented 86.8% and 86.6% of our total revenue in the nine months
ended June 30, 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. In the nine months ended June 30, 2005, we
observed strong demand for our offerings.
License and service revenue from the sale of Directory Systems was $193.0
million for the nine months ended June 30, 2005, an increase of $16.4 million,
or 9.3%, over the nine months ended June 30, 2004. Approximately 90% of the
increase in Directory Systems revenue in the nine months ended June 30, 2005 was
attributable to an increase in business related to Managed Services customers.
License and service revenue from the sale of Directory Systems represented 13.2%
and 13.4% of our total revenue in the nine months ended June 30, 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 increase in fiscal 2005.
In the nine months ended June 30, 2005, revenue from customers in North
America, Europe and the rest of the world accounted for 67.0%, 24.8% and 8.2%,
respectively, of total revenue compared to 66.8%, 26.4%
22
and 6.8%, respectively, for the nine months ended June 30, 2004. Approximately
half of the increase in revenue from customers in North America in the nine
months ended June 30, 2005 was attributable to an increase in business related
to Managed Services customers. The increase in revenue from customers in Europe
in the nine months ended June 30, 2005 was less than the 10.9% increase in our
total revenue, which resulted in a decrease in its percentage of total revenue.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the nine months ended June 30, 2005, cost of license, as a percentage of
license revenue, was 4.4%, compared to 7.3% in the nine months ended June 30,
2004.
COST OF SERVICE. The increase in cost of service in the nine months ended
June 30, 2005 was 11.5%, as compared to the 10.9% increase in our total revenue
in the nine months ended June 30, 2005, and resulted in a slight decrease of
0.3% in our gross margin as a percentage of revenue. Our gross margin was
affected by the continuing investment in our consulting business and our
development center in India, during 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 $5.3 million, or 5.8%, in the nine months ended June 30, 2005 to $97.6
million from $92.3 million in the nine months ended June 30, 2004. This 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% in the nine months ended June 30, 2004 to 6.7%
in the nine months ended June 30, 2005. While we continue to upgrade our
existing systems, in the nine months ended June 30, 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 $6.9 million, or 4.4%, in the nine months ended June 30,
2005 to $166.0 million, from $159.1 million in the nine months ended June 30,
2004. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense in the nine months ended June 30, 2005 was attributable to an overall
increase in our operations, as well as to the increase in our selling and
marketing compensation, although the 4.4% increase was less than the 10.9%
increase in our total revenue.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the nine months ended June 30, 2005 was $7.9 million,
compared to $13.4 million in the nine months ended June 30, 2004. The decrease
in amortization of purchased intangible assets was due to purchased intangible
assets that were fully amortized in fiscal 2004 and in the first three months of
fiscal 2005.
23
OPERATING INCOME. Operating income increased by $41.8 million, or 19.1%,
in the nine months ended June 30, 2005, to $261.1 million, or 17.8% of revenue,
from $219.3 million, or 16.6% of revenue, in the nine months ended June 30,
2004. The increase in operating income in the nine months ended June 30, 2005 is
attributable to the 10.9% increase in our total revenue, which increased at a
greater rate than the 9.3% increase in operating expense.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
by $12.0 million in the nine months ended June 30, 2005 to $14.9 million from
$2.9 million in the nine months ended June 30, 2004. The increase in interest
income and other, net, in the nine months ended June 30, 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 nine months ended June 30, 2005 were $55.2
million on pretax income of $276.0 million, an effective tax rate of 20%
compared to 22% in the nine months ended June 30, 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 $220.8 million in nine months ended June 30,
2005, compared to a net income of $173.3 million in the nine months ended June
30, 2004. The increase in net income is attributable to the 10.9% increase in
our total revenue and the increase in interest income and other, net, which
increased at a greater rate than the increase in operating expenses and income
taxes.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.24,
or 30.4%, in the nine months ended June 30, 2005, to $1.03 from $0.79 in the
nine months ended June 30, 2004.
The shares issuable upon conversion of the 0.50% Notes were included in
the diluted earnings per share calculation for the nine months ended June 30,
2005 following the adoption of EITF 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 EITF 04-8 reduced our
previously reported quarterly diluted earnings per share by $0.01 per share for
the nine months ended June 30, 2004.
24
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
The following is a tabular presentation of our results of operations for
the three months ended June 30, 2005 compared to the three months ended June 30,
2004. Following the table is a discussion and analysis of our business and
results of operations for such periods.
THREE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
--------------------- -------------------
2005 2004 AMOUNT %
--------- --------- ------- --------
(in thousands)
--------------------------------
Revenue:
License................................. $ 27,199 $ 17,298 $ 9,901 57.2%
Service................................. 480,156 432,926 47,230 10.9
--------- --------- -------
507,355 450,224 57,131 12.7
--------- --------- -------
Operating expenses:
Cost of license......................... 1,125 1,448 (323) (22.3)
Cost of service......................... 324,249 283,109 41,140 14.5
Research and development................ 31,393 31,665 (272) (0.9)
Selling, general and
administrative........................ 56,448 52,745 3,703 7.0
Amortization of purchased
intangible assets..................... 2,078 4,558 (2,480) (54.4)
--------- --------- -------
415,293 373,525 41,768 11.2
--------- --------- -------
Operating income........................... 92,062 76,699 15,363 20.0
Interest income and other, net............. 4,305 121 4,184 3,457.9
--------- --------- -------
Income before income taxes ................ 96,367 76,820 19,547 25.4
Income taxes............................... 19,270 16,900 2,370 14.0
--------- --------- -------
Net income................................. $ 77,097 $ 59,920 $17,177 28.7
========= ========= =======
REVENUE. Total revenue increased by $57.2 million, or 12.7%, in the three
months ended June 30, 2005 to $507.4 million from $450.2 million in the three
months ended June 30, 2004. Revenue related to Managed Services customers in the
three months ended June 30, 2005 and 2004 was approximately 40% of total
revenue.
License and service revenue from the sale of ICM Enabling Systems was
$440.0 million for the three months ended June 30, 2005, an increase of $52.0
million, or 13.4%, over the three months ended June 30, 2004. License and
service revenue from the sale of ICM Enabling Systems represented 86.7% and
86.2% of our total revenue in the three months ended June 30, 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. In
the third quarter of fiscal 2005, we observed strong demand for our offerings.
License and service revenue from the sale of Directory Systems was $67.4
million for the three months ended June 30, 2005, an increase of $5.1 million,
or 8.3%, over the three months ended June 30, 2004. Approximately 90% of the
increase in Directory Systems revenue in the three months ended June 30, 2005
was attributable to an increase in business related to Managed Services
customers. License and service revenue from the sale of Directory Systems
represented 13.3% and 13.8% of our total revenue in the three months ended June
30, 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 increase in fiscal 2005.
In the three months ended June 30, 2005, revenue from customers in North
America, Europe and the rest of the world accounted for 68.4%, 24.7% and 6.9%,
respectively, of total revenue compared to 65.9%, 26.1% and 8.0%, respectively,
for the three months ended June 30, 2004. The increase in revenue from customers
in
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Europe in the three months ended June 30, 2005 was less than the 12.7% increase
in our total revenue, which resulted in a decrease in revenue from customers in
Europe as a percentage of total revenue. Revenue from customers in the rest of
the world in the three months ended June 30, 2005 was at the same level as
compared to the three months ended June 30, 2004, which resulted in a decrease
in revenue from customers in the rest of the world as a percentage of total
revenue.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the three months ended June 30, 2005, cost of license, as a percentage of
license revenue, was 4.1%, compared to 8.4% in the three months ended June 30,
2004.
COST OF SERVICE. The increase in cost of service in the three months ended
June 30, 2005 was 14.5%, which is greater than the increase in our total revenue
in the three months ended June 30, 2005, and resulted in a 0.9% decrease in our
gross margin, as a percentage of revenue. Our gross margin was affected by the
continuing investment in our consulting business and our development center in
India, during 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 decreased
by $0.3 million, or 0.9%, in the three months ended June 30, 2005 to $31.4
million from $31.7 million in the three months ended June 30, 2004. Research and
development expense decreased as a percentage of revenue from 7.0% in the three
months ended June 30, 2004 to 6.2% in the three months ended June 30, 2005. The
majority of our research and development expenditures are directed to our ICM
Enabling Systems, expanding functionality and integrating the system components,
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 $3.7 million, or 7.0%, in the three months ended June 30,
2005 to $56.4 million, from $52.7 million in the three months ended June 30,
2004. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense in the third 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 7.0% increase was less than the 12.7%
increase in our total revenue.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended June 30, 2005 was $2.1 million,
compared to $4.6 million in the three months ended June 30, 2004. The decrease
in amortization of purchased intangible assets was due to purchased intangible
assets that were fully amortized in fiscal 2004 and in the first three months of
fiscal 2005.
OPERATING INCOME. Operating income increased by $15.4 million, or 20%, in
the three months ended June 30, 2005, to $92.1 million, or 18.2% of revenue,
from $76.7 million, or 17.1% of revenue, in the three months ended June 30,
2004. The increase in operating income in the third quarter of fiscal 2005 is
attributable to the 12.7% increase in our total revenue, which increased at a
greater rate than the 11.2% increase in operating expense.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
by $4.2 million in the three months ended June 30, 2005 to $4.3 million from
$0.1 million in the three months ended June 30, 2004. The increase in interest
income and other, net, in the third 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
26
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 third quarter of fiscal 2005 were $19.3
million on pretax income of $96.4 million, an effective tax rate of 20% compared
to 22% in the three months ended June 30, 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 $77.1 million in the third quarter of fiscal
2005, compared to a net income of $59.9 million in the three months ended June
30, 2004. The increase in net income is attributable to the 12.7% increase in
our total revenue and the increase in interest income and other, net, which
increased at a greater rate than operating expenses and income taxes.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $
0.09, or 33.3%, in the three months ended June 30, 2005 to $0.36 from $0.27 in
the three months ended June 30, 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 June 30,
2005 following the adoption of EITF 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 EITF 04-8 reduced our
previously reported quarterly diluted earnings per share by 0.01 per share for
the three months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,290.0 million as of June 30, 2005, compared to $1,190.7 million as of
September 30, 2004. The increase is attributable to positive cash flows from
operations which were partially offset by our use of $100.0 million to
repurchase ordinary shares pursuant to our share repurchase program during the
nine months ended June 30, 2005. Net cash provided by operating activities
amounted to $256.6 million and $257.7 million for the nine months ended June 30,
2005 and 2004, respectively. As of August 3, 2005 approximately $268.0 million
was paid in connection with DST and Longshine acquisitions. We currently intend
to retain our future operating cash flows to support the further expansion of
our business, including acquisitions.
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 June 30, 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, during the three months ended June 30, 2005, we had repurchased
approximately 3.5 million ordinary shares, at an average price of 28.33 per
share.
As of June 30, 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 June 30, 2005 we had outstanding letters of
credit and bank guarantees from various banks totaling $13.8 million.
As of June 30, 2005, we had outstanding long-term obligations of $6.7
million in connection with leasing arrangements.
27
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 $53.8 million in the nine
months ended June 30, 2005. Approximately 78% 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 nine months ended June 30, 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.
28
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 June 30, 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) (d)
TOTAL NUMBER OF MAXIMUM NUMBER (OR
SHARES (OR UNITS) APPROXIMATE DOLLAR
(a) (b) PURCHASED AS PART VALUE) OF SHARES (OR
TOTAL NUMBER OF AVERAGE PRICE OF PUBLICLY UNITS) THAT MAY YET BE
SHARES (OR UNITS) PAID PER SHARE ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED (OR UNIT) OR PROGRAMS PLANS OR PROGRAMS (1)
----------------- ----------------- -------------- ----------------- ----------------------
04/01/05-04/30/05 -- -- -- --
05/01/05-05/31/05 3,525,200 $ 28.33 3,525,200 --
06/01/05-06/30/05 -- -- -- --
--------- ---------
Total 3,525,200 $ 28.33 3,525,200 --
========= =========
(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. In accordance with this extension, during the three months
ended June 30, 2005, the Company had repurchased approximately 3.5 million
ordinary shares, at an average price of 28.33 per share.
Convertible Notes
(b) (c) (d)
AVERAGE PRICE TOTAL NUMBER OF MAXIMUM NUMBER (OR
PAID PER PRINCIPAL AMOUNT OF APPROXIMATE DOLLAR
(a) $1,000 CONVERTIBLE NOTES VALUE) OF PRINCIPAL
TOTAL PRINCIPAL PRINCIPAL PURCHASED AS PART AMOUNT OF CONVERTIBLE
AMOUNT OF AMOUNT OF OF PUBLICLY NOTES THAT MAY YET BE
CONVERTIBLE NOTES CONVERTIBLE ANNOUNCED PLANS OR PURCHASED UNDER THE
PERIOD PURCHASED NOTES PROGRAMS PLANS OR PROGRAMS (1)
----------------- ----------------- ------------- ------------------- ----------------------
04/01/05-04/30/05 $ -- $ -- $ -- $ 272,000
05/01/05-05/31/05 -- -- -- 272,000
06/01/05-06/30/05 -- -- -- 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.
29
ITEM 2. REPORTS ON FORM 6-K
(a) Reports on Form 6-K
The Company furnished or filed the following reports on Form 6-K during
the three months ended June 30, 2005:
(1) Form 6-K dated May 16, 2005.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMDOCS LIMITED
/s/ THOMAS G. O'BRIEN
---------------------------
Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
Date: August 15, 2005