UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 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 if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
-----
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
-----
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
YES NO X
--- ---
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-
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AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED DECEMBER 31, 2005
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 2
Unaudited Consolidated Financial Statements 2
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statement of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Operating and Financial Review and Prospects 19
PART II OTHER INFORMATION
Item 1. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 29
Item 2. Reports on Form 6-K 30
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
----------------------------
DECEMBER 31, SEPTEMBER 30,
2005 2005
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 534,388 $ 707,552
Short-term interest-bearing investments 686,556 438,011
Accounts receivable, net 343,487 304,237
Deferred income taxes and taxes receivable 106,840 101,162
Prepaid expenses and other current assets 80,681 76,780
---------- ----------
Total current assets 1,751,952 1,627,742
Equipment, vehicles and leasehold improvements, net 168,338 181,812
Deferred income taxes 117,041 120,217
Goodwill 968,185 969,639
Intangible assets, net 151,691 159,619
Other noncurrent assets 145,434 143,439
---------- ----------
Total assets $3,302,641 $3,202,468
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 101,773 $ 114,392
Accrued expenses and other current liabilities 220,159 199,458
Accrued personnel costs 153,706 148,426
Short-term portion of financing arrangements 4,777 8,480
Deferred revenue 208,094 216,770
Deferred income taxes and taxes payable 176,222 171,377
---------- ----------
Total current liabilities 864,731 858,903
0.50% convertible notes 450,000 450,000
Deferred income taxes 51,975 50,571
Noncurrent liabilities and other 180,968 186,542
---------- ----------
Total liabilities 1,547,674 1,546,016
---------- ----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; L0.01 par value; 0 shares
issued and outstanding -- --
Ordinary Shares - Authorized 550,000 shares; L0.01 par value; 228,504 and
227,321 issued and 201,365 and 200,182 outstanding, respectively 3,665 3,644
Additional paid-in capital 1,890,417 1,870,922
Treasury stock, at cost - 27,139 shares (602,392) (602,392)
Accumulated other comprehensive loss (8,183) (10,886)
Unearned compensation -- (962)
Retained earnings 471,460 396,126
---------- ----------
Total shareholders' equity 1,754,967 1,656,452
---------- ----------
Total liabilities and shareholders' equity $3,302,641 $3,202,468
========== ==========
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
DECEMBER 31,
-------------------
2005(1) 2004
-------- --------
Revenue:
License $ 31,661 $ 20,366
Service 555,367 449,166
-------- --------
587,028 469,532
-------- --------
Operating expenses:
Cost of license 1,062 1,155
Cost of service 374,051 294,947
Research and development 43,114 32,911
Selling, general and administrative 78,550 54,960
Amortization of purchased intangible assets 7,572 3,718
-------- --------
504,349 387,691
-------- --------
Operating income 82,679 81,841
Interest income and other, net 8,414 4,959
-------- --------
Income before income taxes 91,093 86,800
Income taxes 15,759 17,357
-------- --------
Net income $ 75,334 $ 69,443
======== ========
Basic earnings per share $ 0.38 $ 0.34
======== ========
Diluted earnings per share $ 0.36 $ 0.32
======== ========
Basic weighted average number of shares
outstanding 200,525 201,703
======== ========
Diluted weighted average number of shares
outstanding 214,871 217,448
======== ========
(1) The first quarter of fiscal 2006 includes stock-based compensation expense
related to employees of $11,060, which was classified as follows: $4,355 to
cost of service, $1,089 to research and development and $5,616 to selling,
general and administrative.
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, 2005 200,182 $3,644 $1,870,922 $(602,392) $(10,886) $(962) $396,126 $1,656,452
Comprehensive income:
Net income -- -- -- -- -- -- 75,334 75,334
Unrealized gain on
foreign currency
hedging contracts,
net of $(860) tax
benefit -- -- -- -- 2,653 -- -- 2,653
Unrealized gain on
short-term
interest-bearing
investments, net of
$(65) tax benefit -- -- -- -- 50 -- -- 50
----------
Comprehensive income 78,037
----------
Employee stock options
exercised 897 16 8,125 -- -- -- -- 8,141
Issuance of restricted
stock 286 5 -- -- -- -- -- 5
Tax benefit of stock
options exercised -- -- 1,246 -- -- -- -- 1,246
Stock-based compensation
expense related to
employees -- -- 11,060 -- -- -- -- 11,060
Stock-based compensation
expense related to non
employee stock options -- -- 26 -- -- -- -- 26
Reclassification of
unearned compensation
to additional paid in
capital -- -- (962) -- -- 962 -- --
------- ------ ---------- --------- -------- ----- -------- ----------
BALANCE AS OF DECEMBER 31,
2005 201,365 $3,665 $1,890,417 $(602,392) $ (8,183) $ -- $471,460 $1,754,967
======= ====== ========== ========= ======== ===== ======== ==========
As of December 31, 2005 and September 30, 2005, accumulated other comprehensive
loss is comprised of unrealized loss on foreign currency hedging contracts, net
of tax, of $(6,444) and $(9,097), respectively, and unrealized loss on
short-term interest-bearing investments, net of tax, of $(1,739) and $(1,789),
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2005 2004
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 75,334 $ 69,443
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 28,632 22,755
Loss (gain) on sale of equipment 73 (392)
Stock based compensation expense 11,060 --
Deferred income taxes 5,827 (2,534)
Excess tax benefit from stock based compensation (610) 864
Realized gain from short-term interest-bearing
investments (2,355) (39)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (39,250) (27,684)
Prepaid expenses and other current assets (3,641) (14,025)
Other noncurrent assets (2,433) (5,731)
Accounts payable and accrued expenses 26,240 (4,715)
Deferred revenue (14,066) 42,173
Income taxes payable (953) (1,779)
Noncurrent liabilities and other (384) 4,707
--------- ---------
Net cash provided by operating activities 83,474 83,043
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 1,143 1,503
Payments for purchase of equipment, vehicles and
leasehold improvements (14,059) (15,657)
Proceeds from sale of short-term interest-bearing
investments 173,727 132,891
Purchase of short-term interest-bearing investments (419,803) (160,134)
Net cash paid for acquisition (1,406) (18)
--------- ---------
Net cash used in investing activities (260,398) (41,415)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised and
issuance of restricted stock 8,146 5,141
Excess tax benefit from stock based compensation 610 --
Principal payments under financing arrangements and
other (3,708) (613)
Principal payments on capital lease obligations (1,288) (5,916)
--------- ---------
Net cash provided by (used in) financing activities 3,760 (1,388)
--------- ---------
Net (decrease) increase in cash and cash equivalents (173,164) 40,240
Cash and cash equivalents at beginning of period 707,552 550,352
--------- ---------
Cash and cash equivalents at end of period $ 534,388 $ 590,592
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 10,644 $ 21,802
Interest 282 1,388
The accompanying notes are an integral part of these
consolidated financial statements.
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
1. BASIS OF PRESENTATION
Amdocs Limited (the "Company") is a leading provider of software products
and services primarily to the communications industry. The Company and its
subsidiaries operate in one segment offering products and services that enable
their customers to move toward an integrated approach to customer management.
The Company designs, develops, markets, supports, operates, and provides managed
services for information system solutions primarily for leading communications
companies throughout the world.
The unaudited consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles (the
"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, 2005, set forth in the Company's Annual Report on Form 20-F filed
on December 28, 2005 with the U.S. Securities and Exchange Commission (the
"SEC").
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. SIGNIFICANT ACCOUNTING POLICY
Accounting for Stock-Based Compensation
Effective October 1, 2005, the Company adopted FASB Statement No. 123
(revised 2004), "Share-Based Payment," a revision of SFAS No. 123 ("SFAS
123(R)"). SFAS 123(R) supersedes Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations, and amends FASB Statement No. 95, "Statement of Cash Flows."
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 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. In March 2005, the SEC issued Staff Accounting Bulletin No. 107
("SAB 107"), which provides supplemental implementation guidance on SFAS 123(R).
The Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
Prior to October 1, 2005, the Company accounted for share-based payments to
employees under the recognition and measurement provisions of APB No. 25.
Pursuant to these accounting standards, the Company recorded 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
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
shares at that date, and for restricted stock based on the market value of the
underlying shares at the date of grant. No compensation expense was recorded for
stock options that were granted to employees and directors at an exercise price
equal to the fair market value of the Ordinary Shares at the time of the grant.
The Company adopted SFAS 123(R) using the modified prospective method.
Under this transition method, compensation costs recognized in the first quarter
of fiscal 2006 include (a) compensation costs for all share based payments
granted prior to, but not yet vested, as of October 1, 2005, based on the grant
date fair value estimated in accordance with the pro forma provisions of
SFAS 123, and (b) compensation costs for the share based payments granted
subsequent to October 1, 2005 based on the grant date fair value estimated in
accordance with SFAS 123(R). The Company's consolidated financial statements for
prior periods have not been restated to reflect, and do not include, the impact
of SFAS 123(R). The Company selected the Black-Scholes option pricing model as
the most appropriate fair value method for its stock based awards and recognizes
compensation costs using the graded vesting attribution method that results in
an accelerated recognition of compensation costs in comparison to the straight
line method.
As a result of adopting SFAS 123(R) on October 1, 2005, the Company's
income before income taxes and net income for the first quarter of fiscal 2006
(not including restricted stock expense) were $10,423 and $9,101 lower,
respectively, than if it had continued to account for share based compensation
under APB No. 25. Basic and diluted earnings per share for the first quarter of
fiscal 2006 would have been $0.42 and $0.40, respectively, if the Company had
not adopted SFAS 123(R), compared to reported basic and diluted earning per
share of $0.38 and $0.36, respectively. The total income tax benefit recognized
in the income statement for share based compensation was $1,403 and $0 for the
first quarters of fiscal 2006 and 2005, respectively.
Prior to the adoption of SFAS 123(R), the Company presented all tax
benefits of deductions resulting from the exercise of stock options as operating
cash flows in the statement of cash flows. SFAS 123(R) requires the cash flows
resulting from the tax deductions in excess of the compensation costs recognized
for those stock options to be classified as financing cash flows. The $610
excess tax benefit classified as financing cash inflows would have been
classified as an operating cash inflow if the Company had not adopted SFAS
123(R).
In conjunction with the adoption of SFAS 123(R), the Company began to use
the implied volatility of the Company's traded options as the expected
volatility assumption required in the Black-Scholes option valuation model.
Prior to October 1, 2005, the Company had used its historical stock price
volatility in accordance with SFAS 123 for purposes of its pro forma
information. The selection of the implied volatility approach was based upon the
availability of actively traded options on the Company's shares and the
Company's assessment that implied volatility is more representative of future
share price trends than historical volatility. As stock-based compensation
expense recognized in the Company's consolidated statement of income for the
first quarter of fiscal 2006 is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In the Company's pro
forma information required under SFAS 123 for the periods prior to fiscal 2006,
the Company accounted for forfeitures as they occurred.
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
----------------------------
DECEMBER 31, SEPTEMBER 30,
2005 2005
------------ -------------
Accounts receivable - billed $322,663 $282,151
Accounts receivable - unbilled 28,318 28,994
Less - allowances (7,494) (6,908)
-------- --------
Accounts receivable, net $343,487 $304,237
======== ========
4. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity except those resulting from
investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income to
comprehensive income for the following periods:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2005 2004
------- -------
Net income $75,334 $69,443
Other comprehensive income (loss):
Unrealized gain on foreign
currency hedging contracts, net
of tax 2,653 502
Unrealized gain (loss) on
short-term interest-bearing
investments, net of tax 50 (684)
------- -------
Comprehensive income $78,037 $69,261
======= =======
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
5. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2005 2004
------- -------
Current $ 9,932 $19,891
Deferred 5,827 (2,534)
------- -------
$15,759 $17,357
======= =======
The effective income tax rate varied from the statutory Guernsey tax rate
as follows for the following periods:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2005 2004
---- ----
Statutory Guernsey tax rate 20% 20%
Guernsey tax-exempt status (20) (20)
Foreign taxes 18 20
--- ---
Income tax rate before effect of
acquisition-related costs, and
stock-based compensation expense 18 20
Effect of acquisition-related costs
and stock base compensation expense (1) --
--- ---
17% 20%
--- ---
As a Guernsey corporation with tax-exempt status, the Company's overall
effective tax rate is attributable primarily to foreign taxes.
As of December 31, 2005, deferred tax assets of $15,424, 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.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
DECEMBER 31,
-------------------
2005 2004
-------- --------
Numerator:
Numerator for basic earnings per share $ 75,334 $ 69,443
Effect of assumed conversion of 0.50%
convertible notes 1,000 984
-------- --------
Numerator for diluted earnings per
share $ 76,334 $ 70,427
======== ========
Denominator:
Denominator for basic earnings per share
- weighted average number of shares
outstanding 200,525 201,703
Effect of assumed conversion of 0.50%
convertible notes 10,436 10,436
Effect of dilutive stock options granted 3,870 5,309
Effect of restricted stock issued 40 --
-------- --------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 214,871 217,448
======== ========
Basic earnings per share $ 0.38 $ 0.34
======== ========
Diluted earnings per share $ 0.36 $ 0.32
======== ========
The weighted average effect of 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 months ended December 31, 2005 and 2004, and,
therefore, was not included in the above calculation.
The effect of the 0.50% Convertible Senior Notes due 2024 (the "0.50%
Notes") on diluted earnings per share was included in the above calculation.
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
7. ACQUISITIONS
DST INNOVIS
On July 1, 2005, the Company acquired from DST Systems, Inc., or DST,
all of the common stock of DST's wholly owned subsidiaries, DST Innovis,
Inc. and DST Interactive, Inc. The Company refers to these acquired
subsidiaries together as DST Innovis, a leading provider of customer care
and billing solutions to broadband media cable and satellite companies, or
the Broadband Industry. The Company believes that this acquisition has
positioned the Company to offer a comprehensive set of solutions to the
Broadband Industry, as they transition to Integrated Customer Management
or, ICM.
The purchase price for DST Innovis was approximately $237,461, which
included $3,150 of transaction costs. The fair market value of DST Innovis'
assets and liabilities has been included in the Company's consolidated
balance sheet and the results of DST Innovis' operations are included in
the Company's consolidated statements of income, commencing on July 1,
2005.
In addition, the Company commenced integration activities based on a
plan to exit specific research and development activities and to terminate
employees associated with these activities. In accordance with EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination," the plan must be finalized within one year of the acquisition
date and must identify all significant actions to be taken to complete the
plan. The liability associated with this plan, which was recorded as part
of the purchase accounting, is presented in the following table:
EMPLOYEE
SEPARATION CONTRACTUAL
COSTS OBLIGATIONS OTHER TOTAL
---------- ----------- ----- -------
Balance as of October 1, 2005 $ 4,940 $7,103 $673 $12,716
Cash payments (3,826) (88) (415) (4,329)
------- ------ ----- -------
Balance as of December 31, 2005 $ 1,114 $7,015 $258 $ 8,387
======= ====== ===== =======
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
The following is the revised preliminary allocation of the purchase price
and deferred tax assets:
Net assets acquired $ 7,390
Core technology 63,180
Customer arrangements 59,702
In-process research and development 2,760
EITF 95-3 provision and other (19,294)
Printing and mailing obligation (25,777)
Deferred taxes resulting from the difference
between the assigned value of certain assets
and liabilities and their respective tax bases 17,332
Goodwill 132,168
--------
$237,461
========
LONGSHINE
On August 3, 2005, the Company acquired Longshine Information Technology
Company Ltd., or Longshine, a privately-held leading vendor of customer care and
billing software in China. This acquisition enables the Company to offer its
products and services to Chinese service providers and the Company believes it
will allow the Company to expand its presence in this fast growing market. The
purchase price for Longshine was approximately $34,100, which included $1,100 of
transaction costs. The Company may also be obligated to pay up to approximately
$16,000 in additional purchase price over the next two years based on the
achievement of specified performance targets. The fair market value of Longshine
assets and liabilities has been included in the Company's consolidated balance
sheet and the results of Longshine operations have been included in the
Company's consolidated statement of income, commencing on August 3, 2005.
The following is the revised preliminary allocation of the purchase price:
Net liabilities acquired $(12,434)
Core technology 1,000
Customer arrangements 6,500
Goodwill 39,034
--------
$ 34,100
========
Pro forma information on the Company's consolidated statements of income
for the three months ended December 31, 2004 to reflect the Longshine
acquisition is not presented, as its results of operations during such period
are not material to the Company's consolidated statements of income.
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
Set forth below is the unaudited pro forma revenue, operating income, net
income and per share figures for the three months ended December 31, 2004 as if
DST Innovis had been acquired as of October 1, 2004, excluding the
capitalization of research and development expense, write-off of purchased
in-process research and development and other acquisition related costs:
THREE MONTHS ENDED
DECEMBER 31, 2004
------------------
Revenue $523,452
Operating income 71,957
Net income 60,428
Basic earnings per share 0.30
Diluted earnings per share 0.28
8. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAMS
In the fourth quarter of fiscal 2005, the Company commenced a series of
measures designed to align its operational structure to its expected future
growth, to allow better integration of the acquisitions of DST Innovis and
Longshine, and to improve efficiency. As part of this plan, the Company recorded
a charge of $8,135 in connection with the termination of employment of software
and information technology specialists and administrative professionals.
Approximately $3,088 of the total charge was paid in cash as of December 31,
2005. The remaining separation costs are expected to be paid out during fiscal
2006.
The restructuring accrual balance for this cost reduction program is
comprised of the following as of December 31, 2005:
EMPLOYEE SEPARATION
COSTS
-------------------
Balance as of October 1, 2005 $ 7,002
Cash payments (1,955)
Adjustments (219)
-------
Balance as of December 31, 2005 $ 4,828
=======
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
In prior fiscal years, 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 December 31, 2005:
FACILITIES
----------
Balance as of October 1, 2005 $6,667
Cash payments (639)
------
Balance as of December 31, 2005 (1) $6,028
======
(1) The remainder of the accrual is expected to be paid out through August
2008.
9. 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 costs under these plans for the three months ended
December 31, 2005 and 2004, were as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------- -------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 769 $102 $ 547 $ 66
Interest on benefit obligations 956 166 837 121
Expected return on plan assets (796) -- (686) --
----- ---- ----- ----
$ 929 $268 $ 698 $187
===== ==== ===== ====
In the three months ended December 31, 2005, the Company made contributions
of $939 to the pension plan and $39 for other benefits. The Company expects that
contributions for the fiscal year ending September 30, 2006 will approximate
$2,800 to the pension plan and $200 for other benefits.
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
10. STOCK OPTION AND INCENTIVE PLAN
In January 1998, the Company first adopted the 1998 Stock Option and
Incentive Plan (the "Plan"), which provides for the grant of restricted stock
awards, stock options and other stock-based awards to directors, officers,
employees and consultants. The purpose of the Plan is to enable the Company to
attract and retain qualified personnel and to motivate such persons by providing
them with an equity participation in the Company. Since its adoption, the Plan
has been amended on several occasions to, among other things, increase the
number of Ordinary Shares issuable under the Plan. In January 2006, the maximum
number of Ordinary Shares authorized to be granted under the Plan was increased
from 38,300 to 46,300. Awards granted under the Plan generally vest over a
period of four years and stock options have a term of ten years. In the fourth
quarter of fiscal 2005, the Company commenced routinely granting restricted
shares and the Company's equity-based grant package is currently comprised of
restricted stock awards and a fewer number of stock options.
The following table summarizes information about stock options to purchase
the Company's Ordinary Shares, as well as changes during the first quarter of
fiscal 2006:
WEIGHTED
WEIGHTED AVERAGE
-AVERAGE REMAINING
NUMBER OF OPTIONS EXERCISE PRICE CONTRACTUAL TERM
----------------- -------------- ----------------
Outstanding as of October 1, 2005 25,807 $26.91
Granted 1,829 27.46
Exercised (897) 9.20
Forfeited (855) 35.51
------
Outstanding as of December 31, 2005 25,884 $27.28 6.75
====== ====== ====
Exercisble on December 31, 2005 16,039 $30.66 5.76
====== ====== ====
The weighted average grant date fair value of stock options granted during
the three months ended December 31, 2005 and 2004 was $9.69 and $12.47,
respectively. The total intrinsic value of options exercised during the first
quarters of fiscal 2006 and 2005 was $16,636 and $12,161, respectively. The
aggregate intrinsic value of outstanding and exercisable stock options as of
December 31, 2005 was $129,209 and $71,493, respectively.
15
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
The following table summarizes information relating to awards of restricted
nonvested shares, as well as changes to such awards during the first quarter of
fiscal 2006:
NUMBER OF WEIGHTED AVERAGE
SHARES GRANT DATE FAIR VALUE
--------- ---------------------
Outstanding as of October 1, 2005 134 $26.43
Granted 287 27.45
Vested (76) 26.43
Forfeited -- --
--- ------
Outstanding as of December 31, 2005 345 $27.28
As of December 31, 2005, there was $53,411 of unrecognized compensation
expense related to nonvested stock options and nonvested restricted stock
awards. The Company recognizes compensation costs using the graded vesting
attribution method which results in a weighted average period of approximately
one year over which the unrecognized compensation expense is expected to be
recognized.
The fair value of stock options granted was estimated on the date of grant
using the Black-Scholes pricing model that uses the assumptions noted in the
following table (all in weighted averages for options granted during the
period):
THREE MONTHS ENDED
DECEMBER 31,
------------------
2005 2004
----- ------
Risk-free interest rate (1) 4.45% 3.30%
Expected life of stock options (2) 4.50 4.50
Expected volatility (3) 0.35 0.638
Expected dividend yield (4) None None
Fair value per option $9.69 $12.47
(1) Risk-free interest rate is based upon U.S. Treasury yield curve appropriate
for the term of the Company's employee stock options.
(2) Expected life of stock options is based upon historical experience.
(3) Expected volatility for the first quarter of fiscal 2006 is based on
implied volatility of the Company's traded options. For the first quarter
of fiscal 2005, expected volatility is based on the Company's historical
stock price.
(4) Expected dividend yield is based on the Company's history and expectation
of dividend payouts.
16
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
The following table sets forth the pro forma effect of applying SFAS 123 on
net income and earnings per share for the first quarter of fiscal 2005:
THREE MONTHS ENDED
DECEMBER 31,
2004
------------------
Net income, as reported $69,443
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 58
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (7,540)
-------
Pro forma net income $61,961
=======
Basic earnings per share:
As reported $ 0.34
=======
Pro forma $ 0.31
=======
Diluted earnings per share:
As reported $ 0.32
=======
Pro forma $ 0.29
=======
11. CONTINGENCIES
Legal Proceedings
The Company is involved in various legal proceedings arising in the normal
course of its business. Based upon the advice of counsel, the Company does not
believe that the ultimate resolution of these 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 was 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 appeared to be focused on,
but was not explicitly limited to, the Company's forecasting beginning with its
April 23, 2002 press release. The Company responded to an initial document
request by the SEC but has not received any requests for additional information
or had any substantive contact with the SEC with respect to this investigation
since 2003. The Company has cooperated with the SEC staff and believes that it
would be able to satisfy any concerns the SEC staff may have as to the matters
under investigation. However, given
17
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
the current status of the investigation, the Company is still unable to predict
the duration, scope, or outcome of the investigation.
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 expired in December 2005. As of December 31, 2005 and
September 30, 2005, 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
first quarters of fiscal 2006 and 2005.
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.
12. SUBSEQUENT EVENT
On January 17, 2006 Sprint Nextel Corporation announced it had reached a
preliminary agreement for the Company to provide a single billing and customer
care platform for Sprint Nextel's more than 45.6 million wireless subscribers.
18
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 2005 that we filed on December 28,
2005 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 first quarters of fiscal 2006 and 2005,
- 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 first quarters of fiscal 2006 and
2005, 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 first quarters
of fiscal 2006 and 2005. You should read this section in conjunction with our
consolidated financial statements.
19
OVERVIEW OF BUSINESS AND TREND INFORMATION
We combine software and services with business knowledge to accelerate the
adoption of integrated customer management strategies by service providers. Our
market focus is primarily Tier 1 and Tier 2 companies in the communications
industry, and we are a leading provider of software products and services to
that industry. Our addressable market has been expanded to include broadband
media cable and satellite companies, which we refer to as the Broadband
Industry, as a result of our recent acquisition of DST Innovis, Inc. and DST
Interactive, Inc., which we refer to together as DST Innovis. The acquisition
not only enlarges our customer base, but also allows us to offer a broader set
of solutions to customers in the Broadband Industry. We are also leveraging our
experience by working with service providers in the financial services sector,
since certain of the challenges faced by companies in this sector are similar to
those of communications service providers. 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 includes billing, customer relationship management, or CRM, order
management, service fulfillment, mediation, and content revenue management
products, which we collectively refer to as Integrated Customer Management
Enabling Systems, or ICM Enabling 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.
We have designed ICM Enabling Systems to meet the mission-critical needs of
leading communications service providers throughout the entire customer
lifecycle. We support different lines of business, including wireline, wireless,
cable and satellite, and a wide range of communications services, including
voice, video, data, Internet Protocol, or IP, broadband, content, electronic and
mobile commerce. 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 consulting, business strategy, system implementation,
training, integration, modification, ongoing support, enhancement and
maintenance services. In addition, we offer Managed Services that include
services such as system modernization and consolidation, the operation of data
centers, ongoing support, maintenance services, system modification, the
provision of rating and billing services and communications facility management
services, in all cases on either or a combination of a fixed or unit charge
basis to our customers.
We conduct our business globally, and, as a result we are subject to the
effect of general global economic conditions and, in particular, market
conditions in the communications industry. Recently we expanded our operations
in China as a result of the acquisition of Longshine Information Technology
Company, Ltd., or Longshine, a leading vendor of customer care and billing
software in China. We maintain development facilities located in Canada, China,
Cyprus, India, Ireland, Israel and the United States.
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 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.
20
The telecommunications industry is being transformed by continued
consolidation and the convergence of the telecommunications, broadband cable and
satellite industries. Service providers are coping with the challenges of this
consolidation trend and are also expected to offer new IP-based products and
services with innovative business models. Competition among service providers is
intensifying, a trend that increases the need for differentiation. We believe we
have positioned ourselves to take advantage of these trends and to enable
service providers to rapidly introduce new offerings, lower total cost of
ownership and focus on their customers, which we believe drove our growth in the
first quarter of fiscal 2006 and will continue to drive our growth in fiscal
2006.
We believe that demand for our ICM Enabling Systems is driven by, among
other key factors:
- global use of communications services,
- emergence of new communications products and services, especially
video, broadband, data and content services and IP convergence
services, such as Internet Protocol Television, or IPTV, Voice over
IP, or VoIP and services based on IP Multimedia Subsystem systems,
- technological changes, such as the introduction of 3G wireless
technology, next-generation content systems, and WiFi and WiMax based
access technologies,
- ongoing consolidation within the communications industry,
- continued convergence of communications services, broadband cable and
satellite industries,
- 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 customers 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.
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
21
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.
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, generating
substantial, long-term revenue streams, cash flow and operating income. Revenue
from managed services customers was approximately 35% and 40% of our total
revenue in the first quarters of fiscal 2006 and 2005, respectively. 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 term of the relationships.
ADOPTION OF NEW ACCOUNTING STANDARDS
Accounting for Stock-Based Compensation
Effective October 1, 2005, we adopted FASB Statement No. 123 (revised 2004),
"Share-Based Payment," a revision of SFAS No. 123 ("SFAS 123(R)"). SFAS 123(R)
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations, and
amends FASB Statement No. 95, "Statement of Cash Flows." Generally, the approach
in SFAS 123(R) is similar to the approach described in SFAS 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. In March 2005,
the U.S. Securities and Exchange Commission, or the SEC, issued Staff Accounting
Bulletin No. 107 ("SAB 107"), which provides supplemental implementation
guidance on SFAS 123(R). We have applied the provisions of SAB 107 in our
adoption of SFAS 123(R). Prior to October 1, 2005 the Company accounted for
share-based payments to employees under the recognition and measurement
provisions of APB No. 25. Stock-based compensation expense recognized under SFAS
123(R) for the first quarter of fiscal 2006 was $11.1 million. Stock-based
compensation expense recognized under APB No. 25 for the first quarter of fiscal
2005 was not material.
As of December 31, 2005, there was $53.4 million of unrecognized
compensation expense related to nonvested stock options and nonvested restricted
stock awards. We recognize compensation costs using the graded vesting
attribution method which results in a weighted average period of approximately
one year over which the unrecognized compensation expense is expected to be
recognized.
22
We adopted SFAS 123(R) using the modified prospective method. Under this
transition method, compensation costs recognized in the first quarter of fiscal
2006 include (a) compensation costs for all share based payments granted prior
to, but not yet vested as of October 1, 2005, based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS 123, and
(b) compensation costs for the share based payments granted subsequent to
October 1, 2005, based on the grant date fair value estimated in accordance with
SFAS 123(R). Our consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of SFAS 123(R). We
selected the Black-Scholes option pricing model as the most appropriate fair
value method for our stock based awards and recognize compensation costs using
the graded vesting attribution method that results in an accelerated recognition
of compensation costs in comparison to the straight line method.
As a result of the adoption of SFAS 123(R) on October 1, 2005, our income
before income taxes and net income for the first quarter of fiscal 2006 (not
including restricted stock expense), were $10.4 million and $9.1 million lower,
respectively, than if we had continued to account for share based compensation
under APB No. 25. Basic and diluted earnings per share for the first quarter of
fiscal 2006 would have been $0.42 and $0.40, respectively, if we had not adopted
SFAS 123(R), compared to reported basic and diluted earning per share of $0.38
and $0.36, respectively.
Prior to the adoption of SFAS 123(R), we presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the statement of cash flows. SFAS 123(R) requires the cash flows resulting
from the tax deductions in excess of the compensation costs recognized for those
stock options to be classified as financing cash flows. The $0.61 million excess
tax benefit classified as financing cash inflows would have been classified as
an operating cash inflow if the Company had not adopted SFAS 123(R).
In conjunction with the adoption of SFAS 123(R), we began to use the
implied volatility of the Company's traded options as the expected volatility
assumption required in the Black-Scholes option valuation model. Prior to
October 1, 2005, we had used our historical stock price volatility in accordance
with SFAS 123 for purpose of presenting pro forma information. The selection of
the implied volatility approach was based upon the availability of actively
traded options on the Company's shares and the Company's assessment that implied
volatility is more representative of future share price trends than historical
volatility. As stock-based compensation expense recognized in the Consolidated
Statement of Operations for the first quarter of fiscal 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the Company's pro forma information required under SFAS 123 for
the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.
23
RESULTS OF OPERATIONS
The following table sets forth for the three months ended December 31, 2005
and 2004 certain items in our consolidated statements of income reflected as a
percentage of total revenue:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2005 2004
----- -----
Revenue:
License ...................................... 5.4% 4.3%
Service ...................................... 94.6 95.7
----- -----
100.0 100.0
----- -----
Operating expenses:
Cost of license .............................. 0.2 0.3
Cost of service .............................. 63.7 62.8
Research and development ..................... 7.3 7.0
Selling, general and
administrative ............................ 13.4 11.7
Amortization of purchased intangible assets .. 1.3 0.8
----- -----
85.9 82.6
----- -----
Operating income ................................ 14.1 17.4
Interest income and other, net .................. 1.4 1.1
----- -----
Income before income taxes ...................... 15.5 18.5
Income taxes .................................... 2.7 3.7
----- -----
Net income ...................................... 12.8% 14.8%
===== =====
24
THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
The following is a tabular presentation of our results of operations for
the three months ended December 31, 2005 compared to the three months ended
December 31, 2004. Following the table is a discussion and analysis of our
business and results of operations for the mentioned periods.
THREE MONTHS ENDED
DECEMBER 31, INCREASE (DECREASE)
------------------------- --------------------
2005 2004 AMOUNT %
-------- -------------- -------- -----
(in thousands)
Revenue:
License ...................... $ 31,661 $ 20,366 $ 11,295 55.5%
Service ...................... 555,367 449,166 106,201 23.6
-------- -------- --------
587,028 469,532 117,496 25.0
-------- -------- --------
Operating expenses:
Cost of license .............. 1,062 1,155 (93) (8.1)
Cost of service .............. 374,051 294,947 79,104 26.8
Research and development ..... 43,114 32,911 10,203 31.0
Selling, general and
administrative ............ 78,550 54,960 23,590 42.9
Amortization of purchased
intangible assets ......... 7,572 3,718 3,854 103.7
-------- -------- --------
504,349 387,691 116,658 30.0
-------- -------- --------
Operating income ................ 82,679 81,841 838 1.0
Interest income and other, net .. 8,414 4,959 3,455 69.7
-------- -------- --------
Income before income taxes ...... 91,093 86,800 4,293 4.9
Income taxes .................... 15,759 17,357 (1,598) (9.2)
-------- -------- --------
Net income ...................... $ 75,334 $ 69,443 $ 5,891 8.5%
======== ======== ========
REVENUE. Total revenue increased by $117.5 million, or 25.0%, in the first
quarter of fiscal 2006 to $587.0 million from $469.5 million in the first
quarter of fiscal 2005. Approximately $57.2 million of the increase was
attributable to revenue contributed by DST Innovis, and the remainder was
attributable to additional revenue from existing and new customers.
License and service revenue attributable to the sale of ICM Enabling
Systems was $518.9 million in the first quarter of fiscal 2006, an increase of
$111.4 million, or 27.3%, over the first quarter of fiscal 2005. Approximately
$57.2 million of the increase was attributable to revenue contributed by DST
Innovis, and the remainder was attributable to additional revenue from existing
and new customers. License and service revenue resulted from the sale of ICM
Enabling Systems represented 88.4% and 86.8% of our total revenue in the first
quarters of fiscal 2006 and 2005, respectively. The demand for our ICM Enabling
Systems is primarily driven by the need for communications service provides to
continue to integrate their billing, CRM and order management systems into an
ICM approach. In the first quarter of fiscal 2006, we observed strong demand for
our offerings.
License and service revenue resulted from the sale of Directory Systems was
$68.1 million in the first quarter of fiscal 2006, an increase of $6.1 million,
or 9.9 %, over the first quarter of fiscal 2005. The increase in Directory
Systems revenue in the first quarter of fiscal 2006 was attributable to an
increase in business related to Managed Services customers. License and service
revenue from the sale of Directory Systems represented 11.6% and 13.2% of our
total revenue in the first quarters of fiscal 2006 and 2005, 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 in absolute
amount will slightly increase in fiscal 2006.
In the first quarter of fiscal 2006, revenue from customers in North
America, Europe and the rest of the world accounted for 73.1%, 18.4% and 8.5%,
respectively, of total revenue compared to 67.9%, 23.4% and
25
8.7%, respectively, in the first quarter of fiscal 2005. Approximately 50% of
the increase in revenue from customers in North America was attributable to
revenues contributed by DST Innovis, and the remainder was attributable to
additional revenue from existing and new customers. Revenue from customers in
Europe in the first quarter of fiscal 2006, in absolute amounts, was relatively
stable compared to the first quarter of fiscal 2005, and this 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 increased in absolute amounts in
the first quarter of fiscal 2006, but the increase was less than the 25.0%
increase in our total revenue 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 first quarter of fiscal 2006, cost of license, as a percentage of license
revenue, was 3.4%, compared to 5.7% in the first quarter of fiscal 2005.
COST OF SERVICE. The increase in cost of service in the first quarter of
fiscal 2006 was 26.8%, which is greater than the increase in our total revenue
in the first quarter of fiscal 2006. As a percentage of revenue cost of service
was 63.7% in the first quarter of fiscal 2006, compared to 62.8% in the first
quarter of fiscal 2005. Cost of service in the first quarter of fiscal 2006
includes the effect of $4.4 million of stock-based compensation expense related
to employee stock options, and there was no stock-based compensation expense
related to employee stock options in the first quarter of fiscal 2005. Our cost
of service and gross margin may vary depending on the types and geographic
locations of projects that we undertake.
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense. Research and development expense increased by
$10.2 million, or 31.0%, in the first quarter of fiscal 2006 to $43.1 million
from $32.9 million in the first quarter of fiscal 2005. Research and development
expense increased as a percentage of revenue from 7.0% in the first quarter of
fiscal 2005 to 7.3% in the first quarter of fiscal 2006. The increase in
research and development expenses was attributable mainly to research and
development activities related to the DST Innovis acquisition, including
integration efforts of DST Innovis' products into our ICM Enabling Systems.
Research and development in the first quarter of fiscal 2006 includes the effect
of $1.1 million of stock-based compensation expense related to employee stock
options, and there was no stock-based compensation expense related to employee
stock options in the first quarter of fiscal 2005. 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 $23.6 million, or 42.9%, in first quarter of fiscal 2006 to
$78.6 million, from $55.0 million in the first quarter of fiscal 2005. Selling,
general and administrative expense is primarily comprised of compensation
expense. The increase in selling, general and administrative expense in the
first quarter of fiscal 2006 was attributable to an overall increase in our
operations and sales fees, as well as to the inclusion of $5.7 million of
stock-based compensation expense related to employee stock options. There was no
stock-based compensation expense related to employee stock options in the first
quarter of fiscal 2005.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the first quarter of fiscal 2006 was $7.6 million, compared
to $3.7 million in the first quarter of fiscal 2005. The increase in
amortization of purchased intangible assets was due to purchased intangible
assets acquired in the DST Innovis and Longshine acquisitions, partially offset
by purchased intangible assets that were fully amortized in the first quarter of
fiscal 2005.
OPERATING INCOME. Operating income slightly increased by $0.8 million, or
1.0%, in the first quarter of fiscal 2006, to $82.7 million, or 14.1% of
revenue, from $81.8 million, or 17.4% of revenue, in the first quarter of fiscal
2005. The decrease in operating income as a percentage of revenue was
attributable to a 30.0% increase in operating expense which grew at a greater
rate than the 25.0% increase in revenue during the first quarter of fiscal 2006.
Total compensation expense related to employee stock options included in
operating expense for the first quarter of fiscal 2006 was $11.1 million or 1.9%
of revenue.
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INTEREST INCOME AND OTHER, NET. Interest income and other, net increased by
$3.4 million in the first quarter of fiscal 2006 to $8.4 million from $5.0
million in the first quarter of fiscal 2005. The increase in interest income and
other, net, is primarily attributable to the increase in market interest rates
on our short-term interest-bearing investments.
INCOME TAXES. Income taxes for the first quarter of fiscal 2006 were $15.8
million on pretax income of $91.1 million, an effective tax rate of 17.3%
compared to 20.0% in the first quarter of fiscal 2005. Our effective tax rate
for fiscal year 2006 is expected to be approximately 17% on an annualized basis
compared to 20% in fiscal year 2005. Approximately 2% of the reduction in our
effective tax rate is attributable to our continued expansion into countries
with lower effective tax rates and approximately 1% is attributable to the
effect of acquisition-related costs and stock based compensation expense. Our
effective tax rate may fluctuate between quarters as a result of discrete items
that may affect a specific quarter.
NET INCOME. Net income was $75.3 million in the first quarter of fiscal
2006, compared to a net income of $69.4 million in the first quarter of fiscal
2005. The increase in net income is attributable to the increase in interest
income and other, net, and the decrease of our effective tax rate during the
first quarter of fiscal 2006.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.04,
or 12.5%, in the first quarter of fiscal 2006 to $0.36 from $0.32 in the first
quarter of fiscal 2005. The increase in diluted earnings per share resulted from
the increase in net income and from the reduction in diluted weighted average
number of shares outstanding due to our share repurchases during fiscal 2005,
partially offset by stock options exercises. The adoption of SFAS 123(R) with
respect to share based payments to employees had the effect of reducing diluted
earnings per share by $0.04 in the first quarter of fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,220.9 million as of December 31, 2005, compared to $1,145.6 million as of
September 30, 2005. The increase is mainly attributable to positive cash flows
from operations. Net cash provided by operating activities amounted to $83.5
million and $83.0 million for the first quarters of fiscal 2006 and 2005,
respectively.
Our policy is to retain substantial cash balances in order to support the
growth of the Company. We believe that our current cash balances, cash generated
from operations and our current lines of credit will provide sufficient
resources to meet our liquidity needs for at least the next fiscal year.
As of December 31, 2005, $450.0 million and $0.3 million aggregate
principal amount of our 0.50% Notes and 2% Notes were outstanding, respectively.
As of December 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, and outstanding letters of credit and bank guarantees from various
banks totaling $16.5 million. As of December 31, 2005, we had outstanding a
short term loan of $1.7 million secured by specified pledges and guaranties and
outstanding long-term obligations of $1.8 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 fiscal 2005. Since September 30, 2005, there have been no material
changes in contractual obligations outside the ordinary course of our business.
Our capital expenditures were approximately $14.1 million in the first
quarter of fiscal 2006. Approximately 90% of these expenditures consisted of
purchases of computer equipment, and the remainder to 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.
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CURRENCY FLUCTUATIONS
We manage our foreign subsidiaries as integral direct components of our
operations. The U.S. dollar is our functional currency. According to the salient
economic factors indicated in SFAS No.52, "Foreign Currency Translation", our
cash flow, sale price, sales market, expense, financing and intercompany
transactions and arrangement indicators are predominately denominated in the
U.S. dollar. The operations of our foreign subsidiaries provide the same type of
services with the same type of expenditure throughout the Amdocs group.
During the first quarter of fiscal 2006, approximately 75% of our revenue
and approximately 60% of our operating expenses were in U.S. dollars or linked
to the U.S. dollar. As a result of long-term contracts in currencies other than
the U.S. dollar and more customers seeking contracts that are denominated in
currencies such as the Euro, the percentage of our revenue and operating
expenses in U.S. dollar or linked to the U.S. dollar may decrease slightly over
time. Historically, the effect of fluctuations in currency exchange rates 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.
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PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Not applicable
29
ITEM 2. REPORTS ON FORM 6-K
(a) Reports on Form 6-K
The Company furnished or filed the following reports on Form 6-K during the
three months ended December 31, 2005:
(1) Form 6-K dated October 31, 2005.
(2) Form 6-K dated November 10, 2005.
(3) Form 6-K dated December 19, 2005.
(4) Form 6-K dated December 23, 2005.
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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: February 15, 2005