Amdocs Remains a Buy

Amdocs Limited (DOX - Analyst Report), the global leader in customer management and billing software for the communications industry, has declared third quarter of fiscal 2009 financial results, well above our estimates. The company continues to benefit from the telecom carrier industry’s long-term trend towards network consolidation & convergence.

Third quarter revenue of $690.3 million was down 15.9% from the year-ago quarter and down 2.9% sequentially. But this was above our expectation of $680 million and at the high-end of the company’s guidance. Adjusted diluted EPS (excluding special items) during the third quarter was $0.52 compared to $0.53 in the prior-year quarter and $0.48 in the previous quarter. This was also better than our estimate of $0.44.

Gross margin (excluding stock-based compensation expenses) in the third quarter 2009 was 36.8% compared to 36.2% in the prior-year quarter and 36.5% in the previous quarter. After a big reduction of operational cash flow in the previous quarter, Amdocs again generated a solid cash flow of $113.9 million during the third quarter.

As a result, free cash flow (cash flow from operations less capital expenditures) during the quarter was $96.2 million, compared to $83.2 million in the year-ago quarter and $62.7 million in the previous quarter. Net cash balance (cash & marketable securities less total debt) at the end of the third quarter 2009 was $4.81 per diluted share, an improvement of 44.4% year-over-year as well as 14.5% sequentially.

The Telecommunications Software Management System market is highly competitive. More than 100 vendors provide customer management & billing system solutions throughout the world. Besides Amdocs, other major players include Convergys (CVG - Snapshot Report), CSG Systems (CSGS - Snapshot Report), Oracle (ORCL - Snapshot Report) and Comverse (CMVT - Snapshot Report).

Despite competition, Amdocs has the largest customer base and the broadest product line in the industry. The company’s Customer Experience Systems portfolio (CES 7.5) provides a single platform capable of supporting complex requirements of traditional and next-generation "triple-play" voice, video and data services as it focuses on addressing emerging market trends in the communications industry.

Recently, two major European telecom carriers, Elisa Corporation of Finland and T-Mobile UK, entered into a six year and four year managed services contract with Amdocs, respectively. The company already has a seven year managed services contract with AT&T (T - Analyst Report) and another five year contract with Sprint-Nextel (S - Analyst Report). Other major customers of Amdocs’ managed service include Clearwire, Rogers Telecom, Metro PCs, J:COM, and Telenor Sweden. All these contracts resulted in a total order backlog of $2.37 billion at the end of the third quarter of fiscal 2009.

Amdocs has industry-leading technology integration products for large-scale transformational projects and managed services. The company is currently generating more than 70% of its revenue from managed services and other recurring sources.

According to our view, implementation of integrated customer management systems is essential to preventing customer churn at carriers. We thus reiterate Buy for Amdocs.