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, 2004
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 DECEMBER 31, 2004
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 which 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,
2004 2003
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 590,592 $ 550,352
Short-term interest-bearing investments 666,794 640,347
Accounts receivable, net 282,465 254,779
Deferred income taxes and taxes receivable 70,634 62,284
Prepaid expenses and other current assets 98,242 80,229
----------- -----------
Total current assets 1,708,727 1,587,991
Equipment, vehicles and leasehold improvements, net 174,582 181,121
Deferred income taxes 119,859 113,589
Goodwill 802,805 806,874
Intangible assets, net 43,139 47,512
Other noncurrent assets 132,125 126,797
----------- -----------
Total assets $ 2,981,237 $ 2,863,884
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,892 $ 104,415
Accrued expenses and other current liabilities 137,811 137,664
Accrued personnel costs 132,303 124,284
Short-term portion of financing arrangements 989 1,604
Deferred revenue 235,923 223,122
Short-term portion of capital lease obligations 16,194 19,706
Deferred income taxes and taxes payable 167,989 163,648
----------- -----------
Total current liabilities 782,101 774,443
Deferred income taxes 42,445 40,530
0.50% Convertible notes 450,000 450,000
Noncurrent liabilities and other 187,163 154,721
----------- -----------
Total liabilities 1,461,709 1,419,694
----------- -----------
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; 225,619 and
224,947 issued and 202,006 and 201,334 outstanding, respectively 3,613 3,601
Additional paid-in capital 1,843,628 1,837,608
Treasury stock, at cost - 23,613 Ordinary Shares (502,416) (502,416)
Accumulated other comprehensive loss (2,101) (1,919)
Unearned compensation (129) (174)
Retained earnings 176,933 107,490
----------- -----------
Total shareholders' equity 1,519,528 1,444,190
----------- -----------
Total liabilities and shareholders' equity $ 2,981,237 $ 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 DECEMBER 31,
-------------------------------
2004 2003
-------- --------
Revenue:
License $ 20,366 $ 16,621
Service 449,166 411,674
-------- --------
469,532 428,295
-------- --------
Operating expenses:
Cost of license 1,155 1,132
Cost of service 294,947 272,103
Research and development 32,911 30,498
Selling, general and administrative 54,960 52,497
Amortization of purchased intangible assets 3,718 5,096
-------- --------
387,691 361,326
-------- --------
Operating income 81,841 66,969
Interest income and other, net 4,959 1,067
-------- --------
Income before income taxes 86,800 68,036
Income taxes 17,357 14,968
-------- --------
Net income $ 69,443 $ 53,068
======== ========
Basic earnings per share $ 0.34 $ 0.25
======== ========
Diluted earnings per share $ 0.32 $ 0.24
======== ========
Basic weighted average number of shares outstanding 201,703 215,106
======== ========
Diluted weighted average number of shares outstanding 217,448 220,594
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
AMDOCS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
Accumulated
Ordinary Shares Additional Other Total
------------------- Paid-in Treasury Comprehensive Unearned Retained Shareholders'
Shares Amount Capital Stock Loss Compensation Earnings Equity
------ ------ ------- ----- ---- ------------ -------- ------
BALANCE AS OF SEPTEMBER
30, 2004 201,334 $3,601 $1,837,608 $(502,416) $(1,919) $(174) $107,490 $1,444,190
Comprehensive income:
Net income -- -- -- -- -- -- 69,443 69,443
Unrealized gain on
foreign currency
hedging contracts,
net of $165 tax -- -- -- -- 502 -- -- 502
Unrealized loss on
short-term
interest-bearing
investments, net of
$(149) tax -- -- -- -- (684) -- -- (684)
----------
Comprehensive income 69,261
----------
Employee stock options
exercised 672 12 5,129 -- -- -- -- 5,141
Tax benefit of stock
options exercised -- -- 864 -- -- -- -- 864
Expense related to vesting
of stock options -- -- 27 -- -- -- -- 27
Amortization of unearned
compensation -- -- -- -- -- 45 -- 45
------- ------ ---------- --------- ------- ----- -------- ----------
BALANCE AS OF
DECEMBER 31, 2004 202,006 $3,613 $1,843,628 $(502,416) $(2,101) $(129) $176,933 $1,519,528
======= ====== ========== ========= ======= ===== ======== ==========
As of December 31, 2004 and September 30, 2004, accumulated other comprehensive
loss is comprised of unrealized loss on foreign currency hedging contracts, net
of tax, of $(730) and $(1,232), respectively, and unrealized loss on short-term
interest-bearing investments, net of tax, of $(1,371) 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)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2004 2003
--------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 69,443 $ 53,068
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 22,755 25,402
Gain on sale of equipment (392) (45)
Gain on repurchase of 2% convertible notes -- (13)
Deferred income taxes (2,534) (1,654)
Tax benefit of stock options exercised 864 1,672
Realized gain from short-term interest-bearing
investments (39) (388)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (27,684) (11,747)
Prepaid expenses and other current assets (14,025) 10,515
Other noncurrent assets (5,731) (12,059)
Accounts payable and accrued expenses (4,715) 3,202
Deferred revenue 12,801 8,309
Income taxes payable (1,779) 2,178
Noncurrent liabilities and other 34,079 4,211
--------- ---------
Net cash provided by operating activities 83,043 82,651
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 1,503 220
Payments for purchase of equipment, vehicles, leasehold
improvements (15,657) (14,049)
Proceeds from sale of short-term interest-bearing
investments 132,891 311,995
Purchase of short-term interest-bearing investments (160,134) (545,442)
Net cash paid for in acquisition (18) --
--------- ---------
Net cash used in investing activities (41,415) (247,276)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised 5,141 4,846
Repurchase of ordinary shares -- (123,993)
Repurchase of 2% convertible notes -- (4,987)
Principal payments under financing arrangements (615) (546)
Borrowings under financing arrangements 2 --
Principal payments on capital lease obligations (5,916) (6,082)
--------- ---------
Net cash used in financing activities (1,388) (130,762)
--------- ---------
Net (decrease) increase in cash and cash equivalents 40,240 (295,387)
Cash and cash equivalents at beginning of period 550,352 847,600
--------- ---------
Cash and cash equivalents at end of period $ 590,592 $ 552,213
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 21,802 $ 9,125
Interest 1,388 4,575
The accompanying notes are an integral of these
consolidated financial statements.
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
1. BASIS OF PRESENTATION
Amdocs Limited (the "Company") is a leading provider of software
products and services to the communications industry. The Company and its
subsidiaries operate in one operating segment so as to help its customers
move toward an integrated approach to customer management. The Company
designs, develops, markets, supports and operates, and provides Managed
Services for, information system solutions primarily to leading
communications companies throughout the world.
The unaudited consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP"). In the opinion of the Company's management, all
adjustments considered necessary for a fair presentation of the unaudited
interim consolidated financial statements have been included herein and are
of a normal recurring nature.
The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the
reported amounts of assets, liabilities, revenue and expenses. Estimates and
assumptions are reviewed periodically and the effect of revisions is
reflected in the results of operations of the interim periods in which
changes are determined to be necessary.
The results of operations for the interim periods presented herein are
not necessarily indicative of the results to be expected for the full fiscal
year. These statements do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with GAAP. These statements should
be read in conjunction with the Company's consolidated financial statements
for the fiscal year ended September 30, 2004, set forth in the Company's
Annual Report on Form 20-F filed on December 30, 2004 with the Securities
and Exchange Commission.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. SIGNIFICANT ACCOUNTING POLICY
Accounting for Stock-Based Compensation
The Company follows Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations in accounting for its employee stock options. Pursuant to
these accounting standards, the Company records deferred compensation for
share options granted to employees at the date of grant based on the
difference between the exercise price of the options and the market value of
the underlying shares at that date. Deferred compensation is amortized to
compensation expense over the vesting period of the underlying options in
accordance with the accelerated expense attribution method.
As presented below, the Company determined pro forma net income and
earnings per share information as if the fair value method described in
Statements of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
Financial Accounting Standards Board Statement No. 123", had been applied
to its employee stock-based compensation. The Company utilized the
Black-Scholes option-pricing model to estimate fair value,
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
which is one of several methods that can be used under SFAS No. 123. The
Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. Option valuation models require the input of highly
subjective assumptions, including the expected share price volatility. The
Company's options have characteristics significantly different from those
of traded options, and changes in the subjective input assumptions can
materially affect the fair value estimates.
The fair value of options granted was estimated at the date of grant
using the Black-Scholes pricing model with the following assumptions for
the presented periods (all in weighted averages):
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
2004 2003
------ ------
Risk-free interest rate 3.30% 3.08%
Expected life of options 4.50 4.50
Expected annual volatility 0.638 0.691
Expected dividend yield None None
Fair value per option $12.47 $12.43
The following table sets forth the pro forma effect of applying SFAS
No. 123 on net income and earnings per share for the three months ended
December 31, 2004 and 2003:
THREE MONTHS ENDED
DECEMBER 31,
------------------------
2004 2003
------- -------
Net income, as reported $69,443 $53,068
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 58 5
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (7,540) (10,847)
------- -------
Pro forma net income $61,961 $42,226
======= =======
Basic earnings per share:
As reported $ 0.34 $ 0.25
======= =======
Pro forma $ 0.31 $ 0.20
======= =======
Diluted earnings per share:
As reported $ 0.32 $ 0.24
======= =======
Pro forma $ 0.29 $ 0.19
======= =======
The pro forma results for the three months ended December 31, 2003 have
been revised due to the correction of the stock-based compensation amount
for such period made during fiscal 2004. The correction resulted in a
decrease in pro forma net income of $4,135 and a decrease in pro forma
diluted earnings per share of $0.02 for such period.
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
3. ADOPTION OF NEW ACCOUNTING STANDARDS
The Effect of Contingently Convertible Instruments on Diluted Earnings
Per Share
In September 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 04-8, "The Effect of Contingently Convertible
Instruments on Diluted Earnings Per Share" ("Issue 04-8"). Issue 04-8
relates to contingently convertible debt instruments, which are generally
convertible into common shares of the issuer after the common stock price
has exceeded a predetermined threshold for a specified time period (market
price trigger). According to the accounting treatment in effect prior to
this quarter, the potential dilutive effect of the conversion feature was
excluded from diluted earnings per share until the market price contingency
was met. Under Issue 04-8, all instruments that have embedded conversion
features that are contingent on market conditions indexed to an issuer's
share price are required to be included in diluted earnings per share
computations, if dilutive, regardless of whether the market conditions have
been met. The effective date of Issue 04-8 is for reporting periods ending
after December 15, 2004. The consensus is required to be applied
retroactively to instruments outstanding at the date of adoption. Diluted
earnings per share of all prior periods presented for comparative purposes
are required to be restated to conform to the consensus guidance.
The Company adopted Issue 04-8 in the first quarter of fiscal 2005,
which required the addition of 10,436 ordinary shares issuable upon
conversion of the Company's 0.50% Convertible Senior Notes due 2024 (the
"0.50% Notes"), to the diluted earnings per share calculation. The adoption
of Issue 04-8 has no effect on the Company's previously reported quarterly
diluted earnings per share for the three months ended December 31, 2003 as
the Company had no outstanding contingently convertible debt instruments
during that period.
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 must adopt SFAS 123(R) no later than the first interim
period beginning after June 15, 2005. 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.
8
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 results of operations,
although it will have no impact on its overall financial position. 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
------------------------------------
DECEMBER 31, SEPTEMBER 30,
2004 2004
-------- --------
Accounts receivable -billed $272,839 $242,254
Accounts receivable -unbilled 23,411 24,696
Less - allowances (13,785) (12,171)
-------- --------
Accounts receivable, net $282,465 $254,779
======== ========
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
5. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity except those resulting
from investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income to
comprehensive income for the following periods:
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
2004 2003
------- -------
Net income $69,443 $53,068
Other comprehensive income (loss):
Unrealized gain (loss) on
foreign currency hedging
contracts, net of tax 502 (3,199)
Unrealized loss on short-term
interest-bearing investments,
net of tax (684) (465)
------- -------
Comprehensive income $69,261 $49,404
======= =======
6. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
2004 2003
------- -------
Current $19,891 $16,622
Deferred (2,534) (1,654)
------- -------
$17,357 $14,968
======= =======
The effective income tax rate varied from the statutory Guernsey tax
rate as follows for the following periods:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2004 2003
---- ----
Statutory Guernsey tax rate 20% 20%
Guernsey tax-exempt status (20) (20)
Foreign taxes 20 22
---- ----
Effective income tax rate 20% 22%
==== ====
As a Guernsey corporation with tax-exempt status, the Company's overall
effective tax rate is attributable solely to foreign taxes and for fiscal
year 2005 is expected to approximate 20%.
As of December 31, 2004, deferred tax assets of $12,141, 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
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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
DECEMBER 31,
----------------------------
2004 2003
-------- --------
Numerator:
Numerator for basic earnings per share -
net income available to shareholders $ 69,443 $ 53,068
Effect of assumed conversion of 0.50%
convertible notes 984 --
-------- --------
Numerator for diluted earnings per share
- net income available to shareholders
and assumed conversions $ 70,427 $ 53,068
======== ========
Denominator:
Denominator for basic earnings per share -
weighted average number of shares
outstanding 201,703 215,106
Effect of assumed conversion of 0.50%
convertible notes 10,436 - (1)
Effect of dilutive stock options granted 5,309 5,488
-------- --------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 217,448 220,594
======== ========
Basic earnings per share $ 0.34 $ 0.25
======== ========
Diluted earnings per share $ 0.32 $ 0.24
======== ========
(1) The adoption of Issue 04-8 had no impact on the reported diluted
earnings per share for the three months ended December 31, 2003 as
the 0.50% Notes were not outstanding during that period.
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 months ended December 31, 2003 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 for the three months ended December 31,
2004 following the adoption of Issue 04-8. See Note 3.
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
8. REPURCHASE OF SECURITIES
Ordinary Shares
On December 20, 2004, the Company announced that its Board of Directors
had extended the 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. No share repurchases under this program were made in the three
months ended December 31, 2004.
9. ACQUISITION
CERTEN INC.
On July 2, 2003, the Company acquired from Bell Canada ("Bell") its 90%
ownership interest in Certen (renamed Amdocs Canada Managed Services, Inc.)
for approximately $66,000 in cash. In addition, the Company had related
transaction costs of approximately $3,000. In the three months ended
December 31, 2004, the Company corrected the allocation of the purchase
price and recalculated a deferred tax asset related to the fair value of an
acquired pension liability. The corrected purchase price allocation
resulted in a decrease of $4,069 in goodwill.
The following is the corrected allocation of the purchase price and
deferred tax liability:
Purchase price $ 65,887
Estimated transaction costs 2,925
--------
Total purchase price 68,812
Write-off of deferred revenue and allowance on Amdocs books, net of
tax (33,666)
--------
Net amount for purchase price allocation $ 35,146
========
Allocation of purchase price:
90% tangible assets acquired, net of capitalized Amdocs system on
Certen's books $ 80,929
90% liabilities assumed {241,460)
--------
Net liabilities acquired 160,531)
Customer arrangement 36,385
Adjustment to fair value of pension and other post-employment benefit
liabilities (12,605)
EITF 95-3 and other liabilities (2,857)
Deferred taxes resulting from the difference between the assigned
value of certain assets and liabilities and their respective tax
bases 77,742
--------
Net fair value of liabilities acquired (61,866)
Goodwill 97,012
--------
$ 35,146
========
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
10. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAMS
Fiscal Year Ended September 30, 2003
In the first quarter of fiscal 2003, the Company implemented a series
of measures designed to reduce costs and improve productivity, with
targeted quarterly savings of approximately $8,000. As part of this plan,
the Company reduced its workforce by approximately 400 employees,
representing approximately 4% of the Company's worldwide workforce of 9,000
full-time employees, 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 charge associated with these actions and recorded in
the first quarter of fiscal 2003 was $9,956. Approximately $6,029 of the
total charge was paid in cash as of December 31, 2004. The remainder of the
charge, comprised of facility related costs, is expected to be paid out
through June 2008.
Details of $9,956 Restructuring Charge:
In the first quarter of fiscal 2003, Company recorded a charge of
$4,011 related to employee separation costs in connection with the
termination of employment of software information technology specialists
and administrative professionals from various locations around the world.
The Company recorded a charge of $4,022 related to facilities, representing
rent obligations relating to vacated facilities in Raanana, Israel and St.
Louis, Missouri. The Company also recorded a provision of $1,829 for asset
write-offs, principally for leasehold improvements in Raanana, Israel and
St. Louis, Missouri that were abandoned.
The restructuring charge is comprised of the following as of December
31, 2004:
FACILITIES
----------
Balance as of September 30, 2004 $1,797
Cash payments (106)
------
Balance as of December 31, 2004 $1,691
======
The financial savings of these actions, of approximately $8,000
quarterly commencing in the second quarter of 2003, is reflected as a
reduction in operating expense. These cost savings may not be permanent as
increased activity levels resulting from, among other factors,
acquisitions, new Managed Services agreements and increased revenue, may
require an increase in headcount and other increased spending.
Fiscal Year Ended September 30, 2002
In the fourth quarter of fiscal 2002, the Company implemented a cost
reduction program targeted to reduce costs by approximately $30,000
quarterly in response to a decline of the forecasted revenue for the third
and fourth quarters of fiscal 2002. The decline resulted from, among other
factors, slowdowns in customer buying decisions in the third quarter of
fiscal 2002, stemming from overall reductions in the capital investment
budgets of many communications service providers, leading to fewer new
contracts than expected, as well as from smaller than expected initial
spending commitments and reduced discretionary spending under contracts
with some customers.
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
The restructuring charge associated with these actions and recorded in
the fourth quarter of fiscal 2002 was $20,919. Approximately $17,139 of the
total charge was paid in cash as of December 31, 2004. The remainder of the
charge, comprised of facility related costs, is expected to be paid out
through April 2012.
Details of $20,919 Restructuring Charge:
In the fourth quarter of fiscal 2002, the Company recorded a charge of
$11,353 related to employee separation costs in connection with the
termination of employment of approximately 1,000 employees, representing
approximately 10% of the Company's worldwide workforce of 9,900 full-time
employees. The actual number of employees terminated approximated original
estimates. There was not a single group of employees or business function
that was solely impacted by these measures; instead it impacted information
technology specialists and administration professionals across a broad
range of functions according to the areas with reduced activities. The
Company recorded a charge of $7,880 related to facilities, representing
rent obligations relating to vacated facilities in various locations in
Canada, Israel and the United States. The Company also recorded a provision
of $1,584 for asset write-offs, principally for leasehold improvements in
Canada, Israel and the United States that were abandoned.
The restructuring charge is comprised of the following as of December
31, 2004:
FACILITIES
----------
Balance as of September 30, 2004 $ 2,665
Cash payments (76)
Adjustments (1) (1,675)
-------
Balance as of December 31, 2004 $ 914
=======
(1) Reflects adjustments of $1,675 due to changes in previous estimates.
These adjustments resulted in a decrease of restructuring
liabilities related to facilities of $1,675, which was credited to
"cost of service" and "selling, general and administrative" expenses
in the three months ended December 31, 2004.
The financial savings of these actions of approximately $30,000
quarterly commencing in the first quarter of fiscal 2003, is reflected as a
reduction in operating expense. These cost savings may not be permanent as
increased activity levels resulting from, among other factors,
acquisitions, Managed Services agreements and increased revenue, may
require an increase in headcount and other increased spending.
In the first quarter of fiscal 2002, as part of a plan to achieve
increased operational efficiency and to more closely monitor and reduce
costs, the Company consolidated its Stamford, Connecticut data center into
its Champaign, Illinois facility and closed the Stamford facility.
The restructuring charge associated with this action and recorded in
the first quarter of fiscal 2002 was $13,311. Approximately $7,405 of the
total charge was paid in cash as of December 31, 2004. The remainder of the
charge, comprised of facility related costs, is expected to be paid out
through August 2008.
Details of $13,311 Restructuring charge:
Approximately $6,255 of the total restructuring charge related to
facilities and represented rent obligations outstanding for the Stamford
site. Approximately $4,126 of the total restructuring charge related to the
write-off of leasehold improvements at the Stamford site that were
abandoned. The
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
Company also recorded a provision of $2,530 related to employee separation
costs in connection with the termination of employment of 166 employees.
In the fourth quarter of fiscal 2004, the Company increased its accrual
related to facilities by $4,220 due to changes in its previous estimates.
The restructuring charge related to the consolidation of the Stamford
and Champaign facilities is comprised of the following as of December 31,
2004:
FACILITIES
----------
Balance as of September 30, 2004 $5,818
Cash payments (297)
------
Balance as of December 31, 2004 $5,521
======
The operating costs related to the Stamford site that were eliminated
were approximately $8,500 in its last quarter of activity.
11. EMPLOYEE BENEFITS
FASB Statement No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits", requires additional
disclosures about assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other post-retirement benefit
plans.
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 December 31, 2004 and 2003, was as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------ ----------------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 547 $ 66 $ 495 $ 90
Interest on benefit obligations 837 121 647 93
Expected return on plan assets (686) -- (553) --
----- ---- ----- ----
$ 698 $187 $ 589 $183
===== ==== ===== ====
In the three months ended December 31, 2004, the Company made no
contributions. The Company expects that contributions for the fiscal year
ending September 30, 2005 will approximate $3,285 to the pension plan and
$89 for other benefits.
15
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
The Company has been 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
December 31, 2004 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 three months ended December 31, 2004
and 2003.
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.
16
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 months ended December 31, 2004 and
2003,
- 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 months ended December 31, 2004
and 2003, 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-month
periods ended December 31, 2004 and 2003. You should read this section in
conjunction with our consolidated financial statements.
17
OVERVIEW OF BUSINESS AND TREND INFORMATION
Our market focus is primarily the communications industry, and we are a
leading provider of software products and services to that industry. Our
products and services help our customers move toward an integrated approach to
customer management, which we refer to as "Integrated Customer Management", or
"ICM". Our portfolio of product offerings include billing and customer
relationship management ("CRM"), order management, mediation, call rating,
invoice calculation and preparation, bill formatting, collections, provisioning,
content and partner relationship management, support solutions and customer
interaction products, which we refer to, collectively, as "Integrated Customer
Management Enabling Systems", or "ICM Enabling Systems" (previously known as
CC&B Systems).
Our portfolio also includes a full range of directory sales and publishing
systems, which we refer to as "Directory Systems", for publishers of both
traditional printed yellow page and white page directories and electronic
Internet directories.
Our ICM Enabling Systems are designed to meet the mission-critical needs of
leading communications service providers throughout the entire customer
lifecycle. We support a wide range of communications services, including
wireline, wireless, cable, voice, video, data, broadband, content, electronic
and mobile commerce and Internet Protocol ("IP") based services. We also support
companies that offer multiple service packages, commonly referred to as bundled
or convergent service packages.
Due to the complexity of our customers' projects and the expertise required
for system support, we also provide information technology, or "IT", services,
including extensive 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. We are also expanding to system integration and
providing IT consulting services, such as profit enhancement.
Our business is conducted on a global basis. We maintain six development
facilities located in Canada, Cyprus, India, Ireland, Israel and the United
States. We expect our new development center in India to grow and support the
overall activity of our business worldwide at comparatively lower operating
costs.
As part of our strategy, we may pursue acquisitions and other initiatives
in order to offer new products or services or otherwise enhance our market
position or strategic strengths.
We derive our revenue principally from:
- the initial sales of licenses to use our products and related
services, including modification, implementation and integration
services,
- providing Managed Services and other related services for our
solutions, and
- recurring revenue from ongoing support and maintenance provided to our
customers, and from incremental license fees resulting from increases
in a customer's business volume.
Revenue is recognized only when all of the following conditions have been
met: (i) there is persuasive evidence of an arrangement; (ii) delivery has
occurred; (iii) the fee is fixed and determinable; and (iv) collectability of
the fee is reasonably assured. We usually sell our software licenses as part of
an overall solution offered to a customer that combines the sale of software
licenses with a broad range of services, which normally include significant
customization, modification, implementation and integration. As a result, we
generally recognize combined license and service revenue over the course of
these long-term projects,
18
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.
As a result of the slowdown in the communications industry during fiscal years
2003 and 2002, the market value, financial results and prospects, and capital
spending levels of communications companies declined or degraded. During fiscal
2004, several communications service providers demonstrated a greater readiness
to commit to new projects, and in the first quarter of fiscal 2005, we observed
improvement in the markets that we serve. Communications service providers were
increasingly willing to commit to new projects, both in wireline and wireless.
As a result, we expect continued growth in the coming quarters.
We believe that we are a leading global provider of ICM Enabling Systems.
We provide a broad set of products, with proven functionality and scalability,
accompanied by a comprehensive range of business consulting, system
implementation and integration services.
We believe that demand for our ICM Enabling Systems is driven by, among
other key factors:
- the global use of communications services,
- the emergence of new communications products and services,
especially IP, video, broadband, data and content services and IPTV
(Internet Protocol Television),
- technological changes, such as the introduction of wireless Internet
services via GPRS (General Packet Radio Services) and UMTS
(Universal Mobile Telecommunications System) technology,
- the ongoing consolidation within the communications industry,
- the business needs of communications service providers to reduce
costs and retain high value customers, and
- a shift from in-house management to vendor solutions.
We also believe that additional drivers of demand are the continuing trend
for communications service providers to offer their subscribers multiple service
packages, commonly referred to as bundled or convergent services (combinations
of voice, broadband, electronic and mobile commerce and IP services), and the
ability of our ICM Enabling Systems to improve productivity.
19
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 three-month periods ended December
31, 2004 and 2003 was approximately 40% of total revenue.
RESULTS OF OPERATIONS
The following table sets forth for the three months ended December 31,
2004 and 2003 certain items in our consolidated statements of income reflected
as a percentage of total revenue:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2004 2003
----- -----
Revenue:
License .................... 4.3% 3.9%
Service .................... 95.7 96.1
----- -----
100.0 100.0
----- -----
Operating expenses:
Cost of license ............ 0.3 0.3
Cost of service ............ 62.8 63.5
Research and development ... 7.0 7.1
Selling, general and
administrative ........... 11.7 12.3
Amortization of purchased
intangible assets ........ 0.8 1.2
----- -----
82.6 84.4
----- -----
Operating income ............. 17.4 15.6
Interest income and other, net 1.1 0.3
----- -----
Income before income taxes ... 18.5 15.9
Income taxes ................. 3.7 3.5
----- -----
Net income ................... 14.8% 12.4%
===== =====
20
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
The following is a tabular presentation of our results of operations for
the three months ended December 31, 2004 compared to the three months ended
December 31, 2003. Following the table is a discussion and analysis of our
business and results of operations for such periods.
THREE MONTHS ENDED
DECEMBER 31, INCREASE (DECREASE)
---------------------- ----------------------
2004 2003 AMOUNT %
-------- -------- -------- -----
(in thousands)
------------------------------------
Revenue:
License ................... $ 20,366 $ 16,621 $ 3,745 22.5%
Service ................... 449,166 411,674 37,492 9.1
-------- -------- --------
469,532 428,295 41,237 9.6
-------- -------- --------
Operating expenses:
Cost of license ........... 1,155 1,132 23 2.0
Cost of service ........... 294,947 272,103 22,844 8.4
Research and development .. 32,911 30,498 2,413 7.9
Selling, general and
administrative .......... 54,960 52,497 2,463 4.7
Amortization of purchased
intangible assets ....... 3,718 5,096 (1,378) (27.0)
-------- -------- --------
387,691 361,326 26,365 7.3
-------- -------- --------
Operating income ............. 81,841 66,969 14,872 22.2
Interest income and other, net 4,959 1,067 3,892 364.8
-------- -------- --------
Income before income taxes ... 86,800 68,036 18,764 27.6
Income taxes ................. 17,357 14,968 2,389 16.0
-------- -------- --------
Net income ................... $ 69,443 $ 53,068 $ 16,375 30.9
======== ======== ========
REVENUE. Total revenue increased by $41.2 million, or 9.6%, in the three
months ended December 31, 2004 to $469.5 million from $428.3 million in the
three months ended December 31, 2003. Approximately 70% of the increase in total
revenue was due to an increase in business related to Managed Services
customers, and the remainder was attributable to revenue from existing and new
customers. Revenue related to Managed Services customers in the three months
ended December 31, 2004 and 2003 was approximately 40% of total revenue. In the
three months ended December 31, 2004, following the significant weakening of the
U.S. dollar, total revenue was increased by approximately $7 million.
License and service revenue from the sale of ICM Enabling Systems was
$407.5 million for the three months ended December 31, 2004, an increase of
$32.1 million, or 8.6%, over the three months ended December 31, 2003.
Approximately 75% of the increase is attributable to an increase in business
related to Managed Services customers, and the remainder was attributable to
revenue from existing and new customers. License and service revenue from the
sale of ICM Enabling Systems represented 86.8% and 87.7% of our total revenue in
the three months ended December 31, 2004 and 2003, respectively. The demand for
our ICM Enabling Systems is primarily driven by the need for communications
companies to continue to integrate their billing, CRM and order management
systems into an Integrated Customer Management approach. During fiscal 2004,
several communications service providers demonstrated a greater readiness to
commit to new projects, and in the first quarter of fiscal 2005, we observed
improvement in the markets that we serve. Communications service providers were
increasingly willing to commit to new projects, both in wireline and wireless.
License and service revenue from the sale of Directory Systems was $62.0
million for the three months ended December 31, 2004, an increase of $9.1
million, or 17.3%, over the three months ended December 31, 2003. Approximately
40% of the increase in Directory Systems revenue in the three months ended
December 31, 2004 was attributable to an increase in business related to Managed
Services customers, and the remainder was attributable to additional revenue
from existing and new customers. License and service
21
revenue from the sale of Directory Systems represented 13.2% and 12.3% of our
total revenue in the three months ended December 31, 2004 and 2003,
respectively. We believe that we are a leading provider of Directory Systems in
most of the markets we serve. We expect that our revenue from Directory Systems
will slightly increase in fiscal 2005.
In the three months ended December 31, 2004, revenue from customers in
North America, Europe and the rest of the world accounted for 67.9%, 23.4% and
8.7%, respectively, of total revenue compared to 66.4%, 26.7% and 6.9%,
respectively, for the three months ended December 31, 2003. Approximately 85% of
the increase in revenue from customers in North America in the three months
ended December 31, 2004 is attributable to an increase in business related to
Managed Services customers, and the remainder to the expansion of relationships
with existing and new customers in North America. The decrease in revenue from
customers in Europe in the three months ended December 31, 2004 was attributable
to a decrease in revenue from existing customers. The increase in revenue from
customers in the rest of the world in the three months ended December 31, 2004
was attributable to the expansion of relationships with existing and new
customers in the rest of the world.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the three months ended December 31, 2004, cost of license, as a percentage of
license revenue, was 5.7%, compared to 6.8% in the three months ended December
31, 2003.
COST OF SERVICE. The increase in cost of service in the three months ended
December 31, 2004 was 8.4%, as compared to the 9.6% increase in our total
revenue in the three months ended December 31, 2004, and resulted in a 0.7%
increase in our gross margin, as a percentage of revenue. Our gross margin is
affected by the Managed Services projects, which we expect to be less profitable
in their initial period. In the three months ended December 31, 2004, following
the significant weakening of the U.S. dollar, cost of service was increased by
approximately $7 million.
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 $2.4 million, or 7.9%, in the three months ended December 31, 2004 to $32.9
million from $30.5 million in the three months ended December 31, 2003. Such
increase in research and development expense was proportionally less than the
increase in our total revenue, and research and development expense decreased,
as a percentage of revenue, from 7.1% of revenue in the three months ended
December 31, 2003 to 7.0% of revenue in the three months ended December 31,
2004. While we continue to upgrade our existing systems, in the first quarter of
fiscal 2005, we focused significant research and development efforts on the
integration between our products and a unified user interface in order to enable
our customers to adopt an ICM approach. As part of these efforts we will launch
Amdocs 6 in the second quarter of fiscal 2005. The majority of our research and
development expenditures are directed to our ICM Enabling Systems, and the
remainder to directory, content, mediation and order management solutions.
Although we intend to continue to devote resources to research and development,
our research and development budget, 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 $2.5 million, or 4.7%, in the three months ended December
31, 2004 to $55.0 million, from $52.5 million in the three months ended December
31, 2003. 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 2005 was attributable to overall
increase in our operations, as well as to the increase in our selling and
22
marketing compensation, although the 4.7% increase was significantly less than
the 9.6% increase in our total revenue.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended December 31, 2004 was $3.7 million,
compared to $5.1 million in the three months ended December 31, 2003. The
decrease in amortization of purchased intangible assets was due to purchased
intangible assets that were fully amortized in fiscal 2004.
OPERATING INCOME. Operating income increased by $14.9 million, or 22.2%, in
the in the three months ended December 31, 2004, to $81.8 million, or 17.4% of
revenue, from $67.0 million, or 15.6% of revenue, in the three months ended
December 31, 2003. The increase in operating income in the first quarter of
fiscal 2005 resulted from the 9.6% increase in our total revenue, and by the
0.7% increase in our gross margin as a percentage of revenue.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased by
$3.9 million in the three months ended December 31, 2004 to $5.0 million from
$1.1 million in the three months ended December 31, 2003. The increase in
interest income and other, net, in the first quarter of fiscal 2005 is primarily
attributable to the increase in market interest rates on our short-term
interest-bearing investments, and to the decrease in our interest expense due to
the redemption of our 2% Notes in June 2004, which was partially offset by
interest expense on our 0.50% Notes issued in March 2004.
INCOME TAXES. Income taxes for the first quarter of fiscal 2005 were $17.4
million on pretax income of $86.8 million, an effective tax rate of 20% compared
to 22% in the three months ended December 31, 2003. 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 $69.4 million in the first quarter of fiscal
2005, compared to a net income of $53.1 million in the three months ended
December 31, 2003. The increase in net income is primarily attributable to the
9.6% increase in our total revenue.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.32 for the
three months ended December 31, 2004, compared to $0.24 in the three months
ended December 31, 2003.
The shares issuable upon conversion of the 0.50% Notes were included in the
diluted earnings per share calculation for the three months ended December 31,
2004 following the adoption of Issue 04-8, which required the addition of 10.4
million ordinary shares issuable upon conversion of our 0.50% Notes, to the
diluted earnings per share calculation. The adoption of Issue 04-8 has no effect
on our previously reported quarterly diluted earnings per share for the three
months ended December 31, 2003 as the 0.50% Notes were not outstanding during
that period.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,257.4 million as of December 31, 2004, compared to $1,190.7 million as of
September 30, 2004. The increase is attributable to positive cash flows from
operations. Net cash provided by operating activities amounted to $83.0 million
and $82.7 million for the three months ended December 31, 2004 and 2003,
respectively. We currently intend to retain our future operating cash flows to
support the further expansion of our business, including investments related to
Managed Services projects and acquisitions. We may also use a portion of our
cash balances for future repurchases of our outstanding shares, as described
below.
Our policy is to retain substantial cash balances in order to support the
growth of the Company. We believe that our current cash balances, cash generated
from operations and our current lines of credit will provide sufficient
resources to meet our liquidity needs for at least the next fiscal year.
23
As of December 31, 2004, $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. No share repurchases under this
program were made in the three months ended December 31, 2004.
As of December 31, 2004, 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 December 31, 2004 we had outstanding
letters of credit and bank guarantees from various banks totaling $14.4 million.
As of December 31, 2004, we had outstanding long-term obligations of $18.1
million in connection with leasing arrangements.
We have contractual obligations for our convertible notes, financing
arrangements, capital leases and non-cancelable operating leases that were
summarized in a table of contractual obligations in our Annual Report on Form
20-F for the year ended September 30, 2004. Since September 30, 2004, there have
been no material changes in contractual obligations outside the ordinary course
of our business.
Our capital expenditures were approximately $15.7 million in the three
months ended December 31, 2004. Approximately 85% 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 three months ended December 31, 2004, 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.
24
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 December 31, 2004 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
(A) (B) (C) (D)
TOTAL NUMBER OF
SHARES (OR
UNITS) MAXIMUM NUMBER (OR
PURCHASED AS APPROXIMATE DOLLAR
TOTAL AVERAGE PART OF VALUE) OF SHARES (OR
NUMBER OF PRICE PAID PUBLICLY UNITS) THAT MAY YET BE
SHARES (OR PER SHARE ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD UNITS) PURCHASED (OR UNIT) OR PROGRAMS PLANS OR PROGRAMS (1) (2)
------ ---------------- --------- ----------- -------------------------
10/01/04-10/31/04 -- $-- -- 10,100 and $100 million
11/01/04-11/30/04 -- -- -- $100 million
12/01/04-12/31/04 -- -- -- $100 million
---------------- --------------
Total -- -- $100 million
================ ==============
(1) On November 5, 2003, the Company announced that its board of
directors had authorized a share repurchase program of up to five
million ordinary shares during fiscal 2004. As of September 30,
2004, 10,100 shares were available for repurchase pursuant to the
board authorization for this program. This program expired in
November 2004. No share repurchases under this program were made in
the three months ended December 31, 2004.
(2) On December 20, 2004, the Company announced that its Board of
Directors had extended the 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. No share repurchases under this
program were made in the three months ended December 31, 2004.
Convertible Notes
(A) (B) (C) (D)
AVERAGE PRICE TOTAL NUMBER OF MAXIMUM NUMBER (OR
PAID PER PRINCIPAL AMOUNT OF APPROXIMATE DOLLAR
$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 PURCHASED UNDER THE
PERIOD PURCHASED NOTES OR PROGRAMS PLANS OR PROGRAMS (1)
------ --------- ----- ----------- ---------------------
10/01/04-10/31/04 $-- $ -- $-- $272,000
11/01/04-11/30/04 -- -- -- 272,000
12/01/04-12/31/04 -- -- -- 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.
25
ITEM 2. REPORTS ON FORM 6-K
(a) Reports on Form 6-K
The Company filed the following reports on Form 6-K during the three
months ended December 31, 2004:
(1) Form 6-K dated October 1, 2004.
(2) Form 6-K dated November 4, 2004.
(3) Form 6-K dated December 20, 2004.
(4) Form 6-K dated December 21, 2004.
26
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 14, 2005