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 March 31, 2006
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-___
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 1. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
Item 2. Reports on Form 6-K
SIGNATURES
This report on Form 6-K shall be incorporated by reference into the Registration
Statements on Form F-3 (File Nos. 333-114079 and 333-114344) and any other
Registration Statement filed by the Registrant that by its terms automatically
incorporates the Registrant's filings and submissions with the SEC under
Sections 13(a), 13(c) or 15(d) of the Securities Exchange Act of 1934.
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars, unless otherwise stated)
(in thousands, except per share data)
AS OF
---------------------------
MARCH 31, SEPTEMBER 30,
2006 2005
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 545,021 $ 707,552
Short-term interest-bearing investments 808,025 438,011
Accounts receivable, net 349,744 304,237
Deferred income taxes and taxes receivable 80,889 101,162
Prepaid expenses and other current assets 78,538 76,780
---------- ----------
Total current assets 1,862,217 1,627,742
Equipment, vehicles and leasehold improvements, net 159,891 181,812
Deferred income taxes 142,319 120,217
Goodwill 968,185 969,639
Intangible assets, net 143,567 159,619
Other noncurrent assets 145,912 143,439
---------- ----------
Total assets $3,422,091 $3,202,468
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 85,434 $ 114,392
Accrued expenses and other current liabilities 206,529 199,458
Accrued personnel costs 126,254 148,426
Short-term portion of financing arrangements 1,976 8,480
Deferred revenue 245,689 216,770
Deferred income taxes and taxes payable 179,093 171,377
---------- ----------
Total current liabilities 844,975 858,903
0.50% convertible notes 450,000 450,000
Deferred income taxes 53,514 50,571
Noncurrent liabilities and other 175,384 186,542
---------- ----------
Total liabilities 1,523,873 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;
231,294 and 227,321 issued and 204,155 and 200,182
outstanding, respectively 3,714 3,644
Additional paid-in capital 1,950,659 1,870,922
Treasury stock, at cost - 27,139 shares (602,392) (602,392)
Accumulated other comprehensive loss (6,985) (10,886)
Unearned compensation -- (962)
Retained earnings 553,222 396,126
---------- ----------
Total shareholders' equity 1,898,218 1,656,452
---------- ----------
Total liabilities and shareholders' equity $3,422,091 $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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ---------------------
2006(1) 2005 2006(2) 2005
-------- -------- ---------- --------
Revenue:
License $ 30,291 $ 27,344 $ 61,952 $ 47,710
Service 570,838 461,072 1,126,205 910,238
-------- -------- ---------- --------
601,129 488,416 1,188,157 957,948
-------- -------- ---------- --------
Operating expenses:
Cost of license 916 998 1,978 2,153
Cost of service 388,333 310,291 762,384 605,238
Research and development 41,823 33,263 84,937 66,174
Selling, general and administrative 73,799 54,592 152,349 109,552
Amortization of purchased intangible
assets 7,469 2,079 15,041 5,797
-------- -------- ---------- --------
512,340 401,223 1,016,689 788,914
-------- -------- ---------- --------
Operating income 88,789 87,193 171,468 169,034
Interest income and other, net 10,307 5,680 18,721 10,639
-------- -------- ---------- --------
Income before income taxes 99,096 92,873 190,189 179,673
Income taxes 17,334 18,576 33,093 35,933
-------- -------- ---------- --------
Net income $ 81,762 $ 74,297 $ 157,096 $143,740
======== ======== ========== ========
Basic earnings per share $ 0.40 $ 0.37 $ 0.78 $ 0.71
======== ======== ========== ========
Diluted earnings per share $ 0.38 $ 0.34 $ 0.74 $ 0.67
======== ======== ========== ========
Basic weighted average number of shares
outstanding 202,515 202,168 201,509 201,933
======== ======== ========== ========
Diluted weighted average number of shares
outstanding 217,919 218,807 216,394 218,127
======== ======== ========== ========
(1) The second quarter of fiscal 2006 includes equity-based compensation
pre-tax expense of $9,940, which was classified as follows: $3,717 to cost
of service, $720 to research and development and $5,503 to selling, general
and administrative.
(2) The first half of fiscal 2006 includes equity-based compensation pre-tax
expense of $21,000, which was classified as follows: $8,072 to cost of
service, $1,809 to research and development and $11,119 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)
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, 2005 200,182 $3,644 $1,870,922 $(602,392) $(10,886) $(962) $396,126 $1,656,452
Comprehensive income:
Net income -- -- -- -- -- -- 157,096 157,096
Unrealized gain on
foreign currency
hedging contracts,
net of $(1,190) tax
benefit -- -- -- -- 4,158 -- -- 4,158
Unrealized loss on
short-term
interest-bearing
investments, net of
$2 tax benefit -- -- -- -- (257) -- -- (257)
----------
Comprehensive income -- -- -- -- -- -- -- 160,997
----------
Employee stock options
exercised 3,530 62 56,260 -- -- -- -- 56,322
Issuance of restricted
stock 443 8 -- -- -- -- -- 8
Tax benefit of stock
options exercised -- -- 3,398 -- -- -- -- 3,398
Stock-based compensation
expense related to
employees -- -- 21,000 -- -- -- -- 21,000
Stock-based compensation
expense related to non
employee stock options -- -- 41 -- -- -- -- 41
Reclassification of
unearned compensation
to additional paid in
capital -- -- (962) -- -- 962 -- --
------- ------ ---------- --------- -------- ----- -------- ----------
BALANCE AS OF MARCH 31, 2006 204,155 $3,714 $1,950,659 $(602,392) $ (6,985) $ -- $553,222 $1,898,218
======= ====== ========== ========= ======== ===== ======== ==========
As of March 31, 2006 and September 30, 2005, accumulated other comprehensive
loss is comprised of unrealized loss on foreign currency hedging contracts, net
of tax, of $(4,939) and $(9,097), respectively, and unrealized loss on
short-term interest-bearing investments, net of tax, of $(2,046) 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)
SIX MONTHS
ENDED MARCH 31,
---------------------
2006 2005
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 157,096 $ 143,740
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 54,131 43,245
Loss (gain) on sale of equipment 864 (549)
Stock-based compensation expense 21,000 --
Deferred income taxes 10,425 14,289
Excess tax benefit from stock based compensation (1,595) --
Tax benefit from stock options exercised -- 1,358
Realized gain from short-term interest-bearing
investments (3,781) (794)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (45,364) (5,617)
Prepaid expenses and other current assets 456 4,408
Other noncurrent assets (2,813) (12,318)
Accounts payable and accrued expenses (29,202) (45,197)
Deferred revenue 16,185 49,686
Income taxes payable 2,042 (16,241)
Noncurrent liabilities and other 1,987 501
--------- ---------
Net cash provided by operating activities 181,431 176,511
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 3,525 2,510
Payments for purchase of equipment, vehicles and
leasehold improvements (27,106) (36,140)
Proceeds from sale of short-term interest-bearing
investments 524,178 321,098
Purchase of short-term interest-bearing investments (890,670) (467,846)
Net cash paid for acquisitions (1,858) (18)
--------- ---------
Net cash used in investing activities (391,931) (180,396)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised and
issuance of restricted stock 54,178 10,370
Excess tax benefit from stock based compensation 1,595 --
Principal payments under financing arrangements and
other (4,677) (619)
Principal payments on capital lease obligations (3,127) (9,518)
--------- ---------
Net cash provided by financing activities 47,969 233
--------- ---------
Net decrease in cash and cash equivalents (162,531) (3,652)
Cash and cash equivalents at beginning of period 707,552 550,352
--------- ---------
Cash and cash equivalents at end of period $ 545,021 $ 546,700
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 18,490 $ 36,558
Interest 1,882 3,090
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 (
"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
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 three and six
months ended March 31, 2006 include (a) compensation costs for all share based
payments granted prior to, but that had 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 for the three and six months ended March 31, 2006
(not including restricted stock expense) was $8,681 and $19,104 lower,
respectively, than if it had continued to account for share based compensation
under APB No. 25. Net income for the three and six months ended March 31, 2006
(not including restricted stock expense) was $7,720 and $16,821 lower,
respectively, than if it had continued to account for share based compensation
under APB No. 25. Basic earnings per share for the three and six months ended
March 31, 2006 would have been $0.44 and $0.86, respectively, if the Company had
not adopted SFAS 123(R), compared to reported basic earnings per share of $0.40
and $0.78, respectively. Diluted earnings per share for the three and six months
ended March 31, 2006 would have been $0.41 and $0.81, respectively, if the
Company had not adopted SFAS 123(R), compared to reported diluted earnings per
share of $0.38 and $0.74, respectively. The total income tax benefit recognized
in the income statement for share based compensation (including restricted
stock) for the three and six months ended March 31, 2006 was $1,131 and $2,534,
respectively and $0 for the three and six months ended March 31, 2005.
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 $1,595
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
three and six months ended March 31, 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
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
-------------------------
MARCH 31, SEPTEMBER 30,
2006 2005
--------- -------------
Accounts receivable - billed $314,323 $282,151
Accounts receivable - unbilled 42,572 28,994
Less - allowances (7,151) (6,908)
-------- --------
Accounts receivable, net $349,744 $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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
2006 2005 2006 2005
------- ------- -------- --------
Net income $81,762 $74,297 $157,096 $143,740
Other comprehensive income (loss):
Unrealized gain (loss) on
foreign currency hedging
contracts, net of tax 1,505 (1,352) 4,158 (851)
Unrealized loss on short-term
interest-bearing investments,
net of tax (307) (1,137) (257) (1,821)
------- ------- -------- --------
Comprehensive income $82,960 $71,808 $160,997 $141,068
======= ======= ======== ========
5. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
Current $12,500 $ 1,754 $22,432 $21,644
Deferred 4,834 16,822 10,661 14,289
------- ------- ------- -------
$17,334 $18,576 $33,093 $35,933
======= ======= ======= =======
8
The effective income tax rate varied from the statutory Guernsey tax rate
as follows for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 18 20 18 20
--- --- --- ---
Income tax rate before effect of 18 20 18 20
acquisition-related costs, and
stock-based compensation expense
Effect of acquisition-related costs (1) -- (1) --
and stock base compensation expense
--- --- --- ---
17% 20% 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 March 31, 2006, deferred tax assets of $15,478, 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 the 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
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Numerator:
Numerator for basic earnings per share $ 81,762 $ 74,297 $157,096 $143,740
Effect of assumed conversion of 0.50%
convertible notes 979 983 1,979 1,967
-------- -------- -------- --------
Numerator for diluted earnings per share $ 82,741 $ 75,280 $159,075 $145,707
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share- weighted average number of
shares outstanding 202,515 202,168 201,509 201,933
Effect of assumed conversion of 0.50%
convertible notes 10,436 10,436 10,436 10,436
Effect of dilutive stock options granted 4,856 6,203 4,373 5,758
Effect of restricted stock issued 112 -- 76 --
-------- -------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 217,919 218,807 216,394 218,127
======== ======== ======== ========
Basic earnings per share $ 0.40 $ 0.37 $ 0.78 $ 0.71
======== ======== ======== ========
Diluted earnings per share $ 0.38 $ 0.34 $ 0.74 $ 0.67
======== ======== ======== ========
The effect of the 2% Convertible Notes due June 1, 2008 issued by the
Company in May 2001 (the "2% Notes") on diluted earnings per share was
anti-dilutive for the three and six months ended March 31, 2006 and 2005, and
therefore, was not included in the above calculation. As of March 31, 2006 and
2005, the outstanding principal amount of the 2% Notes was $272.
10
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 cable and satellite companies, or the Broadband Industry. The purchase
price for DST Innovis was approximately $237,461, which included $3,150 of
transaction costs.
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. 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 (4,513) (131) (418) (5,062)
------- ------ ----- -------
Balance as of March 31, 2006 $ 427 $6,972 $ 255 $ 7,654
======= ====== ===== =======
Set forth below is the unaudited pro forma revenue, operating income, net
income and per share figures for the three and six months ended March 31, 2005
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 SIX MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2005
------------------ ----------------
Revenue $546,360 $1,069,812
Operating income 85,132 157,089
Net income 71,411 131,839
Basic earnings per share 0.35 0.65
Diluted earnings per share 0.33 0.61
11
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. 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.
QPASS INC.
On April 17, 2006, the Company signed an agreement to acquire Qpass Inc.,
("Qpass"), a leading provider of digital commerce software and solutions.
Pursuant to the agreement the Company will acquire all of Qpass' shares of
capital stock for approximately $275,000 in cash. The Company expects to
complete this acquisition during the third quarter of fiscal 2006, subject to
regulatory approvals and other conditions customary to such transactions. The
Company expects that this acquisition will allow it to support service providers
and media companies seeking to launch and monetize digital content.
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 $5,379 of the total charge had been paid in cash as of March 31,
2006. The remaining separation costs are expected to be paid out during fiscal
2006.
The restructuring accrual for this cost reduction program is comprised of
the following as of March 31, 2006:
EMPLOYEE SEPARATION
COSTS
-------------------
Balance as of October 1, 2005 $ 7,002
Cash payments (4,246)
Adjustments (568)
-------
Balance as of March 31, 2006 $ 2,188
=======
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 for these cost reduction programs is comprised of
the following as of March 31, 2006:
FACILITIES
----------
Balance as of October 1, 2005 $ 6,667
Cash payments (1,338)
-------
Balance as of March 31, 2006 (1) $ 5,329
=======
(1) The remainder of the accrual is expected to be paid out through August
2008.
12
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
March 31, 2006 and 2005, were as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
------------------- -------- --------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 776 $103 $ 548 $ 66
Interest on benefit obligations 965 167 836 120
Expected return on plan assets (803) -- (683) --
Actuarial loss 155 111 -- --
------ ---- ----- ----
$1,093 $381 $ 701 $186
====== ==== ===== ====
The net periodic benefit costs under these plans for the six months ended
March 31, 2006 and 2005, were as follows:
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
------------------- -------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 1,545 $205 $ 1,095 $132
Interest on benefit obligations 1,921 333 1,673 241
Expected return on plan assets (1,599) -- (1,369) --
Actuarial loss 155 111 -- --
------- ---- ------- ----
$ 2,022 $649 $ 1,399 $373
======= ==== ======= ====
In the six months ended March 31, 2006, the Company made contributions of
$1,413 to the pension plan and $92 for other benefits. The Company expects to
make contributions for the fiscal year ending September 30, 2006 of
approximately $2,800 to the pension plan and $200 for other benefits.
13
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, employees, officers,
directors, 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 may be 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 six months period
ended March 31, 2006:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF EXERCISE CONTRACTUAL
OPTIONS PRICE TERM
--------- -------- -----------
Outstanding as of October 1, 2005 25,807 $26.91
Granted 2,983 29.31
Exercised (3,530) 15.98
Forfeited (1,371) 33.98
------
Outstanding as of March 31, 2006 23,889 $28.41 6.69
====== ====== ====
Exercisable on March 31, 2006 13,794 $32.42 5.42
====== ====== ====
The weighted average grant date fair value of stock options granted during
the three months ended March 31, 2006 and 2005 was $10.39 and $13.67,
respectively. The weighted average grant date fair value of stock options
granted during the six months ended March 31, 2006 and 2005 was $9.96 and
$12.58, respectively. The total intrinsic value of options exercised during the
three months ended March 31, 2006 and 2005 was $38,245 and $5,157, respectively,
and during the six months ended March 31, 2006 was $54,881 and $17,318,
respectively. The aggregate intrinsic value of outstanding and exercisable stock
options as of March 31, 2006 was $247,984 and $115,627, respectively.
14
The following table summarizes information relating to awards of restricted
nonvested shares, as well as changes to such awards during the six month period
ended on March 31, 2006:
WEIGHTED
NUMBER OF AVERAGE GRANT
SHARES DATE FAIR VALUE
--------- ---------------
Outstanding as of October 1, 2005 134 $26.43
Granted 443 29.14
Vested (76) 26.43
Forfeited -- --
--- ------
Outstanding as of March 31, 2006 501 $28.83
=== ======
As of March 31, 2006, there was $58,652 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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2006 2005 2006 2005
------ ------ ----- ------
Risk-free interest rate (1) 4.50% 3.66% 4.47% 3.33%
Expected life of stock options (2) 4.50 4.30 4.50 4.50
Expected volatility (3) 0.30 0.616 0.331 0.636
Expected dividend yield (4) None None None None
Fair value per option $10.39 $13.67 $9.96 $12.58
(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 three and six months ended March 31, 2006 is
based on implied volatility of the Company's traded options. For the three
and six months ended March 31, 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.
15
The following table sets forth the pro forma effect of applying SFAS 123 on
net income and earnings per share for three and six months ended March 31, 2005:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2005 2005
------------------ ----------------
Net income, as reported $74,297 $143,740
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 92 150
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (9,723) (17,263)
======= ========
Pro forma net income $64,666 $126,627
======= ========
Basic earnings per share:
As reported $ 0.37 $ 0.71
======= ========
Pro forma $ 0.32 $ 0.63
======= ========
Diluted earnings per share:
As reported $ 0.34 $ 0.67
======= ========
Pro forma $ 0.30 $ 0.59
======= ========
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.
The Company generally sells its ClarifyCRM products with a limited warranty
for a period of 90 days. The Company's policy is to accrue for warranty costs,
if needed, based on historical trends in product failure. Based on the Company's
experience, only minimal warranty services have been required and, as a result,
the Company did not accrue any amounts for product warranty liability during the
six months ended March 31, 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.
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 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 three and six months ended March 31,
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 three and six months ended March 31,
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 three and six
months ended March 31, 2006 and 2005. You should read this section in
conjunction with our consolidated financial statements.
17
OVERVIEW OF BUSINESS AND TREND INFORMATION
We combine software and services with business knowledge to accelerate the
adoption of integrated customer management (ICM) strategy 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
cable and satellite companies, which we refer to as the Broadband Industry, as a
result of our 2005 acquisition of DST Innovis, Inc. and DST Interactive, Inc.,
which we refer to together as DST Innovis. This acquisition not only enlarges
our customer base, but also allows us to offer a broader set of solutions to
customers in the Broadband Industry, which is continuing to converge with the
telecommunications 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, (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 our 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,
broadband 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. In 2005, 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. For example, on
April 17, 2006, we signed an agreement to acquire Qpass Inc., a leading provider
of digital commerce software and solutions. Pursuant to the agreement we will
acquire all of Qpass' shares of capital stock for approximately $275 million in
cash. We expect to complete this acquisition during the third quarter of fiscal
2006, subject to regulatory approvals and other conditions customary to such
transactions. We expect that this acquisition will allow us to support service
providers and media companies seeking to launch and monetize digital content.
18
Industry consolidation and convergence continue, and competition among
service providers is intense. Therefore, we believe the need for differentiation
among service providers is growing. Service providers must have systems that
enhance their interactions with their customers and support the rapid
introduction of new services. This requires an integrated customer management,
or ICM, strategy and systems that can support the full customer lifecycle. We
provide a broad portfolio of integrated, modular products, with proven
functionality and scalability, accompanied by a comprehensive range of business
consulting, system implementation and integration services. We believe we are
uniquely positioned to enable service providers to rapidly introduce new
offerings, lower total cost of ownership and focus on their customers. We
believe that the demand for ICM and our ability to address this demand will
continue to drive our growth in 2006 and beyond.
We believe that demand for our ICM-Enabling Systems is driven by, among
other key factors:
- Service providers' need to focus on their customers in order to build
profitable customer relationships,
- 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, 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 launch and support such bundles, 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
19
- recurring revenue from ongoing support and maintenance provided to our
customers, and from incremental license fees resulting from increases
in a customer's business volume.
Revenue is recognized only when all of the following conditions have been
met: (i) there is persuasive evidence of an arrangement; (ii) delivery has
occurred; (iii) the fee is fixed and determinable; and (iv) collectability of
the fee is reasonably assured. We usually sell our software licenses as part of
an overall solution offered to a customer that combines the sale of software
licenses with a broad range of services, which normally include significant
customization, modification, implementation and integration. As a result, we
generally recognize combined license and service revenue over the course of
these long-term projects, using the percentage of completion method of
accounting. Initial license fee revenue is recognized as work is performed,
using the percentage of completion method of accounting. Subsequent license fee
revenue is recognized upon completion of specified conditions in each contract,
based on a customer's subscriber or transaction volume or other measurements
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 six months ended March 31, 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.
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 three and six months ended March 31, 2006 was $9.9 million
20
and $21.0 million. Stock-based compensation expense recognized under APB No. 25
for the three and six months ended March 31, 2005 was not material.
As of March 31, 2006, there was $58.7 million 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.
We adopted SFAS 123(R) using the modified prospective method. Under this
transition method, compensation costs recognized in the three and six months
ended March 31, 2006 include (a) compensation costs for all share based payments
granted prior to, but that had 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 adopting SFAS 123(R) on October 1, 2005, our income before
income taxes for the three and six months ended March 31, 2006 (not including
restricted stock expense) was $8.7 million and $19.1 million lower,
respectively, than if we had continued to account for share based compensation
under APB No. 25. Net income for the three and six months ended March 31, 2006
(not including restricted stock expense) was $7.7 million and $16.8 million
lower, respectively, than if we had continued to account for share based
compensation under APB No. 25. Basic earnings per share for the three and six
months ended March 31, 2006 would have been $0.44 and $0.86, respectively, if we
had not adopted SFAS 123(R), compared to reported basic earnings per share of
$0.40 and $0.78, respectively. Diluted earnings per share for the three and six
months ended March 31, 2006 would have been $0.41 and $0.81, respectively, if we
had not adopted SFAS 123(R), compared to reported diluted earnings per share of
$0.38 and $0.74, 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 $1.6 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 three and six months ended on March 31, 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.
21
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended March 31,
2006 and 2005 certain items in our consolidated statements of income reflected
as a percentage of total revenue:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2006 2005 2006 2005
----- ----- ----- -----
Revenue:
License ............................... 5.0% 5.6% 5.2% 5.0%
Service ............................... 95.0 94.4 94.8 95.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license ....................... 0.1 0.2 0.2 0.2
Cost of service ....................... 64.6 63.5 64.2 63.2
Research and development .............. 7.0 6.8 7.1 6.9
Selling, general and
administrative ..................... 12.3 11.2 12.8 11.4
Amortization of purchased intangible
assets ............................. 1.2 0.4 1.3 0.6
----- ----- ----- -----
85.2 82.1 85.6 82.3
----- ----- ----- -----
Operating income ......................... 14.8 17.9 14.4 17.7
Interest income and other, net ........... 1.7 1.1 1.6 1.1
----- ----- ----- -----
Income before income taxes ............... 16.5 19.0 16.0 18.8
Income taxes ............................. 2.9 3.8 2.8 3.8
----- ----- ----- -----
Net income ............................... 13.6% 15.2% 13.2% 15.0%
===== ===== ===== =====
22
SIX MONTHS ENDED MARCH 31, 2006 AND 2005
The following is a tabular presentation of our results of operations for
the six months ended March 31, 2006 compared to the six months ended March 31,
2005. Following the table is a discussion and analysis of our business and
results of operations for the mentioned periods.
SIX MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
--------------------- -------------------
2006 2005 AMOUNT %
---------- -------- -------- -----
(in thousands)
Revenue:
License ...................... $ 61,952 $ 47,710 $ 14,242 29.9%
Service ...................... 1,126,205 910,238 215,967 23.7
---------- -------- --------
1,188,157 957,948 230,209 24.0
---------- -------- --------
Operating expenses:
Cost of license .............. 1,978 2,153 (175) (8.1)
Cost of service .............. 762,384 605,238 157,146 26.0
Research and development ..... 84,937 66,174 18,763 28.4
Selling, general and
administrative ............ 152,349 109,552 42,797 39.1
Amortization of purchased
intangible assets ......... 15,041 5,797 9,244 159.5
---------- -------- --------
1,016,689 788,914 227,775 28.9
---------- -------- --------
Operating income ................ 171,468 169,034 2,434 1.4
Interest income and other, net 18,721 10,639 8,082 76.0
---------- -------- --------
Income before income taxes ...... 190,189 179,673 10,516 5.9
Income taxes .................... 33,093 35,933 (2,840) (7.9)
---------- -------- --------
Net income ...................... $ 157,096 $143,740 $ 13,356 9.3%
========== ======== ========
REVENUE. Total revenue increased by $230.2 million, or 24.0%, in the six
months ended March 31, 2006 to $1,188.2 million from $958.0 million in the six
months ended March 31, 2005. Approximately $116.5 million of the increase was
attributable to revenue contributed by DST Innovis, and the remainder was
primarily attributable to projects for Tier 1 and Tier 2 customers.
License and service revenue attributable to the sale of ICM-Enabling
Systems was $1,050.7 million in the six months ended March 31, 2006, an increase
of $218.4 million, or 26.2%, over the six months ended March 31, 2005.
Approximately $116.5 million of the increase was attributable to revenue
contributed by DST Innovis, and the remainder was primarily attributable to
projects for Tier 1 and Tier 2 customers. License and service revenue resulted
from the sale of ICM-Enabling Systems represented 88.4% and 86.9% of our total
revenue in the six months ended March 31, 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 six months ended March 31,
2006, we observed strong demand for our offerings.
License and service revenue resulted from the sale of Directory Systems was
$137.5 million in the six months ended March 31, 2006, an increase of $11.8
million, or 9.4%, over the six months ended March 31, 2005. Approximately 86% of
the increase in Directory Systems revenue in the six months ended March 31, 2006
was attributable to an increase in business related to Managed Services
customers, and the remainder was primarily attributable to projects for Tier 1
and Tier 2 customers. License and service revenue from the
23
sale of Directory Systems represented 11.6% and 13.1% of our total revenue in
the six months ended March 31, 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 increase
in fiscal 2006.
In the six months ended March 31, 2006, revenue from customers in North
America, Europe and the rest of the world accounted for 71.4%, 20.2% and 8.4%,
respectively, of total revenue compared to 66.4%, 24.9% and 8.7%, respectively,
in the six months ended March 31, 2005. Approximately 52.5% of the increase in
revenue from customers in North America was attributable to revenues contributed
by DST Innovis, and the remainder was primarily attributable to projects for
Tier 1 and Tier 2 customers. Revenue from customers in Europe in the six months
ended March 31, 2006, in absolute amounts, was relatively stable compared to the
six months ended March 31, 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 six months ended
March 31, 2006, but the increase was less than the 24.0% 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 six months ended March 31, 2006, cost of license as a percentage of
license revenue was 3.2%, compared to 4.5% in the six months ended March 31,
2005.
COST OF SERVICE. The increase in cost of service in the six months ended
March 31, 2006 was 26.0%, which is greater than the increase in our total
revenue in the six months ended March 31, 2006. As a percentage of revenue, cost
of service was 64.2% in the six months ended March 31, 2006, compared to 63.2%
in the six months ended March 31, 2005. Cost of service in the six months ended
March 31, 2006 includes the effect of $8.1 million of stock-based compensation
expense . Stock-based compensation expense in the six months ended March 31,
2005 was insignificant. 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
$18.7 million, or 28.4%, in the six months ended March 31, 2006 to $84.9 million
from $66.2 million in the six months ended March 31, 2005. Research and
development expense increased as a percentage of revenue from 6.9% in the six
months ended March 31, 2005 to 7.1% in the six months ended March 31, 2006. The
increase in research and development expense 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
offset by cost savings. Research and development expense in the six months ended
March 31, 2006 includes the effect of $1.8 million of stock-based compensation
expense. Stock-based compensation expense in the six months ended March 31, 2005
was insignificant. 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 $42.8 million, or 39.1%, in the six months ended March 31,
2006 to $152.3 million, from $109.5 million in the six months ended March 31,
2005. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense in the six months ended March 31, 2006 was attributable to an overall
increase in our operations, as well as to the inclusion of $11.1 million of
stock-based compensation expense. Stock-based compensation expense in the six
months ended March 31, 2005 was insignificant.
24
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the six months ended March 31, 2006 was $15.0 million,
compared to $5.8 million in the six months ended March 31, 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 $2.4 million, or
1.4%, in the six months ended March 31, 2006, to $171.5 million, or 14.4% of
revenue, from $169.0 million, or 17.7% of revenue, in the six months ended March
31, 2005. The decrease in operating income as a percentage of revenue was
attributable to a 28.9% increase in operating expense which grew at a greater
rate than the 24.0% increase in revenue during the six months ended March 31,
2006. Stock-based compensation expense included in operating expense for the six
months ended March 31, 2006 was $21.0 million or 1.8% of revenue.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased by
$8.1 million in the six months ended March 31, 2006 to $18.7 million from $10.6
million in the six months ended March 31, 2005. The increase in interest income
and other, net, is primarily attributable to the increase in market interest
rates on our cash and short-term interest-bearing investments.
INCOME TAXES. Income taxes for the six months ended March 31, 2006 were
$33.1 million on pretax income of $190.2 million, resulting in an effective tax
rate of 17% compared to 20% in the six months ended March 31, 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 net 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 $157.1 million in the six months ended March 31,
2006, compared to net income of $143.7 million in the six months ended March 31,
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 $0.07,
or 10.4%, in the six months ended March 31, 2006 to $0.74 from $0.67 in the six
months ended March 31, 2005.
25
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
The following is a tabular presentation of our results of operations for
the three months ended March 31, 2006 compared to the three months ended March
31, 2005. Following the table is a discussion and analysis of our business and
results of operations for such periods.
THREE MONTHS ENDED INCREASE
MARCH 31, (DECREASE)
------------------- ----------------
2006 2005 AMOUNT %
-------- -------- -------- -----
(in thousands)
Revenue:
License ...................... $ 30,291 $ 27,344 $ 2,947 10.8%
Service ...................... 570,838 461,072 109,766 23.8
-------- -------- --------
601,129 488,416 112,713 23.1
-------- -------- --------
Operating expenses:
Cost of license .............. 916 998 (82) (8.2)
Cost of service .............. 388,333 310,291 78,042 25.2
Research and development ..... 41,823 33,263 8,560 25.7
Selling, general and
administrative ............ 73,799 54,592 19,207 35.2
Amortization of purchased
intangible assets ......... 7,469 2,079 5,390 259.3
-------- -------- --------
512,340 401,223 111,117 27.7
-------- -------- --------
Operating income ................ 88,789 87,193 1,596 1.8
Interest income and other, net .. 10,307 5,680 4,627 81.5
-------- -------- --------
Income before income taxes ...... 99,096 92,873 6,223 6.7
Income taxes .................... 17,334 18,576 (1,242) (6.7)
-------- -------- --------
Net income ...................... $ 81,762 $ 74,297 $ 7,465 10.0
======== ======== ========
REVENUE. Total revenue increased by $112.7 million, or 23.1%, in the three
months ended March 31, 2006 to $601.1 million from $488.4 million in the three
months ended March 31, 2005. Approximately $59.3 million of the increase was
attributable to revenue contributed by DST Innovis, and the remainder was
primarily attributable to projects for Tier 1 and Tier 2 customers.
License and service revenue attributable to the sale of ICM-Enabling
Systems was $531.8 million in the three months ended March 31, 2006, an increase
of $107.0 million, or 25.2%, over the three months ended March 31, 2005.
Approximately $59.3 million of the increase was attributable to revenue
contributed by DST Innovis, and the remainder was primarily attributable to
projects for Tier 1 and Tier 2 customers. License and service revenue resulted
from the sale of ICM-Enabling Systems represented 88.5% and 87.0% of our total
revenue in the three months ended March 31, 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 three months ended March
31, 2006, we observed strong demand for our offerings.
License and service revenue resulted from the sale of Directory Systems was
$69.3 million in the three months ended March 31, 2006, an increase of $5.6
million, or 8.9%, over the three months ended March 31, 2005. Approximately
45.6% of the increase in Directory Systems revenue in the three months ended
March 31, 2006 was attributable to an increase in business related to Managed
Services customers, and the
26
remainder was primarily attributable to projects for Tier 1 and Tier 2
customers. License and service revenue from the sale of Directory Systems
represented 11.5% and 13.0% of our total revenue in the three months ended March
31, 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 increase in fiscal 2006.
In the three months ended March 31, 2006, revenue from customers in North
America, Europe and the rest of the world accounted for 69.8%, 22.0% and 8.2%,
respectively, of total revenue compared to 64.9%, 26.3% and 8.8%, respectively,
in the three months ended March 31, 2005. Approximately 55.9% of the increase in
revenue from customers in North America was attributable to revenues contributed
by DST Innovis, and the remainder was primarily attributable to projects for
Tier 1 and Tier 2 customers. Revenue from customers in Europe in the three
months ended March 31, 2006, in absolute amounts, was relatively stable compared
to the three months ended March 31, 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 three
months ended March 31, 2006, but the increase was less than the 23.1% 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 three months ended March 31, 2006, cost of license as a percentage of
license revenue was 3.0% compared to 3.6% in the three months ended March 31,
2005.
COST OF SERVICE. The increase in cost of service in the three months ended
March 31, 2006 was 25.2%, which is greater than the increase in our total
revenue in the three months ended March 31, 2006. As a percentage of revenue,
cost of service was 64.6% in the three months ended March 31, 2006, compared to
63.5% in the three months ended March 31, 2005. Cost of service in the three
months ended March 31, 2006 includes the effect of $3.7 million of stock-based
compensation expense. Stock-based compensation expense in the three months ended
March 31, 2005 was insignificant. 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
$8.6 million, or 25.7%, in the three months ended March 31, 2006 to $41.8
million from $33.2 million in the three months ended March 31, 2005. Research
and development expense increased as a percentage of revenue from 6.8% in the
three months ended March 31, 2005 to 7.0% in the three months ended March 31,
2006. The increase in research and development expense 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 offset by cost savings. Research and development expense in the three
months ended March 31, 2006 includes the effect of $0.7 million of stock-based
compensation expense. Stock-based compensation expense in the three months ended
March 31, 2005 was insignificant. 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 $19.2 million, or 35.2%, in the three months ended March
31, 2006 to $73.8 million, from $54.6 million in the three months ended March
31, 2005. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense in the three months ended March 31, 2006 was attributable to an overall
increase in our operations, as well as to the inclusion of $5.5 million of
stock-based compensation expense. Stock-based compensation expense in the three
months ended March 31, 2005 was insignificant.
27
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended March 31, 2006 was $7.5 million,
compared to $2.1 million in the three months ended March 31, 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 $1.6 million, or
1.8%, in the three months ended March 31, 2006, to $88.8 million, or 14.8% of
revenue, from $87.2 million, or 17.9% of revenue, in the three months ended
March 31, 2005. The decrease in operating income as a percentage of revenue was
attributable to a 27.7% increase in operating expense which grew at a greater
rate than the 23.1% increase in revenue during the three months ended March 31,
2006. Stock-based compensation expense included in operating expense for the
three months ended March 31, 2006 was $9.9 million or 1.7% of revenue.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased by
$4.6 million in the three months ended March 31, 2006 to $10.3 million from $5.7
million in the three months ended March 31, 2005. The increase in interest
income and other, net, is primarily attributable to the increase in market
interest rates on our cash and short-term interest-bearing investments.
INCOME TAXES. Income taxes for the three months ended March 31, 2006 were
$17.3 million on pretax income of $99.1 million, resulting in an effective tax
rate of 17% compared to 20% in the three months ended March 31, 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 net 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 $81.8 million in the three months ended March
31, 2006, compared to net income of $74.3 million in the three months ended
March 31, 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 11.8%, in the three months ended March 31, 2006 to $0.38 from $0.34 in the
three months ended March 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,353.0 million as of March 31, 2006, compared to $1,145.6 million as of
September 30, 2005. The increase is mainly attributable to positive cash flows
from operations of $181.4 million, proceeds from employee stock options
exercised and issuance of restricted stock of $54.2 million, partially offset by
$27.1 million of capital expenditures. Net cash provided by operating activities
amounted to $181.4 million and $176.5 million for the six months ended March 31,
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 March 31, 2006, $450.0 million and $0.3 million aggregate principal
amount of our 0.50% Notes and 2% Notes were outstanding, respectively. As of
March 31, 2006, we had available short-term general revolving lines of credit
totaling $31.0 million, none of which was outstanding, and outstanding letters
of credit and bank guarantees from various banks totaling $9.8 million. As of
March 31, 2006, we had outstanding a short term loan of $1.7 million secured by
specified pledges and guaranties.
28
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 $27.1 million in the six months
ended March 31, 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.
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 three and six months ended March 31, 2006 and 2005,
approximately 70% to 80% of our revenue and approximately 50% to 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.
29
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Not applicable
30
ITEM 2. REPORTS ON FORM 6-K
(a) Reports on Form 6-K
The Company furnished or filed the following reports on Form 6-K during the
three months ended March 31, 2006:
(1) Form 6-K dated January 19, 2006.
(2) Form 6-K dated February 15, 2006.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMDOCS LIMITED
/s/ Thomas G. O'Brien
----------------------------------------
Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
Date: May 15, 2006