Analysts have begun issuing updated reported in the wake of Amdocs (NYSE: DOX) announcement this week that it signed an agreement to acquire Qpass, a provider of digital commerce software and solutions. Under the terms of the agreement, Amdocs, a provider of integrated customer management software and services, will acquire all of Qpass' shares of capital stock for approximately $275 million in cash.
Qpass provides product, services and business consulting. It manages data downloads and acts as a channel between the content provider and the service provider.
Amdocs stated that it may incur a one-time charge in its third fiscal quarter of 2006 to account for certain costs related to the acquisition.
According to Merrill Lynch analyst Tal Liani, "Qpass expands Amdocs’ portfolio into the high growth segment of management, billing and customer care for content. This high growth area is highly synergistic with Amdocs’ current activities and will enable the company to utilize its strength in CRM and its relationships with carriers to grow profitably over the next few years. We also believe that Amdocs could add value to Qpass by utilizing its strong relationships with wireless carriers, especially outside the US where Qpass has a smaller presence. Lastly, Qpass is blessed with a strong management team, which will be given incentives to maintain its commitment to Amdocs."
Qpass has relationships with over 300 leading content providers and works with some of the largest carrier groups globally, including Cingular, Sprint, and T-Mobile. Amdocs currently works with 150 leading service providers.
Liani further noted that there were risks associated with the merger. "Entry into a new space is typically accompanied by challenges and concerns, but despite the risks listed below, we have confidence based on Amdocs’ execution history and remain positive on the acquisition. Risks: a) not much upside at Cingular, the largest and most lucrative customer, as Qpass gets a fixed user activation fee instead of sharing revenues; b) somewhat pricey transaction of ~4.5 x 2006 sales; c) success in Europe is yet to be proven as European carriers have been using a more constrained solution based on premium SMS and existing billing systems rather than a comprehensive solution as deployed by US carriers; and d) integration execution risks."
Despite high risk, Liani assigned Amdocs a "Buy" recommendation and a 12-month price objective of $43.
"We value Amdocs on the company’s 2007 potential earnings power and our higher growth expectations going forward (Note that we now expect the company’s long-term EPS growth to be 15% vs. 12% previously). We note, though, that we are currently unable to model Amdocs’ profit and loss impact post the pending AT&T/BLS merger.
"While we cannot provide a detailed forecast, we estimate about 2-4% of additional revenue growth and slightly more EPS growth as expect margins to possibly expand beyond our current estimates in second half of 2007."
Lehman Brothers analyst Julian H. Bu wrote that he didn't expect a large financial impact from the acquisition in the next two years. "Amdocs has intended to provide the most comprehensive one-stop shopping to carriers for BSS solutions, and Qpass clearly fits that objective. We believe that in the next few years, large billing system consolidations at carriers will likely continue to provide greater upside to Street estimates than the newer applications such as content delivery or IPTV."
Lehman Brothers rates Amdocs "Overweight" with a target price of $35.00.
Oscar Gruss Technology Research analyst Roni Biron said, the acquisition was in line with Amdoc's strategy and came as no surprise. "Amdocs has been shopping for companies in the OSS and revenues assurance space. We believe that the integration of Qpass offers interesting synergies such as the bundling of minutes and downloads into certain pricing schemes. Given the consolidation in the telecom market and its cyclical nature, we believe that this acquisition carries strategic merit for Amdocs. We note, however, that the full benefits of this transaction are likely to manifest over time, following an integration process. We do not expect Amdocs to pursue additional acquisitions of this magnitude in the coming year as it digests the acquisitions of DST Innovis and Qpass."
Oscar Gruss reiterated its "Hold" recommendation and $35 price target. "We are raising our 2006 and 2007 revenues estimates by $18 million and $66 million, respectively. We are also reducing our 2006 estimate by one cent to $1.69 and raising our 2007 estimate by one cent to $1.99."
Published by Globes [online], Israel business news - www.globes.co.il - on April 20, 2006
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