“A couple of days before Amdocs issued its profit warning, we ourselves warned that the business environment in which the company operates is currently changing significantly in its disfavor,” says Daniel Meron, analyst with Piper Jaffray, which is represented in Israel by Nessuah Zannex. “One of the clearest indications of this is the fact that Amdocs has recently lost several contracts in Europe, because its customers preferred specific solutions of other providers.
“The contract losses are highly significant, because they indicate a substantial change in the outlook of the telecommunications operators. The need to cut back on expenses these days prevents the operators from installing large systems that require many expensive man-hours. As a result, one could detect at the Supercomm and Billing World exhibitions a marked trend towards modular billing projects.
“This means that, instead of replacing the entire charging and billing system, telecommunications providers are now looking for platforms that enable them to replace only specific systems. Such a platform must facilitate connecting and replacing certain parts within the general billing system. The connections and replacements must be carried out swiftly and easily.
“The Amdocs model, by contrast, suits the approach that prevailed in the telecommunications market in the past two years, whereby whenever any system was changed, the operator would replace the billing system together with the collection and services systems. Amdocs supplied a complete package, and therefore, on this model, it had an important advantage.
Now, because of the economic situation in the telecommunications market, operators have changed their thinking. Budget considerations now make them look for new systems that can replace certain parts within their general systems. As a result, the number of projects in the market has shrunk, as has the value of each project. Besides, the operators now prefer solutions that will reduce as far as possible their dependence on one billing provider.”
A situation like this doesn’t leave much room for Amdocs
“Indeed, the new model is the opposite of the model on which Amdocs works. A further problem stems from the fact that its systems are closed. In recent years, Amdocs, like its competitors, has sold closed system in which any upgrade requires large investment. Operators have realized that this method is damaging to them. The transition to specific systems has raised the importance of the open platform, one that enables many billing providers to connect up to it.
“What’s more, until about ten years ago telecommunications providers almost entirely relied on internal solutions. These were built in patchwork fashion, with no systematic overview, and with old technology. Now, with the entry of new technologies in the telecommunications market, a need has arisen to upgrade the billing and collection systems, customer service systems, and systems for supporting network activity. That is to say, there is a need to upgrade the system both on the network side and on the customer side. This kind of upgrade makes an open platform, on which each system can be separately upgraded or replaced, even more necessary. This spells a tough problem for companies like Amdocs, that provide closed systems.
“Yet another problem arises from the increasing demand for systems capable of doing pricing in real time. Such systems are required to price and bill for content services on broadband networks, and to price and bill for pre-paid services. These services must be priced while the customer is on the network. Amdocs’s systems do not at present answer this need adequately.”
So what’s next?
”Amodocs will have to work very hard to develop or buy new technologies. I believe that it has recently been trying to incorporate a greater degree of modularity into its products. Nevertheless, it would seem that Amdocs will need to do more extensive work on the basis of its systems to facilitate greater cooperation between the various systems and rapid processing of applications that require real-time pricing.”
A couple of days before Amdocs published it profit warning, Piper Jaffray’s analysts published a report in which they wrote, “The DOX picture remains mixed, in our opinion, and has clearly been reflected in trading of late. Long-term trends remain very strong for Amdocs, and we continue to believe that while its market share status may be challenged. This is because the rules of the game continue to change, with an increased emphasis on cost control and a shift to more modular and smaller-scale upgrade projects, which are clearly hurting the Company’s tailored-solutions model in the near term.
“It is possible that these factors may come home to roost in the form of lost business or, for the first time, even displacement of DOX systems at the end of their contract period with other vendors. As a result, the stock is likely to remain choppy in the near term, as investors await receipt of some new wins that were alluded to during the DOX analyst day, to help stem the tide.”
Following the profit warning, Piper Jaffray analysts Robert Goldman and Daniel Meron published a report in which they downgraded Amdocs’s stock to “Market Perform”, and set a target price of $12. “Our new price target of $12 reflects 15x our revised forward 12-month EPS of $0.82 and is based upon a lower multiple than our previous target, due to the expected decline in business,” they wrote.
The report points out that, in addition to the loss of the contract with AT&T Wireless, Amdocs is liable to lose additional wireless operator contracts to other billing providers in the coming months.
“Displacement would be a first, but not likely the last. Contrary to our original thesis, DOX’s relatively high-cost business model just isn’t well suited for the tight-fisted telecom environment. As a result, DOX’s shares could continue to be under pressure for a few quarters, both competitively and from the delays cited by management.”.
What were the outstanding trends at the Supercomm and Billing World exhibitions?
Meron: “Both exhibitions showed that the market will continue to mark time at very low levels of demand. In addition, investment by fixed-line operators in the US has fallen 50% this year in comparison with last year, to some $35 billion. At the same time, the whole market is waiting for developments and growth in the cellular market. The emphasis is on opportunities in markets outside the US, principally in the Asia-Pacific region and in Europe.”
Published by Globes [online] - www.globes.co.il - on 02 July 2002