The financial report for its third fiscal quarter (ending in June) published last week by billing giant Amdocs (NYSE: DOX) showed weakness in several key parameters, indicating that the company’s business will not grow in the next few quarters. The first and clearest indication was Amdocs’s own forecast. The company predicted no growth in the fourth quarter of 2004, and also hinted in a conference call with analysts that it expected no significant growth in the quarter after that, saying, “We expect very, very modest growth.”
Another important parameter is revenue from license sales. Not only did Amdocs’s revenue not grow in this category in the third quarter; it amounted to $17.3 million, 4.5% less than in the preceding quarter. Amdocs attributed the fall in revenue from license sales to slower than expected growth in the market, and said fourth quarter revenue in this item would be the same as in the third quarter.
License sales are a very important basis for growth in revenue from services in succeeding quarters, and are therefore an important indicator of the state of the company’s business in both the quarter being reviewed and in subsequent quarters. In other words, lower revenue in this category points to an absence of growth in the coming quarters.
A third indicator is the backlog. Amdocs’s backlog grew by only $20 million to $1.4 billion in the third quarter. The company said that its backlog was not expected to grow at all in the fourth quarter, and any possible growth would be minimal. Needless to say, the backlog is the basis for a company’s expansion for the next twelve months. Lack of growth in its backlog indicates a severe slowdown for the company’s business.
A fourth indicator is deferred revenue. Like revenue from license sales, this item also declined in the third quarter - by $1.5 million to $231 million (it rose by $50 million in the preceding quarter, but only because of early collection of customers’ debts). A fall in deferred revenue constitutes an addition indicator of fundamental weakness in Amdocs’s results, and points to continued weakness in the next few quarters.
A fifth indicator is the company’s pipeline its deals that are not yet signed. In contrast to previous conference calls with analysts, Amdocs said nothing this time about its pipeline. It can be assumed that were Amdocs’s pipeline substantial, the company would have said so. Saying nothing about its pipeline is liable to be an indicator that the pipeline is weak, together with the other indicators.
Yet another indicator, not included in the report, but which shows that Amdocs does not expect substantial growth in the telecommunications market in the coming quarters, is its aggressive entry into the integration field. Amdocs has recently begun providing systems integration services, and has signed two contracts, with Vodafone Hungary and another yet-to-be-announced company in North America.
In its conference call with analysts following the publication of its results, Amdocs announced the appointment of Rick Matthews as manager of its integration division. Before joining Amdocs, Matthews was a senior manager at integration giant Ernst & Young, where he was responsible for integration projects at several US communications including Nextel Communications (Nasdaq, XETRA: NXTL). In the conference call, Amdocs said that its integration division’ job was to promote and expand Amdocs’s integration business. At Amdocs, division manager is a very senior position, comparable to corporate vice-president.
Since winning the integration contract with Vodafone Hungary, Amdocs has tried to keep a low profile regarding its entry into the systems integration field, for good reason. Amdocs is very aware that the capital market prices integration systems companies at very low multiples. Another reason is that the world’s largest systems integrators, especially Accenture (NYSE: ACN) have up until now been business partners of Amdocs. As part of this business partnership, they recommended that telecommunications operators use Amdocs’s systems. Entering the systems integration market will put Amdocs into direct competition with these companies, and deprive them of an important part of their revenue. Amdocs is aware that it will be very costly to arouse the wrath of integration companies, which is why it is keeping a low profile.
However, establishing a special division for the sector, and appointing as its head a former senior manager from Ernst & Young with extensive experience in integration projects, who likely has very important connections in the US telecommunications industry, is a clear declaration by Amdocs that it intends to make integration a very high priority. What remains to be clarified is whether, and if so, to what extent, Amdocs’s aggressive entry into this field will affect its very important relations with its integration industry business partners, whether the multiple of Amdcos’s share will fall, and if so, how far.
In addition to the integration market and billing for the financial market, which Amdocs is make an intensive effort to penetrate, the company also has two growth engines in the telecommunications market. One is the wireline telecommunications operators segment. Now that cable operators have become active in telephony, wireline telecommunications operators are trying to improve their ability to compete with the cable companies, in order to avoid losing lines. To do that, they will soon have to replace their infrastructures with IP infrastructures in order to provide data and video communications. Amdocs believes that the replacement of the wireline telecommunications operators’ infrastructure, and the operators’ entry into data and video, is giving it the chance to enter a new growing market.
Another growth engine is the cable companies, which are now interested in providing voice over Internet protocol (VoIP) services, and which are expected to invest in this area. As Amdocs has announced before, it also plans to become a player in the cable billing market. Entering this market will give Amdocs a new growing target market.
Published by Globes [online] - www.globes.co.il - on July 26, 2004