"This week, 138 years ago, an important event took place which shaped our industry. On February 14, 1876, two talented individuals walked separately into the USPTO (US Patent and Trademark Office) and filed their request to patent their latest invention - a device that could transmit the tones of a human voice electrically, through a telegraphic circuit, and could reproduce them at the end of that line. What is known today as the "telephone," wrote Eli Gelman, the CEO of Amdocs Ltd. (Nasdaq: DOX) for the past three years, in a post on his blog for his readers - company employees. Amdocs, a software provider with a market cap of $7 billion, provides services for the huge industry that Bell spawned - telecommunications.

"Alexander Graham Bell of Boston and Elisha Gray of Highland Park, Illinois, submitted their patents to the USPTO on the same day - but Bell's was the fifth patent application of the day while Gray's was the 39th. This few hours’ difference between the submissions of practically the same invention generated a decade-long fight over who had the right to call himself "the inventor of the telephone".

Gelman did not write about this cautionary tale in history just to enrich the general knowledge of Amdocs' employees. He wanted them to learn three lessons from this story. The first is that timing is everything - being diligent and moving faster than the competition could be the winning factor. Second is that creating and protecting patents and intellectual property is key. "And most importantly," writes Gelman, "there is no room for second place."

Gelman's concerns about employee complacency might be the reason for his emphasis. After all, Amdocs is in pretty good shape right now: revenue is growing, albeit slowly, but faster than the rate of the market's growth; it has enough cash and distributes dividends; and its share price is close to a ten-year high, though well below its all-time high in early 2000.

Gelman fears complacency. "I wake paranoid in the morning," he likes to say. "We live in a jungle. There is no public or government agency to protect us. A company like us can disappear, and we've already seen companies disappear."

The background is fierce competition. Amdocs is a vendor to the world's telecommunications companies, and to smaller companies as well in recent years, providing them with crucial operating systems: from real-time billing systems, to customer service and management systems, which are integrated with a variety of communications providers (mobile, landline, and other carriers).

Competition in this market comes from giant companies, such as Oracle Corporation (Nasdaq: ORCL), Ericsson AB (Nasdaq; OMX: ERIC), and Huawei Technologies Co. Ltd., which is backed by the Chinese government. "All of these companies are bigger and richer than us, but we must succeed," Gelman tells Amdocs' employees. "The concept is not to be complacent. Do not relax."

Another case that Gelman mentioned in a blog was a chance meeting with an executive of Nokia Corporation (NYSE: OMX: NOK), which at the time dominated the mobile telephone industry, the same month that Apple Inc. (Nasdaq: AAPL) launched the iPhone. "He was very pleased with himself. I told him that they might have missed out, because the iPhone was a genuine disruption. He said Nokia sold more phones in a weekend than Apple sold in a quarter."

Gelman, an Amdocs veteran was a vice president before leaving the company in 2008 in favor of a brief, but successful stint at Retalix Ltd., a software company that was sold to a US competitor for $800 million. Gelman was Retalix's chairman and part of the company's controlling core along with a group of former Amdocs executives and Ishay Davidi's FIMI Opportunity Funds. In September 2010, then-Amdocs CEO Dov Baharav decided to leave, and Gelman was called to rally to the cause. He took up the post of CEO at the end of the year, in a very natural succession.

Building a new strategy

Outwardly, Gelman's appointment may have seemed routine, but he has built a completely new strategy for Amdocs since assuming office. "We dug a new furrow," is how he described it to employees. This furrow was mainly expressed in two areas: an emphasis on emerging markets (which were actually disappointing in the fourth quarter of 2013); and entry into a new business - network applications, through two acquisitions.

Until a few years ago, most of Amdocs's business was in North America and Europe, and activity in emerging markets was negligible. The company was built to serve big companies, and its systems were not always suited to carriers in emerging markets. In view of the problematic macroeconomic climate in recent years, it was clear that the company's growth would not come from developed countries.

At the same time, Amdocs noticed that carriers in emerging markets emphasized user experience, and Amdocs had always branded itself as a provider of solutions to enhance this. Whether or not the company's decision to expand to emerging markets was natural or forced, these markets accounted for 12.3% of the company's revenue in its 2013 fiscal year, up from 11.5% in the fiscal year 2012 and 8.6% in 2011.

In absolute terms, Amdocs's revenue from emerging markets rose 50% between 2011 and 2013, to $411 million. Although emerging markets did not do well in the company's first fiscal quarter of 2014 (which began in October 2013), Gelman is optimistic about them. In a conference call, he told analysts that emerging markets "could generate double-digit growth in the coming years." He admitted, however, that the going would not be smooth, saying, "There will be quarters of growth and quarters of decline, followed by rapid growth."

Despite geographical diversification, Amdocs remained very dependent on a few big customers last year. 20 customers accounted of 70% of revenue, with AT&T Inc. (NYSE: T), once a party at interest in the company, still the biggest customer, accounting for 28%. Sprint Corporation (NYSE: S) and Bell Canada Inc. were the second largest customers, each accounting for just under 10% of revenue.

Amdocs mentions this as a risk factor in its financial reports, because loss of a major customer will have a material adverse effect on its revenue. On the other hand, the big customers are the world's strongest carriers, which continue with Amdocs from project to project. Some of them swallow smaller competitors, and this consolidation has previously created growth engines for Amdocs, when the buyer replaces the acquired company's systems with Amdocs systems.

No boxes

Amdocs's entry into network applications is another change at the company. It acquired two companies in late 2013: Actix International Ltd. and Celcite Ltd. for $250 million. Actix optimizes mobile networks, and Celcite provides self-organizing network (SON) and network management solutions.

Amdocs did not creep into either activity from its software to hardware, although there are hardware companies that offer software solutions. Amdocs did not want to boxes, on the grounds that the Chinese would always do it cheaper. As it was, Amdocs is entering a market with many active companies, and it will have to win its own market share. Amdocs estimates the new market at several hundred million dollars, but not immediately. It has more than $3 billion in annual sales, and this is a nice growth engine, but not one that will change the picture.

Amdocs has more than $1.2 billion in cash, allowing it to make acquisition. Alongside the publication of its latest financial report in late January, it announced another small acquisition, or an IT services vendor in Latin America.

In the past 18 months, Amdocs has distributed modest quarterly dividends, and it continues its share buyback program. As for larger acquisitions or increasing the return to investors, Gelman's aides say that keeping a balance in the use of the company's cash is important to him. The argument is that no part of the company's strategy is based on acquisitions, and it makes them only if it decides that this is better than in-house development.

After 3% growth in 2013, and following the latest acquisitions, Amdocs expects 5-8% growth in fiscal year 2014. This is not a dizzying growth rate, but it is faster than the growth rate for the IT telecommunications equipment industry. Responding to Amdocs employees who asked if he was satisfied with the current single-digit growth rate, Gelman replied, "No, but we have to be realistic. It's not possible to grow seven times faster than the market. If we achieve consistent 5% growth, we'll be in great shape compared with the benchmark, because most competitors are small."

On the other hand, Amdocs could itself become a target for acquisition or hostile takeover by one of the giants seeking to boost its growth rate. "You can never say it's impossible at a public company," Gelman tells aides on this point. "If the share price is $43 and you're offered $80, it will be very hard to come up with a counterargument, but that doesn’t happen every day. Hostile takeovers are very rare, and usually fail. We believe that we'll bring much more value to shareholders customers, and employees on our own. Why be a division of IBM, Oracle, or HP?" he says.

Gelman once called himself a "builder", saying, "I want to build things." The analogy is clear: build Amdocs, don’t sell it.

Union games

The first workers committee in Israeli high tech was recently established at Ness Technologies Ltd. There is no similar workers committee at Amdocs, but its managers can talk about an interesting simulation that Gelman conducted. During a discussion on employee salaries and bonuses, he asked executives to play the role of union representatives, to ensure that employees' voices would be heard during the discussion. "Obviously, Amdocs considered employees before, but the subject is now central. In the CEO's world view, satisfied employees are also good employees," they say there.

At least once a year, Gelman makes a presentation to all employees via video conference, where he outlines the strategy, targets, achievements, and areas to focus on. More than once, he tells the top managers, "The more the employee understands the big picture, the more satisfied he is and he will contribute more."

Let there be no mistake, Amdocs has fired hundreds of employees in Israel and other countries over the years, including during the dot.com bubble and the last economic crisis. In the past two years, however, its workforce has grown.

One recent departure was by one of Amdocs's top executives, SVP and head of Customer Business Group Ayal Shiran. He was succeeded by Shuky Sheffer, who like Gelman, returned to the company from Retalix, where he was CEO before leaving a few months after its acquisition.

Aircraft carrier or racing sloop

In conversations with employees, Gelman compared Amdocs to an aircraft carrier that moves like a racing sloop - fast and maneuverable. 32 years old and with almost 21,000 employees, the company is more like an aircraft carrier than a sloop.

The aircraft carrier/sloop Amdocs has undergone a lot over its years in business. It was once known as "the billing giant", but in recent years it has repeatedly stressed that it much more than a provider of billing solutions.

Amdocs was founded in 1982. Morris Kahn and the bothers Shmuel and Zvi Meitar founded Aurec Information Ltd., which produced classified guides such as the Golden Pages, and only later entered the billing and customer services software sector for telecommunications carriers.

In 1998, Amdocs held its IPO on the New York Stock Exchange at $14 per share for a value of $2.75 billion. The share price peaked at $80 in 2000, but the bursting of the dot.com bubble sent it down to below $6. The share price closed at $44.54, after a 25% rally in the past 12 months.

Oppenheimer analyst Shaul Eyal, who recently raised its recommendation for Amdocs, says that, notwithstanding a 23% yield in 2013, it underperformed the 38% gain by Nasdaq.

Gelman believes that Amdocs "has to reinvent itself" every five years. "This is an exhausting cycle, but you see the reward of your work, because it is creative," he once told friends. "I've been at Amdocs for 27 years, and it's as if I worked for four different companies with the same name."

According to Thomson/First Call, most analysts are on the fence regarding Amdocs's current incarnation. Eight of thirteen analysts give it a "Hold" recommendation and five give it a "Strong buy" recommendation. No analysts recommends selling the share.

Published by Globes [online], Israel business news - www.globes-online.com - on February 23, 2014

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