Zacks_Analysts' Blog : Amdocs Beats, Outlook Strong - Analyst Blog

Yesterday, after market close, Amdocs Limited (DOX) declared its financial results for the third quarter of fiscal 2011, which surpassed the Zacks Consensus Estimate by a penny. However, Amdocs provided solid financial outlook for the ensuing fourth quarter, attributable to a healthy demand trend for managed services.

Quarterly net income, on a GAAP basis, was $91.8 million or 50 cents per share compared with a net income of $92.3 million or 45 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS stood at 56 cents in the reported quarter, just a penny ahead of the Zacks Consensus Estimate of 55 cents.

Quarterly total revenue of approximately $801.4 million increased 6.4 % year over year, surpassing the Zacks Consensus Estimate of $798 million. Favorable foreign currency exchange rate contributed $5 million to the revenue growth. Moreover, higher demand in emerging nations coupled with strong signs of improvement in European markets was responsible for the upside in revenue.

Quarterly gross margin was 34.9% compared with 36.2% in the year-ago quarter. Reported operating income was approximately $105.7 million, up 0.4% year over year. Operating margin was 13.2% versus 13.5% in the prior-year quarter.

At the end of the third quarter of 2011, total order backlog was $2,620 million compared with $2,470 million at the end of the previous quarter. In the reported quarter, the company repurchased shares worth $157 million.

At the end of the third quarter of 2011, Amdocs generated $387.9 million in cash from operations compared with $537.6 million in the year-ago period. Free cash flow (cash flow from operations less capital expenditure) at the end of the third quarter of 2011 was $307.9 million compared with $478.1 million in the prior-year period.

At the end of the third quarter of 2011, Amdocs had approximately $1,133.8 million in cash and marketable securities and no outstanding debt on its balance sheet compared with $1,433.3 million of cash and marketable securities and $200 million of outstanding debt at the end of fiscal 2010.

Segment Wise Results

Service revenue was $772.3 million, up 6.1% year over year. License revenue was approximately $29.1 million, up 13.7% year over year. Technologically, Customer Experience Systems revenue was $751.1 million, up 8.4% year over year. Directory revenue was $50.3 million, down 16%.4 year over year. The company’s core Managed Services revenue was $384.2 million, up 4.2% year over year.

Geographically, North America generated $584.9 million, up 2.2% year over year; Europe generated $105.5 million, up 30.9% year over year; while the Rest of the World contributed the remaining $111 million, up 10.7% year over year. Revenue from the emerging markets was $73.2 million, up 30.2% year over year.

Future Financial Outlook

Management expects fourth quarter of 2011 revenue in the range of $800 million - $815 million. EPS, on a GAAP basis, is expected between 46 cents – 54 cents. Non-GAAP EPS, excluding 4 cents – 5 cents per share of equity-based compensation expense, is projected in the range of 58 cents – 64 cents.

Recommendation

Continuous growth momentum in the telecom and cable sector along with the recent acquisition of MX Telecom and Canada-based Bridgewater Systems will allow Amdocs to gain traction in Europe and emerging nations of Asia and Latin America.

However, higher operating expenses coupled with stiff competition from Convergys Corp. (CVG) and Comverse Technology will act as headwinds for the stock going forward.

We, thus, maintain our long-term Neutral recommendation for Amdocs. Currently, Amdocs has a Zacks#2 Rank, implying a short-term Buy rating.