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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2006
Commission File Number 1-14840
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
FORM 20-F [X] FORM 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule
101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule
101(b)(7): [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
YES [ ] NO [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-___
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AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED JUNE 30, 2006
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 1. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
Item 2. Reports on Form 6-K
SIGNATURES
This report on Form 6-K shall be incorporated by reference into the Registration
Statements on Form F-3 (File Nos. 333-114079 and 333-114344) and any other
Registration Statement filed by the Registrant that by its terms automatically
incorporates the Registrant's filings and submissions with the SEC under
Sections 13(a), 13(c) or 15(d) of the Securities Exchange Act of 1934.
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(dollar and share amounts in thousands, except per share data)
AS OF
----------------------------
JUNE 30, SEPTEMBER 30,
2006 2005
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 485,458 $ 707,552
Short-term interest-bearing investments 722,094 438,011
Accounts receivable, net 414,154 304,237
Deferred income taxes and taxes receivable 77,653 101,162
Prepaid expenses and other current assets 81,793 76,780
----------- -----------
Total current assets 1,781,152 1,627,742
Equipment, vehicles and leasehold improvements, net 184,878 181,812
Deferred income taxes 163,191 120,217
Goodwill 1,209,060 969,639
Intangible assets, net 202,501 159,619
Other noncurrent assets 155,549 143,439
----------- -----------
Total assets $ 3,696,331 $ 3,202,468
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 117,248 $ 114,392
Accrued expenses and other current liabilities 239,273 199,458
Accrued personnel costs 156,115 148,426
Short-term portion of financing arrangements 1,938 8,480
Deferred revenue 243,381 216,770
Deferred income taxes and taxes payable 175,210 171,377
----------- -----------
Total current liabilities 933,165 858,903
0.50% convertible notes 450,000 450,000
Deferred income taxes 81,209 50,571
Noncurrent liabilities and other 201,070 186,542
----------- -----------
Total liabilities 1,665,444 1,546,016
----------- -----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; (pound)0.01 par value; 0 shares
issued and outstanding - -
Ordinary Shares - Authorized 550,000 shares; (pound)0.01 par value; 232,575 and
227,321 issued and 205,436 and 200,182 outstanding, respectively 3,737 3,644
Additional paid-in capital 1,994,356 1,870,922
Treasury stock, at cost - 27,139 shares (602,392) (602,392)
Accumulated other comprehensive loss (3,621) (10,886)
Unearned compensation - (962)
Retained earnings 638,807 396,126
----------- -----------
Total shareholders' equity 2,030,887 1,656,452
----------- -----------
Total liabilities and shareholders' equity $ 3,696,331 $ 3,202,468
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollar and share amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2006(1) 2005 2006(2) 2005
-------------- -------------- -------------- --------------
Revenue:
License $ 23,220 $ 27,199 $ 85,172 $ 74,909
Service 603,228 480,156 1,729,433 1,390,394
-------------- -------------- -------------- --------------
626,448 507,355 1,814,605 1,465,303
-------------- -------------- -------------- --------------
Operating expenses:
Cost of license 995 1,125 2,973 3,278
Cost of service 402,626 324,249 1,165,010 929,487
Research and development 46,455 31,393 131,392 97,567
Selling, general and administrative 74,940 56,448 227,289 166,000
Amortization of purchased intangible 8,547 2,078 23,588 7,875
assets
In-process research and development 8,415 - 8,415 -
-------------- -------------- -------------- --------------
541,978 415,293 1,558,667 1,204,207
-------------- -------------- -------------- --------------
Operating income 84,470 92,062 255,938 261,096
Interest income and other, net 14,938 4,305 33,659 14,944
-------------- -------------- -------------- --------------
Income before income taxes 99,408 96,367 289,597 276,040
Income taxes 13,823 19,270 46,916 55,203
-------------- -------------- -------------- --------------
Net income $ 85,585 $ 77,097 $ 242,681 $ 220,837
============== ============== ============== ==============
Basic earnings per share $ 0.42 $ 0.38 $ 1.20 $ 1.10
============== ============== ============== ==============
Diluted earnings per share $ 0.39 $ 0.36 $ 1.13 $ 1.03
============== ============== ============== ==============
Basic weighted average number of shares
outstanding 204,404 200,494 202,474 201,453
============== ============== ============== ==============
Diluted weighted average number of shares
outstanding 220,109 216,570 217,633 217,608
============== ============== ============== ==============
(1) The three month period ended June 30, 2006 includes equity-based
compensation pre-tax expense of $10,948, which was classified as follows:
$4,165 to cost of service, $1,232 to research and development and $5,551
to selling, general and administrative.
(2) The nine month period ended June 30, 2006 includes equity-based
compensation pre-tax expense of $31,948, which was classified as follows:
$12,237 to cost of service, $3,041 to research and development and $16,670
to selling, general and administrative.
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMDOCS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(dollar and share amounts in thousands)
Accumulated
Ordinary Shares Additional Other Total
---------------- Paid-in Treasury Comprehensive Unearned Retained Shareholders'
Shares Amount Capital Stock Loss Compensation Earnings Equity
------- ------- ---------- --------- ------------- ------------ ---------- -------------
BALANCE AS OF SEPTEMBER 30,
2005 200,182 $ 3,644 $1,870,922 $(602,392) $ (10,886) $ (962) $ 396,126 $ 1,656,452
Comprehensive income:
Net income - - - - - - 242,681 242,681
Unrealized gain on
foreign currency
hedging contracts, net
of $(1,990) tax benefit - - - - 7,802 - - 7,802
Unrealized loss on
short-term
interest-bearing
investments, net of
$63 tax benefit - - - - (537) - - (537)
-------------
Comprehensive income - - - - - - - 249,946
-------------
Employee stock options
exercised 4,793 85 83,405 - - - - 83,490
Issuance of restricted
stock, net of
cancellations 461 8 - - - - - 8
Tax benefit of stock
options exercised - - 5,905 - - - - 5,905
Stock-based compensation
expense related to
employees - - 31,948 - - - - 31,948
Stock-based compensation
expense related to non
employee stock options - - 53 - - - - 53
Issuance of stock options
related to acquisitions - - 3,085 - - - - 3,085
Reclassification of
unearned compensation to
additional paid in
capital - - (962) - - 962 - -
------- ------- ---------- --------- ------------- ------------ ---------- -------------
BALANCE AS OF JUNE 30, 2006 205,436 $ 3,737 $1,994,356 $(602,392) $ (3,621) $ - $ 638,807 $ 2,030,887
======= ======= ========== ========= ============= ============ ========== =============
As of June 30, 2006 and September 30, 2005, accumulated other
comprehensive loss is comprised of unrealized loss on foreign
currency hedging contracts, net of tax, of $(1,295) and $(9,097),
respectively, and unrealized loss on short-term interest-bearing
investments, net of tax, of $(2,326) and $(1,789), respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollar in thousands)
NINE MONTHS ENDED JUNE 30,
----------------------------------------
2006 2005
------------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 242,681 $ 220,837
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 83,151 64,835
In-process research and development 8,415 -
Loss on sale of equipment 925 117
Stock-based compensation expense 31,948 -
Deferred income taxes 25,118 3,527
Tax benefit from stock options exercised - 1,934
Realized gain from short-term interest-bearing
investments (5,392) (1,154)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (105,002) (38,316)
Prepaid expenses and other current assets 1,399 8,779
Other noncurrent assets (12,671) (8,757)
Accounts payable and accrued expenses 39,633 (15,719)
Deferred revenue (10,060) 29,271
Income taxes payable (8,114) (6,095)
Excess tax benefit from stock-based compensation (2,301) -
Noncurrent liabilities and other 11,687 (2,615)
------------------- ----------------
Net cash provided by operating activities 301,417 256,644
------------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold
improvements 3,736 4,140
Payments for purchase of equipment, vehicles and
leasehold improvements (53,617) (53,812)
Proceeds from sale of short-term interest-bearing
investments 851,868 648,238
Purchase of short-term interest-bearing investments (1,131,159) (657,865)
Net cash paid for acquisitions (271,930) (4,609)
------------------- ----------------
Net cash used in investing activities (601,102) (63,908)
------------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised and
issuance of restricted stock 83,195 14,053
Excess tax benefit from stock-based compensation 2,301 -
Repurchase of ordinary shares - (99,976)
Principal payments under financing arrangements and (4,774) (656)
other
Principal payments on capital lease obligations (3,131) (17,085)
------------------- ----------------
Net cash provided by (used in) financing activities 77,591 (103,664)
------------------- ----------------
Net (decrease) increase in cash and cash equivalents (222,094) 89,072
Cash and cash equivalents at beginning of period 707,552 550,352
------------------- ----------------
Cash and cash equivalents at end of period $ 485,458 $ 639,424
=================== ================
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 27,996 $ 55,875
Interest 2,182 3,590
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
1. BASIS OF PRESENTATION
Amdocs Limited (the "Company") is a leading provider of software products
and services primarily to the communications industry. The Company and its
subsidiaries operate in one segment offering products and services that enable
their customers to move toward an integrated approach to customer management.
The Company designs, develops, markets, supports, operates, and provides managed
services for information system solutions primarily for leading communications
companies throughout the world.
The unaudited consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP"). In the opinion of the Company's management, all adjustments considered
necessary for a fair presentation of the unaudited interim consolidated
financial statements have been included herein and are of a normal recurring
nature.
The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the reported
amounts of assets, liabilities, revenue and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is reflected in the
results of operations of the interim periods in which changes are determined to
be necessary.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the full fiscal year.
These statements do not include all information and footnotes necessary for a
complete presentation of financial position, results of operations and cash
flows in conformity with GAAP. These statements should be read in conjunction
with the Company's consolidated financial statements for the fiscal year ended
September 30, 2005, set forth in the Company's Annual Report on Form 20-F filed
on December 28, 2005 with the U.S. Securities and Exchange Commission (the
"SEC").
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. SIGNIFICANT ACCOUNTING POLICY
Accounting for Uncertainty in Income Taxes
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes -- An
Interpretation of SFAS No. 109, (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return that results in a tax benefit. Additionally, FIN 48
provides guidance on de-recognition, income statement classification of interest
and penalties, accounting in interim periods, disclosure, and transition. This
interpretation is effective for fiscal years beginning after December 15, 2006.
The Company is currently evaluating the effect that the application of FIN 48
will have on its consolidated results of operations and financial condition.
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
Accounting for Stock-Based Compensation
Effective October 1, 2005, the Company adopted FASB Statement No. 123
(revised 2004), "Share-Based Payment," a revision of SFAS No. 123 ("SFAS 123(R)
"). SFAS 123(R) supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations, and amends FASB Statement No. 95, "Statement of Cash Flows."
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all stock-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. In March 2005, the SEC issued Staff Accounting Bulletin No. 107
("SAB 107"), which provides supplemental implementation guidance on SFAS 123(R).
The Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
Prior to October 1, 2005, the Company accounted for stock-based payments
to employees under the recognition and measurement provisions of APB No. 25.
Pursuant to these accounting standards, the Company recorded deferred
compensation for share options granted to employees at the date of grant based
on the difference between the exercise price of the options and the market value
of the underlying shares at that date, and for restricted stock based on the
market value of the underlying shares at the date of grant. No compensation
expense was recorded for stock options that were granted to employees and
directors at an exercise price equal to or greater than the fair market value of
the Ordinary Shares at the time of the grant.
The Company adopted SFAS 123(R) using the modified prospective method.
Under this transition method, compensation costs recognized in the three and
nine months ended June 30, 2006 include (a) compensation costs for all
stock-based payments granted prior to, but that had not yet vested as of,
October 1, 2005, based on the grant date fair value estimated in accordance with
the pro forma provisions of SFAS 123, and (b) compensation costs for the
stock-based payments granted subsequent to October 1, 2005 based on the grant
date fair value estimated in accordance with SFAS 123(R). The Company's
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). The Company selected the
Black-Scholes option pricing model as the most appropriate fair value method for
its stock-based awards and recognizes compensation costs using the graded
vesting attribution method that results in an accelerated recognition of
compensation costs in comparison to the straight line method.
As a result of adopting SFAS 123(R) on October 1, 2005, the Company's
income before income taxes for the three and nine months ended June 30, 2006
(not including restricted stock expense) was $9,337 and $28,441 lower,
respectively, than if the Company had continued to account for stock-based
compensation under APB No. 25. Net income for the three and nine months ended
June 30, 2006 (not including restricted stock expense) was $8,296 and $25,117
lower, respectively, than if the Company had continued to account for
stock-based compensation under APB No. 25. Basic earnings per share for the
three and nine months ended June 30, 2006 was $0.04 and $0.12 lower,
respectively, than if the Company had continued to account for share based
compensation under APB No. 25. Diluted earnings per share for the three and nine
months ended June 30, 2006 was $0.04 and $0.11 lower, respectively, than if the
Company had continued to account for stock-based compensation under APB No. 25.
The total income tax benefit recognized in the income statement for stock-based
compensation (including restricted stock) for the three and nine months ended
June 30, 2006 was $1,281 and $3,815, respectively, and $0 for the three and nine
months ended June 30, 2005.
Prior to the adoption of SFAS 123(R), the Company presented all tax
benefits of deductions resulting from the exercise of stock options as operating
cash flows in the statement of cash flows. SFAS
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
123(R) requires the cash flows resulting from the tax deductions in excess of
the compensation costs recognized for those stock options to be classified as
financing cash flows. The $2,301 excess tax benefit classified as financing cash
inflows would have been classified as an operating cash inflow if the Company
had not adopted SFAS 123(R).
In conjunction with the adoption of SFAS 123(R), the Company began to use
the implied volatility of the Company's traded options as the expected
volatility assumption required in the Black-Scholes option valuation model.
Prior to October 1, 2005, the Company had used its historical stock price
volatility in accordance with SFAS 123 for purposes of presenting its pro forma
information. The selection of the implied volatility approach was based upon the
availability of actively traded options on the Company's shares and the
Company's assessment that implied volatility is more representative of future
share price trends than historical volatility. As stock-based compensation
expense recognized in the Company's consolidated statement of income for the
three and nine months ended June 30, 2006 is based on awards ultimately expected
to vest, such expense has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the Company's pro forma information required under SFAS 123 for
the periods prior to fiscal 2006, the Company accounted for forfeitures as they
occurred.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
--------------------------
JUNE 30, SEPTEMBER 30,
2006 2005
---------- -------------
Accounts receivable - billed $ 377,713 $ 282,151
Accounts receivable - unbilled 43,925 28,994
Less - allowances (7,484) (6,908)
--------- ---------
Accounts receivable, net $ 414,154 $ 304,237
========= =========
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
4. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity during
a period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity except those resulting from
investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income to
comprehensive income for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income $ 85,585 $ 77,097 $ 242,681 $ 220,837
Other comprehensive income (loss):
Unrealized gain (loss) on
foreign currency hedging
contracts, net of tax 3,644 (4,186) 7,802 (5,037)
Unrealized (loss) gain on
short-term interest-bearing
investments, net of tax (280) 1,216 (537) (605)
--------- --------- --------- ---------
Comprehensive income $ 88,949 $ 74,127 $ 249,946 $ 215,195
========= ========= ========= =========
5. INCOME TAXES
The provision for income taxes for the following periods consisted
of:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2006 2005 2006 2005
-------- --------- -------- --------
Current $ 86 $ 30,018 $ 22,518 $ 51,662
Deferred 13,737 (10,748) 24,398 3,541
-------- -------- -------- --------
$ 13,823 $ 19,270 $ 46,916 $ 55,203
======== ======== ======== ========
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The effective income tax rate varied from the statutory Guernsey tax
rate as follows for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ----
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 17 20 18 20
--- --- --- ---
Income tax rate before effect of 17 20 18 20
acquisition-related costs, and
stock-based compensation expense
Effect of acquisition-related costs (3) - (2) -
and stock-based compensation expense
--- --- --- ---
14% 20% 16% 20%
=== === === ===
As a Guernsey corporation with tax-exempt status, the Company's overall
effective tax rate is attributable to foreign taxes.
As of June 30, 2006, deferred tax assets of $20,987, derived from net
capital and operating loss carry forwards related to some of the Company's
subsidiaries, were offset by valuation allowances related to the uncertainty of
realizing tax benefit for such losses. When realization of the tax benefits
associated with such net capital and operating losses is deemed more likely than
not, the valuation allowance will be released through income taxes.
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Numerator:
Numerator for basic earnings per
share $ 85,585 $ 77,097 $242,681 $220,837
Effect of assumed conversion of
0.50% convertible notes 985 988 2,964 2,955
-------- -------- -------- --------
Numerator for diluted earnings per $ 86,570 $ 78,085 $245,645 $223,792
share
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share - weighted average number
of shares outstanding 204,404 200,494 202,474 201,453
Effect of assumed conversion of
0.50% convertible notes 10,436 10,436 10,436 10,436
Effect of dilutive stock options
granted 5,080 5,640 4,609 5,719
Effect of restricted stock issued 189 - 114 -
-------- -------- -------- --------
Denominator for diluted earnings 220,109 216,570 217,633 217,608
per share - adjusted weighted
average shares and assumed
conversions
======== ======== ======== ========
Basic earnings per share $ 0.42 $ 0.38 $ 1.20 $ 1.10
======== ======== ======== ========
Diluted earnings per share $ 0.39 $ 0.36 $ 1.13 $ 1.03
======== ======== ======== ========
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
7. ACQUISITIONS
CRAMER
On July 18, 2006, the Company entered into a Share Sale and Purchase
Agreement to acquire Cramer Systems Group Limited, or Cramer, a privately-held
leading provider of operations support systems (OSS) solutions. The acquisition
of Cramer was completed on August 14, 2006. Pursuant to the agreement, the
Company acquired all of the shares of capital stock of Cramer for approximately
$375,000 in cash, net of cash on hand, subject to post-closing adjustments. The
Company expects that this acquisition will enable it to leverage and greatly
enhance its current assets in the BSS (business support systems) and OSS market.
QPASS
On May 31, 2006 the Company acquired all of the capital stock of Qpass
Inc., or Qpass, a leading provider of digital commerce software and solutions.
The Company expects that this acquisition will allow it to support service
providers and media companies seeking to launch and monetize digital content,
and believes that this acquisition positions it as the leader in the emerging
digital content market. Qpass revenue for the twelve months ended September 30,
2005 was approximately $35,000.
The aggregate purchase price for Qpass was $281,480, which consisted of
$274,024 in cash, $3,085 related to the assumption of stock options held by
Qpass employees and $4,371 of transaction costs. The fair value of the stock
options was estimated using the Black-Scholes option pricing model (see note
10). The acquisition was accounted for as a business combination using the
purchase method of accounting, as required by Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141"). The fair market
value of Qpass assets and liabilities has been included in the Company's
consolidated balance sheet and the results of Qpass's operations have been
included in the Company's consolidated statements of income, commencing on June
1, 2006. The Company obtained a preliminary independent valuation of the
intangible assets acquired in the Qpass transaction. The total purchase price
was allocated to Qpass's assets and liabilities, including identifiable
intangibles, based on their respective estimated fair values, on the date the
transaction was consummated. The value of acquired technology included both
existing technology and in-process research and development. The valuation of
these items was determined by applying the income forecast method, which
considered the present value of cash flows by product lines. Of the $72,981 of
acquired identifiable intangible assets, $8,340 was assigned to in-process
research and development and was written-off as of the closing date of the
acquisition, in accordance with Financial Accounting Standards Board
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method." The in-process research and
development had no alternative future use and had not reached technological
feasibility as of the closing date of the acquisition. The fair value assigned
to core technology was $28,060 and is being amortized over 3 to 4.5 years
commencing on June 1, 2006. The fair value assigned to customer arrangements was
$36,581 and is being amortized over 7 years commencing on June 1, 2006. The
excess of the purchase price over the fair value of the net liabilities and
identifiable intangibles acquired, or goodwill, was $240,989, of which none is
tax deductible. Goodwill is accounted for under Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and is
accordingly subject to an annual impairment test.
The following is the preliminary allocation of the purchase price:
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
Assets acquired $ 24,396
Liabilities assumed (54,693)
---------
Net liabilities assumed (30,297)
Core technology 28,060
Customer arrangements 36,581
In-process research and development 8,340
Deferred taxes resulting from the difference
between the assigned value of certain assets and
liabilities and their respective tax bases and
loss carry forward, net (2,193)
Goodwill 240,989
---------
$ 281,480
=========
LONGSHINE
On August 3, 2005, the Company acquired Longshine Information Technology
Company Ltd., or Longshine, a privately-held leading vendor of customer care and
billing software in China. The purchase price for Longshine was approximately
$34,100, which included $1,100 of transaction costs. The Company may also be
obligated to pay up to approximately $16,000 in additional purchase price over
the next two years based on the achievement of specified performance targets.
DST INNOVIS
On July 1, 2005, the Company acquired from DST Systems, Inc., or DST, all
of the common stock of DST's wholly owned subsidiaries, DST Innovis, Inc. and
DST Interactive, Inc. The Company refers to these acquired subsidiaries together
as DST Innovis, a leading provider of customer care and billing solutions to
broadband cable and satellite companies. The purchase price for DST Innovis was
$237,461, which included $3,150 of transaction costs.
In addition, the Company commenced integration activities with respect to
the DST Innovis business based on a plan to exit specific research and
development activities and to terminate employees associated with these
activities. The liability associated with this plan, which was recorded as part
of the purchase accounting, is presented in the following table:
EMPLOYEE
SEPARATION CONTRACTUAL
COSTS OBLIGATIONS OTHER TOTAL
---------- ----------- --------- ----------
Balance as of October 1, 2005 $ 4,940 $ 7,103 $ 673 $ 12,716
Cash payments (4,651) (175) (418) (5,244)
Adjustments (1) (277) (9) (155) (441)
Balance as of June 30, 2006 $ 12 $ 6,919 $ 100 $ 7,031
(1) Reflects adjustments due to changes in original estimates within one year
of the acquisition date. The adjustments were recorded as part of the
purchase accounting which resulted in reduction of goodwill.
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
Set forth below is the unaudited pro forma revenue, operating income, net
income and per share figures for the three and nine months ended June 30, 2005
as if DST Innovis had been acquired as of October 1, 2004, excluding the
capitalization of research and development expense, write-off of purchased
in-process research and development and other acquisition related costs:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
------------------ -----------------
Revenue $ 569,676 $ 1,639,488
Operating income 93,580 250,669
Net income 76,919 208,758
Basic earnings per share 0.38 1.04
Diluted earnings per share 0.36 0.97
8. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAMS
In the fourth quarter of fiscal 2005, the Company commenced a series of
measures designed to align its operational structure to its expected future
growth, to allow better integration of the acquisitions of DST Innovis and
Longshine, and to improve efficiency. As part of this plan, the Company recorded
a charge of $8,135 in connection with the termination of employment of software
and information technology specialists and administrative professionals.
Approximately $6,637 of the total charge had been paid in cash as of June 30,
2006. The remaining separation costs are expected to be paid out during the
fourth quarter of fiscal 2006.
The restructuring accrual for this cost reduction program is comprised of
the following as of June 30, 2006:
EMPLOYEE SEPARATION
COSTS
-------------------
Balance as of October 1, 2005 $ 7,002
Cash payments (5,504)
Adjustments (1) (648)
----------------
Balance as of June 30, 2006 $ 850
================
(1) Reflects adjustments due to changes in previous estimates, which were
recorded in cost of service expenses, and differences in foreign exchange
rates from balances paid in currencies other than the U.S. dollar, which
were recorded in interest income and other, net.
In prior fiscal years, the Company implemented a series of cost reduction
programs designed to reduce operating costs and improve productivity. As part of
these programs, the Company reduced its
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
workforce, vacated facilities in different centers around the world and
implemented other cost reduction measures, including travel cuts and reduction
in other discretionary costs.
The restructuring accrual for these cost reduction programs is comprised
of the following as of June 30, 2006:
FACILITIES
----------
Balance as of October 1, 2005 $ 6,667
Cash payments (2,084)
Adjustments (1) 1,091
----------
Balance as of June 30, 2006 (2) $ 5,674
==========
(1) Reflects adjustments due to changes in previous estimates, which were
recorded in cost of service expenses.
(2) The remainder of the accrual is expected to be paid out through August
2008.
9. EMPLOYEE BENEFITS
The Company maintains non-contributory defined benefit plans that provide
for pension, other retirement and post-employment benefits for some of its
Canadian employees based on length of service and rate of pay. Contributions by
the Company are based on various generally accepted actuarial methods and
reflect actuarial assumptions concerning future investment returns, salary
projections and future service benefits. Plan assets consist primarily of
Canadian and other equities, government and corporate bonds, debentures and
secured mortgages, which are held in pooled fund units established by Bell
Canada Enterprises for the collective investment of registered pension plan
assets.
The net periodic benefit costs under these plans for the three months
ended June 30, 2006 and 2005, were as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2006 JUNE 30, 2005
---------------------- ----------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
---------- ---------- ---------- ----------
Service costs $ 800 $ 106 $ 537 $ 65
Interest on benefit obligations 994 172 821 119
Expected return on plan assets (828) - (673) -
Settlements 991 - - -
Actuarial loss 80 58 - -
---------- ---------- ---------- ----------
$ 2,037 $ 336 $ 685 $ 184
========== ========== ========== ==========
15
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The net periodic benefit costs under these plans for the nine months
ended June 30, 2006 and 2005, were as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2006 JUNE 30, 2005
---------------------- ----------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
---------- ---------- ---------- ----------
Service costs $ 2,345 $ 311 $ 1,632 $ 197
Interest on benefit obligations 2,915 505 2,494 360
Expected return on plan assets (2,427) - (2,042) -
Settlements 991 - - -
Actuarial loss 235 169 - -
---------- ---------- ---------- ----------
$ 4,059 $ 985 $ 2,084 $ 557
========== ========== ========== ==========
In the nine months ended June 30, 2006, the Company made contributions of
$2,146 to the pension plan and $105 for other benefits. The Company expects to
make contributions for the fiscal year ending September 30, 2006 of
approximately $2,800 to the pension plan and $200 for other benefits.
16
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
10. STOCK OPTION AND INCENTIVE PLAN
In January 1998, the Company adopted the 1998 Stock Option and Incentive
Plan (the "Plan"), which provides for the grant of restricted stock awards,
stock options and other stock-based awards to, employees, officers, directors,
and consultants. The purpose of the Plan is to enable the Company to attract and
retain qualified personnel and to motivate such persons by providing them with
an equity participation in the Company. Since its adoption, the Plan has been
amended on several occasions to, among other things, increase the number of
Ordinary Shares issuable under the Plan. In January 2006, the maximum number of
Ordinary Shares authorized to be granted under the Plan was increased from
38,300 to 46,300. Awards granted under the Plan generally vest over a period of
four years and stock options have a term of ten years. In the fourth quarter of
fiscal 2005, the Company commenced routinely granting restricted shares and the
Company's equity-based grant package may be comprised of restricted stock awards
and a fewer number of stock options.
The following table summarizes information about options to purchase the
Company's Ordinary Shares, as well as changes during the nine month period ended
June 30, 2006:
WEIGHTED
AVERAGE
WEIGHTED AVERAGE REMAINING
NUMBER OF OPTIONS EXERCISE PRICE CONTRACTUAL TERM
----------------- ---------------- ----------------
Outstanding as of October 1, 2005 25,807 $26.91
Granted (1) 3,439 27.78
Exercised (4,793) 17.44
Forfeited (1,794) 34.32
-------
Outstanding as of June 30, 2006 22,659 $28.45 6.50
======= ====== ====
Exercisable on June 30, 2006 12,585 $32.97 5.12
======= ====== ====
(1) Includes options to purchase 297.6 Ordinary Shares assumed in connection
with the Company's acquisition of Qpass (see note 7), at weighted average
exercise price of $8.01.
The weighted average grant date fair value of stock options granted during
the three months ended June 30, 2006 and 2005 was $22.75 and $13.92,
respectively. The weighted average grant date fair value of stock options
granted during the nine months ended June 30, 2006 and 2005 was $11.66 and
$12.63, respectively. The total intrinsic value of options exercised during the
three months ended June 30, 2006 and 2005 was $20,130 and $7,453, respectively,
and during the nine months ended June 30, 2006 and 2005 was $75,011 and $24,771,
respectively. The aggregate intrinsic value of outstanding and exercisable stock
options as of June 30, 2006 was $245,432 and $106,505, respectively.
17
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The following table summarizes information relating to awards of
restricted nonvested shares, as well as changes to such awards during the nine
month period ended on June 30, 2006:
WEIGHTED AVERAGE
NUMBER OF SHARES GRANT DATE FAIR VALUE
---------------- ---------------------
Outstanding as of October 1, 2005 134 $26.43
Granted 465 29.45
Vested (76) 26.43
Forfeited (4) 32.12
--- ------
Outstanding as of June 30, 2006 519 $29.09
=== ======
As of June 30, 2006, there was $51,946 of unrecognized compensation
expense related to nonvested stock options and nonvested restricted stock
awards. The Company recognizes compensation costs using the graded vesting
attribution method which results in a weighted average period of approximately
one year over which the unrecognized compensation expense is expected to be
recognized.
The fair value of stock options granted was estimated on the date of grant
using the Black-Scholes pricing model with the assumptions noted in the
following table (all in weighted averages for options granted during the
period):
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2006 2005 2006 2005
--------- ---------- -------- ----------
Risk-free interest rate (1) 5.00% 3.79% 4.54% %3.35
Expected life of stock options (2) 3.74 4.50 4.38 4.50
Expected volatility (3) 0.30 0.603 0.327 0.635
Expected dividend yield (4) None None None None
Fair value per option (5) $ 22.75 $ 13.92 $ 11.66 $ 12.63
(1) Risk-free interest rate is based upon U.S. Treasury yield curve
appropriate for the term of the Company's employee stock options.
(2) Expected life of stock options is based upon historical experience.
(3) Expected volatility for the three and nine months ended June 30, 2006 is
based on implied volatility of the Company's traded options. For the three
and nine months ended June 30, 2005, expected volatility is based on the
Company's historical stock price.
(4) Expected dividend yield is based on the Company's history and future
expectation of dividend payouts.
(5) The total fair value of stock options assumed in connection with the
Company's acquisition of Qpass was $8,484 of which $3,085 was allocated to
the purchase price (see note 7).
18
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share data)
The following table sets forth the pro forma effect of applying SFAS 123
on net income and earnings per share for three and nine months ended June 30,
2005:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2005
------------------ -----------------
Net income, as reported $ 77,097 $ 220,837
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 56 206
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (9,732) (26,995)
============== ==============
Pro forma net income $ 67,421 $ 194,048
============== ==============
Basic earnings per share:
As reported $ 0.38 $ 1.10
============== ==============
Pro forma $ 0.34 $ 0.96
============== ==============
Diluted earnings per share:
As reported $ 0.36 $ 1.03
============== ==============
Pro forma $ 0.32 $ 0.91
============== ==============
11. CONTINGENCIES
Legal Proceedings
The Company is involved in various legal proceedings arising in the normal
course of its business. Based upon the advice of counsel, the Company does not
believe that the ultimate resolution of these matters will have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
The Company generally sells its products with a limited warranty for a
period of 90 days. The Company's policy is to accrue for warranty costs, if
needed, based on historical trends in product failure. Based on the Company's
experience, only minimal warranty services have been required and, as a result,
the Company did not accrue any amounts for product warranty liability during the
nine months ended June 30, 2006 and 2005.
The Company generally indemnifies its customers against claims of
intellectual property infringement made by third parties arising from the use of
the Company's software. To date, the Company has incurred only minimal costs as
a result of such obligations and has not accrued any liabilities related to such
indemnification in its consolidated financial statements.
19
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
FORWARD LOOKING STATEMENTS
This section contains forward-looking statements (within the meaning of
the United States federal securities laws) that involve substantial risks and
uncertainties. You can identify these forward-looking statements by words such
as "expect", "anticipate", "believe", "seek", "estimate", "project", "forecast",
"continue", "potential", "should", "would", "could" and "may", and other words
that convey uncertainty of future events or outcome. Statements that we make in
this document that are not statements of historical fact also may be
forward-looking statements. Forward-looking statements are not guarantees of
future performance, and involve risks, uncertainties and assumptions that may
cause our actual results to differ materially from the expectations that we
describe in our forward-looking statements. There may be events in the future
that we are not accurately able to predict, or over which we have no control.
You should not place undue reliance on forward-looking statements. We do not
promise to notify you if we learn that our assumptions or projections are wrong
for any reason. We disclaim any obligation to update our forward-looking
statements, except where applicable law may otherwise require us to do so.
Important factors that may affect these projections or expectations
include, but are not limited to: changes in the overall economy; changes in
competition in markets in which we operate; changes in the demand for our
products and services; consolidation within the industries in which our
customers operate; the loss of a significant customer; changes in the
telecommunications regulatory environment; changes in technology that impact
both the markets we serve and the types of products and services we offer;
financial difficulties of our customers; losses of key personnel; difficulties
in completing or integrating acquisitions; litigation and regulatory
proceedings; and acts of war or terrorism. For a discussion of these important
factors, please read the information set forth under the caption "Risk Factors"
in our Annual Report on Form 20-F for fiscal 2005 that we filed on December 28,
2005 with the United States Securities and Exchange Commission ("SEC").
INTRODUCTION
In this section, we discuss the general financial condition and the
results of operations for Amdocs and its subsidiaries including:
- the factors that affect our business,
- our revenue and costs for the three and nine months ended June 30,
2006 and 2005,
- the reasons why such revenue and costs were different from period to
period,
- the sources of our revenue,
- how all of this affects our overall financial condition,
- our capital expenditures for the three and nine months ended June
30, 2006 and 2005, and
- the sources of our cash to pay for future capital expenditures and
possible acquisitions.
In this section, we also analyze and explain the changes in the specific
line items in our consolidated statements of income between the three and nine
months ended June 30, 2006 and 2005. You should read this section in conjunction
with our consolidated financial statements.
20
OVERVIEW OF BUSINESS AND TREND INFORMATION
Consolidation and convergence in the communications industry are
continuing, and competition among service providers is intensifying, even as new
players enter the marketplace. To compete, we believe that service providers are
seeking new revenue streams and the ability to deliver new, converged services
and service bundles. As a result, service providers are increasingly offering
bundles of wireline and wireless voice, data and video services. We believe the
need for differentiation among service providers is growing, requiring service
providers to have systems in place to enhance cutomer interactions, as well as
business support systems (BSS) and operations support systems (OSS) to support
the rapid introduction of new services. To succeed, we believe, service
providers must transform themselves by adopting an integrated customer
management (ICM) strategy with systems that can support the full customer
lifecycle. We are a leading provider of software products and services to
accelerate and ease the adoption of ICM by service providers. We provide a broad
portfolio of integrated, modular products, with proven functionality and
scalability, accompanied by a comprehensive range of business consulting, system
implementation and integration services. Our market focus is primarily Tier 1
and Tier 2 companies in the communications industry including leading broadband
cable and satellite companies. Our addressable market has been expanded to
include content providers and media companies as a result of our recent
acquisition of Qpass Inc., which we refer to as Qpass. Our acquisition of Qpass
allows us to offer a broader set of solutions to service providers and media
companies seeking to launch and monetize digital content, and we believe it
positions us as the leader in the emerging digital content market. We are also
leveraging our experience by working with service providers in the financial
services sector, since certain of the challenges faced by companies in this
sector are similar to those of communications service providers. Our portfolio
of product offerings includes revenue management (e.g. billing, mediation,
partner settlement), customer management (e.g. customer relationship management,
or CRM), service management, service fulfillment (including ordering, activation
and provisioning) and digital commerce management (e.g. content revenue
management). We refer to these offerings collectively as Integrated Customer
Management-Enabling Systems, or ICM-Enabling Systems.
Our portfolio also includes a full range of directory sales and publishing
systems, which we refer to as Directory Systems, for publishers of both
traditional printed yellow page and white page directories and electronic
Internet directories.
We have designed our ICM-Enabling Systems to meet the mission-critical
needs of leading communications service providers throughout the entire customer
lifecycle. We support different lines of business, including wireline, wireless,
broadband cable and satellite, and a wide range of communications services,
including voice, video, data, IP, broadband, content, electronic and mobile
commerce. We also support companies that offer multiple service packages,
commonly referred to as bundled or converged service packages.
Due to the complexity of our customers' projects and the expertise
required for systems support, we also provide information technology, or IT,
services, including extensive consulting, business strategy, system
implementation, training, integration, modification, ongoing support,
enhancement and maintenance services. In addition, we offer Managed Services
that include services such as system modernization and consolidation, data
center operation, ongoing support, maintenance services, system modification,
rating and billing services and communications facility management services. All
IT and Managed Services are provided to our customers on a fixed or unit charge
basis or a combination of the two.
We conduct our business globally, and, as a result we are subject to the
effect of global economic conditions and, in particular, market conditions in
the communications industry. We maintain development facilities located in
Canada, China, Cyprus, India, Ireland, Israel and the United States.
21
As part of our strategy, we have pursued and may continue to pursue
acquisitions and other initiatives in order to offer new products or services or
otherwise enhance our market position or strategic strengths. For example, on
May 31, 2006 we completed our acquisition of Qpass and on August 14, 2006, we
completed our acquisition of Cramer Systems Group Limited, which we refer to as
Cramer, a privately-held leading provider of OSS solutions. Pursuant to the
agreement, we acquired all the shares of capital stock of Cramer for
approximately $375 million in cash, net of cash on hand, subject to post-closing
adjustments. We expect that our acquisition of Cramer will enable us to leverage
and greatly enhance our current assets in the BSS (business support systems) and
OSS market.
We provide a broad portfolio of integrated, modular products, with proven
functionality and scalability, accompanied by a comprehensive range of business
consulting, system implementation and integration services. We also have
strengthened our presence in the digital content area. With our
recently-completed acquisition of Cramer, we believe we are positioned to become
the only vendor in the communication industry that can provide an end-to-end
solution, from BSS to OSS. We believe we are uniquely positioned to enable
service providers to rapidly introduce new offerings, reduce total cost of
ownership and focus on customers. We believe that the demand for ICM and our
ability to address this demand will continue to drive our growth in the fourth
quarter of 2006 and beyond.
We believe that demand for our ICM-Enabling Systems is primarily driven by
the following key factors:
- Industry transformation, including:
- global use of communications and content services,
- increase in digital and mobile commerce,
- ongoing consolidation within the communications industry, and
- continued convergence of communications, broadband cable and
satellite industries.
- Technology advances, such as:
- emergence of new communications products and services,
especially video, broadband, data and content services,
including IP-based services, such as Internet Protocol
Television (IPTV) and Voice over IP (VoIP),
- evolution to next generation networks such as IP Multimedia
Subsystem (or IMS), that enable truly converged services like
as fixed-mobile convergence, and
- technological changes, such as the introduction of 3G wireless
technology, next-generation content systems, and WiFi- and
WiMax- based access technologies,
- Customer focus. For example:
- service providers' desire to focus on their customers in order
to build profitable customer relationships, and
- the "authority shift" toward the consumer, with customers
demanding new, innovative services that can be accessed
anytime and anywhere, as well as higher levels of customer
service.
- The need for operational efficiency resulting from:
- the shift from in-house management to vendor solutions, and
- business needs of service providers to reduce costs and lower
their total cost of ownership as well as retain high value
customers in a highly competitive environment.
We also believe that additional drivers of demand are the continuing trend
for communications service providers to offer their customers bundled or
converged services (combinations of voice, broadband, electronic and mobile
commerce and IP services), and the ability of our ICM-Enabling Systems to launch
and support such bundles, improve customer satisfaction, loyalty, profitability
and overall productivity.
We derive our revenue principally from:
22
- the initial sales of licenses to use our products and related
services, including modification, implementation and integration
services,
- providing Managed Services and other related IT services, and
- recurring revenue from ongoing support, maintenance and enhancements
provided to our customers, and from incremental license fees
resulting from increases in a customer's business volume.
Revenue is recognized only when all of the following conditions have been
met: (i) there is persuasive evidence of an arrangement; (ii) delivery has
occurred; (iii) the fee is fixed and determinable; and (iv) collectability of
the fee is reasonably assured. We usually sell our software licenses as part of
an overall solution offered to a customer that combines the sale of software
licenses with a broad range of services, which normally include significant
customization, modification, implementation and integration. As a result, we
generally recognize combined license and service revenue over the course of
these long-term projects, using the percentage of completion method of
accounting. Initial license fee revenue is recognized as work is performed,
using the percentage of completion method of accounting. Subsequent license fee
revenue is recognized upon completion of specified conditions in each contract,
based on a customer's subscriber or transaction volume or other measurements
when greater than the level specified in the contract for the initial license
fee. Service revenue that involves significant ongoing obligations, including
fees for software customization, implementation and modification, also is
recognized as work is performed, under the percentage of completion method of
accounting. Revenue from software solutions that do not require significant
customization and modification is recognized upon delivery or as services are
provided. In Managed Services contracts, we typically recognize revenue from the
operation of a customer's system either ratably over the service period or as
services are performed. Revenue from ongoing support services is recognized as
work is performed. Revenue from third-party hardware sales is recognized upon
delivery and installation, and revenue from third-party software sales is
recognized upon delivery. Maintenance revenue is recognized ratably over the
term of the maintenance agreement. As a result of a significant portion of our
revenue being subject to the percentage of completion accounting method, the
size and timing of customer projects and our progress in completing such
projects may significantly affect our annual and quarterly operating results.
Revenue from Managed Services arrangements is included in both license and
service revenue from the sale of ICM-Enabling Systems and Directory Systems.
Managed Services projects are a significant part of our business, generating
substantial, long-term revenue streams, cash flow and operating income. Revenue
from managed services customers was approximately 35% and 40% of our total
revenue in the nine months ended June 30, 2006 and 2005, respectively. In the
initial period of our Managed Services projects, we generally invest in
modernization and consolidation of the customer's systems. Invoices are usually
structured on a periodic fixed or unit charge basis. As a result, Managed
Services projects can be less profitable in the initial period. Margins tend to
improve over time as we benefit from the operational efficiencies provided by
system modernization and consolidation.
ADOPTION OF NEW ACCOUNTING STANDARDS
Accounting for Uncertainty in Income Taxes
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes -- -- An
Interpretation of SFAS No. 109, (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return that results in a tax benefit. Additionally, FIN 48
provides guidance on de-recognition, income statement classification of interest
and penalties, accounting in interim periods,
23
disclosure, and transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. We are currently evaluating the effect that
the application of FIN 48 will have on our consolidated results of operations
and financial condition.
Accounting for Stock-Based Compensation
Effective October 1, 2005, we adopted FASB Statement No. 123 (revised
2004), "Share-Based Payment," a revision of SFAS No. 123 ("SFAS 123(R)"). SFAS
123(R) supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations, and amends FASB Statement No. 95, "Statement of Cash Flows."
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all stock-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. In March 2005, the U.S. Securities and Exchange Commission, or the
SEC, issued Staff Accounting Bulletin No. 107 ("SAB 107"), which provides
supplemental implementation guidance on SFAS 123(R). We have applied the
provisions of SAB 107 in our adoption of SFAS 123(R). Prior to October 1, 2005
the Company accounted for stock-based payments to employees under the
recognition and measurement provisions of APB No. 25. Stock-based compensation
expense recognized under SFAS 123(R) for the three and nine months ended June
30, 2006 was $10.9 million and $31.9 million.
As of June 30, 2006, there was $51.9 million of unrecognized compensation
expense related to nonvested stock options and nonvested restricted stock
awards. The Company recognizes compensation costs using the graded vesting
attribution method which results in a weighted average period of approximately
one year over which the unrecognized compensation expense is expected to be
recognized.
We adopted SFAS 123(R) using the modified prospective method. Under this
transition method, compensation costs recognized in the three and nine months
ended June 30, 2006 include (a) compensation costs for all stock-based payments
granted prior to, but that had not yet vested as of, October 1, 2005, based on
the grant date fair value estimated in accordance with the pro forma provisions
of SFAS 123, and (b) compensation costs for the stock-based payments granted
subsequent to October 1, 2005, based on the grant date fair value estimated in
accordance with SFAS 123(R). Our consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R). We selected the Black-Scholes option pricing model as the most
appropriate fair value method for our stock-based awards and recognize
compensation costs using the graded vesting attribution method that results in
an accelerated recognition of compensation costs in comparison to the straight
line method.
As a result of adopting SFAS 123(R) on October 1, 2005, our income before
income taxes for the three and nine months ended June 30, 2006 (not including
restricted stock expense) was $9.3 million and $28.4 million lower,
respectively, than if we had continued to account for stock-based compensation
under APB No. 25. Net income for the three and nine months ended June 30, 2006
(not including restricted stock expense) was $8.3 million and $25.1 million
lower, respectively, than if we had continued to account for stock-based
compensation under APB No. 25. Basic earnings per share for the three and nine
months ended June 30, 2006 was $0.04 and $0.12 lower, respectively, than if we
had continued to account for stock-based compensation under APB No. 25. Diluted
earnings per share for the three and nine months ended June 30, 2006 was $0.04
and $0.11 lower, respectively, than if we had continued to account for
stock-based compensation under APB No. 25
Prior to the adoption of SFAS 123(R), we presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the statement of cash flows. SFAS 123(R) requires the cash flows resulting
from the tax deductions in excess of the compensation costs recognized for those
stock options to be classified as financing cash flows. The $2.3 million excess
tax benefit classified as financing cash inflows would have been classified as
an operating cash inflow if we had not adopted SFAS 123(R).
24
In conjunction with our adoption of SFAS 123(R), we began to use the
implied volatility of the Company's traded options as the expected volatility
assumption required in the Black-Scholes option valuation model. Prior to
October 1, 2005, we had used our historical stock price volatility in accordance
with SFAS 123 for purpose of presenting pro forma information. The selection of
the implied volatility approach was based upon the availability of actively
traded options on our shares and our assessment that implied volatility is more
representative of future share price trends than historical volatility. As
stock-based compensation expense recognized in the Consolidated Statement of
Operations for the three and nine months ended on June 30, 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. In our pro forma information required under SFAS
123 for the periods prior to fiscal 2006, we accounted for forfeitures as they
occurred.
RESULTS OF OPERATIONS
The following table sets forth for the three and nine months ended June
30, 2006 and 2005 certain items in our consolidated statements of income
reflected as a percentage of total revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue:
License............................. 3.7% 5.4% 4.7% 5.1%
Service............................. 96.3 94.6 95.3 94.9
-------- -------- -------- --------
100.0 100.0 100.0 100.0
-------- -------- -------- --------
Operating expenses:
Cost of license..................... 0.2 0.2 0.2 0.2
Cost of service..................... 64.3 63.9 64.2 63.4
Research and development............ 7.4 6.2 7.2 6.7
Selling, general and
administrative.................... 12.0 11.1 12.5 11.3
Amortization of purchased intangible
assets............................ 1.3 0.4 1.3 0.6
In-process research and development
1.3 - 0.5 -
-------- -------- -------- --------
86.5 81.8 85.9 82.2
-------- -------- -------- --------
Operating income...................... 13.5 18.2 14.1 17.8
Interest income and other, net........ 2.4 0.8 1.9 1.1
-------- -------- -------- --------
Income before income taxes............ 15.9 19.0 16.0 18.9
Income taxes.......................... 2.2 3.8 2.6 3.8
-------- -------- -------- --------
Net income............................ 13.7% 15.2% 13.4% 15.1%
======== ======== ======== ========
25
NINE MONTHS ENDED JUNE 30, 2006 AND 2005
The following is a tabular presentation of our results of operations for
the nine months ended June 30, 2006 compared to the nine months ended June 30,
2005. Following the table is a discussion and analysis of our business and
results of operations for the mentioned periods.
NINE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------------------ ----------------------
2006 2005 AMOUNT %
------------- -------------- ------------ -------
(in thousands)
---------------------------------------------
Revenue:
License...................... $ 85,172 $ 74,909 $ 10,263 13.7%
Service...................... 1,729,433 1,390,394 339,039 24.4
------------- -------------- ------------
1,814,605 1,465,303 349,302 23.8
------------- -------------- ------------
Operating expenses:
Cost of license.............. 2,973 3,278 (305) (9.3)
Cost of service.............. 1,165,010 929,487 235,523 25.3
Research and development 131,392 97,567 33,825 34.7
Selling, general and
administrative.... ........ 227,289 166,000 61,289 36.9
Amortization of purchased
intangible assets.......... 23,588 7,875 15,713 199.5
In-process research and
development 8,415 - 8,415 -
------------- -------------- ------------
1,558,667 1,204,207 354,460 29.4
------------- -------------- ------------
Operating income................ 255,938 261,096 (5,158) (2.0)
Interest income and other, net.. 33,659 14,944 18,715 125.2
------------- -------------- ------------
Income before income taxes...... 289,597 276,040 13,557 4.9
Income taxes.................... 46,916 55,203 (8,287) (15.0)
------------- -------------- ------------
Net income...................... $ 242,681 $ 220,837 $ 21,844 9.9%
============= ============== ============
REVENUE. Total revenue increased by $349.3 million, or 23.8%, in the nine
months ended June 30, 2006 to $1,814.6 million from $1,465.3 million in the nine
months ended June 30, 2005. Approximately $178.1 million of the increase was
attributable to revenue contributed by DST Innovis, and the remainder was
primarily attributable to projects for Tier 1 and Tier 2 customers.
License and service revenue attributable to the sale of ICM-Enabling
Systems was $1,607.2 million in the nine months ended June 30, 2006, an increase
of $334.9 million, or 26.3%, over the nine months ended June 30, 2005.
Approximately $178.1 million of the increase was attributable to revenue
contributed by DST Innovis, and the remainder was primarily attributable to
projects for Tier 1 and Tier 2 customers. License and service revenue resulted
from the sale of ICM-Enabling Systems represented 88.6% and 86.8% of our total
revenue in the nine months ended June 30, 2006 and 2005, respectively. The
demand for our ICM-Enabling Systems is primarily driven by communications
service providers' need to continue to integrate their billing, CRM and order
management systems into an ICM approach. In the nine months ended June 30, 2006,
we observed strong demand for our offerings.
License and service revenue resulted from the sale of Directory Systems
was $207.4 million in the nine months ended June 30, 2006, an increase of $14.4
million, or 7.5%, over the nine months ended June 30, 2005. Approximately 83% of
the increase in Directory Systems revenue in the nine months ended June 30,
26
2006 was attributable to an increase in business related to Managed Services
customers. License and service revenue from the sale of Directory Systems
represented 11.4% and 13.2% of our total revenue in the nine months ended June
30, 2006 and 2005, respectively. We believe that we are a leading provider of
Directory Systems in most of the markets we serve. We expect that our revenue
from Directory Systems in absolute amount will increase in fiscal 2006.
In the nine months ended June 30, 2006, revenue from customers in North
America, Europe and the rest of the world accounted for 70.3%, 21.5% and 8.2%,
respectively, of total revenue compared to 67.0%, 24.8% and 8.2%, respectively,
in the nine months ended June 30, 2005. Approximately 58.9% of the increase in
revenue from customers in North America was attributable to revenues contributed
by DST Innovis, and the remainder was primarily attributable to projects for
Tier 1 and Tier 2 customers. Revenue from customers in Europe in the nine months
ended June 30, 2006, increased in absolute amounts, but the increase was less
than the 23.8% increase in our total revenue which resulted in a decrease in
revenue from customers in Europe as a percentage of total revenue. Revenue from
customers in the rest of the world as a percentage of our total revenue in the
nine months ended June 30, 2006 was at the same level as in the nine months
ended June 30, 2005.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the nine months ended June 30, 2006, cost of license as a percentage of
license revenue was 3.5%, compared to 4.4% in the nine months ended June 30,
2005.
COST OF SERVICE. The increase in cost of service in the nine months ended
June 30, 2006 was 25.3%, which is greater than the increase in our total revenue
in the nine months ended June 30, 2006. As a percentage of revenue, cost of
service was 64.2% in the nine months ended June 30, 2006, compared to 63.4% in
the nine months ended June 30, 2005. Cost of service in the nine months ended
June 30, 2006 includes the effect of $12.2 million of stock-based compensation
expense. Stock-based compensation expense in the nine months ended June 30, 2005
was insignificant. Our cost of service and gross margin may vary depending on
the types and geographic locations of projects that we undertake.
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense. Research and development expense increased by
$33.8 million, or 34.7%, in the nine months ended June 30, 2006 to $131.4
million from $97.6 million in the nine months ended June 30, 2005. Research and
development expense increased as a percentage of revenue from 6.7% in the nine
months ended June 30, 2005 to 7.2% in the nine months ended June 30, 2006. The
increase in research and development expense was attributable mainly to research
and development activities related to the DST Innovis acquisition, including
integration efforts of DST Innovis' products into our ICM-Enabling Systems
partially offset by cost savings. Research and development expense in the nine
months ended June 30, 2006 includes the effect of $3.0 million of stock-based
compensation expense. Stock-based compensation expense in the nine months ended
June 30, 2005 was insignificant. We believe that our research and development
efforts are a key element of our strategy and are essential to our success.
However, an increase or a decrease in our total revenue would not necessarily
result in a proportional increase or decrease in the levels of our research and
development expenditures, which could affect our operating margin.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased by $61.3 million, or 36.9%, in the nine months ended June 30,
2006 to $227.3 million, from $166.0 million in the nine months ended June 30,
2005. Selling, general and administrative expense is primarily comprised of
compensation expense. The increase in selling, general and administrative
expense in the nine months ended June 30, 2006 was attributable to an overall
increase in our operations, as well as to the inclusion of $16.7 million of
stock-based compensation expense. Stock-based compensation expense in the nine
months ended June 30, 2005 was insignificant.
27
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the nine months ended June 30, 2006 was $23.6 million,
compared to $7.9 million in the nine months ended June 30, 2005. The increase in
amortization of purchased intangible assets was due to purchased intangible
assets acquired in the DST Innovis, Longshine and Qpass acquisitions, partially
offset by purchased intangible assets that were fully amortized in the first
quarter of fiscal 2005.
IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
was $8.4 million for the nine months ended June 30, 2006, as compared to zero
for the nine months ended June 30, 2005. Our third quarter 2006 in-process
research and development expense was related primarily to our Qpass acquisition.
The additional write-off was related to an immaterial acquisition.
OPERATING INCOME. Operating income decreased by $5.2 million, or 2.0%, in
the nine months ended June 30, 2006, to $255.9 million, or 14.1% of revenue,
from $261.1 million, or 17.8% of revenue, in the nine months ended June 30,
2005. The decrease in operating income as a percentage of revenue was
attributable to a 29.4% increase in operating expense which grew at a greater
rate than the 23.8% increase in revenue during the nine months ended June 30,
2006. Stock-based compensation expense included in operating expense for the
nine months ended June 30, 2006 was $31.9 million or 1.8% of revenue.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
by $18.8 million in the nine months ended June 30, 2006 to $33.7 million from
$14.9 million in the nine months ended June 30, 2005. The increase in interest
income and other, net, is primarily attributable to the increase in market
interest rates on our cash and short-term interest-bearing investments as well
as the impact of foreign exchange benefits.
INCOME TAXES. Income taxes for the nine months ended June 30, 2006 were
$46.9 million on pretax income of $289.6 million, resulting in an effective tax
rate of 16.2% compared to 20% in the nine months ended June 30, 2005.
Approximately 2.5% of the reduction in our effective tax rate is attributable to
our continued expansion into countries with lower effective tax rates and to a
slight release of certain tax reserves and approximately 1.3% is attributable to
the net effect of acquisition-related costs and stock-based compensation
expense. Our effective tax rate for the fourth quarter of fiscal 2006 is
expected to be between 16% to 18% compared to 20% in the fourth quarter of
fiscal year 2005.Our effective tax rate may fluctuate between quarters as a
result of discrete items that may affect a specific quarter.
NET INCOME. Net income was $242.7 million in the nine months ended June
30, 2006, compared to net income of $220.8 million in the nine months ended June
30, 2005. The increase in net income, in absolute amounts, is attributable to
the increase in interest income and other, net, and the decrease of our
effective tax rate partially offset by the decrease in operating income.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.10,
or 9.7%, in the nine months ended June 30, 2006 to $1.13 from $1.03 in the nine
months ended June 30, 2005.
28
THREE MONTHS ENDED JUNE 30, 2006 AND 2005
The following is a tabular presentation of our results of operations for
the three months ended June 30, 2006 compared to the three months ended June 30,
2005. Following the table is a discussion and analysis of our business and
results of operations for such periods.
THREE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------------------ --------------------
2006 2005 AMOUNT %
------------- -------------- ---------- -------
(in thousands)
-------------------------------------------
Revenue:
License...................... $ 23,220 $ 27,199 $ (3,979) (14.6%)
Service...................... 603,228 480,156 123,072 25.6
------------- -------------- ----------
626,448 507,355 119,093 23.5
------------- -------------- ----------
Operating expenses:
Cost of license.............. 995 1,125 (130) (11.6)
Cost of service.............. 402,626 324,249 78,377 24.2
Research and development 46,455 31,393 15,062 48.0
Selling, general and
administrative............. 74,940 56,448 18,492 32.8
Amortization of purchased
intangible assets.......... 8,547 2,078 6,469 311.3
In-process research and
development 8,415 - 8,415 -
------------- -------------- -----------
541,978 415,293 126,685 30.5
------------- -------------- ----------
Operating income................ 84,470 92,062 (7,592) (8.2)
Interest income and other, net 14,938 4,305 10,633 247.0
------------- -------------- ----------
Income before income taxes 99,408 96,367 3,041 3.2
Income taxes.................... 13,823 19,270 (5,447) (28.3)
------------- -------------- ----------
Net income...................... $ 85,585 $ 77,097 $ 8,488 11.0
============= ============== ==========
REVENUE. Total revenue increased by $119.0 million, or 23.5%, in the three
months ended June 30, 2006 to $626.4 million from $507.4 million in the three
months ended June 30, 2005. Approximately $61.6 million of the increase was
attributable to revenue contributed by DST Innovis, and the remainder was
primarily attributable to projects for Tier 1 and Tier 2 customers.
License and service revenue attributable to the sale of ICM-Enabling
Systems was $556.5 million in the three months ended June 30, 2006, an increase
of $116.5 million, or 26.5%, over the three months ended June 30, 2005.
Approximately $61.6 million of the increase was attributable to revenue
contributed by DST Innovis, and the remainder was primarily attributable to
projects for Tier 1 and Tier 2 customers. License and service revenue resulted
from the sale of ICM-Enabling Systems represented 88.8% and 86.7% of our total
revenue in the three months ended June 30, 2006 and 2005, respectively. The
demand for our ICM-Enabling Systems is primarily driven by communications
service providers' need to continue to integrate their billing,
29
CRM and order management systems into an ICM approach. In the three months ended
June 30, 2006, we observed strong demand for our offerings.
License and service revenue resulted from the sale of Directory Systems
was $69.9 million in the three months ended June 30, 2006, an increase of $2.5
million, or 3.8%, over the three months ended June 30, 2005. Approximately 66.1%
of the increase in Directory Systems revenue in the three months ended June 30,
2006 was attributable to an increase in business related to Managed Services
customers. License and service revenue from the sale of Directory Systems
represented 11.2% and 13.3% of our total revenue in the three months ended June
30, 2006 and 2005, respectively. We believe that we are a leading provider of
Directory Systems in most of the markets we serve. We expect that our revenue
from Directory Systems in absolute amount will increase in fiscal 2006.
In the three months ended June 30, 2006, revenue from customers in North
America, Europe and the rest of the world accounted for 68.1%, 24.0% and 7.9%,
respectively, of total revenue compared to 68.4%, 24.7% and 6.9%, respectively,
in the three months ended June 30, 2005. Approximately 76.0% of the increase in
revenue from customers in North America, in absolute amount, was attributable to
revenues contributed by DST Innovis, and the remainder was primarily
attributable to projects for Tier 1 and Tier 2 customers.The increase in revenue
from customers in North America was slightly less than the 23.5% increase in our
total revenue. Revenue from customers in Europe in the three months ended June
30, 2006, in absolute amounts, increased, but the increase was less than the
23.5% increase in our total revenue, which resulted in a slight decrease in
revenue from customers in Europe as a percentage of total revenue compared to
the three months ended June 30, 2005. Revenue from customers in the rest of the
world increased in the three months ended June 30, 2006, as a result of revenue
contributed by Longshine.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the three months ended June 30, 2006, cost of license as a percentage of
license revenue was 4.3% compared to 4.1% in the three months ended June 30,
2005.
COST OF SERVICE. The increase in cost of service in the three months ended
June 30, 2006 was 24.2%, which is greater than the increase in our total revenue
in the three months ended June 30, 2006. As a percentage of revenue, cost of
service was 64.3% in the three months ended June 30, 2006, compared to 63.9% in
the three months ended June 30, 2005. Cost of service in the three months ended
June 30, 2006 includes the effect of $4.2 million of stock-based compensation
expense. Stock-based compensation expense in the three months ended June 30,
2005 was insignificant. Our cost of service and gross margin may vary depending
on the types and geographic locations of projects that we undertake.
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense. Research and development expense increased by
$15.1 million, or 48%, in the three months ended June 30, 2006 to $46.5 million
from $31.4 million in the three months ended June 30, 2005. Research and
development expense increased as a percentage of revenue from 6.2% in the three
months ended June 30, 2005 to 7.4% in the three months ended June 30, 2006. The
increase in research and development expense was attributable mainly to research
and development activities related to the DST Innovis acquisition, including
integration efforts of DST Innovis' products into our ICM-Enabling Systems
partially offset by cost savings. Research and development expense in the three
months ended June 30, 2006 includes the effect of $1.2 million of stock-based
compensation expense. Stock-based compensation expense in the three months ended
June 30, 2005 was insignificant. We believe that our research and development
efforts are a key element of our strategy and are essential to our success.
However, an increase or a decrease in our total revenue would not necessarily
result in a proportional increase or decrease in the levels of our research and
development expenditures, which could affect our operating margin.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased by $18.5 million, or 32.8%, in the three months ended June 30,
2006 to $74.9 million, from $56.4 million in the three
30
months ended June 30, 2005. Selling, general and administrative expense is
primarily comprised of compensation expense. The increase in selling, general
and administrative expense in the three months ended June 30, 2006 was
attributable to an overall increase in our operations, as well as to the
inclusion of $5.6 million of stock-based compensation expense. Stock-based
compensation expense in the three months ended June 30, 2005 was insignificant.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS. Amortization of purchased
intangible assets in the three months ended June 30, 2006 was $8.5 million,
compared to $2.1 million in the three months ended June 30, 2005. The increase
in amortization of purchased intangible assets was due to purchased intangible
assets acquired in the DST Innovis, Longshine and Qpass acquisitions.
IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
was $8.4 million for the three months ended June 30, 2006, as compared to zero
for the three months ended June 30, 2005. Our third quarter 2006 in-process
research and development expense was related primarily to our Qpass acquisition.
The additional write-off was related to an immaterial acquisition.
OPERATING INCOME. Operating income decreased by $7.6 million, or 8.2%, in
the three months ended June 30, 2006, to $84.5 million, or 13.5% of revenue,
from $92.1 million, or 18.2% of revenue, in the three months ended June 30,
2005. The decrease in operating income as a percentage of revenue was
attributable to a 30.5% increase in operating expense which grew at a greater
rate than the 23.5% increase in revenue during the three months ended June 30,
2006. Stock-based compensation expense included in operating expense for the
three months ended June 30, 2006 was $10.9 million or 1.7% of revenue.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
by $10.6 million in the three months ended June 30, 2006 to $14.9 million from
$4.3 million in the three months ended June 30, 2005. The increase in interest
income and other, net, is primarily attributable to the increase in market
interest rates on our cash and short-term interest-bearing investments as well
as the impact of foreign exchange benefits.
INCOME TAXES. Income taxes for the three months ended June 30, 2006 were
$13.8 million on pretax income of $99.4 million, resulting in an effective tax
rate of 13.9% compared to 20% in the three months ended June 30, 2005.
Approximately 3.4% of the reduction in our effective tax rate is attributable to
our continued expansion into countries with lower effective tax rates and to a
slight release of certain tax reserves and approximately 2.7% is attributable to
the net effect of acquisition-related costs and stock-based compensation
expense. Our effective tax rate for the fourth quarter of fiscal 2006 is
expected to be between 16% to 18% compared to 20% in the fourth quarter of
fiscal 2005. Our effective tax rate may fluctuate between quarters as a result
of discrete items that may affect a specific quarter.
NET INCOME. Net income was $85.6 million in the three months ended June
30, 2006, compared to net income of $77.1 million in the three months ended June
30, 2005. The increase in net income, in absolute amounts, is attributable to
the increase in interest income and other, net, and the decrease of our
effective tax rate partially offset by the decrease in our operation income.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased by $0.03,
or 8.3%, in the three months ended June 30, 2006 to $0.39 from $0.36 in the
three months ended June 30, 2005.
31
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,207.6 million as of June 30, 2006, compared to $1,145.6 million as of
September 30, 2005. The increase is mainly attributable to positive cash flows
from operations of $301.4 million, proceeds from employee stock options
exercised and issuance of restricted stock of $83.2 million, partially offset by
$271.9 net cash paid for acquisitions and $53.6 million of capital expenditures.
Net cash provided by operating activities amounted to $301.4 million and $256.6
million for the nine months ended June 30, 2006 and 2005, respectively.
Our policy is to retain substantial cash balances in order to support the
growth of the Company. We believe that our current cash balances, cash generated
from operations and our current lines of credit will provide sufficient
resources to meet our liquidity needs for at least the next fiscal year.
As of June 30, 2006, $450.0 million and $0.2 million aggregate principal
amount of our 0.50% Notes and 2% Notes were outstanding, respectively. As of
June 30, 2006, we had available short-term general revolving lines of credit
totaling $31.0 million, none of which was outstanding, and outstanding letters
of credit and bank guarantees from various banks totaling $6.0 million. As of
June 30, 2006, we had outstanding short term loans totalling $1.7 million
secured by specified pledges and guaranties.
We have contractual obligations for our convertible notes, financing
arrangements, capital leases and non-cancelable operating leases that were
summarized in a table of contractual obligations in our Annual Report on Form
20-F for fiscal 2005. Since September 30, 2005, there have been no material
changes in contractual obligations outside the ordinary course of our business.
Our capital expenditures were approximately $53.6 million in the nine
months ended June 30, 2006. Approximately 80% of these expenditures consisted of
purchases of computer equipment, and the remainder to leasehold improvements. We
funded our capital expenditures principally from operating cash flows. We do not
anticipate any changes to this policy in the foreseeable future.
CURRENCY FLUCTUATIONS
We manage our foreign subsidiaries as integral direct components of our
operations. The U.S. dollar is our functional currency. According to the salient
economic factors indicated in SFAS No.52, "Foreign Currency Translation", our
cash flow, sale price, sales market, expense, financing and intercompany
transactions and arrangement indicators are predominately denominated in the
U.S. dollar. The operations of our foreign subsidiaries provide the same type of
services with the same type of expenditure throughout the Amdocs group.
During the three and nine months ended June 30, 2006 and 2005,
approximately 70% to 80% of our revenue and approximately 50% to 60% of our
operating expenses were in U.S. dollars or linked to the U.S. dollar. As a
result of long-term contracts in currencies other than the U.S. dollar and more
customers seeking contracts that are denominated in currencies such as the Euro,
the percentage of our revenue and operating expenses in U.S. dollar or linked to
the U.S. dollar may decrease slightly over time. Historically, the effect of
fluctuations in currency exchange rates on our consolidated operations was not
material. As more of our customers seek contracts that are denominated in
currencies other than the U.S. dollar, our exposure to fluctuations in currency
exchange rates could increase. In managing our foreign exchange risk, we enter
from time to time into various foreign exchange hedging contracts. We do not
hedge all of our exposure in currencies other than the U.S. dollar, but rather
our policy is to hedge significant net exposures in the major foreign currencies
in which we operate. We periodically assess the applicability of the U.S. dollar
as our functional currency by reviewing the salient indicators.
32
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Convertible Notes
(d)
(c) MAXIMUM NUMBER (OR
(b) TOTAL NUMBER OF APPROXIMATE DOLLAR
AVERAGE PRICE PRINCIPAL AMOUNT OF VALUE) OF PRINCIPAL
(a) PAID PER $1,000 CONVERTIBLE NOTES AMOUNT OF CONVERTIBLE
TOTAL PRINCIPAL AMOUNT PRINCIPAL AMOUNT PURCHASED AS PART OF NOTES THAT MAY YET BE
OF CONVERTIBLE NOTES OF CONVERTIBLE PUBLICLY ANNOUNCED PURCHASED UNDER THE PLANS
PERIOD PURCHASED NOTES PLANS OR PROGRAMS OR PROGRAMS (1)
----------------- ---------------------- ---------------- ------------------------------------------------
04/01/06-04/30/06 $ - - - $ 272,000
05/01/06-05/31/06 - - - 272,000
06/01/06-06/30/06 97,000 $ 1,000 97,000 175,000
---------------------- --------------------
Total $ 97,000 $ 1,000 $ 97,000 $ 175,000
--------------
(1) In April 2004, the Company's board of directors authorized the Company to
repurchase the outstanding amount of the 2% Notes.
33
ITEM 2. REPORTS ON FORM 6-K
(a) Reports on Form 6-K
The Company furnished or filed the following reports on Form 6-K during
the three months ended June 30, 2006:
(1) Form 6-K dated April 21, 2006.
(2) Form 6-K dated April 27, 2006.
(3) Form 6-K dated May 15, 2006.
(4) Form 6-K dated May 17, 2006.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMDOCS LIMITED
/s/ Thomas G. O'Brien
------------------------------
Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
Date: August 15, 2006