Amdocs Limited — FY2016 Form 20-F Summary
Business context and reporting period
This is Amdocs’ annual report for the fiscal year ended September 30, 2016, prepared under U.S. GAAP in U.S. dollars. Amdocs provides software and services—principally customer experience solutions, including BSS/OSS, network offerings, analytics and managed services—to communications, pay-TV, entertainment and media providers. The filing also reports unaudited results for the quarter ended September 30, 2016.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $3.718 billion | $3.644 billion |
| Operating income / margin | $483.1 million / 13.0% | $515.9 million / 14.2% |
| Net income / margin | $409.3 million / 11.0% | $446.2 million / 12.2% |
| Diluted EPS | $2.71 | $2.85 |
| Operating cash flow | $620.2 million | $772.6 million |
| Cash, cash equivalents and short-term investments | $1.096 billion | $1.354 billion |
Cost of revenue was 64.8% of revenue, implying a gross margin of approximately 35.2%, compared with 35.5% in FY2015. Cash and investments less $200 million of short-term borrowings totaled approximately $896 million at year-end. The $500 million revolving credit facility matures in December 2019; Amdocs borrowed $200 million in September 2016 and repaid it in October. It had redeemed all convertible notes due 2024 on September 6, 2016. Shareholders’ equity was $3.454 billion; total assets were $5.331 billion.
FY2016 quarterly results for the quarter ended September 30 were revenue of $940.7 million, operating income of $118.5 million, net income of $95.7 million and diluted EPS of $0.64. The comparable FY2015 quarter reported $926.8 million, $109.7 million, $91.1 million and $0.59, respectively.
Material changes versus the prior year
- Revenue grew 2.0%, despite an approximately 1.5% adverse foreign-exchange effect. Customer experience solutions revenue rose 2.5% to $3.630 billion; directory revenue fell 12.4% to $88.5 million.
- Growth came from Europe and the rest of the world, while North American revenue declined, mainly reflecting slower discretionary spending by AT&T. North America represented 64.0% of revenue versus 70.1% in FY2015.
- Operating income declined 6.4% and net income declined 8.3%. Higher amortization of acquired intangibles, other acquisition-related costs and cost of revenue outpaced revenue growth. FY2015 had also benefited from a fair-value gain on acquisition-related liabilities.
- Effective tax rate rose to 15.5% from 13.1%. Diluted EPS fell 4.9%, partly cushioned by a lower diluted share count.
- Operating cash flow decreased about 20% to $620.2 million. Cash and investments fell primarily due to share repurchases, acquisitions, capital expenditures and dividends.
- Amdocs acquired Vindicia, Brite:Bill and Pontis in September 2016 for $258.5 million in cash, with potential additional performance-based consideration. Goodwill increased to $2.212 billion; no goodwill impairment was reported.
Outlook, commentary, risks and unusual items
- Management said it expected directory-systems revenue to continue declining in FY2017. The filing does not provide a clear numerical company-wide revenue or earnings forecast.
- Management expected FY2017 capital expenditures to be financed internally. It stated that cash balances, operating cash generation and credit lines were expected to meet operating needs and support repurchases and dividends for at least the next fiscal year.
- The board approved a quarterly dividend of $0.195 per share for January 2017 and proposed, subject to shareholder approval, an increase to $0.22 per share beginning in April 2017.
- Customer concentration is substantial: AT&T generated 33% of FY2016 revenue (34% in FY2015), and the ten largest customers generated approximately 73%. A single customer also accounted for 34% of accounts receivable at year-end.
- Principal risks include communications-industry spending and consolidation, competitive pressure, project timing and percentage-of-completion estimates, customer concentration and credit exposure, foreign-exchange movements, acquisition integration, talent retention, cybersecurity and service disruption, and political or regulatory conditions in regions where Amdocs operates.
- Unrecognized tax benefits, including interest and penalties, were $196.7 million; audit-resolution timing is uncertain. A lawsuit in Oregon alleges breach of contract and trade-secret misappropriation related to an electronic payment solution. The company reported that it could not reasonably estimate the lawsuit’s outcome and had accrued no amount for it.
- Contractual obligations totaled $535.6 million, including $277.1 million of non-cancelable operating leases. The company reported no off-balance-sheet arrangements. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether AT&T spending and concentration, and the large receivable exposure to one customer, change materially.
- Whether revenue growth and margins improve after the FY2016 decline in operating profit and net income, and whether directory revenue contracts as management expected.
- Whether acquisitions deliver growth and returns sufficient to justify purchase costs, rising goodwill and acquired-intangible amortization.
- How operating cash flow, working capital, capital spending, repurchases and dividends affect liquidity and the company’s cash-return plans.
- Developments in tax audits and uncertain tax positions, the Oregon litigation, and any effects from currency, cybersecurity or service interruptions.