Amdocs Limited — FY2015 Form 20-F
Reporting period: Fiscal year ended September 30, 2015. This is an annual filing, not a standalone fourth-quarter report; the filing also provides unaudited Q4 results. Amounts below are U.S. dollars.
Business context
Amdocs provides software and services to communications, entertainment and media service providers, including business and operational support systems, network solutions and managed services. Customer experience solutions generated 97.2% of FY2015 revenue. Managed services revenue was approximately $1.84 billion, up from $1.73 billion in FY2014.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $3,643.5 million | $3,563.6 million | +2.2% |
| Operating income | $515.9 million | $495.6 million | +4.1% |
| Net income | $446.2 million | $422.1 million | +5.7% |
| Diluted EPS | $2.85 | $2.62 | +8.8% |
| Operating margin | 14.2% | 13.9% | +0.3 percentage points |
| Net margin | 12.2% | 11.8% | +0.4 percentage points |
| Operating cash flow | $772.6 million | $709.3 million | +8.9% |
Gross margin was approximately 35.5% (cost of revenue was 64.5% of revenue). Net cash flow after $120.5 million of capital expenditures was approximately $652.1 million. Cash and short-term interest-bearing investments totaled $1,354.0 million; net of short-term debt, the company reported $1,134 million. Total assets were $5,324.7 million and shareholders’ equity was $3,406.8 million. Short-term borrowings were $220.0 million at year-end and were repaid in October 2015; $0.6 million of convertible notes remained outstanding.
Q4 FY2015: Revenue was $926.8 million, operating income $109.7 million, net income $91.1 million and diluted EPS $0.59. Compared with Q4 FY2014, revenue increased from $900.3 million, while operating income declined from $126.1 million, net income from $100.5 million and diluted EPS from $0.63.
Changes and material items
- Revenue growth was led by the rest of the world, partly offset by lower revenue in North America and Europe. Foreign-exchange movements reduced reported revenue growth by approximately 3.0%.
- Customer experience solutions revenue rose 3.1% to $3,542.5 million; directory systems revenue fell 21.2% to $101.0 million amid continued market weakness.
- In July 2015, Amdocs acquired a substantial majority of Comverse’s BSS assets for $268.1 million in cash. The acquisition contributed $13.0 million of restructuring charges and increased purchased-intangible amortization and goodwill.
- Operating margin improved year over year; management attributed the improvement primarily to revenue growing faster than operating expenses. The filing also cites a gain from changes in fair value of certain acquisition-related liabilities as a contributor to lower cost of revenue.
- Net income included a 13.1% effective tax rate, down from 13.8% in FY2014. Tax benefits included releases of valuation allowances and other tax items; the filing cautions that tax rates can fluctuate.
Liquidity, capital allocation and outlook
Operating cash flow was $772.6 million. FY2015 cash uses included $454.0 million for share repurchases, $263.2 million net cash paid for acquisitions, $120.5 million for capital expenditures and $100.8 million for dividends. Amdocs repurchased 8.6 million shares at an average $52.80; $260.1 million remained authorized. The $500 million revolving credit facility matures in December 2019, and the company reported compliance with its financial covenants.
Management said cash balances, operating cash generation and credit lines were expected to cover operating needs, repurchases and dividends for at least the next fiscal year. Its long-term capital-allocation guideline was to retain roughly half of free cash flow for business growth and return the other half through repurchases and dividends. No specific revenue or earnings guidance is provided in the filing. A proposed quarterly dividend increase to $0.195 per share was subject to shareholder approval; capital expenditures in FY2016 were expected to be funded internally.
Risks, contingencies and controls
- Customer concentration is significant: AT&T represented 34% of FY2015 revenue, and the ten largest significant customers represented approximately 72%. The filing includes DIRECTV revenue under AT&T following their July 2015 transaction.
- Other key risks include communications-industry spending and consolidation, competition, project timing and execution, hiring and retention, acquisitions and integration, foreign exchange, cybersecurity and service disruptions, intellectual-property claims, and political and operational exposure in Israel and other markets.
- Unrecognized tax benefits totaled $126.7 million. The company was under tax audits in several jurisdictions; timing of resolution was uncertain. Management believed ordinary-course legal proceedings would not have a material adverse effect.
- Contractual obligations totaled $507.3 million, including $247.0 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; management concluded disclosure controls and internal controls were effective as of September 30, 2015.
Most important facts for investors to verify
- Whether revenue growth and margins can improve after the FY2015 slowdown in reported growth and the Q4 decline in operating income and net income.
- How much growth and profitability the Comverse assets contribute, and whether integration or restructuring costs persist.
- AT&T and other major-customer exposure, including the effects of customer consolidation and the inclusion of DIRECTV-related revenue.
- Cash generation after repurchases, dividends, acquisitions and capital expenditures, and the status of the proposed dividend increase.
- Potential changes in tax benefits, uncertain tax positions and foreign-exchange exposure; the filing does not provide a quantified outcome for these uncertainties.