Amdocs Limited — FY2017 Form 20-F Summary
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2017, not a standalone fourth-quarter filing. Amdocs provides software and services primarily to communications, cable, entertainment and media companies. Its fiscal 2017 revenue was generated mainly from customer experience solutions, including business and operational support systems, digital services and managed services. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Financial performance and position
Amounts below are in U.S. dollars; annual amounts are in millions unless otherwise stated.
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $3,867.2 | $3,718.2 | +4.0% |
| Operating income | $517.3 | $483.1 | +7.1% |
| Net income | $436.8 | $409.3 | +6.7% |
| Diluted EPS | $2.96 | $2.71 | +9.2% |
| Operating margin | 13.4% | 13.0% | +0.4 percentage points |
| Net margin | 11.3% | 11.0% | +0.3 percentage points |
| Cash provided by operations | $636.1 | $620.2 | +$15.9 |
- Customer experience solutions revenue rose 4.9% to $3,809.1 million and represented 98.5% of total revenue. Directory systems revenue fell 34.4% to $58.1 million.
- Cost of revenue was 64.8% of revenue in both years. Operating expenses grew more slowly than revenue, supporting the improvement in operating margin. The effective tax rate was 14.8%, compared with 15.5% in FY2016.
- Fourth-quarter FY2017 revenue was $979.7 million, operating income $132.0 million, net income $107.2 million and diluted EPS $0.73.
- At September 30, 2017, cash, cash equivalents and short-term investments totaled $979.6 million, versus $1,095.7 million a year earlier. The prior-year balance included $200 million of short-term financing; net of that financing, FY2016 liquidity was $895.7 million. Total assets were $5,279.4 million and shareholders’ equity was $3,574.1 million.
- No borrowings were outstanding under the $500 million revolving credit facility at year-end; the facility was extended in December 2017 to mature in December 2022. The company had $33.7 million of letters of credit and bank guarantees outstanding. Convertible notes had been redeemed in September 2016.
- FY2017 investing cash outflow was $185.3 million, including $133.4 million of equipment and leasehold-improvement purchases and $18.1 million of net acquisition payments. Financing cash outflow was $569.8 million, including $340.6 million of share repurchases and $121.5 million of dividends.
Material changes versus the prior comparable period
- Revenue growth accelerated from 2.0% in FY2016 to 4.0% in FY2017, driven primarily by North American activity, including AT&T and Pay TV providers, and contributions from Vindicia, Brite:Bill and Pontis, acquired in September 2016.
- Operating income and net income recovered from FY2016 declines. FY2017 operating margin improved to 13.4% from 13.0%; diluted EPS also benefited from a lower weighted-average share count following repurchases.
- North America increased to 65.9% of revenue from 64.0%. Europe declined to 12.6% from 13.8%, partly reflecting lower transformation and implementation work. AT&T remained 33% of revenue in both years; the ten largest customers contributed approximately 71% versus 73%.
- Foreign-exchange impacts moved interest and other income/expense from a $1.6 million gain in FY2016 to a $4.4 million expense in FY2017.
Outlook, commentary, risks and unusual items
- Outlook: The filing does not provide specific FY2018 revenue or earnings guidance. Management expected directory-systems revenue to continue declining in FY2018. It planned to return approximately 100% of FY2018 free cash flow to shareholders before capital expenditures for the new Israel campus.
- Capital allocation: The board approved a new $800 million share-repurchase authorization in November 2017, in addition to remaining authority of approximately $256 million at fiscal year-end. The quarterly dividend was $0.22 per share; a proposed increase to $0.25, subject to shareholder approval, was anticipated for April 2018.
- Investment plans: The company expected up to $350 million of net investment over four to five years for a new Ra’anana, Israel campus, including approximately $100 million in FY2018. The land transaction remained subject to customary closing conditions.
- Concentration and market risks: AT&T accounted for one-third of revenue, and the ten largest customers for about 71%. Other stated risks include communications-industry competition and consolidation, customer spending delays or financial distress, project execution and revenue-estimation judgments, talent retention, acquisitions and integration, cybersecurity and service disruptions, foreign exchange, and political conditions in Israel and other operating regions.
- Legal and tax contingencies: A U.S. lawsuit alleges breach of contract and trade-secret misappropriation; no loss was accrued because the company could not determine that a loss was probable or estimate the outcome. A dispute with a state-owned Ecuadorian telecom enterprise includes a damages claim; the outcome could not be reasonably estimated. Unrecognized tax benefits totaled $193.0 million, including interest and penalties; timing of audit resolutions was uncertain.
- Unusual tax items: FY2017 tax expense included benefits from audit conclusions, statute-of-limitations expirations and valuation-allowance releases. These items contributed to the 14.8% effective tax rate, so the rate may not represent a recurring level.
- Controls and audit: Management and Ernst & Young concluded internal control over financial reporting was effective as of September 30, 2017. The auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification points
- Review customer concentration and the status, scope and terms of the AT&T services agreement, which runs through September 2021.
- Assess whether FY2017 growth and margin improvement are sustainable, separating recurring operating performance from acquired contributions and discrete tax benefits.
- Verify cash generation against planned buybacks, dividends, the campus investment and the company’s definition of free cash flow.
- Monitor the Ecuador dispute, U.S. litigation and $193.0 million of unrecognized tax benefits for developments that could affect cash flows or reported results.
- Check the detailed financial-statement notes for project-accounting estimates, customer receivables, foreign-exchange hedges and future lease obligations.