Amdocs Limited — FY2014 Form 20-F
Business context and reporting period. Amdocs provides software and services to communications, entertainment and media service providers. This audited annual report covers the fiscal year ended September 30, 2014, with comparisons to FY2013 and FY2012. The company reports under U.S. GAAP in U.S. dollars. The filing also presents unaudited fourth-quarter results for the three months ended September 30, 2014.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $3,563.6 million | $3,345.9 million | +6.5% |
| Operating income | $495.6 million | $481.6 million | +2.9% |
| Operating margin | 13.9% | 14.4% | Down 0.5 percentage points |
| Net income | $422.1 million | $412.4 million | +2.3% |
| Net margin | 11.8% | 12.3% | Down 0.5 percentage points |
| Diluted EPS | $2.62 | $2.53 | +3.6% |
| Operating cash flow | $709.3 million | $670.5 million | +5.8% |
- Revenue was predominantly service revenue: $3,471.8 million, or 97.4% of total revenue. Customer experience solutions generated $3,435.5 million, while directory systems revenue fell 20.0% to $128.2 million.
- Cash, cash equivalents and short-term interest-bearing investments totaled $1,424.5 million at year-end; net of short-term debt, the filing reports $1,214 million. Current assets were $2,424.0 million and current liabilities $1,200.7 million.
- FY2014 investing cash use was $298.6 million, including $180.5 million net cash paid for acquisitions and $111.6 million for equipment and leasehold improvements. Financing cash use was $321.6 million, including $372.0 million of share repurchases and $90.9 million of dividend payments.
- At September 30, the company had $210.0 million drawn on its revolving credit facility; it repaid this borrowing in October 2014. Convertible notes outstanding were $0.6 million. The company also had a $500 million five-year revolver and reported compliance with its financial covenants.
Fourth-quarter results
For the quarter ended September 30, 2014, revenue was $900.3 million, operating income $126.1 million, net income $100.5 million and diluted EPS $0.63. Compared with the September 2013 quarter, revenue increased 6.5%, operating income 2.6%, net income 13.0% and diluted EPS 16.7%.
Material changes and management commentary
- FY2014 growth was driven mainly by increased activity in North America and Europe, including network optimization activity following the Actix and Celcite acquisitions. Foreign exchange reduced reported revenue growth by approximately 0.5 percentage points.
- Operating margin declined as purchased-intangible amortization rose 51.2% to $58.1 million, primarily reflecting the Actix and Celcite acquisitions. Cost of license and service remained approximately flat as a percentage of revenue.
- AT&T represented 33% of FY2014 revenue, up from 28% in FY2013. The ten largest significant customers together represented approximately 73% of revenue, versus 70%.
- The company repurchased 8.4 million shares at an average $44.14 per share during FY2014. A $750 million repurchase authorization adopted in April 2014 had $714.0 million remaining at year-end.
- The board approved a quarterly dividend of $0.155 per share for January 2015 and proposed, subject to shareholder approval, increasing the quarterly rate to $0.17, with the first payment anticipated in April 2015. Management described a long-term aim to retain roughly half of free cash flow and return the other half through dividends and repurchases; actual distributions remain discretionary.
Outlook, risks and unusual items
- No specific FY2015 revenue or earnings guidance is provided in the filing. Management expected FY2015 capital expenditures, principally computer equipment, to be funded internally.
- Key risks include customer concentration and potential loss or reduced spending by major customers; competition and changing communications technology; project timing and percentage-of-completion estimates; acquisition integration; hiring and retention of skilled staff; foreign-exchange exposure; cybersecurity, system outages and product defects; and political or operating disruption, particularly in Israel and India.
- The effective tax rate was 13.8%, compared with 13.3% in FY2013. The filing identifies dependence on foreign tax benefits and tax-law changes as risks. Unrecognized tax benefits were $123.9 million at year-end; audit resolution timing was uncertain.
- Management said ordinary-course legal proceedings were not expected, individually or in aggregate, to materially affect financial position, results or cash flows. No goodwill or long-lived-asset impairment was recorded in FY2014, FY2013 or FY2012. Other-than-temporary investment impairments were described as immaterial.
- FY2014 net income included tax benefits of $18.7 million from lapses of limitation periods and $14.6 million from a settled tax position. The filing also notes a $210 million revolver draw in September, repaid the following month.
- Ernst & Young issued unqualified audit opinions on the financial statements and internal control over financial reporting; management assessed disclosure controls as effective.
Investor verification points
- Review the sustainability of growth and margins, including the impact of acquired network-optimization businesses and amortization expense.
- Assess exposure to AT&T and the ten largest customers, and whether customer concentration or project timing affects future revenue and cash conversion.
- Verify the post-year-end repayment of the $210 million revolver borrowing and monitor the use of remaining repurchase authorization and dividend capacity.
- Evaluate the $123.9 million of unrecognized tax benefits, tax incentives in India and Israel, and potential effective-tax-rate changes.
- Review acquisition performance and integration, including any contingent consideration related to Celcite, and test management’s project-estimate and revenue-recognition assumptions.