Matt Edward Smith - Secretary & Head-Investor Relations Eli Gelman - President and Chief Executive Officer, Amdocs Management Ltd.; Director, Amdocs Ltd. Tamar Rapaport-Dagim - Chief Financial Officer.

Amit Singh - Jefferies LLC Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker).

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Amdocs Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the conference over to Matthew Smith, Head of Investor Relations. Please go ahead, sir..

Thank you, Karen, and before we begin I would like to point out that during this call, we will discuss certain financial information that is not prepared in accordance with GAAP.

The company's management uses this financial information in its internal analysis in order to exclude the effect of acquisitions and other significant items that may have a disproportionate effect in a particular period.

Accordingly, management believes that isolating the effects of such events enables management and investors to consistently analyze the critical components and results of operations of the company's business and to have a meaningful comparison to prior periods.

For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's earnings release, which will also be furnished with the SEC on Form 6-K. Also, this call includes information that constitutes forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future results to differ from those anticipated.

These include but are not limited to the effects of general economic conditions and such other risks as discussed in our earnings release today and at greater length in the company's filings with the Securities and Exchange Commission, including in our annual report on Form 20-F for the fiscal year ended September 30, 2015 filed on December 10, 2015 and our Form 6-K furnished for the first quarter of fiscal 2016 on February 16, 2016.

Amdocs may elect to update these forward-looking statements at some point in the future, however the company specifically disclaims any obligation to do so. Participating on the call with me today are Eli Gelman, President of Chief Executive Officer of Amdocs Management Ltd.; and Tamar Rapaport-Dagim, Chief Financial Officer.

And with that I'll turn it over to Eli..

Thank you, Matt. And good afternoon to anyone joining us on the call today. We are pleased to report solid results for our second fiscal quarter which included revenues at the midpoint of our guidance on a constant currency basis.

During the quarter, we maintained our strong win rate with respect to some of the industry's most important transformation projects.

We saw further acceptance of our managed services offering with strategic customers in Europe and the rest of the world, and we launched Amdocs CES 10, a major new product stack, specifically designed to accelerate the service provider's transition from the traditional to digital business model.

Now as usual, let me provide some regional color with the respect of our activities in the second quarter. Beginning with North America, sequential performance improved in quarter two and included encouraging signs of stabilization in AT&T discretionary spending following a slow start in the fiscal year.

Regarding our outlook in North America, we continue to see opportunities to support our customers in their most strategic long-term initiatives. Let me take a moment to expand on two of these.

First, Amdocs is proud to have been selected by AT&T as a leading partner to build key components of the Domain 2.0 software program, a groundbreaking industry development that will be integral to AT&T's plan to virtualize 75% of their network by 2020.

By leveraging our network-related knowledge and mission-critical software expertise, Amdocs will deliver a highly advanced and sophisticated set of products that will comprise major components of Domain 2.0 environment. Additionally, Amdocs will have the right to market solution suite globally.

Second, we have growing conviction that leading Pay TV operators in North America are finally contemplating projects which are designed to improve customer experience, streamline systems and respond to increasing competitive environment, which may result from AT&T merger with DIRECTV, the continued emergence of over-the-top service providers and new market entrants like (04:39).

Taking into consideration factors such as these, we expect Pay TV market dynamics to continue to change rapidly in the coming quarters and years, and we believe that Amdocs is well positioned to benefit as these trends unfold. The initial signs for Amdocs are positive and include in our recent launch of the unified Optimum website for Cablevision.

Now Optimum customers can benefit from many new engaging digital touch points and services. To summarize North America, we are pleased with our progression in quarter two and we still expect a stronger second half from AT&T along the lines we discussed with you last quarter.

We believe that the new growth opportunities such as Domain 2.0 and those in the Pay TV industry will take several more quarters to translate to revenues, and we are bullish about them. At the same time, we are conscious of the many moving parts, some of which are continuing to create near-term headwinds.

This includes the effects of consolidation activity currently in progression or may be contemplated among wireless and Pay TV operators. Moving to Europe, we delivered sustained growth and secured additional new wins with some of the region's leading service providers.

This includes Three Ireland, a subsidiary of Hutchison Group, which announced in March a five-year managed services contract with Amdocs to support its digital transformation across all line of businesses.

Looking ahead, Europe is on track to be an important growth engine for Amdocs in fiscal 2016, although quarterly trends may exhibit lumpiness given the timing of projects activity, foreign currency fluctuation and challenging macro and regulatory conditions.

Turning finally to the rest of the world, performance was healthy and as we moved highly complex projects toward production and extended the scope and activities with existing customers. For instance, Amdocs has been selected to assume responsibility for Vodafone India's postpaid billing system under a five-year managed services model.

This important deal highlights the growing strategic relationship with Vodafone Group, and demonstrates the increasing acceptance of our managed services offering in rest-of-the-world markets. Regarding our outlook in rest of the world, we are on track to deliver double-digit growth in FY 2016.

Nevertheless, we are closely monitoring development in Brazil, where the recent macroeconomic challenges are resulting in longer decision-making cycle than we originally anticipated. Moreover, we remind you that quarterly trends are likely to remain lumpy given the project orientation of our customer engagement in our rest-of-the-world markets.

Now let me take a moment to update you on our activities with former Comverse customers. First, we are pleased to report that we have successfully completed the post-merger integration of the Comverse BSS assets we acquired last July. Second, we continue to see positive level of customer retention and engagement.

Average DSIs are naturally smaller in comparison to our core business, but the total available pipeline is significant. During quarter two, Sky Italia upgraded its billing system to the latest Amdocs Kenan release, version 3.0, and assigned Amdocs end-to-end responsibility to the program with multiyear maintenance contract.

Additionally, we are encouraged to see managed services opportunities with former Comverse customers such as the five-year contract we announced today with Botswana Telecommunications. Overall, we are pleased with our regional performance for the first six months, especially given the challenges of the global macroeconomics and industry environment.

We are also on track with our operational performance, and we are quite satisfied with the recent track record of stable profitability we have delivered. Non-GAAP operating margins are fluctuating at the high end of our long-term target range of 16.2% to 17.2%, in line with our guidance from the start of the fiscal year.

This reflects our focus on maintaining consistent execution as we deploy a record number of complex transformation projects worldwide. As we said last quarter, projects such as these are quite challenging and sometimes come with a profitability below the company average.

Nevertheless, these activities provide the base and foundations on which we can secure additional business in subsequent years to drive long-term growth.

An example of our ability to smoothly expand our activities and bring additional business value to customers is Vodafone Netherlands, where in 2012, we modernized their full BSS stack on CES 8.1, primarily to support postpaid customers.

In subsequent deals, we enabled integrated prepaid capabilities by adding Turbo Charging then upgraded enterprise and retail store systems and delivered the complex OSS consolidation to production.

Looking ahead, we believe we are well positioned to bring multi-play functionality to support Vodafone Netherlands' cable joint venture with Ziggo, a subsidiary of Liberty Global. In summary, through continuous system and service upgrades only, we were able to support our customers in their ever-changing business needs.

Finally, I'd like to update you with our latest thoughts on capital allocation, which as you know is a subject we constantly review as part of our strategy to enhance shareholder value.

As we discussed last November, over the previous three fiscal years, we returned approximately 80% of our free cash flow to shareholders by executing on our share repurchase activities at levels well above that suggested by our 50/50 framework.

We felt that we could do that while still supporting our strategic initiatives, and we indicated that we would plan to maintain a fairly similar philosophy to our capital allocation in fiscal 2016. Since then, our visibility with respect to activities at AT&T and continued business momentum at Comverse has improved.

Additionally, we are tracking towards the midpoint of our full-year target of non-GAAP earnings per share growth of 3.5% to 7.5%, and our cash balance is healthy as a result of robust free cash flow generation and recent stock option exercises.

With these conditions in mind, we plan to increase our capital return to shareholders to roughly 100% of free cash flow throughout the second half of fiscal 2016, which we believe we can do without significantly effecting our capacity to execute M&A as another vehicle to support our strategy.

This decision is consistent with our ongoing commitment to disciplined and practical allocation of cash, and our balanced philosophy of 50/50 framework. We will update you on the longer-term plans for capital allocation when we provide guidance for fiscal 2017 in November.

Of course, we retain the option to exercise flexibility and will vary the actual level of share repurchase from quarter to quarter depending on factors such as outlook for M&A, financial markets and the prevailing industry conditions. With that, I will turn the call over to Tamar..

Thank you, Eli. Second fiscal quarter revenue of $926 million was within our guidance range of $905 million to $945 million and included a negative impact from foreign currency fluctuations of approximately $1 million relative to the first fiscal quarter of 2016.

Our second quarter guidance range had included a marginal sequential impact from foreign currency, so revenue performance was therefore at the midpoint of our expectations after adjusting for foreign currency fluctuation.

Our second fiscal quarter non-GAAP operating margin at 17.1% represents an increase of 10 basis points compared to the first fiscal quarter of 2016 and towards the high end of our long-term target range of 16.2% to 17.2%.

Below the operating line, non-GAAP net interest and other income was $1 million in Q2, reflecting positive contributions from foreign exchange. For forward-looking purposes, we continue to expect the non-GAAP net interest and other expense in the range of a few million dollars quarterly due to foreign currency fluctuations.

If we look at non-GAAP EPS, it was $0.92 in Q2 compared to a guidance range of $0.84 to $0.90. Foreign exchange gains, which are included in net interest and other income, and a slightly lower effective tax rate positively impacted diluted non-GAAP EPS in Q2.

With respect to Q3, we expect the non-GAAP effective tax rate to be on the high end of our target range of 13% to 16%. For the full fiscal year 2016, we expect our non-GAAP effective tax rate to be within our target range of 13% to 16%. Free cash flow was at $91 million in Q2.

This was comprised of cash flow from operations of approximately $118 million less $27 million in net capital expenditures and other. This result includes an annual cash bonus payment for the prior fiscal year, consistent with our guidance last quarter.

Additionally, we remind you that we expect free cash flow to convert at a rate more on par with our expected non-GAAP net income in fiscal 2016. DSO of 74 days increased by 2 days quarter over quarter. This item may fluctuate from quarter to quarter. Total unbilled receivables increased by $9 million as compared to the first fiscal quarter of 2016.

Our total deferred revenue, both short and long term, increased by $14 million sequentially in Q2. As indicated in the past, both of these items may fluctuate from quarter to quarter. Our cash balance at the end of the second fiscal quarter was approximately $1.2 billion.

Our 12-month backlog, which includes anticipated revenue related to contracts, estimates revenue from managed services contracts, letters of intent, maintenance and estimated ongoing support activities were $3.1 billion at the end of second fiscal quarter, up $10 million sequentially from the end of the prior quarter.

During the second fiscal quarter, we repurchased $101 million of our ordinary shares under our $750 million authorization plan.

We had $60 million remaining out of that authorization as of March 31, and we also have an additional $750 million authorized pursuant to our February 2016 share buyback program to be executed at the company's discretion going forward. That additional authority does not have a stated expiration date.

Now turning to our outlook, we expect revenue to be within a range of $910 million to $950 million for the third fiscal quarter of 2016. Embedded within this guidance is a positive sequential impact of approximately $5 million from foreign currency fluctuations as compared to Q2.

For the full fiscal year 2016, we expect total revenue growth slightly below the midpoint of our previously guided range of roughly 2% to 6% on a constant currency basis.

This outlook incorporates a pickup in discretionary spending of AT&T and continued business momentum with former Comverse customers as well as various risks and unknowns, including global macroeconomic challenges and the effect of consolidation activity in North America.

On a reported basis, revenue growth is also tracking slightly below the midpoint of our previously guided range of 0.5% to 4.5% for the full fiscal year.

Consistent with our previous guidance, this range includes an anticipated drag from foreign currency fluctuations of about 1.5% relative to the exchange rate prevailing at the end of our fourth fiscal quarter 2015.

Incorporated within this outlook and consistent with our prior expectation, we anticipate revenue from our directory business in fiscal 2016 to place a drag of less than 1% on the total company results. We continue to anticipate our non-GAAP operating margin for fiscal 2016 to be at the higher end of our long-term target range of 16.2% to 17.2%.

As a reminder, operating margins may fluctuate within our long-term target range from quarter to quarter. We expect the third fiscal quarter diluted non-GAAP EPS to be in the range of $0.84 to $0.90.

Our third fiscal quarter non-GAAP EPS guidance incorporates an expected average diluted share count of roughly 152 million shares and the likelihood of a negative impact from foreign exchange fluctuations in non-GAAP net interest and other expense.

We excluded the impact of incremental future share buyback activities during the third fiscal quarter as the level of activity will depend on market conditions.

For the full fiscal year, we are on track to deliver non-GAAP EPS growth towards the midpoint of our previously guided range of 3.5% to 7.5% Our full-year EPS outlook does factor in expected repurchase activity over the year.

As Eli indicated earlier, we plan to return approximately 100% of free cash to shareholders for share repurchases and dividend payment in the second half of fiscal year 2016. With that, we can turn it back to the operator to begin our question-and-answer session..

Thank you. Our first question comes from the line of Ashwin Shirvaikar from Citibank. Ashwin your line is open, could you check your mute button? He may have left the computer, we'll move on. Our next question comes from the line of Jason Kupferberg from Jefferies..

Hi, guys. This is Amit Singh for Jason. Thank you for taking my question.

Just quickly on your overall guidance, first thing I wanted to check is what is the organic revenue growth expectation over there? Has anything changed in the contribution that you're expecting from Comverse for the full year?.

No, not significantly. As we indicated in the beginning of the year, we thought it will take some time until we start seeing the upsell and synergy opportunities, just given how naturally sales cycles work. So, we are seeing the business momentum picking up. We are happy about where we are seeing the pipeline.

We just talked about a couple of examples of new deals we're seeing. So, I'd say roughly in line with what we thought in the beginning of the year..

And also, the encouraging thing there with Comverse is that we came up with, like Kenan going digital, basically offering extension of the Kenan offering with the new digital components from the CES stack, which is a very nice combination.

It does not force Comverse customers to move away from some of the billing engines and rating engines that they like. And that allows a gradual transformation to those that want to take this path. Obviously, people want to transform to CES, we encourage it as well.

But we see different angles of positive momentum with the digital component, with going to managed services, which is quite rare for, in the past, had been at least, with Comverse customers, and the acceptance in many other areas. On top of all that, we have additional services that Comverse did not offer before.

So, we more or less see that the engines that we anticipated while carrying this deal, start warming up and performing and we hope for a continuation of it..

All right. Great. And then between last quarter and this quarter, now you're expecting your revenue growth to be slightly below the midpoint of your guidance range. I just wanted to get a sense of what changed there. And also, it seems like a lot of AT&T revenue growth is sort of, and there's a bit of back-end loaded acceleration in your guidance.

I just wanted to test the – your confidence level in that..

Well, Amit, it's mainly a matter of timing. We're basically trying to tell you that we are not losing the project we planned. We're not deteriorating on pricing significantly.

I mean, the regular pressure all is there, but when you take into account the overall market conditions and you look at our competitors and a lot of not so good things that's happening around us, we cannot exclude that there will be some slowdown in certain areas of ours.

And when we contemplate forward on a detailed level from bottom-up all the different accounts, the timing of projects and so on and so forth, we came to the conclusion that the third quarter and mainly fourth quarter will be, again, they'll grow faster than the beginning of the year.

It's just that the overall will be slightly lower than the midpoint. I would say, probably 30 basis points, 40 basis points, 50 basis points, maybe half a percentage, not a – it's not like significant. But it's a result of when you add up all the timing and execution of projects that's what you'll end up.

And I think that in terms of our position, our momentum in the market and many other indications including Comverse and the new projects in Domain 2.0, which is a network function virtualization project. And the wake-up that we see in the cable and satellite industry show that the fundamentals, that we believe the fundamentals are as good as always.

And it's just that when we add up all the numbers and some of the slowdown of project conversion from sales to project, or the execution of a project, we are guiding to slightly below midpoint on mainly in the quarter four..

Thank you. And we have a question from the line of Ashwin Shirvaikar from Citi..

Thanks. Hi, Eli. Hi, Tamar..

Hi, Ashwin..

Sorry, I was disconnected..

I hope that you heard our prepared comments, though..

I did. I got disconnected just as Tamar was saying let's go to questions. So, congratulations on the quarter. I like the capital allocation announcement. It's good to hear the wins at AT&T, I guess two sub-parts.

Do the wins affect the pricing on the overall contract? And secondly, on their earnings call, AT&T also had comments on service delivery automation and IT rationalization.

How does that affect you?.

So, pricing in general is always an issue that we deal with. Our new deal with AT&T does not connect to pricing. I mean, we are competitive, everybody knows AT&T, it's not like we are the only people that knows AT&T, so we have to be competitive on everything we do there. Definitely on everything new that we do.

And these new activities on the network function virtualization is a fruition of a very long process. AT&T does not take any discounts or nothing less than perfect. So, they obviously compared us with everybody and his wife. Everybody. Everybody want to be part of this project.

And the fact that we are the lead partner to develop together with AT&T these components of Domain 2.0 is definitely encouraging and exciting, and it's a groundbreaking product set. Now, whether we will be able to sell it later on in many copies or whatever, I don't know yet. It's way too early, we are just constructing it as we speak.

But pricing was not part of this thing. It was pure engineering capability, no discount, no shortcuts, tight process that took more than a year. And you can imagine that all the big names, I mean like the biggest names in the industry were competing for that and we won it and we are very pleased with it.

In terms of the other comment about IT rationalization and many things like this, we are working with AT&T as a very close partner for many years, especially in the last few years in many new areas. I'm sure that they are focusing with high level of attention to DIRECTV and the transformation that they need to go through there.

They did not do this acquisition for $67 billion or so for leaving IT intact. We have talked about things that they're doing on the wireless spec, wireless. I mean, Cricket, everything. And now some of this – some of it, I hope, that will be with us in the future. We want to win as much as we can.

But we bring a lot of value to AT&T, I believe, and we are working very, very diligently to try to convince AT&T such as in the innovative Domain 2.0 that even on new projects we are the most trustworthy, capable partner that they can choose. So, the most important thing in my opinion there in management is that they have activity.

They want to address it. They want to tackle it head on. AT&T does not leave things unattached or just sitting on their hands, that's not AT&T. So....

Yeah..

...the rest of it, the details will have to wait until we'll get there..

Yeah. Thank you for those comments. Just follow up on the note very good managed services traction that you're seeing, particularly nowadays, outside the U.S. and the question I have is, if you can comment on the impact on the business model. I mean, does it become more stable in terms of outcomes because of this worst impact on profitability.

Do you need to build in-country facilities in each of these countries to support managed services or can you do with just regional global facilities?.

Thank you, Ashwin. I think it's a very important point. We always said that as part of the buildup of relationship with customers, we see that as a long-term cycle.

Usually starts with a transformation project, and we would like them to see that evolving into additional capabilities, we could provide managed services, and definitely an important one among that list as well as upsell of additional product.

And with the managed services, I'm happy to say the phenomena you described that we are seeing also outside North America in recent years, customers moving into managed services. Sometimes it's a customer that's already implemented our product and went into production and then moving into managed services.

And sometimes like in the case of the recently announced deal with Three in Ireland, it's assigned what we call managed transformation that includes the modernization project as well as taking responsibility for the legacy they want through managed services, and then put the new system that will be put in place.

In general, the delivery model we have is comprised of large global centers of competencies in different aspects, as well as some relatively thin layer usually on the ground. We have been practicing that for years including automated tools around that and different sophisticated capabilities we've built in terms of how to do it in an effective way.

And in terms of the business impact, we definitely like the recurring nature of the revenue that comes with the managed services. And not less important is the fact we are becoming incumbent within the customer on a day-to-day basis.

We stay very close to what's happening within the customer environment, can identify different pain points, can bring to the table different ideas and practically suggest additional things we can do for the customers. So, it's creating a different type of relationship beyond just a contractual revenue that is coming in with that repeated activity.

And from margins point of view, it's comparable to the average corporate margins, usually in a managed services bill. On a specific bill, there is some pressure in the beginning as we put the setup cost in place and build the capabilities and then it's expanding over time.

But given the fact that it's a portfolio of many deals across the company, we do see that actually as something that can definitely help in building the scale and the capabilities..

I just want to add that we are expanding the operational capability as we go. In the last three years we opened operation centers in Manila for Southeast Asia. We are expanding our activities in Mexico in Guadalajara.

We have an operations center in Nazareth, and we developed software that allow us to control travel ticketing, monitoring, preventive managed services globally so we can move the traffic based on where we have people availability and when we have expertise.

And so this entire machine is becoming more scalable and more effective as we're adding more customers into this environment. Altogether, it's usually a good thing for us..

Thank you. One moment to see if we have any additional questions. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Matthew Smith for any closing comments..

Thank you very much for joining our call this evening and for your continued interest in Amdocs. We look forward to hearing from you in the coming days, and if you do have any additional questions, please call the Investor Relations group. Have a great evening, and with that, we'll conclude the call..

Thank you..

Thanks..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day..