Yesterday, after market close, Amdocs Limited (DOX) declared financial results for the second quarter of fiscal 2011, easily beating the Zacks Consensus Estimates. Moreover, Amdocs provided a solid financial outlook for the ensuing third quarter, attributable to healthy demand trend for managed services.  As a result, in the after market trade on NYSE, stock price of Amdocs went up 81 cents (2.67%) to $31.20.

Quarterly net income, on a GAAP basis, was $94.1 million or 50 cents per share compared with a net income of $68.6 million or 33 cents per share in the prior-year quarter. The second quarter of fiscal 2011 adjusted (excluding special items) EPS was 56 cents, miles ahead of the Zacks Consensus Estimate of 51 cents.

Quarterly total revenue of approximately $789 million was up 6 % year over year, surpassing the Zacks Consensus Estimate of $782 million. Revenue was positively impacted by $5 million sequentially due to favorable movement of foreign currency exchange rate. Business in North America was comparatively strong and Europe showed signs of improvement.

Quarterly gross margin was 34.9% compared with 36% in the year-ago quarter. Quarterly operating income was $106.6 million, up 3.3% year over year. Operating margin was 13.5% compared with 13.9% in the prior-year quarter.

At the end of the second quarter of fiscal 2011, total order backlog was $2,590 million compared with $2,560 million at the end of the previous quarter. In the reported quarter, the company repurchased $161 million worth of shares.

During the first half of fiscal 2011, Amdocs generated $237.9 million of cash from operations compared with $358.1 million in the year-ago period. Free cash flow (cash flow from operations less capital expenditure) in the first half of fiscal 2011 was $182.4 million compared with $318 million in the prior-year period.

At the end of the first quarter of fiscal 2011, Amdocs had approximately $1,156.5 million of cash and marketable securities and no outstanding debt on its balance sheet compared with $1,433.3 million of cash and marketable securities and $200 million of outstanding debt at the end of fiscal 2010.

Segment Wise Results

Service revenue was $760.2 million, up 5.9% year over year. License revenue was $28.7 million, up 10.6% year over year. Technologically, Customer Experience Systems revenue was $737.2 million, up 7% year over year. Directory revenue was $51.7 million, down 6% year over year. The company’s core Managed Services revenue was $382.6 million, up 8.3% year over year.

Geographically, North America generated $598.4 million, up 4.5% year over year; Europe generated $97.2 million, up 5.5% year over year; and the Rest of the World generated the remaining $93.3 million, up 27.4% year over year. Separately, the emerging markets revenue was $52.1 million, down 9.7% year over year.

Future Financial Outlook

Management expects third quarter of fiscal 2011 revenue to be within the range of $790 million – $805 million. EPS, on a GAAP basis, is expected to be within the range of 45 cents – 53 cents. Non-GAAP EPS, excluding 4 cents – 5 cents per share of equity-based compensation expense, will be within the range of 57 cents – 63 cents.

Recommendation

We maintain our long-term Neutral recommendation on Amdocs. Currently, it holds a short-term Zacks #4 Rank (Sell) on the stock. We believe highly competitive nature of the Telecommunications Software Management System (TSMS) market and erosion of margins are the primary reasons for the short-term Sell rating. Major competitors of Amdocs are Convergys Corp. (CVG) and Comverse Technology.

 
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