Welcome to the Amdocs Second Quarter Fiscal 2015 Earnings Call. My name is Bakiba and I will be your operator for today's call. [Operator Instructions]. I will now turn the call over to Matt Smith, Head of Investor Relations. Matt, you may begin.

Thank you, Bakiba. 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 risks include, but are not limited to, the effects of general economic condition; risks related to our ability to close the acquisition of assets of Comverse and successfully integrate those assets into our business. 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, 2014, filed on December 8, 2014; and our Form 6-K furnished for the first quarter of FY '15 on February 9, 2015. 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 and Chief Executive Officer of Amdocs Management Limited 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're pleased with our second fiscal quarter, during which we continued to focus on the various components of our long-term growth strategy. We expanded our customer base by securing significant wins in strategic markets. We persistently executed to bring highly complex projects toward production. And we expanded and extended relationship with long-standing customers through enhanced product functionality, broader services and the penetration of new buying centers. We believe that the model of initial penetration, followed by strong execution and then follow-on expansion, is a cornerstone in our ability to continuously improve our market share. This model has also translated well in our Rest-of-the-World market, where we achieved record revenue in the second quarter. As always, we're focused on our financial discipline which includes the management of our foreign currency hedging program. This program is designed to protect our profitability and robust free cash flow generation. And we're pleased that it has been proven effective for the volatile currency markets over the last two fiscal quarters. As for the allocation of our free cash flow, we remain committed to returning capital to shareholders in FY '15, at levels substantially above that suggested by our long-term 50/50 framework. At the same time, we have continued to allocate and to evaluate long-term growth initiatives as a use of our cash, including M&A. Along these lines, we returned more than 100% of free cash flow to shareholders in the second quarter, including through a dividend. Additionally, we're pleased to announce that today, we signed an agreement to acquire a substantial majority of the BSS, Business-Support System, assets of Comverse, for approximately $272 million in cash, subject to customary closing conditions. This strategic deal geographically complements our existing activities and will…

Thank you, Eli. I'll begin with our second fiscal quarter revenue which was in line with our midpoint of our expectations on a constant currency basis. Second fiscal quarter revenue of $903 million was within our guidance range of $900 million to $930 million. And included a negative impact from foreign currency fluctuations of approximately $16 million, relevant to the first fiscal quarter of 2015. Our second-quarter guidance range already embedded a negative sequential impact of approximately $3 million from foreign currency fluctuations. Revenue performance was therefore in line with the midpoint of our expectations, after adjusting for the additional negative impact of foreign currency fluctuations. Our second fiscal quarter non-GAAP operating margin was 17%, an increase of 10 basis points compared to the first fiscal quarter of 2015 and within our target range of 16.2% to 17.2%. We continue to expect operating margins to fluctuate within this range for the remainder of FY '15. And we would not extrapolate a continuing trend of margin expansion from the strong results in Q2. Below the operating line, non-GAAP net interest and other expense was $1.7 million in Q2. For forward-looking purposes, we continue to expect a non-GAAP net interest and other expense in the range of a few million dollars quarterly, due to foreign currency fluctuations. Diluted non-GAAP EPS was $0.82 in Q2, compared to guidance range of $0.78 to $0.84. Our non-GAAP effective tax rate of 15.3% in Q2 was modestly higher than our expected annual range of 13% to 15%. While the effective tax rates may change from quarter to quarter, as was the case in our first half of the fiscal year, for the full FY '15, we continue to expect our non-GAAP effective tax rate to remain within the target range of 13% to 15%. Free cash…

[Operator Instructions]. And our first question is going to come from Ashwin from Citibank. Please go ahead with question or comment.

My question is on Comverse and Tamar, you said that Comverse's public BSS information is not a good guide with regards to revenues. Would that comment also be true with regards to the segment margins that they have? And if so, what should we assume for modeling purposes with regards to what the revenue contribution and net income contribution might be in FY '16?

As I said, there are some accounting purchase adjustments, as well as some differences in the specific assets that we've acquired relative to what was included in their segment. So overall, we expect that the revenue contribution on a quarterly basis would be in the low tens of millions of dollars for the first couple of quarters. We'll come with more accurate numbers as we get into the next fiscal year and of course, as part of our overall guidance then. In terms of margin, after inclusion of this acquisition, we believe we will remain within the operating margin, long term target we've provided already, of 16.2% to 17.2%. And from the earnings per share point of view on a non-GAAP basis, first year should be neutral to EPS. And thereafter, it should be accretive.

Okay. And so when you're making asset purchase like this, where you only buy some of the assets, would that also mean that you're not then able to use the NOLs that Comverse has piled up?

The NOLs was not a major part of this consideration for the deal. You're right, it's an asset deal, we will look forward in terms of how we're structuring the different activities in line with our current tax structure. The NOLs was not part of the consideration here.

Ashwin, I would like to add that we believe that the financially, it's a good deal. But strategically, we believe we have the potential to be a brilliant deal over the next couple of years or few years because we're acquiring relationships and long-term maintenance contracts and a presence in additional dozens of customers, very important customers, in different regions that we're active in or are complementing our regional presence. We're talking about customers that used to have a very limited functionality, mainly billing and invoicing and things like this, from the Kenan days or the Comverse one days and so on and so forth. So when you look at the breadth of product and services that we can offer and relationships and product and services relationship and managed services, this actually should be the highlights of this deal. And from this respect, we believe it's strategic, but also can turn into, financially, a very intelligent deal. And I think we also would be very important for the customers that we're acquiring. We had the chance to talk to some of them and we had a very positive response, an initial response from these customers. So all together, these are the essence of the deal, while being also a good financial deal.

Yes, no, the financial part I get and I'm trying to more understand what exactly you bought and what exactly you said no to in terms of the assets you're purchasing. I completely understand the relationships and the good long track record you guys have of growing relationships, so that's all good. Just trying to understand what you got and what you didn't get.

I will tell you that -- only that much. We're very careful in what we're bringing home. And we know we took the assets that we thought are relevant. Part of the reason why it took us longer, it was not a simple thing for Comverse on their side to, in a way, split the company into two pieces, the digital or the VAS aspect and the BSS and that was the breakthrough in the dialogue with them, when they agreed to do it. And then they kept their end to this deal. And on the overall assets, we basically took, really, what we needed and what we can actually reuse and expand and so on and so. So we were very careful in executing this deal.

Thank you. Our next question is going to come from S.K. Prasad Borra from Goldman Sachs. Please go ahead.

A couple, if I may. Probably to start off, to get better view on your guidance, what would you need to achieve higher end of the guidance? Is it more of the deals coming online? Or is it a case of signing newer deals? If you can provide some color on that?

All of the above. We need the more projects, more and new logos and which will be usually translated into new opportunities over time. Keep on executing and just a larger or higher rate of transformation and new projects in the market will be what we need.

And from an end market perspective, we have seen announcements from various telcos. CapEx was probably very weak in the first quarter, with the expectation that as you look at second half the general spending patterns should improve. I know you guys are more reliant on OpEx than CapEx, but just from a spending perspective, it seems to be getting healthy. Are you expecting a post-impact from that, at all?

We're not that correlated to these kinds of trends on a sequential basis, from the CapEx point of view of the spend. And in general, we're seeing very, I would say, active dynamics in the North American market and in general. You referred, I assume to the North American spend. But overall, if you look on our results, we're definitely happy about the momentum we're seeing. Also, in rest of the world which is becoming a more meaningful part. And in North America, naturally, the consolidation, whether things will happen or delay or slowdown, it could have some impact on the activity level that we will see, moving into the next half of the year.

Maybe one comment about the way to look at CapEx [indiscernible] we're not that related to that. We're not 100%, also, correlated to the OpEx. It's kind of the beauty of our business model. But specifically to the CapEx, when you look at companies like AT&T or other companies, you may sometimes need to read into the fine print, because they may reduce the CapEx location into North America markets, for example. But they take some of this money and invest it elsewhere. With AT&T, specifically, it's quite clear that that's what they are doing. They're moving some money outside of North America. So you need to look at the overall picture. So if that, for example, means that they are going to be in the very comprehensive network in Mexico, for their [indiscernible] and Nextel assets that, in a way, could actually represent new opportunities which we don't know yet, but could represent new opportunities. So you need to really look very carefully in the way that they are spending the money in North America. Sometimes, it's basically reallocation of money into different geographies or different activities.

Just a last one, from my end, post-acquisition of Comverse BSS business, now is your strategy clearly shifting to acquiring some growth year assets? Or would you consider more consolidation in the BSS space?

As we said all along, we don't have a rule for that. We will do things that will strategically support the growth of the company. It takes us a long time to convince ourselves that we need it, because we know all the risks that have associated with M&A. But I would believe that we will keep on using M&A as a vehicle to accelerate growth, as sometimes consolidation, sometime technology, sometime diversification, sometime just buying some intellectual property from customers that we can generalize and do better with. So I would say all of that. We would -- we actually like to use M&A in different directions.

Thank you. Our next question is going to come from Tom Roderick from Stifel. Please go ahead.

So Tamar, I think if I heard you correctly, you were talking about revenue contribution from the acquired BSS business from Comverse being in the low tens of millions per quarter. Now from our modeling of Comverse in the past, we had that at over $200 million this year. So that would be maybe something less than half or yes, a little bit less than half of that run rate or about that. Is that just a conservative attempt to acknowledge that there will be some disruption right out of the gates? Or is that low tens of millions per quarter sort of the rough run rate of the business that you're buying and you hope to achieve upside to that when you can up-sell to the install base?

First of all, there is a certain treatment of the purchase accounting in relation to deferred revenue. As you know, within the Comverse results there was a waterfall of deferred revenue impacting their numbers which will change when we go through the purchase accounting exercise, from the numbers point of view. Then there is also other factors, such as the time it will take up to create additional upside of business, as we move into that level of new logos that Eli mentioned. We're very happy about the opportunity to go and expand and selling more offerings and et cetera. But this kind of new sale cycles will take time.

And Tom, don't forget that we're taking less than 100% of the assets. And don't forget that we have to be conservative in the first couple of quarters because some of it we don't know yet. So -- and what is low, exactly? I mean, like you're saying low is $220 million or maybe it could be $230 million? But there's something in this range. We're not trying to guide the exact number right now, because we're still walking on that and as Tamar said and I added, we have some additional consideration. It's a good deal.

And one of the areas where it's been very clear that Comverse has been trying to build out its BSS business has been in managed services. Some of that has lent itself to tier two, tier three markets, emerging markets, Latin America, to a certain degree. Certainly India and other places like that. Can you talk, Eli, about the competitive dynamics in those markets? How you think that Amdocs can augment that managed services strategy, if in fact that is part of what you've acquired? And then just lastly on that, how you think you can leverage the installed R&D, the developmental and engineering work that Comverse brings to the table, particularly as you look at your Israeli operations to achieve some synergies on that front?

So for the first question, look, almost 50% of our business is managed services. Obviously, we understand something about it. We also tried it successfully, in recent years, outside of North America, in Europe, in Latin America, in Southeast Asia, on the OSS front. I mean, in five different dimensions. So obviously, we would try to take whatever we can within the assets that we're buying and accelerate the managed services concept, because in many cases, it would be applicable. We believe that we're the strongest player in this -- in managed services, within this domain. So without seeing -- whatever we get is a stepping stone and the rest of it, we can climb up and use it as a bridge head to expand. As for the engineering aspect of it, it's actually -- the BSS assets of Comverse are not in Israel. It's in Boston; most of the Kenan engineering in New Jersey, close to our operations. So in terms of engineering, we will take the engineers we need. We would not take those that we don't need and that's it, but it's not in Israel. Actually, in Israel, a majority of the business in Israel is their value-added services and the digital life. The digital aspect and this deal is very non-Israeli centered.

Thank you. Our next question comes from Tavy Rosner from Barclays. Please go ahead.

I was going to ask, when looking outside of the core business, if you look at the address and moves, I was wondering if you could give us an update, since your presentation in December, what you view the opportunities for the new domains, perhaps is 2015 and 2016? What kind of revenue contribution we could see from there?

I'm not sure we will have the time to cover all of it. But just to give you a glimpse, we distinguish between several things that we think that will be of size in the near future. And things that are on the runway, that has potential, but financially or number-wise would not make an impact in the near future. So among the things that have definitely revenues and EBIT along with it is some of the network application, the RAN, radio access network optimization activities, the SON activities. New services that we have, like all the activations and things like this which is part of our services 3.0 initiative which was part of the presentation at the analyst day about growth engines for us. On the newer things, we see progress on many fronts, including the big data analytics applications. Now we added another use case for big data analytics for the network which is called the best network investment, which is helping the carriers to decide in which network elements and which network geographies and what technology to invest their money. On the mobile financial services, we see progress in the emerging markets, especially, but not only. We have some new projects in Sprint and in other places. On the network functions virtualization, this is more in the proof of concept and small project mode. But again, this one of the things, like [indiscernible] and other, that can one day -- that I cannot predict right now, but can climb quite fast. So the bottom line is that we believe that we make progress fronts that we presented in the analyst day. And if you know this, some of the press releases that we're putting out represent it. And the rest of it, we'll have to give you an update on a more detailed level, some other time.

And a housekeeping one for Tamar, when looking at the EPS guidance for the year, for the growth of 4.5% to 7.5%, on what kind of share count is this based?

We're not committing to the share account of that. We have talked about the fact that we're planning to be, for the fiscal year, substantially ahead of our 50/50 return rate of cash to shareholders. You've seen we've done it the first half of the year. But we have not committed to share count behind that.

Thank you. Our next question is going to come from Mark Sue from RBC. Please go ahead.

Maybe just on the capital returns, you've commendably returned over 100% of your cash to shareholders. You have had some recommendations from folks to add more debt to actually lever up on the balance sheet. Any thought there and to potentially run at that rate of continued high returns to shareholders?

So yes, some people suggested it. We said all along that we would need to have a good reason to do that. Just to leverage the company for the sake of leveraging your company, not necessarily is a good idea. But we can see situations that they will go into a significant M&A that will make sense to leverage the company, if we can strategically justify a large deal, we can strategically justify the leverage. Other than that, we said we have a philosophy of 50/50, but we're executing based on the reality of what we have, the performance of the company and the cash that we generate. In some cases, we get back from exercise option. So we navigate this line carefully all the time. We're giving you, usually, the framework of our thinking. But if you want to get the best outcome of this framework of 50/50, it is that we want to do both. We want to return cash to shareholders and we want to continue doing M&A and now it's a -- depends on which quarter and which year, on the assets that we have, as we demonstrated with this transaction. We're very careful to do an asset deal of what we need. The minimum price that we could pay for such a deal, its quite easy to do big deals and then look for ways to justify it.

Yes. And so the recurring theme, it seems to be large deals. We'll be seeing it where you've got customers who are consolidating telcos and cable and others and wireless as well. And we're also seeing it with some of your competitors, such as Nokia and Alcatel getting together and Ericsson moving warranty of markets and they are driving out scale to do that. So as we look forward over the next few years, is it a business of increasing scale? And is that the driving force right now in terms of your priority to -- and also to grow? And maybe your thoughts on how do you scale that organization in a nonlinear fashion? Since it is a very headcount-centric business?

So yes, scale does matter. But it's not scale for sake of scale. It's the ability to maintain a highly competitive product set and services set, in a high scale. This is the name of the game. Otherwise, the IBM of the world and the Tech Mahindra's of the world would do better and they don't, because they don't have the sophistication or the product set and the offering that we have. And they do not invest in the future of this industry. So it's not only the scale. We specifically relate to the scale in the Comverse context because one of the reasons, I believe, that they got to the conclusion that it's better home for this asset -- Amdocs is a better home for this asset is because they cannot justify their huge investment in the R&D. With the number of [indiscernible] and the number of customers they have. So it is a matter of scale, but it's not only a matter of scale. And in terms of the -- and the strategy for growth, we have said all along, we're expanding geographically, we're expanding on the services, we're expanding on the products. We will do some consolidation. We may do some diversification. We actually are not trying to think at least and sometimes execute on several dimensions of growth.

Thank you. Our next question is going to come from Jason Kupferberg from Jefferies. Please go ahead.

This is Amit Singh for Jason. Just wanted to quickly come back to the growth in different geographies. So in North America, the revenues this quarter were pretty much flattish, year over year and that is significantly down from where you were, especially at the end of last year. And you had spoken about growth in North America to come down. But as we look at -- and I understand the long-term opportunities there from consolidation et cetera. But in the near term, how should we think about growth in the region? And how do you plan to achieve your guidance? Is most of the growth going to come from emerging markets? Or you expect North America to start improving from here a little bit?

So in general it's a matter of the size of the base of business we have in each one of the regions, not just the growth rate. So 1% on our North America base still is more significant than a few percentage points on the rest of the world. But nevertheless, I believe there is growth opportunity in North America. Yes, we're moderating relative to last year. But you need to remember, first of all, it's a matter of natural activity level of certain project that is ramping down or ramping up, plus Canadian dollar exchange rate is also impacting results in North America. And given recent two quarters fluctuation of the currency there that has been material, as well. So overall, we continue to be focused on North America. We believe we have a very strong presence there, the right offering, the right partnerships and yet we're very excited about the growth opportunity in the rest of the world, as well. So we don't see a contradiction, of course.

And in Europe, Europe had been good to us in the last couple of years, despite the overall microeconomics. And we believe that the assets that we will acquire through the Comverse deal will also accelerate that. So we should not underestimate Europe at all. As for North America, I just want to mention that there is very little activity today, still, in the cable industry. Now that Comcast is dropping the deal with Time Warner, it may change the dynamics in this market, because they did it to go back to the drawing boards and decide about a different strategy. Charter may decide to do something and other people. So this entire pay TV has been very -- almost dormant, in terms of technology, IT technology. AT&T DirecTV can generate some boost in North America, and network virtualization, it will flow. We know that it will be slow to come. But when it comes, it represents a quite sizable opportunity for Amdocs. And we believe the consolidations is not over yet, at all. Not among the wireless, not among the satellite and pay TV, maybe the cross between them, maybe another multi-play player. Could be that money from the outside will come into North America. So North America is just in a period right now of wait and see and a lot of it depends on regulatory approvals and so on and so forth. But it's still a very strong and very dynamic market and we think that we may be able to keep on tapping into this.

Quickly on FX, we talk about FX impact on the top line, but if you look at margins in general, is there any benefit to the margins from FX that you're witnessing?

It's not a matter of benefit. But I have to say we're satisfied with the fact we were able to protect the profitability of the company, despite a major negative impact on the top line which has been always the design on our hedging program, to protect the bottom line. So that has been working well for us and effective indeed.

[Operator Instructions]. And our next question is coming from Sterling Auty from JPMorgan. Please go ahead.

This is actually Ken Talanian on for Sterling. You mentioned earlier that customers had a positive reaction to the acquisition of the Comverse assets. I was wondering if you could share any specific commentary from key customers like Telstra?

No, obviously, we cannot do that. We cannot go to the specific comments. The comments are what you would expect, but it's nice, still, to hear them. Some people say they would love to tap into our services capabilities and accelerate. We do services with a great knowledge of the product and the space. It's not generic SI. So this is one type of comment. The other make the comment that it will be much easier to do convergent project, because we own post-paid and pre-paid and it's all integrated. And we have -- so that's something that will excite other people. Some people would -- that we won't like the SingTel project, is something that we won about two quarters ago. But in Optus, for example, we're converting from Comverse old assets to Amdocs. So obviously, we can ensure a smoother transformation. So you get different comments from different places. But I think the overall theme is that they understand the logic, they support it and we're the best house for this type of assets. They would have the old concerns, obviously, about the future; now they would have less. And these are the type of comments. Obviously, a specific comment by a specific CEO, a specific CXO is not appropriate.

Thank you. We have our next question coming from Ashwin from Citibank. Please go ahead.

I just wanted to follow up, just a clarification on the FX impact, Tamar. You said that a couple of million dollars more, sequentially. Is that correct? And would that then basically be basically what, $18 million, $19 million impact in Q3? Is that what you're saying?

You mean on the top line, Ashwin?

On the top line.

So relative to the -- comparing quarter to quarter, Q3 guidance to Q2 actual results, we already took into consideration $2 million negative impact from FX. Given the exchange rates we've seen at the end of the recent quarter. But of course, the environment may change. Just sharing with you what the assumption we've baked in already.

Right, so Q2 total impact from currency was--

Q2 relative to Q1 was 16.

So now it's 18? In the quarter, it's an $18 million impact? Is that what you're saying?

$18 million is if you compare Q3 to Q1. I'm sorry, it's a bit confusing.

No, so okay, you're doing sequential, okay.

So it's sequential. Sequentially, Q2 relative to Q1 was $16 million. Looking into the guidance of Q3 relative to Q2, it's $2 million.

And when I consider that for six or seven quarters now, the width of your revenue range has been $30 million and now it's -- I think it's $40 million. Is that indicative of a -- I would say a weaker dynamic, in terms of revenue conversion or anything like that? Or are you just giving yourself room to play because of the uncertainty with FX and so on and so forth?

It's primarily the FX issue. We've just, in this quarter, relative to our guidance, it was $12 million, $13 million. So we wanted to make sure we leave enough room in a bigger range, for the FX topic.

Okay. And one last question, if I can squeeze this in. You guys have made some pretty good, interesting investments in the mobile money, internet of things, in those areas. Could you comment on the monetization of some of those? I know you acquired Utiba and signed a couple of mobile wallet type contracts in the last couple of quarters. But is it possible to size up what that opportunity is, what it's growing at and so on?

The sizing of it will probably be premature. I can tell you that the amount of -- if you can say energy that we see in this topic -- the amount of new wins that we have. The presence that we're getting in some quiet customers, so the Utiba and some new customers, in the right markets and the right market meaning, for us, in India, Indonesia, Philippines, Latin America and others. We're not coming with some new use cases of electronic money, if you will which are premature to share right now, but interesting ones. And we're also seeing some progress in the developed markets, with this type of approach. So we're pleased with the progress there. But we've said all along, it will be a long runway. And maybe then, the slope of growth will change quite significantly and dramatically. I have also to mention that we see it as a topic that really -- it's a topic that attracts a lot of interest from the world. Recently, we took upon ourselves to be a leader in WEF, in the World Economic Forum, in Davos and in other places, in promoting this financial inclusion. You know, the accessibility to money and financial services, to the un-banked and the under-banked. And that's part of the same notion that this topic is very, very important, in terms of the world and how people are treating it. So all together, it's a very positive thing. On the internet of things, for example, we made some progress, interestingly, in some application of security at home, in the connected homes and some in the connected cars. But I think it's a little bit premature to connect all the dots and say, these are offering in the IoT space. Like with other [indiscernible] topics, like big data analytics and others, we're very careful to find the specific angle, the specific laser focus go to market, when we come to this type of application. Otherwise, it's just a lot of words and they have their own words and we're not very good in marketing. So I think that we see some progress there, but still a little bit premature.

Thank you. And at this time, we have no further questions. So I would now like to turn the call back over to Mr. Matt Smith for closing remarks.

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 give us a call at the Investor Relations group. Have a great evening and with that, we will conclude the call.