Amdocs Limited (DOX) Q2 2009 Earnings Report, Transcript and Summary

Welcome to the Amdocs first quarter 2009 earnings release conference call. Today’s call is being recorded and webcast. At this time I’d like to turn the call over to Mr. Tom O’Brien. Thomas G. O’Brien: I'm Tom O'Brien, Vice President of Investor Relations for Amdocs. 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 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 to the SEC on Form 6-K. Also this call includes information that constitutes forward-looking statements. Although we believe that 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 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 year ended September 30, 2008 as filed on December 8th, 2008 and 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 in the call today are Dov Baharav, President and Chief Executive Officer of Amdocs Management Limited and Tamar Rapaport-Dagim, Chief Financial Officer. Following our prepared comments we'll open the call to Q&A. Now let me turn the call over to Dov Baharav.

Tonight we reported our business results for the first quarter of fiscal 2009 with revenue of $754 million and non-GAAP operating income of $136 million. Clearly we are disappointed with the first quarter revenue as our results came in well below our expectations. While we discuss the potentially negative implications of macro economic factors last quarter we had not anticipated that the conditions would deteriorate as quickly as they did. Service providers rapidly adjusted their spending behavior as part of their 2009 budgeting purposes and in response to the worsening economic outlook. As a result we did not make our revenue number Q1 and we are now planning for significantly lower revenue outlook for the rest of the year. In response to the demand environment we have been taking proactive measures to protect our margin and our cash flow two metrics that are better under control at this stage of the business cycle. We tightened our expense control and further reduce our [inaudible] to adjust our cost structure to the more challenging [inaudible]. As a result we delivered on our profit margin target with an 18% non-GAAP operating margin in the first quarter 10 basis points above the fourth quarter of 2008 despite a $44 million miss in revenue well into the midpoint of our guidance. Our focus on margin enables us to generate $0.55 in non-GAAP EPS in Q1 which was within guidance. Furthermore we generated $111 million in free cash flow in Q1 also in line with expectations outlined in early November demonstrating our increased focus on cash flow. In light of the quarter results let me try to provide answers to what we believe will be key questions from the market. First what changed between early November and the close of the quarter to cause the negative revision to the revenue and to the outlook? Second do we think it will get worse? If so, how much worse? And third, how is Amdocs responding to the change in the demand from practical and strategic standpoints? In response to the first question, what changed during the quarter, the answer is we saw global economic conditions significantly worsen and our customers responded in real time by adjusting their budgets. Specifically the vast majority of the shortfall in our Q1 revenue was the result of delays in deal closings and we now assume that our ability to convert our pipeline will be far more strained over the course of 2009 than we had previously planned particularly for large deals that will require fee level and board approval in this environment. To provide more color the delays were widespread across geographies and business lines with our cable and satellite business being the only notable exception where we actually outperformed our expectations. Europe continues to be particularly weak for us as we are more dependent on [inaudible] revenues there as compared to North America where we have large multi-year many services deals. Additionally we are seeing a slight reduction in development work at existing customers as discretionary spending is cut back. While a more modest [inaudible] to follow a lower a revenue outlook it is further evidenced that customers are really tightening their belts. We also saw slightly greater than expected decline in our directory business mainly due to foreign exchange. In response to the second question of will this get worse, the answer we don’t know for certain but expect it will. We are now internally planning our cost structure for a year in which sales cycle may lengthen further and revenue could be down as much as 9% to 12% relative to fiscal year 2008 with currency effects contributing roughly 3% of the decline. We are not providing full year guidance because it would suggest a position in focusing that we simply do not have. That being said the communications industry remains in relatively sound financial condition and we have a strong recurring revenue stream of many services and ongoing support agreements comprising roughly 70% of our book of revenue. As such we expect that the sequential changes in revenue will become smaller as the year progresses and the revenue level more closely approach our core recurring base. As for the last question, how is Amdocs responding, we are using every tool we have. From a practical standpoint we have proactively adjusted our workforce relative to the demand outlook particularly in higher cost geographies and restricted our discretionary spending in areas like travel and marketing. We are managing the business with cash flow margins and capital preservation as priorities. Strategically we continue to move forward with our four key growth drivers, cable, managed services, emerging markets and OSS, areas where spending environments remain more favorable than in the industry at large and should therefore drive market share gain to Amdocs over the next year. Additionally we expect there will be opportunities to expand our leadership with M&A over the course of this downturn. Cash is a strategic asset and given the strength of our balance sheet we are in a unique to pursue initiatives when other firms are facing more challenging financial prospects. Summing up as we navigate through these challenging economic conditions it is our view that Amdocs has every opportunity to emerge from this crisis with a stronger franchise and competitive position even though it will certainly be choppy along the way. Looking back in history that is precisely what happened over the course of the 2001 and 2003 downturn when Amdocs strongly carrying [inaudible] business proved more resilient than the [inaudible]. As we did then our strategy is to utilize our financial strength to continue investing in R&D, to acquire key businesses to expand our managed services presence. Let me now turn the call over to Tamar for the financial review.

The first quarter revenue was $754 million representing growth of 1.6% over last year’s first quarter. Sequentially revenue decreased by $71 million with approximately $30 million of the decrease attributable to foreign exchange effects. Our non-GAAP EPS which excludes the provision related costs, restructuring charges and equity based compensation expense, [inaudible] tax expense of $0.55 per diluted share. GAAP EPS was $0.35 per diluted share. I’ll spend a minute now on a few non-GAAP items. License revenue increased to $44.6 million this quarter driven by percentage of completion accounting on implementation projects, subsequent license fees and some point solutions. Given the slower pace of new starts this quarter and the expected decline in revenues next quarter we believe that license revenue will decline in Q2. Operating margin was 18% up 10 basis points sequentially and 30 basis points over the prior year. Improvement was driven primarily by the cost control efforts that Dov discussed previously. While it still remains our goal to maintain margins at around this level, this will be difficult if the revenue comes towards the bottom end of our Q2 range and in this scenario we would likely have to take further cost actions and that will take time to implement. Other income increased in Q4 primarily due to much smaller foreign exchange impact as our enhanced hedging strategy took hold. Also in the quarter we purchased $100 million of our $450 million convertible note financed by tapping our credit facility. This resulted in a $1.8 million pre-tax gain in the quarter net of fees within other income. We anticipate that the remaining $350 million of covert will [inaudible] the company on March 15 and we are likely to settle in cash although we have the option to use shares as well. [Inaudible] to us if we settle in cash we will no longer need to include the if converted shares in our fully diluted share count. You may want to consider this in your models for Q3 and Q4 but the impact is [inaudible] in Q2 EPS [inaudible]. The effective tax rate in Q4 was 15.7%, slightly above our guidance of 13% to 15%. We continue to believe the 13% to 15% range is reasonable for fiscal 2009 but quarterly rates will fluctuate. Free cash in the quarter was $111 million up 88% over the prior year. Included in the calculation of this number was approximately $30 million in net cap ex, down 12% over the prior year. Free cash flow in Q2 will be impacted by annual bonus payments which are traditionally made in January. After these payments, estimated to be approximately $50 million, free cash flow in Q2 is expected to be similar to Q1. DSO at the end of the quarter was 65 days up from 63 days last quarter and similar to what we saw last year. The current balance of deferred revenue was $150 million at the end of Q1 and unbilled accounts receivable was $55 million. The decrease in deferred revenue is a reflection of the more [inaudible] deal activity that we saw in the quarter. Additionally, as previously disclosed we received a large upfront payment in Q4 of 2008 and part of the decline in the deferred revenue in Q1 was the natural reversal of this payment as we began working on the projects. Our 12 month backlog which includes contracts, estimated revenues from managed services contracts, letter of intent, maintenance and estimated on work support activities was $2,400,000 million at the end of the quarter. Looking forward, our estimate for the second quarter of fiscal 2009 are for revenue of approximately $700 to $720 million and non-GAAP EPS of $0.47 to $0.51 excluding the effect of acquisition related charges and excluding equity based compensation expense of approximately $0.05 to $0.06 per share net of [inaudible] tax effect. We expect fully diluted GAAP EPS of $0.34 to $0.39. Our EPS guidance for Q2 is based on a fully diluted share count estimate of approximately 210 million shares. Now, let me turn the call back over to Dov.

At this time let me open the call to Q&A.

(Operator Instructions) Your first question comes from Ashwin Shirvaikar – Smith Barney Citigroup. Ashwin Shirvaikar – Smith Barney Citigroup: My question is back in 2002 when your demand evaporated, your earnings and cash flow went down worse than your revenues. So far this time that does not seem to be happening so my question is how much leeway do you have in your cost structure and Tamar, you didn’t allude to this a little bit, to withstand another couple of quarters of 5% to 10% sequential revenue declines?

Let me try to take it Ashwin. I think that we were prepared for this quite as bad as in 2002. In 2002 it happened as a complete surprise to us while this time the global downturn started long ago so we expected it to get to teleco. As a result of it started September we started taking some proactive activities so we were able to maintain the profitability and there is room moving forward to continue and adjust the expenses to the level of revenue. So, we believe in principal in our ability to protect profitability and continue to generate cash even in a downturn environment. Actually, we didn’t give guidance in the numbers here because it will actually convey precision that we do not have in this uncertain environment. The only thing that we said is when we are planning our expenses we take a 9% to 12% reduction in 2009 in comparison to 2008. That actually suggests, if at all, smaller reduction of the revenue in the second half. Ashwin Shirvaikar – Smith Barney Citigroup: A question on deferred revenue, if it has gone down from September to December in most years, it did that this year also but the magnitude was greater and last year it kicked back up in the March quarter. My question is why was there a sharper drop off this quarter and do you expect a similar March quarter recovery?

You know part of the deferred revenue had to do with the upfront large payments we had received last quarter and the fact that [inaudible] revenue against that and some of it was related to other projects. Unfortunately when less new projects are getting signed and feeding that balance, this reduction is not necessarily recoverable. Deferred revenue in general is a balance that may fluctuate from quarter-to-quarter and we are not guiding because it’s not certain exactly what the balance will be. I would not count necessarily on recovering in the March quarter.

Your next question comes from Tom Roderick – Thomas Weisel Partners. Tom Roderick – Thomas Weisel Partners: Dov and Tamar, when you think about visibility obviously there’s a big portion of your business that’s managed services and then there’s this portion that’s related to projects, how do you feel about visibility going in to next quarter? What was impaired this last quarter in terms of the number of project delays, what are you anticipating for project delays in the next quarter and what gives you the comfort with following the challenges you had this last quarter that you can still hit this $700 to $720 that you’ve laid out there for guidance.

Well, one of the methodologies and the practices that we are very proud of is the fact that we man the company in a very simple way. That is to say bottom up. We collect all the projections of all the client business executives, talking to the customer on a day-to-day basis and that actually comprises our projection with some adjustments. However, in the first quarter what happen is that we were disappointed. That is to say our client business executives that are dealing with the directors and vice presidents of the customers got promises and guarantees from the customers that things would be fine. However, when the deal got to the CEO level, to the board level and others there were delays which surprised the people at the customers and our own client business executives. That plus all the delays caused us to miss the numbers in Q1. So, when we refer to Q2 we adapted I would say an additional layer I would say to our regular process of focusing by adding more conservative corporate haircut. By that, actually taking the projections of all the people and applied some conservatism based on some estimates and criteria and as a result of it we think that now given the visibility that we have, given the amount of delays that we have seen so far, given what we’ve seen in the marketplace, we feel more comfortable with the projection for Q2 and we think the probability of meeting it is much higher than last quarter. Tom Roderick – Thomas Weisel Partners: Just one brief follow on if I could, on the issue of backlog, particularly given the challenges in the top line, backlog is hanging in there pretty nicely, how does this happen? Can you explain the dynamics of what’s holding the backlog number up there at a relatively consistent level for right now? And, how does the backlog number adjust for contracts that have been signed but perhaps are taking longer to implement or deploy or even get started? How do you think about those dynamics in the context of backlog?

The backlog is comprised mainly of the layer of revenue that is managed service layer and the recurring layer meaning the 70% that we refer to. It also includes signed projects based on an estimation of how we will recognize these projects based on the planned execution. What we report is the 12 month backlog so by definition there is a [inaudible] judgment of how this projects will be recognized. Give the facts that we have signed, also within Q1, new deals for example managed services that are adding to the backlog. As the securing activities through longer term contracts, that helps us to maintain a relatively strong backlog even though we have seen a more sharp drop in the revenue.

Your next question comes from Jason Kupferberg – UBS. Jason Kupferberg – UBS: I have a question on the margins, I know you mentioned that you intend to manage the cost structure as if revenues could be down as much as 9% to 12% this fiscal year but, can you help us think through what that implies from a margin perspective for the year? Because, if I’m not mistaken last quarter your target was to have full year fiscal ’09 non-GAAP EBIT margins in the neighborhood of where you were for the fourth quarter of fiscal ’08 i.e. about 17.9% or so. How should we think about that though because obviously you did a little better than you thought on the margins side in the first quarter of fiscal ’09 so how should we think about the margin potential for the full year of fiscal ’09.

[Inaudible] the potential outcome for the next quarter, we understand obviously that we may continue the need to cut costs further and we are tracking that very closely to protect the stability of margins as much as possible. As we are go lower and lower obviously the challenge is quite tough to maintain the 18% that we guided as our target in November so I would not commit necessarily that this 18% is viable also in the scenario of the further significant decrease in the revenue but we’re doing our utmost obviously, to achieve the higher margins that is targeting to that level. Jason Kupferberg – UBS: Then can you talk about in the geographies, you mentioned briefly in Europe that you’ve got a lot more project based work there and obviously it was down really substantially as it was with Asia Pac and I’m assuming some of this is currency related so it would be helpful first of all if you could tell us what the constant currency quarter-over-quarter growth rate in Europe and Asia Pac were? Then, maybe just give a little more texture around what exactly happened in those regions because obviously being down in the range of 25% to 30% sequentially is pretty amazing.

What we’ve seen in Europe is as you said a significant decline. It has to do with the fact that in Europe, unlike in North America where we have very large managed service deals and large customer base of recurring revenue in Europe our revenue has been historically more vulnerable to the pace of new projects and the fact that we completed some projects and did not have enough pipeline of closed new projects coming in caused significant drop in the Europe region revenue. So, out of this $40 million drop that we have seen in Europe, about a quarter has to do with the foreign exchange headwinds but about three quarters has to do with the constant currency base reduction. What we see in the rest of the world, yes we have seen some headwinds from foreign exchange, for example in Australia, on the top line but most of the APAC region other than Australia is actually denominated in US dollar and in total when we’re looking at emerging market activities we’ve actually seen also there some delays in the closure of projects but revenue being able to hold much stronger than obviously what we’ve seen in Europe. Jason Kupferberg – UBS: One quick clarification, the managed services business if we are thinking about the potential of a 9% to 12% overall revenue decline this fiscal year would that mean that the managed services business, that 40% of your revenue base in and of itself would be down year-over-year? Is there any way we can think about that versus your project based business?

My estimation of the managed service activity are much less vulnerable however, not all of the 40% is contractually committed for us so we may see on the edges some changes in the level for example of the people doing the development around legacy. But, that’s marginal relative to the more sensitivity that we have on the top layer that we consider, the 30% layer that we consider project revenue where they’re much more impacted by the downward cycle.

We expect the proportion of managed services to be higher.

Your next question comes from Julio Quinteros – Goldman Sachs. Julio Quinteros – Goldman Sachs: Real quickly, on the comments made on the outperformance of cable and wireless, how much of that is from Comcast? And, where are we at in the ramp of that contract?

Overall there are no questions that the Comcast deal where we won through bidding, strategic bidding the contract, it gave us a lot of credibility in the industry and that if you coupled it with the announcement we had today of the substantial win with Rogers Communication, we are performing a full transformation of their cable, wireless, wired LAN activity to create a one Roger. Actually, these two substantial contracts position us as the leading vendor partner to the cable companies with the ability to provide them the quadruple play. So, Rogers is delivering Canada in the cable area and the wireless and Comcast is delivering in the United States and we announced last quarter more [inaudible] in their cable areas so as we said the activity with all the customers was actually more what we expected and we expect additional growth in 2009. Julio Quinteros – Goldman Sachs: Just coming back as a follow up on the service provider spending, can you just go back through some of the comments, you walked through a lot of different variables there in terms of what was changing on the margin as far as service provider spending was concerned. Can you just give us those points again? It sounded like it was development work and a couple of other factors that were part of the surprise on the numbers there?

Actually, most of the changes we have seen as the quarter progressed was in the space of commitments to new projects. So yes, there was a small amount in changes in the development around the existing implementation or ongoing support but that was the smaller part for the reason of the decline surprises. Julio Quinteros – Goldman Sachs: Then just lastly for me, the reduction in cost containment efforts and some of the reductions in work force, did you quantify how much that is suppose to contribute to cost savings as we kind of go forward?

We did not quantify specifically but as you can see already Q1 versus Q4 you see about a $60 million decline in the overall cost of the company. Obviously, a lot of that is contributed by these cost initiatives that we’ve taken.

Your next question comes from Tal Liani – Bank of America Merrill Lynch. Tal Liani – Bank of America Merrill Lynch: I have two questions, first we and when I say we I mean our estimates, we went from roughly give or take 10% growth estimate for ’09 and in a short period of time we’re now at -10% if I take the midpoint of your guidance so, there’s a 20% swing. The question is how low could it go? I’m trying to understand what is real return – of your revenues the managed services that you’re given what’s the percentage of revenues and then try to build on top of it other things that are likely to come back? Just to understand what’s contractually going to be recurring and what you think could be recurring and [inaudible] of course to understand the downside risk if it’s going to be worse than you think? The second thing is I want to go back to your filed recently your K for the year and there you say customer number one, which we know is AT&T, I think from memory is up something like 42% and I think Sprint is down 15% year-over-year. I’m trying to understand whether there is any substantial risk with this 40% growth in AT&T or not? Could there be delays in projects? Could we see if certain projects are suppose to be rolled out over three years suddenly being rolled out over five years? Just again to understand the commitment of the customer to roll it out on the original time frame?

Let me start with the first one, how low it can go. We indicated about 70% of our revenue is recurring revenue. 40% is from managed services and 30% from just recurring revenue and the rest of the revenue new projects. No questions, the 30% of the new projects is the most vulnerable portion of the revenue of the company. That’s what happened, immediately we see when the environment is changing and there are delays and less projects are in the marketplace and the projects that were discussed are getting in, in a slower pace, this 30% is withheld. It’s clear also, the closer you get to the 70%, the slower is the pace of the potential revenue reduction. Now, we feel very comfortable with the 40% of managed services, it’s relatively, highly secure. We feel that the 30%, and you can take the 2008 numbers and calculate what is the 40% and what is the 30% and the 30% of the recurring revenue is also with high probability, no it’s not guaranteed because if the carriers would stop doing business and disappear and [inaudible] the revenue of course they will find a way not to pay us. However, we feel that the 70% is highly, highly, I would say assured or we feel very comfortable with it for the following reasons: first of all, the telecommunication industry will continue to operate. People will continue to talk over the phone, people will continue to use the Internet, people will continue to use wireless and to watch TV. So, maybe there’s some contraction but overall, the industry will continue to operate. Secondly, we serve the largest and the strongest service providers on this plant. So, the AT&T of the world, the Comcast of the world, it’s Bell Canada, it’s Rogers, it’s TMO, it’s [inaudible], it’s Deutsche Telekom, it’s [inaudible], they will weather the storm. They might suffer here and there but they are going to continue to do their business. More than that, we serve some of them with managed services contract that are long term, that they cannot breach right now. More than that, we serve them in their mission critical areas. That is to say billing operations, supporting the CRM, they can stop the support of the customer. So, as a result of this we feel that the 70% of the managed services in the recurring revenue which is generated from the largest service providers on this planet where we service them in managed services and mission critical services is relatively and with high probability. So, we believe that to some extent this area is well protected. More than that, from the additional 30% that is left there for new projects, they won’t disappear because there is a lot of competition in the marketplace and they need to compete and they need to acquire new capabilities, they need to create new digital lifestyles, the cable company needs to introduce the quadruple play and they also have this idea that in such crisis the strong become stronger. So, some of them would like to invest and so we will capture some of the revenue in this area. We believe that yes we might lose additional revenue but we will see a slower pace of reducing revenue in the second half of the year. Now, to the next question of AT&T that is maybe the largest customer and what is the risk there. I would say what is [inaudible] is that they work with the largest service providers including AT&T, including Sprint, including TMO, including Bell Canada, including Deutsche Telekom, including others. The point is that first of all we see stability in North America and the relationship that we have with them, the trust that we have created, the value that we bring to them on a day-to-day basis actually enables us to come with new ideas how we can help them cope with this crisis. How we will help them to reduce their expenses and by that increasing our revenue. That’s what we’ve done to sell them [inaudible] and are doing it as we speak. So, to some extent I feel more comfortable that we will be successful with our large customers rather than acquiring substantial new customers in the coming two quarters. Tal Liani – Bank of America Merrill Lynch: The last point I wanted to ask you is about the M&A activity. You mentioned it again today, you’ve been mentioning it for about a year that the current environment is an opportunity to expand maybe via M&A. I remember you saying it maybe for about a year, maybe I’m wrong but for around a year, why didn’t it happen so far? Just to understand what are the give and takes of the inputs in your decision process? Second, are you trying to expand in to new area completely or are you trying to cement something you already have just with other features? And, are you open to a big acquisition or are you open to just small acquisitions of those features you are missing?

Well first of all you’re right, we have been talking about M&A for a long time. I say it all the time, we are committed to bring value to the shareholders and create value to the shareholders and not just I said some M&A we’ll do it no matter what. I must admit, we have not found the right thing yet and there was no right opportunities that matured that enabled us to create value to the shareholder. We will not do anything that we do not find it creating value to the shareholder. Moving forward, I’m not so sorry we have not done it give the market condition right now. Looking at the valuation of companies these days, so maybe today to do acquisition is better than six months ago or a year ago. We’ll accelerate our activity in this regard and we’ll find the target that on one hand will augment our line of products so enable us to have stronger portfolio and maybe help us to provide better services on top of that or expand our services in other areas. And of course, when looking at stuff we will do something that makes sense taking in to consideration the cash we have on hand, the risk that we undertake and how we can bring value to the shareholders.

Your next question comes from Scott Sutherland – Wedbush Morgan Securities. Scott Sutherland – Wedbush Morgan Securities: I had a question on your managed services, I think you’ve been running around 40% of revenue and I know you’re rounding there but kind of tell us how that maybe is higher than the low 40s now because overall revenue is down. If that is stable I would have expected it to moved up from the 40% comment you said last quarter. So, did it grow, did it shrink, has it been relatively flat, that’s my first question?

As we said when we’re talking about the 40% and 30% layers it’s a round number that is given to give you a flavor of the current level of revenue and the visibility that we have. We have not seen any significant change in the existing managed revenue deals and we have signed new managed services deals. As we move during this year actually we see managed services one of the potential areas in which we can expand business given the immediate cost savings that can generate to our customers. Scott Sutherland – Wedbush Morgan Securities: I’m just trying to get at we talked a lot about the future of what you see in managed services but what has happened this quarter? Was it relatively flat, was it slightly down, slightly up as far as the revenue component?

I don’t think as a percentage of revenue it has changed that much. On the one hand we’ve completed some activities around existing managed services and on the other end we’ve signed new ones but we don’t have yet the full quarter impact. Scott Sutherland – Wedbush Morgan Securities: So it’s about flat on a percentage basis that means it would be down –

On a percentage basis it’s rounding to the 40%. Again, maybe it’s 1% up or down, I’m not sure. Scott Sutherland – Wedbush Morgan Securities: But I’m trying to think on an absolute basis is it up or down? If it’s kind of flat or maybe up a little bit on a percentage basis that means it would be down on a sequential basis overall.

I’m not sure I have the exact absolute numbers. Scott Sutherland – Wedbush Morgan Securities: My second question is when you look at the cable market, you’ve won some market share there and got some good deals with Comcast. I’m looking at subscriber growth that’s relatively flat but more people are adding more services. Are you seeing growth in that fashion from cable that there’s more services in quad plane cable? Are you seeing more market share gains driving your growth there?

From the cable line of business is mainly providing services to our customers and even in some cases paid by the bill. But, I would say the main factor that actually effects the volume of the revenue is how much license, how much services we sell them and that is affected or maybe I would say driven by the need of the service providers in the cable service industry to be more competitive to provide the quadruple play or to provide the data, voice over IP and being creative these days. Maybe that will continue to be the driver and this industry is to go through evolution and we think that the growth driver built over the last few years will help us out. As we said before, we have OSS, it’s a new area for Amdocs where we announced that we are [serving] in this regard. We bought Jacob Rimell which is an OSS company for cable company so here we see that generates revenue for us in the cable industry. On top of it we [framed] it in to managed services and we believe we will see managed services in this industry swell that will help us to drive. On top of it, we see the digital lifestyle, our activity in promoting the online experience is another driver in this industry so the additional [inaudible] systems with DSS actually strengthened by the OSS, the managed services, the digital lifestyle, also is actually creating for us additional driver to grow in the cable industry.

Your next question comes from Shyam Patil – Raymond James & Associates, Inc. Shyam Patil – Raymond James & Associates, Inc.: Dov, you mentioned earlier that 30% of the non new deal business was considered recurring and I just wanted to get a sense how much of that piece is maintenance and how much of it is ongoing support which potentially could get cut in this environment?

I would say again 40% is managed services 30% is recurring revenue and the rest of it, the residual is new project. The 30% of the recurring revenue includes maintenance yes, that we are getting and ongoing support. Now, the vast majority of it is the ongoing support of services layer and yes, we say it’s not bulletproof, it’s not a 100% guarantee. However, since its mission critical, since it serves them in the main elements that helps them to compete, we believe it is less vulnerable. We think that out of the residual of the new projections we are not going to lose the 30%, we will lose part of it and even if we lose even something in the recurring revenue, that will be compensated by the new projects that we still continue to win. Shyam Patil – Raymond James & Associates, Inc.: Then you also commented in the script that for expense planning purposes you’re assuming 9% to 12% revenue growth. Under that scenario if you look at this quarter, you spent $618 million in op ex, is that the right dollar amount you can maintain for the next few quarters or can that decline further? And, if so what range should we be thinking about there?

We assume that if the situation continues to deteriorate then revenue will go down we need to take further cost cutting initiatives. So, first of all some of the things we’ve already done did not yet have the full quarter impact in Q1. So, this will generate more savings as we go in Q2 and help to mitigate for the quarter reduction in revenue we’re expecting. In addition to that, yes if we see further deterioration in the revenue we need to take further actions that will help us to protect profitability.

Your next question comes from Lauren Ye – J. P. Morgan. Lauren Ye – J. P. Morgan: I just wanted to understand that cost initiative a little better once again. Can you talk about specifically areas you cut this quarter to cut that $60 million? And then going forward, what exactly are the areas that you are going to continue to cut? I guess you just mentioned that you should see more impact or more cost cutting from some of the initiatives that you’ve already done, what would those be? KK First of all naturally as a company driving about 95% of its revenue from services that are done by people, when we see contraction in the level of services and in this quarter where we’ve already seen contractions in the level of services from new projects especially, we are taking a cap on the number of people mainly in the high cost regions. Some of it is in change of mix and some of it is an absolute reduction. In addition to that, we have placed very strict controls around the items such as travel, items such as marketing expenses, cut back on some discretionary areas. What I am saying is not necessarily we have seen the full impact already in Q1 it is because some of the reduction in costs was done during Q1 and yet to happen during Q2 so the full quarter impact is yet to happen. Lauren Ye – J. P. Morgan: I just wanted to understand a little better about this backlog and maybe a better way for me to ask it is just looking towards next quarter, your backlog this quarter was relatively held in [res] I guess compared to revenue but next quarter do you think we’ll see the same patterns where backlog will hold in a little better than revenue? I guess specifically if you’re seeing contracts lengthen how are the contracts exactly structured, does it stay in your backlog? Is that the reason perhaps for the revenue discrepancies this quarter?

First of all we’re not guiding to the backlog number for next quarter because that depends very specifically on the timing of signing new contracts so this exact number is hard to predict. Looking on the lengthening actually what we refer to is mainly the lengthening of the sales cycle on new projections rather than lengthening of existing projects even though it may happen that sometimes also an existing project that is within backlog has some changes in timeline. But that currently and so far is not the main issue we are seeing that causes the reduction in the revenue.

Your next question comes from Shaul Eyal – Oppenheimer & Co., Inc. Shaul Eyal – Oppenheimer & Co., Inc.: Two quick questions on my end, Tamar I just want to clarify one thing, the foreign exchange impact this quarter out of the $40 million miss was that $10 million?

The foreign exchange impact out of the $71 million reduction in revenue Q1 versus Q4 is about $30 million was the fx headwinds and about $40 million on the constant currency basis. Shaul Eyal – Oppenheimer & Co., Inc.: On the cable and satellite segments obviously, you guys are doing quite well relative to the other segments, what do you think are the indication from Dish extending their contract for only a year with [CSGN], how could that impact your business down the road?

Well it looks like there is an opening there and we have never given our intention not to sell to Dish, to sell to Time Warner and to sell Charter so we will try to sell ever potential customer there. The fact that we embarked on this last project with Rogers and the additional win with Comcast actually signals to the industry that there is a solution for the quadruple play for the new world for the cable and satellite companies. I believe that every cable satellite company will consider Amdocs very seriously moving forward and we intend to do every effort in order to win every opportunity available.

Your next question comes from Daniel Meron – RBC Capital Markets. Daniel Meron – RBC Capital Markets: Can you give us a little bit more color on what kind of deal do you expect to come in, in this period? Is there any characteristic that encompasses all those? On the other side, what kind of deal you don’t expect that is related to the health of the carrier or is it just lack of urgency on their part?

We believe that we are well equipped to offer meaningful product project solutions to our customers in this very special time. So, first of all I would say given the pressure on revenue and I would say cutting expenses might be one of the first priorities and the managed services is maybe the best tool right now for this market and we see an increased demand for managed services. As you know, we established a special unit to actually promote the managed services and we had a win this quarter and we see additional substantial potential moving forward of managed services for the rest of the year. We believe we’re able to close deals in this environment just because of this weak environment. That will be a major driver to our activity in 2009. On top of it, the cable people maybe won’t go to restaurants but they’ll watch TV and maybe consume more services by the cable company so we believe that we’ll see growth in the cable activity. Emerging markets, we think emerging markets will be hurt less and still have growth in number of subscribers and they mature there and they are moving from an initial system to a more mature system with more competition so we expect more activity in emerging markets. We are building our presence there. We see substantial traction and we believe we will see growth in this area. The [inaudible] might also be an area that we see activity and I would say the digital lifestyle, all these online activity content, digital services and other might present another growth area. So, overall we think that we have several growth drivers that will help us to offset some of the negative trends of the industry in 2009. Daniel Meron – RBC Capital Markets: Then on the strategic picture you mentioned that you see yourself improving your positioning compared to your peers. Can you give a little bit more color on that as far as are you seeing more weakness from the larger players are lowering their focus on this segment like Erickson or others or do you see more weakness coming from the system integrators like [inaudible] that obviously blew up or regional players, small ones being in Eastern Europe or in China or anywhere else. Can you give us a little more color on where you see your positioning improving.

Well I think if we take 2002 as an example we got in to the crisis of 2002 competing with many other vendors. In 2004 I think the number of competitors has been reduced substantially, maybe it was cut by half or even more. So, when there is a storm I would say the small guys suffer more, the people with less quality offering cannot make it. We believe that our comprehensive substantial offering off products and services that can bring value to the customers even in cutting their expenses or making them more competitive I think that will help us. So, what we can see right now from competitive point of view, we see that the fact that we can provide them end-to-end solution where we can guarantee the results, we can guarantee the deliver, on time, on budget with the quality, with the references, that actually plays to our end and we see the demand growing for our services. People stopped believe in slogan and just promises by new players in the market that will provide some magic solution and this consolidating market, by the way, actually is controlled by larger service providers where the [inaudible] are usually experienced people. It’s very difficult to sell them stories and some promises with no basis and that are not founded on reality. In this environment we believe that we can gain market share and given all our rich portfolio and our unique offering we believe that we are gaining market share and will continue to gain market share and with the additional investment in R&D that we do today and additional M&A that we do today, with all of that we will emerge out of this quite stronger.

Your next question comes from Karl Keirstead – Kaufman Brothers. Karl Keirstead – Kaufman Brothers: It is certainly true that Amdocs is not the only IT vendor that is experiencing discretionary project cuts and bookings delays. But, most of the other IT vendors are also admitting to pricing pressure in their respective industries and that’s a subject that you haven’t addressed yet on the call and I’m wondering if you could add a little bit of color as to the extent of pricing pressure you are seeing in yours?

The reason why we don’t mention it is because it’s a very basic fact of life for us for the last five year so the question is whether we have a price atmosphere pressure or service atmosphere pressure, it is difficult to differentiate. All the time have price pressure. So, the point is that we have unique offerings that enable us to offer cost performance and value to the customer that does not depend on the unit price. When we offer a solution that is as a unique combination of CRM and billing and OSS the only company that offers this, it’s a business support system and operating support system integrated. That creates an offering that not depends on the unit price. When we combine it with consulting and some business processes that enable the customer to generate the value again, it’s not unit price, nobody can compete with us with business process, there is no price for business process. So, eventually the customer can evaluate the total cost of a solution with business processes that is provided to him. There, we think that we do not have too much competition. As a result of it we believe we can handle very well the price pressure. Karl Keirstead – Kaufman Brothers: Then just a quick follow up for Tamar, could you talk a little bit about how you’re going to protect your margins by potentially shifting your mix of employees onsite to offshore? And, give a little update as to your offshore resource headcount?

We continue to increase our offshore number of employees on an ongoing basis and definitely that is going to continue the trend. The fact that we’ve increased our number of employees in India for example from about zero five years ago to almost 4,000 now is definitely a major change in mix of employees around the world. But, in addition to the change of mix obviously, one of the major contributors to the ability to adjust our cost structure is reducing the overall amount of the employees aligning it to the level of activity on the top line as well as reprioritizing and rationalizing some of these discretionary expenses we have in terms of what are the right priorities in this environment. You can see for example, the R&D expenses were relatively stable even though we reduced significantly the overall cost structure of the company because we are very focused to do the cost cuttings while continuing to invest in the growth engines that will serve us as the best company when this climate actually changes.

Your final question comes from Larry Berlin – First Analysis. Larry Berlin – First Analysis: Just curious what’s up with the [directory] because we have seen a pretty significant drop in revenue there and I thought it was recurring and very domestic so the foreign exchange shouldn’t have had a big affect on that.

The [directory] to industry in general is facing pressure for several quarters now. What we have seen in this business is the end of several projects that are not followed up by new ones. We’ve expected a step reduction decline in Q1, it was a big higher than what we expected originally especially due to foreign exchange. Going forward actually we believe this reduction will stabilize as we have a very high portion of the [directory] business which is under managed services arrangements. Larry Berlin – First Analysis: Just one other thing, I was just curious what’s up with the open market efforts in that division?

As I said we are quite excited about the digital lifestyle and a very important part of it is the open market. Open market is a unique activity of the company where we actually enable content providers and maybe the [inaudible] of content providers to sell their content over wireless and actually through all the carriers in North America. So, we service the hub, the largest in the marketplace. We see substantial growth, we see profitability and to some extent it might serve in the future, we can expand it farther to be maybe [inaudible] certain type of content for wireless but maybe expand it to more types of content and maybe make it more meaningful for us. This is an area that we focus on and we intend to leverage in the future as part of our digital lifestyle and overall we except substantial revenue growth in this area.

Ladies and gentlemen that does conclude today’s question and answer session. At this time I’d like to turn the call back over to the company for any closing remarks.

We appreciate that investing in this market requires patience as growth expectations slow. However, it is our commitment to focus on profitability, cash flow and shareholder value creating initiatives to deliver an Amdocs that is even stronger when the economy regains momentum. Thank you and good night.

This does conclude today’s conference call. We appreciate your participation. You may disconnect at this time.