Amdocs Limited (DOX) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the Amdocs Fourth Quarter 2014 Earnings Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Matthew Smith, Head of Investor Relations. Mr. Smith, you may begin.

Thank you, Ellen. Now 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 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, 2013, filed on December 9, 2013; and our Form 6-K furnished for the first quarter of fiscal 2014 on February 11, 2014, the second quarter of fiscal 2014 on May 15, 2014, and the third quarter of fiscal 2014 on August 18, 2014. 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. Additionally, we are pleased to mention that our Analyst and Investor Briefing will be held on Tuesday, December 16, at the NASDAQ Marketsite Headquarters in New York City. Please contact Investor Relations for further details and check out Investor Relations website several days in advance for details on how to access the live webcast. 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. With that, I'll turn it over to Eli.

Thank you, Matt. And good afternoon to everyone joining us on the call today. We delivered a solid performance in our fourth quarter and I'm pleased to report that we concluded fiscal 2014 with diluted non-GAAP earnings per share growth of 8%, which was above the midpoint of our guidance issued at the start of the fiscal year. Overall, we believe fiscal 2014 was a year for significant growth and progress for Amdocs. We successfully executed on some of the industry's most complex transformation projects. We further invested in our market-leading portfolio as demonstrated through the release of Amdocs CES 9 and we have leveraged our M&A and R&D activity to enter new domains such us radio access network optimization structure and Network Functions Virtualization. Additionally, domains for our products and services remain strong throughout the year and across regions. This resounded in a number of significant wins, which enhanced our competitive position within new and existing customers. Let me take a moment to elaborate on these. In North America, we closed out another strong year with a record quarter. AT&T remained an important contributor to the performance in fiscal 2014, but activity level were healthy across the region as we supported key customers such as Bell Canada, Sprint and TELUS with modernizations designed to respond to rapidly changing market dynamics. In Europe, we are pleased with our overall performance for the year, despite headwinds from foreign currency fluctuations in fourth quarter. During fiscal 2014, we strengthened our relationship with influential carriers such as Vodafone Group, where we expanded our Managed Services activity to 7 affiliates. Additionally, at Vodafone Germany, we successfully completed the consolidation of 5 legacy systems into 1 Amdocs Operations Support System. This new OSS system, which commenced live production in the fourth quarter is believed to be one of the industry's largest-ever data migration within the OSS field according to Vodafone. In the emerging market, revenue growth was moderate in fiscal 2014 as we focused on bringing several highly complex transformation projects into production. During the year, we made significant progress expanding our relationship with strategic customers such as Telefónica. In the fourth quarter, Telefónica Argentina selected Amdocs to manage a range of its Business Support Systems applications, and this is in addition to the previously announced transformation awards at Telefónica Argentina as well as those of Telefónica affiliates in Peru and in Chile, and further demonstrates the value and expertise we are able to bring to these major projects. Our regional performance also includes our strategic initiatives in the network software domain. During the fourth quarter, the leading carriers in the developed Southeast Asian market deployed the Amdocs' Self-Optimizing Networks solution, including our customer expertise -- experience analytics, to improve its 4G coverage. Additionally, we recently announced a new offering and enhancement to support customers' activities in the area of Network Functions Virtualization, NFV. Now moving to our fiscal 2015 outlook. Let me add some color around our core business on a regional basis. Beginning with North America, we expect overall growth rates to moderate in fiscal 2015 after a strong performance in fiscal 2014. This outlook reflects normal variations in account activity. Additionally, we remain subject to lingering uncertainties resounding from the announced consolidation activity in Wireless and Pay TV market. Taking into consideration the various scenarios, which could result from the combined impact of these consolidations, we believe the anticipated headwinds are the same or better relative to our assessment as end of last quarter. That said, we cannot predict all possible outcomes, especially those that might result from future consolidation on our market or from an unplanned cancellation of a customer merger activity currently in progress. In Europe, we are pursuing long-term growth opportunities with some of the regional and largest carriers, while leveraging our improved competitive position in highly relevant products and services offering. Nevertheless, we expect macroeconomics and regulatory conditions to remain challenging, and quarterly trends may be difficult to predict within the context of the full year. In the emerging markets, we continue to see positive long-term growth trajectory based on project awards already in the backlog and the pipeline of opportunity is ahead of us. Additionally, our growing reputation is positioning us to participating further opportunities within the larger operators in the developed Southeast Asia and the developed Latin America. Nevertheless, quarterly trends will continue to exhibit lumpiness, primarily owing to the project's orientation of our customer engagements in these regions. To summarize the fiscal 2015 outlook, we feel good about our full year prospects and our ability to maximize the total return we provide to our shareholders. More specifically, I believe there are multiple vehicles, which may help us to execute on this objective. Let me elaborate. First, we expect to grow -- to deliver revenue growth of 2.5% to 5.5% for the full fiscal year. This outlook takes into consideration macro- and industry-specific risks and unknowns, although as I mentioned earlier, we cannot predict all possible outcomes. Second, the company retains the capacity to drive strategic growth through M&A in fiscal 2015. This is not factored into the outlook provided. We see a rich pipeline of M&A opportunities but as demonstrated with our network software initiatives, we are disciplined in our approach and we act when we find right targets that fit our strategy and at the appropriate time. Third, we expect operating margin to be within the new range of 16.2% to 17.2% in fiscal 2015. The midpoint of which is roughly comparable with our performance in fiscal 2014 and about 20 basis points higher than the midpoint of our prior range. This outlook is consistent with our previously stated role to maintain or improve margins over the long term and reflects consistent operation execution and internal efficiency improvements, balanced with strategic business initiatives that drives future growth. We remind you though, however, that the margins may fluctuate within the stated range in any given period. Fourth, we remain committed to the disciplined return of cash to shareholders over the short and long term. During the quarter -- or the fourth quarter, we executed on our share repurchase program at a level substantially above that suggested by our flexible 50-50 framework and we plan to maintain a fairly similar approach relative to our 50-50 framework in the early part of fiscal 2015. Fifth, we continue to believe in the value of dividends as demonstration of our confidence in the future success of Amdocs. Within this context, we are pleased to announce that our board has approved our recommendation to increase the quarterly cash dividend by nearly 10% to $0.17 per share. This dividend increase will be subject to shareholder approval at our Annual Meeting in January and will be payable in April 2016. I would like to remind you though that future changes in the dividend will be subject to periodic review and will be timed to the underlying growth rate of our business and overall capital requirement. Finally, we are excited to invite you to join us for our formal Analyst Investor Day on Tuesday, December 16. We will host the event at NASDAQ Marketsite Headquarter in New York City's Midtown. During which, we look forward to providing you with an updated view of our strategic initiatives in the area of NFV, Network Functions Virtualization and BDA, Big Data Analytics as well as our updated 3-year operating outlook. With that, I will turn the call over to Tamar.

Thank you, Eli. Fourth fiscal quarter revenue of $900 million was within our guidance range of $890 million to $920 million, with a negative impact from foreign currency fluctuations of approximately $6 million relative to the third fiscal quarter of 2014. Excluding foreign currency headwinds, revenue performance was in line with the midpoint of our expectations and was driven by continued strength in North America. Our fourth fiscal quarter non-GAAP operating margin was 16.8%, an increase of 10 basis points compared to the third fiscal quarter of 2014 and within our target range of 16% to 17%. Below the operating line, non-GAAP net interest and other income was $1.8 million in Q4, reflecting positive contribution from other income. 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. Diluted non-GAAP EPS was $0.78 in Q4 compared to our guidance range of $0.75 to $0.81. The higher effective tax rate negatively impacted non-GAAP EPS in Q4 and was primarily attributable to an increase in accumulative tax provisions, resulting from recent changes in tax rates in a certain jurisdiction. The cash flow was robust at $163 million in Q4. This was comprised of cash flow from operations of approximately $193 million, that's $30 million in net capital expenditures and other. As a reminder, over the long term, free cash flow tends to convert at a rate on par with our non-GAAP net income. DSO of 73 days decreased by 3 days quarter-over-quarter. The total unbilled receivable was down by $3 million as compared to third fiscal quarter 2014. Our total deferred revenue, both short and long term, decreased by $58 million sequentially in Q4. As indicated in the past, both of these items may fluctuate from quarter-to-quarter. Our cash balance at the end of the fourth fiscal quarter was approximately $1.4 billion, though net of short-term debt, it was $1.2 billion. We drew down to $110 million on our credit facility in Q4 for shares and funding purposes and the balance has since been fully repaid. Our 12-month backlog, which includes anticipated revenue related to contracts estimated revenue for Managed Services contract, letters of intent, maintenance and estimated ongoing support activities was $3 billion at the end of the fourth fiscal quarter, up $30 million sequentially. During the fourth fiscal quarter, we repurchased $110 million of our ordinary shares. We completed our prior $500 million program and had $714 million remaining under the more current $750 million authorization as of September 30. Now turning to our outlook. We expected revenue to be within the range of $895 million to $925 million for the first fiscal quarter of 2015. Embedded within this range, we anticipate a negative sequential impact of approximately $6 million from foreign currency fluctuations. For the full fiscal year, we expect total revenue growth to be within the range of roughly 2.5% to 5.5%, including an anticipated drag from foreign currency fluctuations of about 1%. Incorporated within this outlook and consistent with our prior expectations, we anticipate revenue from our Directory business in fiscal 2015 to decrease in the double-digit percentage range, placing about 1% drag on the total company results. As Eli discussed, we anticipate our non-GAAP operating margin for fiscal 2015 to be within a new target range of 16.2% to 17.2%. We expect our non-GAAP effective tax rate to be in the range of 13% to 15% for fiscal 2015. We expect the first fiscal quarter diluted non-GAAP EPS to be in the range of $0.77 to $0.83. Our first fiscal quarter non-GAAP EPS guidance also incorporates an expected average diluted share count of roughly 160 million shares with the likelihood of a negative impact from foreign exchange fluctuations and non-GAAP net interest and other expense. We excluded the impact of incremental future share buyback activity during the first fiscal quarter, as the level of activity will depend on market conditions. For the full fiscal year, we expect to deliver 4.5% to 7.5% diluted non-GAAP EPS growth. Our full year EPS outlook does factor in expected repurchase activity over the year. As Eli mentioned earlier, we plan to execute on our share repurchase program at levels substantially above that suggested by our 50-50 framework in the early part of fiscal '15. Finally, we expect the total return we deliver to shareholders will be enhanced beyond the earnings growth outlook by our dividend program, which in the new quarterly dividend rate, is approved by shareholders at the Annual Meeting in January, would yield about 1.4% on the current share price. Therefore, in fiscal 2015, we expect the sum of our diluted non-GAAP EPS growth plus the dividend yield to equate the total shareholder return in the mid- to high single digit. With that, we can turn it back to the operator to begin our question-and-answer session.

[Operator Instructions] The first question is from David Kaplan with Barclays.

Can you talk a little bit about the mix of the revenues? It seems the license revenue has been fluctuating quite a bit if you look back. So last fiscal year, even this year, third quarter had a kind of a strange mix in the fourth quarter since you're back in line. What is happening there with the license and revenues that has to do at all with the regional mix? Or where is that coming from?

So David, thanks for the question. As we said in the past, license is becoming less and less irrelevant indicator for us as almost the majority of the deals that we have are full project responsibility rather than just selling the product license on its own, which means that the overall negotiation and the deal value as a whole are the key parameters we're looking at and not the license portion itself. While saying that, we are focused more on the maintenance revenue stream that is of course is recurring later on in terms of the overall negotiation there from that point of view. So you will see fluctuations, it has to do with one other project that are specifically moving further ahead within a given period and what is the license portion classified within this project. But I don't think you should put too much into it, not in terms of the revenue. And as you can see, these fluctuations are not having any material impact on our margins as well, so I just wouldn't put too much into it.

Okay. And then just on the regional mix, the emerging markets, I think kind of seem to have weakened somewhat or slowed into the fourth quarter. Is that just a timing issue again, a quarterly fluctuation? Or did something change?

Yes. We continue to be very excited about our progress in emerging markets in terms of both winning deals in the backlog being built as well as the pipeline. What you've seen in the revenue fluctuations from quarter-to-quarter is just the result of the fact that it's primarily project activity in these regions. So the different mix of how different projects progress can have an impact there on a quarterly basis, but the overall vector continues to be a vector of growth.

The next question is from Shaul Eyal with Oppenheimer. Shaul Eyal - Oppenheimer & Co. Inc., Research Division: Not trying to front run your mid-December Analyst Day, but on the SDN front, Eli, are you already cooperating or will you be cooperating with some of the big players in the virtualization arena?

What do you mean by big players? I think our customers there are the biggest in the world, okay? And then in terms of carriers and the people that would need virtualization on the network software front. And the competitors are the biggest in the world, so it's going to be interesting, yes. Shaul Eyal - Oppenheimer & Co. Inc., Research Division: Got it. Okay. It seems to me there was no one specific point, but rather a combination of points you brought up during your prepared remarks about consolidation, Europe, macro. What's the main factor, which drives the slightly more conservative stance on the revenue specifically regarding fiscal '15?

First of all, I'm not sure that we have a more reserved view on fiscal 2015. If I compare it to our view ahead of 2014 or ahead of 2013 we feel, actually, as good or better about the market now and the relevancy of our products and services and [indiscernible]. So I do not share this. We are trying to give us much color as possible to all the potential upside and as well as some of the issues we have and I think that fluctuation in foreign currencies definitely bothers us in Europe and some other areas. Consolidation in North America, we said it. Part of it is a good thing, part of it is could be presenting some short-term pressure. We believe that overall consolidation is actually good for Amdocs. We've seen it all around the world and throughout the years and we have some big competitors we need to be concerned about, because we are moving into new fields. But other than trying to give you some color on all the issues we have, I would say that we are walking into this year better prepared and with better view of our chances between the marketplace than we had 1 year, 2 years ago.

I think that probably -- I think that explanation show that just given the business movement in rates, just to remind you, we're not talking about the 1% drag. On a constant currency basis, the growth in midpoint is 5%, actually, not the 4%.

In other words, what we know today on FX kind of resets or present a reset of 1% before we even start the year.

The next question is from Ashwin Shirvaikar with Citi.

I guess my first question is with regards to the assumptions that you're making to get to either the top or the bottom of the range. With the way I kind of look at it is last year, you guided to 4% to 8%. This year it's 2.5% to 5.5%, but you have a percent adjustment from currency and a percent adjustment from the Directory business, I guess so it's equivalent to more like 4.5% to 7.5%. So in some sense, are you moving towards that sort of long-term mid-single-digit range that you consider safe? Is that how one should look at it?

No. The first thing you have to remember that -- going into the FY '14 if you think about the fiscal guidance, we knew some of the effect of acquired companies. So you have to -- if you want to compare it, you really need to remove almost 42% from the previous year.

Remember we guided 2%, 3% going into fiscal '14. When we talked about 4% to 8%, we said that 2% to 3% are coming from the acquired companies.

If you take this one out, it's actually -- the 4.5% and 7.5% is actually quite good calculation you made plus or minus 7% or whatever, but that's all without M&A at all, and in FY '14, we moved into the year. We knew that more than 2% of it is relatively -- of course, strategically, we're not sorry for that, but we have to compare it to several.

No. The point I'm trying to get to though is that you outlined a long list of factors, which as a sort of a reason for being "conservative". But really your performance this year or expected performance next 12 months, is better than the organic performance 12 months ago, right?

That is true.

We're not trying to be conservative, Ashwin, we're trying to give some color about the uncertainties that we see in the market just to show with you what's out there because North American consolidation, of course, is a factor planning for the year, and also to shed some light about what are different moving parts. So when we're looking into the outlook, we feel there's a good momentum in the different regions as we spoke about it. We are taking into consideration the moving parts and things that can happen within the year. Of course, we cannot factor all scenarios as we explained and hence the range, but I don't feel that we are trying to hint that there is any more conservatism or concerns going into this year, not at all.

Since both you and Shaul are very experienced and know the company well, I have a concern about the need to count the number of words we said and all the concern. We're basically trying truly to give you color. I would be very surprised if any one of the colors that we added surprises. It's all there. But again, we are very accurate people so we cannot say something without saying what bothers us. If you ask me the bottom line, you are right. And that's what I tried to answer, Shaul as well. Going into the year, we actually feel stronger this year than we felt 1 year ago and 2 years ago.

Understood. And If I can ask one question on the network side of things as you added some of these products around optimization, virtualization and so on, the nature of those -- of the work that you're signing, is that more project-oriented? And is there a possibility that you can, down the road, can work that into a little bit more of a managed services offering, which gives you more of visibility?

So it's a very good question. We think it's potential, but I don't think it's any time soon. So right now, the nature of those -- most of these projects are project orientation. However, you need to remember that in opposed to an IT pure project, we need to be in the entire infrastructure even for 1/10 of the customer base, in the network space you'll build it gradually by region or by technology or by whatever. So you will do optimization of 3G network in the city, then you go to the next city and you do the same thing, so expand incrementally. So this project has a tendency to repeat as you go into new cities and then new technologies and so on and so forth. So that's one thing that you have to remember. So it's project-oriented, but it's likely that -- has different dynamics. The second thing is that we believe that we are developing, as we speak, services around this product and around this project. Eventually, it may even get to the Managed Services. In some places, we have already longer-term agreements so it's not only 1 project for 1 -- for 6 months, over 1 year, whatever. So altogether, I think overall, over time, we'll see more services and more -- even to the level of managed services and I tried to just to give you more color about the project because when you say project, it's actually quite different from projects in the IT.

The next question is from Tom Roderick with Stifel. Matthew Van Vliet - Stifel, Nicolaus & Company, Incorporated, Research Division: Matt Van Vliet on for Tom. First question about the expansion of the Telefónica Argentina deal, can you talk about what the process was of communicating with them, of taking on more work there? And then how that may impact the ability to expand within other businesses of Telefónica as we've seen you guys do so successfully with Vodafone.

So Matt, thank you very much for that question. The dynamic is quite simple. We pull the same "trick" every time. We just do a very good job in one space and then we get additional work. Specifically, it's -- in Telefónica Argentina specifically, it's around taking more responsibility on the BSS space, set of applications. That is to say that we can provide testing and augmentation of technology, sometimes around our product and our activity, sometimes it's adjustment activities to -- with other people's product, sometimes homegrown product and services. But it's obviously within our domain expertise, so we really understand it better than anyone else. It's a very positive thing. It's a good trend that we see. I think it's something that we can repeat in other places within Telefónica like -- again, we need to finish the transformation of Peru but then we can offer the same thing in Peru, in Columbia and other places. The second I mentioned is ability to go out to other affiliates and Telefónica have few other affiliates in Latin America and definitely more affiliates in Europe that hopefully, in the future, we'll be able to help them as well. So I would say, the encouraging thing is that we are demonstrating the same value-based expansion. In other words, we're bringing more value, we get more work. When we get more work, we bring more value. And this is like a -- it's a positive cycle and we demonstrate that in Vodafone in the last couple of years, definitely this year in FY '14. By the way, we are still demonstrating it 25 years later in AT&T. And now we hope to do the same thing in Telefónica and in some other carriers that we just started a relationship this year. So I think it is repeatable. Now, in what pace? When? What scope? It's really hard to predict, but it's all built into the business model and our offering and our ability to provide these services all across the globe because you need to have a very good engineer in basically in all of these places. In this case, in Argentina or in Latin America in general, in the Philippines or wherever it is. Matthew Van Vliet - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And then looking at the U.S. or the North American business, you talked about doing a bit of a sensitivity analysis on possible outcomes for consolidation. How wide of a range are you expecting between in a kind of worse case and best case scenarios for the North American business?

Well, basically, we said before that everything we know, all the moving parts in North America and all the unknowns of AT&T and Leap and AT&T and DirecTV and Comcast and Time Warner, I mean, you name it. We calculate all of that to equate in about a quarter and we always thought that it's about a headwind of 1%. We believe now that it's the same or better. How better it could be? I don't know. If it will be flat, it will be very nice. It will be plus, maybe not this year, maybe later on. Again, we believe that in longer term, all of this requires highly complex heavy-lifting projects. There are very few people that can do it. Even some of the names that claim that they can do it, they cannot. And therefore, it usually provides an opportunity for Amdocs longer term. We've seen it all around the world and it's more than 10 years that we're seeing this. It's not every year, it's not every place and it's not guaranteed. But -- so this is kind of the range that we gave before and then we basically updated these ranges to be same or better, that is to say that we feel slightly stronger in some of the cases. That's it. I mean, this is the best color I can give. I think it's the best color we have. And then again, we mentioned that we cannot calculate all the computation because it's one of these big things of change or there's another consolidation tomorrow morning, we want to make sure that we understand what is in our calculation, what can we predict even within several permutation and what we cannot. So that's again, maybe we added too many words there but giving the other questions, but it's the color I can give you.

[Operator Instructions] The next question is from Mark Sue with RBC Capital Markets.

As far as when you're seeing consolidation -- and there was a lot of complex projects which has benefited Amdocs. Can you talk about subsequently was there any pricing negotiation or impact over the longer term after you saw these businesses reached that state? And then secondly, I just had a question on just kind of the moving parts in terms of deferred revenues recognizing it does fluctuate, it does seem to be quite a bit down from last quarter.

Let me take to try to take that -- the first question and I'll ask Tamar to respond to the second one Mark. Look, in terms of pricing, we said more than once. We are very careful about negotiating things and selling things for a cheap price or for a low price. We -- we're actually known to be probably the most expensive or one of the most expensive provider and it's because we provide lots of value. So yes, when people consolidate and theory shows that they have a stronger leverage on you because this carrier's becoming bigger. But I have to tell you that I don't think that they need to have this consolidation to -- at a leverage and we always have this discussion so I don't think that AT&T with another 1 or 2 companies is really a very different AT&T or Vodafone with another 1 or 2 companies or Telefónica with another 1 or 2 companies. And all of them are the consolidators. So yes, pricing is always an issue. All of these carriers are under -- are somewhat of a pressure and we keep on basically saying and executing on one dimension. We bring value and this value worth the money. We never competed on price of individuals, on software, on licenses, on whatever. We provide much higher value and on top of it, we provide almost zero risk because we don't sell projects. And the risk of selling a project is actually even more significant than saving a few million dollars year-on-year. It's not only the money that they are going to spend in a sales project, which usually equates to tens if not hundreds of millions of dollars. It's the time that they are losing. That is a very -- it's devastating to these carriers. So when you combine the value we bring on the positive things like functionality, time-to-market, we provide the best infrastructures to these companies to go to succeed in their marketplace. And if you compound to that the risk and if you can somehow calculate what the risk was, I think there is only one chance -- one conclusion we can get with it, that you need to go with Amdocs. And frankly, we have a very high win rate in the market in the last few years. So I think more and more people get it now. Don't get it as we think we can get to 100% win rate. Win rate, we're very close to that. We have to be realistic. We have a lot of competitors. All of them are big names. All of them are trying hard. We're just being probably luckier and we get better results at the end of the day.

On the deferred revenue...

Just on the deferred revenue fluctuations, please?

Yes. On the deferred revenue, we've seen it peak last quarter and now back to the level we've had 1 year ago. Primarily around some activities with North American customers, nothing major there other than the fact it's a combination of where the invoicing license specifically fall within the quarter relative to our progression within a project. Unlike a pure software player where deferred revenue can be a leading indicator, this is not the case in our business model. So I don't think you should associate too much into it. We will see fluctuations in deferred revenue coming in and out within quarters quite difficult.

Okay. Understood. And then just lastly, on just cash flow, how we should think about CapEx for next year, depreciation expense? Anything moving towards working capital requirement that might change free cash flow for next year?

I think we'll elaborate more on that in the Analyst Day but in general, we are not a capital-intensive business and I don't expect that to change in any significant way.

The next question is from S.K. Borra with Goldman Sachs.

Mainly on operating margins. One, your indication indicating towards increased focus on total revenues compared to just license revenue stream. What does that mean in terms of the margin profile, especially over the next 12 months? Is the margin for these total revenues you're talking about at the same level as licenses?

We are not pricing separately usually the license from the rest of the projects because it's an overall negotiation. So the fact you are seeing license tracking up-and-down and fluctuating within the quarter is not therefore, necessarily changing the margin profile, because it started an overall project with a certain margin. Therefore, also looking into next year, I don't think necessarily the element of license proportion out of total revenue is a major factor, if at all a factor, within the way we look at our expectations for margin. And there are many other elements, of course, that flow into the expectations on margins, which are beyond this point specifically.

Okay. And probably more from a medium-term perspective, beyond operational leverage in the model, are there any incremental drivers for operating margin expansion you're seeing in the next few years?

Well, we said more than once that we are trying to balance between operating the machine better and do more software with less people or faster and while maintaining the growth of the company, which is fed by very, very complex projects so you have to be very careful. It's not like a steady machine that you just need to oil better. And that's why we are showing -- and I'm proud of it that we're showing a creeping up of the margin without risking the gross profit of the company. And we'll try to do the same thing in the future. The other thing you need to remember is that we are -- every time we can actually afford to do it, we are expanding on some of the new initiatives. So if we will, for example, stop some of the -- or slow down some of the emerging markets penetration, obviously you can get a better margin because all of this penetration project comes with a profile of low margin. It's like the nature of this penetration. I don't think it's a stuff that we need to do for the sake of the midterm and the long term of the company. So when you balance all of that, I think that we can be within the range. We've been doing better in the last year or so than before and if there is a way to improve it further, we'll do it. But we're not trying to guide to that at all. And so I don't want to build any expectations further expansion of operating margins. We picked it up 20 basis points this time. We felt that it is the right thing to do. We can meet it. The future -- we'll see in the future.

We have no further questions at this time. I'd like to turn the call back to Matthew Smith for closing remarks.

Thank you, Ellen, and thank you very much, everyone, 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've got additional questions, please call the Investor Relations group. Have a great evening and with that, we'll conclude the call.