Ladies and gentlemen, thank you for standing-by and welcome to the Q4 2019 Amdocs earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Matt Smith, Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you. 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 the 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, 2018, filed on December 10, 2018, our Form 6-K furnished for the first quarter of fiscal 2019 filed on February 19, 2019, the second quarter of fiscal 2019 on May 28, 2019 and the third quarter of fiscal 2019 on August 19, 2019. 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 Shuky Sheffer, President and Chief Executive Officer of Amdocs Management Limited and Tamar Rapaport-Dagim, Joint Chief Financial and Operating Officer. And with that, I will turn it over to Shuky.

Thank you Matt and good afternoon to everyone joining us today. I am pleased to report strong operating results for fourth fiscal quarter, this highlights of which included an exciting new agreement with AT&T, significant managed service extension at U.S. Cellular, T-Mobile's Metro pre-paid and Telkom South Africa and some new strategic wins in Amdocs media. Altogether, we maintained our high win rate, extended our market-leading position and exited Q4 record 12-month backlog that was up roughly 4% for the year ago quarter. Regarding fiscal 2019, we successfully met our financial targets for the year, which was my first as Amdocs' CEO. To briefly recap on our annual performance. We delivered record revenue, which was up 4% in constant currency and in line with the midpoint of our guidance. This performance includes revenue decline 12% at AT&T that was higher than what we originally expected at the beginning of fiscal 2019. However, we will more than offset this headwind with strong growth in the broader North America, Europe and rest of the world. A growth area was managed services, which had its best ever year. This was driven by the continued ramp up of managed transformation activities with new customer activity, VIL and Sky Italy and was support by the multi-year extension of several pre-existing agreement that highlighted the trusted partner relationship and value position we continue to bring to our long-standing managed services customers. Fiscal 2019 was also notable for our stable profitability and healthy cash collection as we focused on reaching key invoicing milestone of many transformation project we believe are essential for our market position in the long- term goals. As such, we exceeded our full year target for normalized free cash flow of $600 million, a majority of which we returned to shareholders through our quarterly…

Thank you Shuky. Fourth fiscal quarter of $1.3 was at the midpoint of our guidance range on a constant currency basis after adjusting for the negative impact of approximately $5 million of foreign currency movement relative to guidance. Our fourth quarter guidance range had assumed a sequential positive impact from foreign currency fluctuations of approximately $2 million as compared to Q3. On a year-over-year basis, our fourth quarter revenue grew by 2.8% as reported and 3.6% after adjusting for foreign currency headwinds of approximately 80 basis points. Consistent with our guidance, Q4 revenue included a partial quarter revenue contribution of several million dollars from TTS Wireless, the acquisition of which we closed early August. Our fourth fiscal non-GAAP operating margin was 17.3%, consistent with the higher end of our long term target range of 16.5% to 17.5%. Below the operating line, non-GAAP net interest and other expense was $2.5 million in Q4. For forward-looking purposes, we continue to expect 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 $1.08 in Q4, above the midpoint of our guidance range of $1.04 to $1.10. As anticipated, our non-GAAP effective tax rate of 16.1% was above the midpoint of our annual target range of 13% to 17% in the fourth fiscal quarter. Diluted GAAP EPS was $0.90 for the fourth fiscal quarter, above our guidance range of $0.81 to $0.89. Free cash flow was $179 million in Q4. This was comprised of cash from operations of approximately $214 million less $34 million in net capital expenditures and other. Normalized free cash flow for the quarter was $190 million, which is an improvement relative to $89 million a year ago. For the full year fiscal 2019, normalized free cash…

[Operator Instructions]. Our first question comes from Tom Roderick with Stifel. Your line is now open.

Yes. Hi. Good afternoon. Thank you for taking my questions.

Hi Tom.

So let me just address the backlog here for a second. So $90 million sequential backlog, that's a level of increase we haven't seen in quite a long time and really not anything close for a long time. So when I look at some of these deals, it looks like there was certainly some pent-up demand. The AT&T deal, in particular, looks very, very interesting. Can you just talk about that new deal activity environment that you are seeing? Is there pent-up demand, particularly in the U.S.? And should we expect to see a little bit more of that as an impact to backlog going forward? Or should we just view this $90 million increase as a bit of a waft?

Look, the $90 million is indeed an exceptional sequential increase. As you said, we have not seen for many years. And I think it's a combination of primarily the AT&T deal that we talked about as well as the fact that in addition to that we have the factors of TTS Wireless coming into the backlog as well as several other awards. You have seen the announcements that we have shared and this was just examples. It's not the full list of deals. So I think the combination of all of that contributed to a significant increase. Now looking forward, we already have as of now, the knowledge of signing the Vodafone Germany transformation in Q1. And in addition to that, as we said, we feel we have a solid pipeline. So I don't think you should expect now this kind of magnitude of backlog increases from quarter-to-quarter. But we are pretty much feel good about what we think in terms of the pipeline and the ability to convert that into deals.

Excellent. Okay. Congratulations on that.

Thank you Tom.

So Tamar, can you then just sort of help us think through what appears to be a little bit of a disconnect between that really nice rise in the backlog and then sort of looking at the normalized free cash flow number of $480 million or total of $ 350 million next year, if I am looking at that right. Can you help us understand why that normalized number would sort of look to be down? What are some of the factors? You specifically mention AT&T and the renegotiation or restructuring of that deal might lead to the first half being substantially lower than the second half. Can you just talk to that dynamic and particularly how AT&T impacts it? Thank you.

So thanks, Tom, for the question. So just to clear, between reported free cash flow and the normalized free cash, the main difference is the $120 million of investment in the multi-year development plan we have on the new campus in Israel. So I will refer the rest of my question to the $480 million which is more reflective of the business itself. So what we are seeing is that the new awards, AT&T included as well as some other awards that we are very happy about, does require investments in the upfront, some setup activities that are required, things like building up new sites, new training programs, rebadging employees in some cases, et cetera as well as some function of how the structuring of the milestones for invoicing the customers look like. So think about it as a somewhat of a small period or short period of investment that is quickly coming back in the second half of the year in the form of the cash flow acceleration that we are expecting to see returning in the second half of the fiscal year. We are already to the 100% earnings to cash conversion. And obviously, we will catch up with for this kind of investments later on in their lifecycle.

And then, Tamar, as we build our models, do you have a suggestion as to how much of the full year number we ought to backend loaded for the second half? Is that sort of like a 60% number, higher than that? Just ballparking it, what's a good way to think about the way that builds?

I need to think about that. But I would say, probably roughly speaking, I don't know, two-third, but I have to run the model in my head again.

Okay. That's helpful. It's a good start. Thank you very much. Nice job.

Thanks.

Thank you.

[Operator Instructions]. Our next question comes from Jackson Ader with JPMorgan. Your line is now open.

Hi. Thanks. Good evening guys. A question, just to follow-up on the cash flow. Does this then imply that you have kind of two separate headwinds here? So on the one end, you have an increase in the number of investment and also people are pushing out payment terms. Did I hear that correct?

I am sorry. Can you repeat the question? We didn't hear you well.

Apologies. Yes. I was just saying, so I just want to clarify on the cash flow. We have, on the one hand, increased investments. And then on the other hand, the renegotiation of the AT&T contract is also kind of a pushing out of invoicing milestones from maybe what you would have invoiced previously?

Yes. It's a fair description. It's a combination of both.

Okay. That's fair. And then so when we think about the $100 million or so roughly, just like the year-over-year decline in normalized free cash flow, I mean how do you guys think about the payback or the return on that increased investment from the reduction in cash?

In general, when we look on deals with customers, many of our of our customer deals are multi-year deals, whether it's a large transformation that can take beyond one fiscal year or definitely multi-year engagements that includes managed services. So from our point of view, of course, we look on the cost of capital of the company and make sure that after taking that into consideration, looking on the opportunity to create the margin of the relationship as well as the parameters of the specific deal plus additional potential activities we see beyond that, that it makes sense for us to do that. So that would be always the case and whenever we go, sometimes when we go into new relationship that starts with a transformation project, as we always explained in the past, a transformation project is usually the differentiator that we can penetrate the new customers with but it's also lower in margins relative to the later recurring revenue managed services opportunities. And our track record shows that with many of the new logos that we achieved in the last couple of years, often times through a win of transformation project, we managed to expand this relationship to recurring revenue to additional app sells as well as managed services. We talked about it quite a lot, I think, in the last quarter, giving some examples of customers in APAC that we won in the last several years of new logos expanding this relationship to managed services. There are also good examples here in the States, for example U.S. Cellular started with a transformation project then shifted gears to be more of a managed services agreement and now we are already in a more mature phase of the relationship moving into the next cycle of modernization and we just release today an announcement of an expansion of the managed services engagement there. So I am just giving you color around what kind of expectation we have when we go into a customer relationship. Usually, the longevity of relationship we have with customers runs over decades. So again, when we are looking on ROI, we don't necessarily think about it in the context of decades, don't get me wrong, we want to see the ROI faster, but definitely the track record shows that any new relationship evolves later on to a long term relationship.

Sure. Okay. All right. That was helpful, Tamar. Thank you.

Thank you.

Thank you. And our next question comes from Shaul Eyal with Oppenheimer. Your line is now open.

Thank you. Good afternoon Tamar. Shuky. Congrats. So really going back to Tom's commentary about the backlog, really a flurry of contract announcements, renewals, AT&T, T-Mobile, U.S. Cellular obviously contributing to the healthy increase the $90 million mentioned sequentially this quarter. When we think about it also from a deferred revenue perspective and I know DOX is not the best example given the business model, but should can we reconcile that growing backlog number on the one hand, with the fact that short and deferred revenue kind of still relatively low? And I know many of us here cover big enterprise software companies, different business model. But help us, may be Tamar, to address that point?

So Shaul, in our business model, unlike pure software players, I don't think deferred revenue is a leading indicator and I don't think you should look for that correlation because, you know, it's not model where we see mainly maintenance and license upfront which creates those deferred revenue balances you would expect in a software company. I believe that in our case, actually the 12-months backlog is a much better leading indicator. And in terms of the relationship of project ramp up to both deferred revenue and unbilled revenue, it's a mix of how the revenue recognition is progressing relative today with invoices. But unfortunately in our case, usually the customers expect to see some deliverable before we can invoice. So that means that over a project lifecycle, usually there is a lag between the revenue recognized and when we can actually catch up with the invoicing. Hence the phenomenon that we are seeing where we have such a great win rate with transformation projects which we is great news for the company and as I explained before, usually the beginning of the relationship or the expansion of relationship with a customer that leads later on to more business, yes, in the shorter term of the project lifecycle, usually, we are moving with certain lag between revenue recognition and the point of invoicing. Nevertheless, obviously given the track record that we have of executing on this project, giving the strong position of the customers that we serve is maybe just a lag in timing, that is catching up pretty quickly.

Absolutely, completely, completely understood. And thank you so much for this color. Right on, absolutely. And Shuky, maybe slightly more from a macro perspective and going back to this slurry of renewals and the new announcements, should we look at Amdocs as some sort of a leading or a lagging indicator into some of the trends that are taking place within the telecom arena, at large and maybe specifically as it relates to the U.S. telecom and cable market?

I am not sure I understood the question.

Everything that we --

I think, Shaul -- I am sorry. Go ahead.

No. I will just maybe try and simplify that. Given the acceleration that we are seeing with the backlog on the one hand and pretty much with the strong business momentum and contract announcement, in you view, is Amdocs some sort of a leading or a lagging indicator from an economic perspective into 's is happening on the broader telecom arena and to an extant what's happening specifically within the U.S. telecom and cable arena?

I don't know if you can always connect the two, of the macroeconomic situation and Amdocs' success. I can give you one example. If you look at today in Europe. Europe, if you look at the Amdocs display in general, it's pretty much zero growth. On the other had, it's today may be our biggest growth engine and the reason about of the trends in the market. So in Europe, the trend in the market is convergence. All the big companies, obviously Vodafone included, we talked about Vodafone Germany, which is a significant part of Vodafone in general and is doing one of the most complex transformation getting the Vodafone mobile, fixed line and old LGI consolidate to one consumer experience, which is very, very big transformation. So not always you can find the correlation between the macroeconomics and Amdocs' success. As I said in my script, I think it's what is nice. Because when we look ahead, we see pretty much growth across the board. So we see modest growth in North America. We see very accelerated growth in Europe. We see growth in the rest of the world. So overall, I think, we are pretty happy with the way they are balancing the growth activities that we do across the board.

Thank you so much. Well done. Congrats.

Thank you.

Thank you.

Thank you. And our next question comes from Tavy Rosner with Barclays. Your line is now open.

Hello. This is Peter Zdebski, on for Tavy. Thanks for taking my question. We were wondering if you could provide any color back on cash flow on any factoring that in 2019 and perhaps specifically how that might have compared to 2018? And then I have a follow-up.

So as we said in the beginning of 2019, our expectations for stronger cash for the year as well as that indeed what's happened has actually happened despite the fact we used small amount of factoring for practical reasons and even smaller than 2018. So in total, it was a headwind rather than a tailwind. But overall it was immaterial.

That's very helpful. Thank you. And then one follow-up. Have you seen any incremental or can you give any incremental color on traction with NFV?

So I think as mentioned before, we signed another NFV deal this quarter with VodafoneZiggo, which is important because this is a sales deal that we did with Vodafone and I hope which represents for us opportunity later on. So we see couple of deals every quarter. And the traction of NFV, as we have said before, is slower. I think that the majority of customers move a lot of focus to 5G and building the right monetization solution, charging solution on 5G. In a way, 5G infrastructure, not just the radio, obviously, the core network, by definition is going to accelerate the NFV related activity. But we see good healthy activity. But as I said, the majority of the focus has shifted to 5G deployment and 5G use cases.

Okay. Thanks very much for the color and congrats on the quarter.

Thank you.

Thank you.

Thank you. And our next question comes from Will Power with Baird. Your line is now open.

Hi guys. This is Charlie Erlikh, on for Will. Thanks for taking the question. And sorry if this has been asked before. I joined a little bit late but I just wanted about the 2020 revenue guidance. Given some of the strong wins this quarter with AT&T and a lot of others and the really strong backlog as well, I guess I am a little surprised that the 2020 revenue guidance isn't even higher than it is. Am I getting ahead of myself on these new deals in the backlog? Or are there other things to consider? Thanks.

So we touched on those point that in fact what we are seeing is that a lot of those new activities that we are talking about are going to ramp up more strongly for the second half of the year. So we do expect acceleration and that some of these strength in the backlog would put its direction into revenue recognition more in the second half of the year. So I think that's a simple answer between what we talked about in terms of the wins as well as the backlog increase relative to the revenue expectations.

Okay. That makes sense. And then just a quick housekeeping question. Could you tell us what the cash interest paid was in the quarter?

Cash interest paid, I have to admit I do not remember. But it is immaterial amount, for sure.

Okay. All right. Congrats on the quarter. Thanks for taking the questions.

Thank you.

Thank you.

Thank you. [Operator Instructions]. And I am showing no further questions in the queue at this time. I would like to turn the call back to Matt Smith for any closing remarks.

Thank you very much for joining our call this evening and for your interest in Amdocs. We forward to hearing from you in the coming days. And if you do have any additional questions, please contact me here at the Investor Relations group. Thanks and have a great evening.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.