Ladies and gentlemen, thank you for standing by. And I'd like to welcome you all to today's call, the Second Fiscal Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn our call over to your speaker today, Mr. Matthew Smith. Please go ahead, sir.

Thank you, Ryan. 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 be also 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, the duration and severity of the COVID-19 pandemic and its impact on the global economy 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, 2019, filed on December 16, 2019, and our Form 6-K furnished for the first quarter of fiscal '20 on February 18, 2020. 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'll turn it over to Shuky.

Thank you, Matt. Good afternoon, everyone. Thank you for joining us on the call today, and I sincerely hope that you and your loved ones are safe and well at a difficult time in the world. I'm proud of our second fiscal quarter performance, especially considering the global health and economic crisis created by the COVID-19 pandemic. We delivered a record high revenue that was slightly above the midpoint of our guidance, adjusting for foreign currency headwinds. We maintained stable profitability with solid free cash flow generation, and we ended Q2 with a strong balance sheet and enough liquidity to support our ongoing business needs and long-term investments. Regarding our response to the COVID-19 pandemic. We demonstrate incredible execution as we adapted our global operations to ensure business continuity and the health and wellbeing of our global workforce, our customer and their respective families. From our vantage point in Southeast Asia, Amdocs is among the first in our industry to proactively address the business impact in the evolving crisis. We acted decisively to communicate precautionary measures and employee travel restrictions throughout the region and parts of Europe. And in early February, we are one of the first companies to announce our withdrawal for GSMA Mobile World Congress in Barcelona. By mid-March, almost 100% of our 25,000 employees were equipped to securely work from home and mostly operating the mission-critical system required to keep our customer operations running seamlessly across 85 countries. For the small number of essential employees required to be on-premise at customer and end of site, we took a proper step to ensure their safety. To smoothly position Amdocs global development, project delivery and Managed Services operation with our short-term productivity intact, it is not trivial. We successfully completed an incredible 20 go-lives in March, another 26 in…

Thank you, Shuky. Second fiscal quarter revenue of $1.5 billion was slightly above the midpoint of our expectation of $1.35 billion and $1.75 billion, excluding for negative foreign currency impact of approximately $8 million relative to guidance range. On a reported basis, revenue performance included a negative impact from foreign currency fluctuations of approximately $6 million relative to the first fiscal quarter of 2020. Due to our strong win momentum entering the quarter and the disciplined execution we have delivered to our customers, we are pleased to have met all revenue expectations while adjusting our global operations in response to COVID-19 outbreak. On a year-over-year basis, our second quarter revenue grew by 2.8% as reported and 3.7% in constant currency. Our second fiscal quarter non-GAAP operating margin was 17.2%, above the midpoint of our long-term target range of 16.5% to 17.5% and consistent with our guidance. Below the operating line, non-GAAP net interest and other expense was $2.3 million in Q2. Foreign currency fluctuations in the quarter were higher than normal, and our hedging program was effective in mitigating for most of the impact on the bottom line. 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. We remind you that our foreign currency hedging program is designed to protect our profitability and free cash flow generation rather than revenue, and we are pleased that this approach has proven effective through the volatile currency markets of the second quarter. Due to GAAP, EPS was $1.08 in Q2, above the midpoint of our guidance range of $1.03 to $1.09. As anticipated, our non-GAAP effective tax rate of 18.3% in the second fiscal quarter was above the high end of our annual target range…

[Operator Instructions] We'll start with our first question from the line of Ashwin Shirvaikar from Citi.

Good to hear your voices, hope you're well. I guess I wanted to start by asking how your clients are adapting this new environment. It seems as though new signings are coming back, so maybe the sales process is working. But could you talk about ramps of existing deals? Can you talk about your current conversations? Or I would think digital transformation is now more important than ever before, any other points to consider? Are they pushing out payments? Are there any differences versus telecom versus media, things like that?

So I think from a sales perspective, we see 2 types of activities. There was the activity that we engaged prior to the COVID-19. And as I mentioned, there was a big slowdown during the March time frame, and we expect and want to see recovery in Q3. We see some signing of some of this deal at the beginning of Q3. We hope to be able to continue this momentum. From an offering perspective, we see, again, 2 types of offering, A, we continue all the offering at the end of this commissioning of 5G monetization, as you mentioned, digital transformation, et cetera; but we also coming with a new idea and innovation to support what we believe is a reflection of the COVID-19 pain points. Obviously, we are trying to find solution for the fact, there's a little [indiscernible]. So how we can elevate the self-care and the e-commerce activities, obviously, closing the call center or moving to call center to work-from-home. This is another thing that we are coming with innovative solution to support our customer that have to move thousands and thousands of customer service representatives to work from home. How to monetize the network and how to optimize the network in time like this. So another area, we are coming -- start innovation solution to support our customers. For Q2, I cannot tell you that we have seen pressure regarding collection. Actually, we had a good, very decent collection quarter. I cannot tell you that this will be always the case. But so far, I think the value of the services, the importance of the services, the mission-critical services we deliver, I think that, as I mentioned, we've done an exceptional good job in this quarter and also in April. So, so far, we did not see this pressure.

Ashwin, one point maybe to add is on the media side. We're very pleased with the continued wins momentum all over the world, and you've seen some of the examples we shared during the prepared remarks, with many new logos, a lot of service providers around the world launching OTT services. We're seeing the demand for the content management and processing that we provide as well as things like seamless identity management and onboarding of new consumers. MarketONE has been a very successful platform, both with T-Mobile that's launched already new partners as well as AT&T Mexico, so we're very pleased with the momentum over there.

Got it. Thank you. And then the second question really is about cost flexibility as you think about the current environment. And that's, both a question about the ability to cut costs, control costs as well as the willingness, given that you have fairly large number of transformational deals going on and so on and so forth. Can you talk about your cost flexibility?

Sure. So what we are seeing is that, obviously, we need to plan for multiple scenarios given the uncertainty. So what we're trying to do is to build cost contingency initiatives that are trying to factor in different things that can happen both in terms of ramp-up, ramp-down. As you know, we have quite a robust delivery model that is a global one. And as a matter of regular business, we need all the time to be able to reallocate resources between activities that are accelerating in certain customers versus others that are naturally ramping down, so it's a muscle in the company in a way that is very active. And even more so, of course, in times like that, we are continuing to be very cautious on talent acquisition these days, while we aren't hiring many employees, and by the way, virtually onboarding hundreds of employees in different places in the world. We are very selective in where we decide to recruit. At the same time, we continue to balance the different activities that we do with all kinds of initiatives that are least harmful to the employees and the productivity and the commitments we can do for our customers. And by doing that, so far, we've managed to do a good job in protecting the margin, plus we have things in our contingency plans to address any further pressure if one will come. So that's why we came out with the message, we believe that in the second half of the year, while we're experiencing some pressure on the top line, we can protect the margin level we've seen in the last couple of quarters.

[Operator Instructions] Our next question comes from the line of Jackson Ader from JP Morgan.

Collection just seems strong in the quarter, and that runs counter to, I think, what we would have expected. And so just curious about the collections activity in the quarter. And then also, have you had any customers maybe that you'd hit invoicing milestones on their projects, and they've asked for either deferrals or leniency in payment terms?

So I think Jackson, it's a good point because naturally, collecting money is never an easy thing. Everybody wants the cash in their banking account, and definitely in times like that. But at the same time, we've been very focused on making sure that, A, we invoice for all the milestones that we've hit and we collect the money that is well-deserved after we meet those milestones. And it's an ongoing discussion with customers. So yes, naturally, there are difficulties that come with the situation. By the way, some of them even logistical difficulties like how do people access the bank accounts in countries in which they pay by checks. I know it's hard to believe that in some countries, this is still the case, but it is. So all the way from these kind of, I will call it, more logistical challenges that we have to overcome to customers dialogue around can we move the payment, et cetera. So it's an ongoing discussion we have with customers. I think that we are managing that in an effective way. Our customers understand how well we are executing to the commitments we have. And the other way around, we expect to be paid on time.

Okay. And then actually, that's a nice segue into my follow-up, which was, is there any more color maybe that you could provide on when you were talking about the just logistical hang ups of getting paid, what about the logistical hang ups that go with some of your transformation or project-oriented milestones? Are there things that are there milestones that Amdocs cannot typically hit during this time period that would preclude you from being able to recognize revenue from a certain project because of COVID-19?

The answer is a straight no. I think that we proved during February and March, and in April, that we are able to deliver all milestones. This is what I said in the script that we are very proud in how effectively we move to work completely virtual, leveraging the best-in-class methodologies, collaboration tools. We are working in Vodafone Germany on continuation, which I think one of the biggest transformation in the world, everything in a virtual way from probably 3 to 4 countries. The same in Orange Spain and same in others, so I think that we were able to adopt very, very fast to deploy all this production milestone. As I mentioned, in Southeast Asia, we moved one of the operator in 2 weekends to the whole system to the cloud. Everything was supported remotely from our workforce in India, in Israel, United States, in the Philippines, et cetera. So I can tell you with a great confidence that we have done exceptionally well to this environment, and I don't see any reasons, as we will continue to deploy. I think between March and June together, we deployed 15 milestone to production. So it's a major...

March and April.

March and April, sorry. So the answer is that I don't see any reasons we won't continue to deliver.

I think just to add on that, it requires, obviously, a lot of joint effort with our customers and a lot of open dialogue about how to make it happen, which obviously is the case in terms of the joint interest of both parties and just an incredible commitment of our workforce. Our employees have been wonderful in coping with the all move in a very fast pace to this working from home mode and very small quantity of employees that are essential to be on customer or our own sites, like data center support, things like that, have been also very flexible in agreeing to do the task. And obviously, we made all of that while making sure they are very safe in controlled clean environments.

[Operator Instructions] Our next question comes from the line of Hugh Cunningham from OpCo.

Hey, guys. Thanks for taking my question. Regarding the new campus in Israel, has the COVID-19 lockdown impacted the progress of work there? And looking forward, do you expect any impact on the work on the new campus?

I can start and Tamar will complete. I can tell you that the whole arrangements we have in the campus is we have a lot of flexibility. We made sure that we have flexibility with all the contractors. We are evaluating what we call the next-generation of way of working. It's going to be -- continue to be balanced between working from the office. There are certain things that the only way to doing in the highest productivity is from the office. And definitely, we see that -- more and more colleagues work from home. So this is, I think, we have flexibility. Additionally, in the campus, we moved from pretty much from lease-to-own and definitely, when you own the campus, you have much more flexibility to balance the workforce working for the companies as much as you need, rather than when you sign a long-term leasing deal with a landlord that usually typically don't have so much flexibility. So I believe we've built the right flexibility to adjust to the needs that we needs that we need. Tamar, do you want to add?

And we're continuing on time. Actually, the construction sector in Israel has been excluded as an essential sector. So we're continuous while there were limitations on other activities in country, the construction continued as planned.

Okay. And so the cash flow you've laid out, reemphasized, there's no expectation and that's going to change?

Yes. Again, we're saying up to 90% because obviously, we want to take a cautious view on the number we're giving you. And if we can delay some of these payments, that will be good. I think you'd agree with me. So I think that overall, in terms of the expectation, it will definitely not be more than the 90% that we expect for the year. Maybe some of it will shift a bit to next year.

[Operator Instructions] We do have a question that came in from the line of Charlie Erlikh from Baird.

This is Charlie Erlikh for Will Power. Wondering if I can ask a question on the balance sheet. Amdocs has always had a really strong balance sheet. So I'm wondering what the uses and maybe the reason and timing around the $350 million you guys raised this quarter? And then also wanted to clarify that I heard correctly that you raised another $100 million in Q3?

So you're right, we have a strong balance sheet, and we are definitely laying down and giving you full transparency about how we are planning to use the money. What we said is the majority of the free cash flow we will generate the normal free cash flow will be returned to shareholders. So as you can understand, on top of that, we are funding the buildup of the campus that we just touched, and again, that was planned. So the main reason we draw the money was just to be cautious. Given these kind of circumstances and economic pressure coming with the COVID-19 pandemic, we know liquidity is a scarce asset. We prefer this liquidity will be in our bank account rather than on the other side. So that's the main reason. We're not trying to signal here any kind of a mega move that was not planned before, just to be on the safe side.

Great. Yes, that makes sense. And then I might have missed it because...

And on the $100 million that to be, sorry, I didn't respond to the other part of your question. Yes, we did do additional $100 million during the beginning of Q3 on top of the $350 million. So in total, we have already borrowing, as of now, $450 million.

Great. And then just my last question on AT&T. I'm sorry if I missed this, but did you guys call anything out in the beginning of the call on AT&T specifically, if there's any changes to their discretionary spending patterns or trends or any conversations you're having with them, either positive or negative given the environment?

The comment that I had regarding AT&T that we are happy with the execution of the large Managed Service agreement that we've signed with them in the last year, in Q4 last year. So the execution of this contract started already and is going well. Additionally, we are talking with them on different ideas and innovation that can be relevant for COVID-19 situation and more.

This is a follow-up from the line of Jackson Ader from JP Morgan.

Sorry, just one quick follow-up on gross margin. I know, Tamar, you said you expect operating margin to be roughly in line with the first half. What should we be expecting with gross margin? If you could give us additional color there.

Jackson, usually, we are not guiding, or to be honest, managing our activities to the gross margin level because we do want to keep the flexibility between primarily in our execution of delivery. Sometimes, we would like to accelerate R&D. For example, now one of the ideas that we have looking at different opportunities in the market is to see where we can slightly accelerate R&D activity. So the shift between margin, the gross margin level and operating margin is something that we may see. It's not in a material way, but that's why we're very focused on managing and guiding also on the operating margin level.

And at this time, there are no further questions on the line. I would now turn it back over to our speaker, Matt?

Thanks, Ryan, and thanks very much, everyone, for joining our call this evening and for your interest in Amdocs. We do look forward to hearing from you in the coming days. If you do have any additional questions, just give us a call at the Investor Relations group. And with that, stay fit and wealthy, fat and healthy, and have a great evening. Thanks.

And this does conclude today’s call. And you may all disconnect. Speakers, please close the line.