We reiterate our long-term Neutral recommendation on Amdocs Ltd. (DOX) following our assumption that an improving global economy will revive the Telecommunications Software Management Systems market. Amdocs has a strong portfolio of several industry-leading technology integration products for managed services and large transformational projects.We believe the long-term fundamentals of Amdocs remain firm mainly due to the transition of telecom service providers to converged and consolidated solutions.
Amdocs is well positioned in the market as carriers sell bundled and converged IP-based network solutions to their subscribers. These services include cable, fixed-mobile converged and high-speed broadband Internet access solutions. As order sizes became larger, carriers started spending more on customer care and billing software. Amdocs offers integrated customer management systems, which is essential for carriers in order to prevent customer churn. There are huge opportunities that exist with Amdocs as more telecom companies starts deploying 3G and 4G networks. Additionally, investment in the emerging markets will further drive the top line and bottom line growth.
We believe the proposed merger of AT&T (T) with T-Mobile USA, if materialized, may act as a long-term catalyst for Amdocs. Historically, Amdocs remains a beneficiary of the merger among the U.S. telecom carriers. AT&T is the biggest customer of Amdocs, accounting for about 29%-30% of the company’s total revenue. The services integration of the two platforms may generate incremental revenue per annum.
However, in the near term, profitability may suffer resulting from higher expenses for productivity improvement, suspension of program implementation at Clearwire Corp. (CLWR), and emerging markets sales opportunities. Amdocs is investing heavily in the emerging markets in order to increase sales, leading to a drop in margin. Even in the developed markets, management has decided to undertake a series of program regarding training, knowledge transfer, and productivity enhancement in order to cope up with recessionary situations. All these activities will result in bottom-line shrinkage that may continue in the rest of fiscal 2011.
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