Making Billing Software Sexy

Amdocs sees fertile ground ahead, along with some possible competitive heat from Lucent.
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The stock price of billing software company Amdocs (DOX) - Get Report has more than doubled since early October, and the company is telling investors more good news is on the way.

Amdocs specializes in billing software for telecommunications companies, particularly for mid- and high-tier wireless companies. Just how important is this area? Telecommunications giant

Lucent

(LU)

joined the bandwagon last month when it offered to pay $1.48 billion in an all-stock transaction to acquire privately held billing software company

Kenan

. Some analysts estimate the market for telecom software could reach $23.4 billion worldwide by 2000, from $14.3 billion in 1996. Specifically, customer management is seen generating $9.8 billion in 2000 and order management $4.9 billion.

"In our view, Lucent's move is a clear validation of the high-growth opportunities in this new space," wrote analyst Marianne Wolk of

BancBoston Robertson Stephens

earlier this month. "Today, the bulk of these systems are legacy, patchwork solutions (within the incumbents) and homegrown solutions (within the emerging carriers). These are fertile markets for a massive upgrade cycle to support new packet-based networks and multiple service (convergence) telecom offerings." Wolk's firm has underwritten for Amdocs but not for Lucent.

Focusing on this fertile ground ahead, Amdocs CEO Avi Naor told investors at last week's

Goldman Sachs Technology Investment Symposium

that he expects Amdocs to grow revenue at a rate of 35% or more per year. At this rate of growth, Amdocs will erase all $7.5 million in bank debt from its balance sheets this year.

Though Lucent's entry into the market has helped to highlight the importance of billing software to some investors and analysts, it is also seen by some analysts as cranking up the competitive heat for 17-year-old Amdocs.

But Naor says this is not necessarily true. He says Lucent is targeted more toward the lower and middle markets to compete with Germany's

LHS Group

(LHSG)

.

And since Lucent's focus is mainly on equipment, many big carriers are unlikely to look to it for billing needs. "For Lucent, the important thing is equipment," Naor told

TSC

in an interview. "In the long term, the competitor for us will be Lucent, not Kenan, and Lucent is an equipment company." That means that bigger, higher-margin companies that want customized products would likely turn to Amdocs rather than Lucent because Amdocs will be able to provide carriers with more specialized products that can earn the companies an efficiency edge, Naor says.

Dealing mostly with higher-end customers also creates other benefits such as providing better visibility of earnings. "We build long-term relationships with our customers," Naor says.

And it is these long-term relationships that make Amdocs really attractive to investors. Long-term relationships -- and the subsequent recurring maintenance revenue stream they generate -- allow Amdocs to boast that more than 85% of its revenue for fiscal 1999 is 99% guaranteed, as is about 60% of its revenue for fiscal 2000.

Goldman Sachs analyst Rick Sherlund estimates that 90% of Amdocs' revenue comes from professional services, with the rest coming from software license fees. "This model has resulted in a highly visible recurring revenue stream, with about 80% of the company's annual revenue identified early in the year and as much as 95% of quarterly revenue identified at the beginning of each quarter," says Sherlund, whose firm has underwritten for Amdocs.

Though Sherlund has Amdocs on his U.S. recommended list, he also notes that the days' sales outstanding, or DSO, figure, which measures accounts receivables, is on the high side. DSO stood at 88 days in the first quarter of 1999, ended Dec. 31, up from 69 the prior quarter and 80 in the year-ago period. Naor recognizes that DSOs have crept above the company's aim of between 75 and 85, but he says he's confident they will ease back into the company's target range during the second quarter.

Still, skeptics like

Warburg Dillon Read

analyst Michael Agrawala say the number of live customers Amdocs has is unsettling because it is still roughly the same as some of its competitors. "It is tough to take their word for subscriber/scaleability

issues because

they are impacted by

such things as service features and number of tariffs. The only thing that you can really hang your hat on is 'live' sites." Warburg Dillon Read has not underwritten for Amdocs lately.

Agrawala says he would feel more comfortable with Amdocs if it could also boast that it has many more customers than its competitors.

But no need to worry, says Naor. He says he believes customers will start piling in once they realize that in order to become more competitive, they need Amdocs' software to help trim expenses.