Merrill Lynch doesn't expect recovery in the company's activity in the short term, and believes that the optimism broadcast by management in its recent conference call leads to an unrealistic forecast, which could be followed by future negative announcements.
The company is still in denial, and its 10% growth forecast isn't in line with its financials, Merrill Lynch commented. Based on the bank's model, revenue is expected to drop 12% in the coming year, and could drop as much as 22% in 2003. The worst scenario speaks of earnings per share shrinking to $1.07 in 2003, 30% short of market estimates.
The bank said that the company's weakness is in part due to the changing nature of how Amdocs conducts business. In the past, customers were charged for services, applications and license use, the bank explained, noting that Amdocs demanded payment at the beginning of a project, and would charge additional money for its application or incorporation. Today the company charges a fixed price per deal.
Merrill Lynch noted that customer acquisition policy is becoming increasingly controlled. Several providers participate in a customer tender. This allows the customer to study the performance of several billing systems. The customer pays a certain amount for beginning to study the billing system, and the payment increases as the customer progresses in studying the system. The purpose of the study is to understand the entire value of the project. In the past, customers would first start incorporating the system, and only in the course of this would understand the real cost of the project, and if it is really meets their expectations.
Due to the transition to this lengthy study period, project incorporation periods lengthened too from a period of six months to nine months, to a period of nine months to 12 months. This is negatively impacting Amdocs, especially since in the past it had higher income from new customers, when pricing wasn't based on fixed prices, Merrill Lynch marked.
The bank noted that Convergys (NYSE:CVG) is Amdocs' main and almost only rival. Merrill Lynch said that based on its own sources of information, Convergys' billing system Geneva is better than Amdocs' in technology, upgrading capacity and features. This concerns the bank because it claims Amdocs has had little success in recent years in getting 2.5G contracts, compared with Convergys' success with the Geneva software. The bank said that it can point to several Amdocs customers, such as Vodafone (NYSE, LSE:VOD), which have signed contracts with other billing providers for new-generation systems.
Merrill Lynch said that Amdocs is aware of the growth difficulties in the billing market in the short term, and is therefore expanding in the customer relationship management market. The bank believes that Amdocs' management will continue expanding into new markets by making new acquisitions, and Merrill Lynch notes the opportunity in the wireless market, and mentioned Verizon Communications (NYSE:VZ) as a potential customer.
Amdocs' revenue from selling 2G billing systems is a thing of the past, Merrill Lynch said, noting that customers today have private systems that don't have to be replaced. The bank said that A 2.5G system deal is in the range of $3 million to $8 million, while a 2G system deal came to $20 million or more, and especially big deals came to $60 million to $100 million. This is one of the reasons why there has been a drop in the volume of Amdocs' contracts in the last year and a half.