Amdocs Downgraded to Underperform - Analyst Blog

We downgrade our recommendation on Amdocs Limited (DOX) to Underperform on the basis of its disappointing financial outlook for the first quarter of fiscal 2011. Profitability will suffer as a result of higher expenses for productivity improvement, emerging market sales opportunity, and suspension of program implementation at Clearwire Corp. (CLWR).

We believe bottom-line shrinkage may continue thereafter as the developed economies are still not out of the woods and emerging market opportunities are subject to regulatory and geo-political uncertainties. The company is still facing demand softness in the European regions and also in the North American markets.

While the macro economic factors are mostly negative in Europe, Amdocs is facing competitive pressure in North America. These two regions remain near-term concerns.

As a result, the company is forced to concentrate on the emerging markets that will require initial expenditures for several customer-centric initiatives and upfront costs. Even in the developed markets, management has decided to undertake a series of programs regarding training, knowledge transfer, and productivity enhancement in order to cope with recessionary situations. All these activities will result in bottom-line shrinkage that may continue beyond the first quarter of fiscal 2011.

Amdocs is facing a high level of customer concentration. Three major clients, namely,  AT&T (T), Sprint Nextel (S) and BCE Inc. (BCE) accounted for 51% of the company's total revenue. Loss of any of these customers will result in significant erosion of the top-line.

The company's entry into other business segments, such as financial services outsourcing and non-telecom customer relationship management software, may not be as successful as anticipated.

Telecommunications Software Management System market is highly competitive. More than 100 vendors provide customer management and billing system solutions throughout the world.

Amdocs is the dominant provider of customer care and billing systems to the telecom industry. However, the company is a relatively minor supplier of billing systems to the cable industry.  It also lags other vendors in non-telecom customer relationship management software.

 
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