Amdocs Limited (DOX) Q4 2008 Earnings Call Transcript

Tom O'Brien - VP, IR Dov Baharav - President and CEO Tamar Rapaport-Dagim - SVP and CFO

Ashwin Shirvaikar - Citigroup Dan Terlin - Merrill Lynch Daniel Meron - RBC Capital Markets Shyam Patil - Raymond James Julio Quinteros - Goldman Sachs Tom Roderick - Thomas Weisel Partners Jason Kupferberg - UBS Karl Keirstead - Kaufman Brothers Sterling Auty - JPMorgan Marianne Wolk - Susquehanna Ted Jackson - Cantor Fitzgerald

Good day, everyone, and welcome to this Amdocs fourth quarter 2008 earnings release conference call. Today's call is being recorded and webcast. At this time, I will turn the call over to Mr. Tom O'Brien. Please go ahead, sir. Tom O'Brien: Thank you, Cynthia. I'm Tom O'Brien, Vice President of Investor Relations for Amdocs. 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 and 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 also be furnished to the SEC on Form 6-K. Also, this call includes information that constitutes forward-looking statements. Although we believe that 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 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 year ended September 30, 2007 as filed on December 3rd, 2007; and in our Form 6-K is furnished on February 11, May 6th and August 11, 2008. Amdocs may elect to update these forward-looking statements at some point in future; however, the company specifically disclaims any obligation to do so. Participating in the call today are Dov Baharav, President and Chief Executive Officer of Amdocs Management Limited; and Tamar Rapaport-Dagim, Chief Financial Officer. Following our prepared remarks, we'll open the call to Q&A. Now, let me turn the call over to Dov Baharav.

Thank you, Tom. Good afternoon, ladies and gentlemen. We are pleased to report our business results for the fourth quarter of fiscal 2008, with revenue growing 14% to a record of $825 million and operating income growing 16%. This good news was offset by the extreme volatility in financial markets, which had an adverse effect on our earnings per share in the quarter, and which will be a headwind for revenue as we move into fiscal 2009. Clearly, we are experiencing unprecedented market conditions. There have been rapid and large movements in foreign exchange rates, and interest rates have declined to very low levels. Credit markets have been in turmoil, and this will impact economic activity around the world. There is uncertainty as to how it will impact our customers and their spending decisions. As a result, while we cannot today commit to guidance for the full year, we are managing our expenses under the assumption that fiscal 2009 revenue could be flat to low single-digit percentage growth for the year, with the goal of maintaining profitability at levels similar to what we saw in the fourth quarter. When we look at our business, we see strength. We are not seeing cancellation of existing commitments. And in fact, in recent weeks, we have continued to sign new important deals. We support mission critical activities for the best customers in the world, including managed services under long-term contract, and this drives strong recurring revenue with high visibility and strong backlog. Beyond that, our [backlog] of potential new business remains solid, although in this environment it is likely that the pace of transformational projects will slow. The strength of our business was demonstrated by the wins that we had in Q4 across lines of businesses and geographies. We see the cable and satellite market as an area that will be less affected by economic conditions, and we are experiencing accelerated growth in our cable and satellite activity. In Q4, Comcast made a strategic decision to deploy next-gen customer care billing and OSS products based on Amdocs CES 7.5. As a customer in the cable and satellite market, it has chosen Amdocs' Enterprise Product Catalog. Amdocs also enjoyed growth in our managed services activity, which drives the recurring revenue. Amdocs signed a six-year agreement, including managed services, to support MetroPCS, a provider of advanced wireless services leveraging our Amdocs CES 7.5 platform to bring new capability to its customers. In New York, Amdocs was chosen by Debitel, a large provider of mobile services in Germany, to provide a single billing platform to support its consolidated operations. In spite of the fall in momentum in emerging markets, ITC selected Amdocs Compact Convergence offering for real-time charging and service delivery across its CDMA network. OSS is a growth engine, and service providers are moving to IP network to reduce cost and introduce new capabilities. Amdocs’ market leading OSS platform drives our growth in this area, as shown by our expanding business with Vodafone in the OSS fulfillment area. Today, we announced our pending acquisition of ChangingWorlds. The formalization is crucial to service providers' success as they seek to strengthen their role in (inaudible). Using ChangingWorlds' personalization products and technology in combination with our broad and strong portfolio will allow service providers to power more relevant and personal customer experiences across all touch points, so they can be more targeted in everything that they do, from sales and support to the merchandising of their content across the three screens. In this time of uncertainty, we continue to focus on the long-term strategic position of Amdocs and our growth potential. We leverage our growth engines in cable and satellite, emerging market, OSS, and managed services. This growth engine serves mission-critical activities for the world's leading companies. We will continue to invest in our future in areas such as digital lifestyle, so that when economic condition improve, we will be even farther in the lead. This investment includes both R&D spending as well as strategic M&A such as the pending ChangingWorlds acquisition. Let me turn the call over to Tamar for the financial review. Tamar Rapaport-Dagim: Thank you, Dov. Our fourth quarter revenue was $825 million, representing growth of 13.6%. Our non-GAAP EPS, which excludes acquisition related costs, restructuring charges, and equity-based compensation expense, net of the related tax effect, was $0.54 per diluted share. GAAP EPS was $0.38 per diluted share. I'll spend a minute now on a few non-GAAP items. As we forecasted last quarter, license revenue increased in Q4. Operating margin was 17.9%, flat compared to Q3, and we see about the same in Q1 '09. For the year, operating margins were up 40 basis points. The improvement was driven by better profitability on our projects, and leverage on operating expenses, which more than made up for the short-term margin pressure from the new managed services deals. Other income decreased compared to Q3, primarily due to foreign exchange losses. These losses were primarily due to reevaluation of assets and liabilities dominated in non-US dollar currencies and cost us $0.08 of EPS. We have increased our balance sheet hedging program, which we think will greatly mitigate the future impact of currency fluctuations in the balance sheet, but it is impossible to eliminate all foreign exchange risks. The effective tax rate in Q4 was 13.8%, in line with our guidance of 13% to 15%. At this time, we see the same range for fiscal 2009. Free cash flow in the quarter was $145 million. Included in the calculation of this number was approximately $33 million in net CapEx. Free cash flow benefited this quarter from a large payment from a new customer that could have been over $100 million even without this payment. We are expecting free cash flow in Q1 to be $100 million or better. DSO at the end of the quarter was 63 days, down from 65 days last quarter. The current balance in deferred revenue was $198 million at the end of Q4, and unbilled accounts receivable was $48 million. We expect fluctuations in this account on a quarterly basis. Long-term unbilled accounts receivable was $47 million, and long-term deferred revenue was $19 million. When we look at the total of all our unbilled AR and deferred revenue accounts, we're in about the same overall net deferred revenue position as we were in last year. Our 12-month backlog, which includes contract committed revenue from managed services contract, letters of intent, maintenance, and estimated ongoing support activities, was $2.420 billion at the end of the quarter. Backlog at September 30 was negatively impacted by the strengthening of U.S. dollar as well. To put it into perspective, if we use the foreign exchange rates from June 30, our backlog at the end of Q4 would have been nearly $50 million greater. During the quarter ended September 30, we used $83 million to repurchase approximately 3 million shares at an average price of $27.72 per share. Given the uncertainty in the current economic environment, Amdocs will not continue its share buyback activity at this time. Looking forward, our guidance for the first quarter of fiscal 2009 is for revenue of approximately $785 million to $810 million and non-GAAP EPS of $0.54 to $0.57, excluding the effect of acquisition-related charges and excluding equity-based compensation expense of approximately $0.05 to $0.06 per share, net of related tax effects. As we mentioned in the press release today, the anticipated decrease in Q1 revenue compared to Q4 '08 is entirely driven by foreign currency headwinds which significantly affect us, as about 30% of our revenue is received in non-U.S. dollar currencies. We will have diluted GAAP EPS only after we complete preliminary purchase price accounting for the ChangingWorlds acquisition. Our EPS guidance for Q1 is based on a fully diluted share count estimate of approximately 250 million shares. Now let me turn the call back over to Dov.

Thank you, Tamar. Amdocs is well positioned to cope with the market we could see in 2009. We have a solid balance sheet, growth engine, cash flow, and great customers. We will weather the storm and continue build the company for future growth. At this time, let me open the call to Q&A.

(Operator Instructions). We will take our first question from Ashwin Shirvaikar from Citigroup. Please go ahead. Ashwin Shirvaikar - Citigroup: Thank you. My first question is, having signed so many clients and contracts in the last two, three quarters, why can you not provide even sort of a loose full-year outlook? How much of the decision to not throw out a full-year outlook is related to currency versus market conditions?

Thank you, Ashwin, for the question. And yes, we see encouraging signs in the market. To say, we don't see cancellation of the current activity. We signed many deals in the recent few months and even in the recent few weeks. However, the business we are finding might provide us confidence regarding Q1 and Q2, but not Q3 and Q4. And given the fact that the world is facing such unbelievable financial turmoil and we see signs of a global recession, I would say that there is uncertainty what will happen in the marketplace. And at this point to provide the full-year guidance would be, I would say, too much, and we do not feel comfortable with giving it. What we try to share with you is, first of all, that the Q1 results was affected mainly by the foreign exchange. Other than that, it would be in line with Q4. And moving forward, as we said, the jury is still out. I'll think that will shape up. We are managing the business and controlling and managing our expenses under the assumption that we should generate the profitability at the same level as Q4, given the new dollar revenue that we have in Q1. Ashwin Shirvaikar - Citigroup: Okay. And then a follow-up question on the balance sheet hedging that you mentioned. I know you had a program, fairly extensive hedging program, both for earnings and for balance sheet, if I'm not mistaken. So, what changes are you making? Tamar Rapaport-Dagim: First of all, historically, we're more focused on the hedging of the net exposure of cash flow coming in under different currencies. With different changes historically of 1% to 3% per quarter, the reevaluation of the balance sheet was not a material amount on a quarter-to-quarter basis. However, with the drastic changes in currencies that we've seen since September, we have decided to extensively increase our balance sheet hedge in order to greatly mitigate for such effects going forward. Unfortunately, even with the best hedging program, we cannot provide a fully safe insurance against the impact that the currencies will have. But I believe that we are much better covered today than we were before this crisis happened. Ashwin Shirvaikar - Citigroup: And there is an other impact in Q1 as well, right? Tamar Rapaport-Dagim: To a much lower extent, given the increase we've have done already during September in the hedging program. Ashwin Shirvaikar - Citigroup: Okay. Thank you.

We'll take our next question from Tal Liani with Merrill Lynch. Please go ahead. Dan Terlin - Merrill Lynch: Hi, this is actually [Dan Terlin] following in on Tal's behalf. Had follow-up on the currency. I was hoping you could give more details on your investment strategy. Why are you keeping investments in non-U.S. dollar investments? Tamar Rapaport-Dagim: We're keeping all our investments of the excess cash and the short-term portfolio in U.S. dollar. The balance sheet evaluation has to do with operational balances. For example, we run activities in different countries, in different currencies. So, we must maintain a minimum level of cash just to support the ongoing operation: paying salaries, receiving collections and so forth, in and out on a daily basis. This minimum level still with currency changes of over 10% are creating some impacts. And yes, during September, we've increased significantly our hedging program against operating cash, against the accounts receivable and so forth in order to greatly mitigate this going forward. Dan Terlin - Merrill Lynch: Okay. Thank you.

We'll take our next question from Daniel Meron with RBC Capital Markets. Please go ahead. Daniel Meron - RBC Capital Markets: Thank you. Dov, can you provide us with a little bit more of a sense on how much conservatism are you building into your guidance here? If it wasn't FX being what it is, if it wasn't for that, for the economic picture, what kind of growth should we have been looking for based on the pipeline that you have in front of you and the signed contracts?

Well, Daniel, thank you for the question. To some extent, we indicated that all the reduction in expected revenue for Q1 in comparison to Q4 is due to ForEx. That is to say, if we had about $825 million revenue in Q4 and the guidance is between $785 million and $810 million, so it's maybe about $25 million or maybe more reduction in revenue. It wrenches it off. It means that the impact on the year of 2009 is at least 3% because of ForEx. The revenue with the value of 3% have been erased due to the foreign exchange adverse impact on us. Now, that was based on October numbers. Tamar Rapaport-Dagim: Mid-October range.

Mid-October range exchange rates. Now, things might change. And then it will have an impact on us. On top of it, you ask about the level of conservativism. We are humbled by what happened to the financial world. And looking at the potential global recession and to say that we know what will happen four quarters from now, it will not be a responsible move. We are encouraged by the agreement that we signed today, by the activity with the customers. And in order to ensure the possibility, we manage the company assuming that we have a lower level of revenue, which derives a lower level of expenses, and then we'll see what's happening after the first quarter. Daniel Meron - RBC Capital Markets: Okay. Thanks, Dov. To follow up, you mentioned that you are managing the costs here. What kind of workover measures did you take or you plan to take in order to mitigate that, be it in headcount, be it in other costs? If you can quantify that, of course, that will be good.

We actually are managing all the activities of the company, including the plans, the growth plan of manpower. Unfortunately, we had to part from 700 employees lately in areas that we saw that we have some surpluses. And we are adjusting the activity. There are changes in the sources of revenue for the company. We have growth in OSS. We have growth in managed services. We have growth in cable. We have growth in emerging markets. And in some areas like Yellow Pages, we do not experience the same growth. So, as a result of it, we are adjusting the activity accordingly and making sure that we keep the company efficient. Daniel Meron - RBC Capital Markets: Thank you, Dov. Good luck going forward.

Thank you.

We will take our next question from Shyam Patil with Raymond James. Please go ahead. Shyam Patil - Raymond James: Hi. A question on the FX again. It looks like there is about 9 points of FX relative headwind next year. Are you assuming that revenue growth on a constant currency basis is somewhat flattish to '08 or are you assuming slowing as well?

Yes, what we said is that given the uncertainty in the marketplace, we do not give guidance for 2009. What we gave guidance is only for Q1 2009. What we said is that in order to make sure that our expenses are kept in line with the dollar-denominated reduced revenue, we assume that the level of revenues that we have in Q1 should be actually be in according to which we measure our expenses and we insist on getting type of stability that we had in Q4, and moving forward, that is our assumptions that that's the way that we should manage our expenses right now. We are encouraged by the current activity. We have substantial growth engines, but we are not in a position to give guidance for full year 2009. Shyam Patil - Raymond James: Got it. And just a quick follow-up, Tamar, I think you guided to December quarter free cash flow of about $100 million. Could you maybe walk us through the operating cash flow in terms of what your assumptions are for, the important working capital accounts like deferred revenue and accounts receivable, and then, should we expect the free cash flow, net income gap to tighten throughout the year? Tamar Rapaport-Dagim: We're not guiding specifically to deferred revenue in AR balances of the cash flow from quarter-to-quarter, but we are definitely guiding for Q1 cash flow to be at $100 million or better, and what we're looking at within that is definitely a lot focus to improve the realization of cash. You have seen that already in Q4. We are focused to continue that into Q1, and keep that momentum as the year progresses. Shyam Patil - Raymond James: Okay. Thank you.

We will take our next question from Julio Quinteros with Goldman Sachs. Please go ahead. Julio Quinteros - Goldman Sachs: I want to come back to the same question, I think it was asked again, I wanted to see if I could ask it a little bit differently, trying to get same point. What assumptions are built into your fiscal 2009 comment, where you expect revenue to be flat to low single-digit percentage, maybe if you take a look at the existing book of business and add on top of that the new book of business. What exactly are you assuming gets you to flat to low single-digit revenue growth, excluding the currency impact? Tamar Rapaport-Dagim: Since we're not giving guidance, we wanted to give you color on how we actually run the expenses of the company, and we look at the expenses, we have taken the approach that we need to run it based on the current revenue level that we see after the impact of the foreign currencies, which is flat to maybe low single-digit growth rate. And we are being conservative on how we manage the expenses, putting a lot of focus on the efficiencies on the company. While we see a lot of good signs of the activity with the customers, the fact that they continue to sign contracts with us, the fact that we see strong backlog for the next 12 months, is obviously, encouraging us, as well as the strong balance sheet that we are entering in to this, maybe difficult times with the right strong position to be at. Julio Quinteros - Goldman Sachs: Yes, I think that's exactly what I'm trying to understand, especially because the recent rate of new announcements and new awards that are expected to ramp throughout the next fiscal year. What I'm trying to find is the balance between being able to ramp all of the new work and still keeping expenses flat. What other levels if you will are available for you to pull back to actually maintain the flat operating expense projection. Tamar Rapaport-Dagim: So as we did in 2008 and I talked about the fact we were able to increase margin of our projects, because we were heavily focused on how we deliver the projects and actually inserting new methodologies of project deliveries in order to make it in a more efficient way, as well as the flexibility of managing the expenses from the different development centers we have around the world, including low-cost countries. So, we have introduced new methodologies of actually executing a project, flexibility of cost structure, as well as much more focus these days in terms of where we would like to invest the money and how we would like to invest it, including more focus on things like travel and ongoing expenses within the company to make sure we are running it within the very little way. Julio Quinteros - Goldman Sachs: Okay. And then just finally for me, the fourth quarter number that you guys are talking about is the 17.5% that you cited on the beginning of the call here. Tamar Rapaport-Dagim: 17.9%. Julio Quinteros - Goldman Sachs: 17.9% That's the number you are citing for the first quarter in terms of what you are targeting right now? Tamar Rapaport-Dagim: We are targeting to maintain that, yes. Julio Quinteros - Goldman Sachs: Thanks. Good luck.

Thanks, Julio. Tamar Rapaport-Dagim: Thanks, Julio.

And we'll take our next question from Tom Roderick with Thomas Weisel Partners. Please go ahead. Tom Roderick - Thomas Weisel Partners: Hi. Thanks, and good afternoon. Dov, you commented on the lack of cancellations in the marketplace as perhaps a sign of strength or at least a sign that things are holding in steady there. Is that an expectation that you hold as you look in to 2009, kind of based on past cycles that we should see some cancellations? And when you think about the types of projects that could get canceled or delayed, could you talk about which portions of your business you are trying to protect from that front?

Thank you, Tom. We indicated what we have seen so far, which is to say, our visibility backward is 100%. Looking forward, we see several layers of activity with some different confidence. There is a basic layer for the long-term managed services agreements. And the managed services activity in the company is about 40%, and that provide us very strong visibility and predictability. It is our long-term contract. We are the largest carrier of this planet, which deliver to them mission-critical services, which are essential for the operation. And that is something that they will not change. It's commitment of the customers. It's mission critical. Now, on top of it, we have the recurring revenue of ongoing support for existing customers, which is, again, mission-critical system and recurring revenues that we expect it to continue. Now, still maybe 20%, 30% of new projects that we have every year that actually we have not seen any cancellation. However, the hesitation is how many new projects will be converted in our pipeline from prospect to a contract. And if the economic situation will worsen, then it might have an impact on us. So, however, if things will continue to be as they are, maybe we'll be able to actually convert this prospect to contracts and achieve our goals and maybe exceed our goals. So, the substantial or the majority of activity is relatively secured, including the possibility in it. There is certain percentage that, I would say, is under a little bit higher risk. However, it includes growth engines that are needed even in time of pressure in the marketplace. First of all, managed services. We help our customers to save money in this tough period. So, we expect this segment of our activity to grow, even though we have it just now as prospect. OSS, we are growing very fast in OSS, and carriers are willing to replace their network in order to save money, in order to move to IP, in order to create new capabilities. And we have the leading OSS platform. And we believe that that presents an area of growth even in tough environment. Cable, cable is not going to be affected in this marketplace as it has not been affected in 2002, because people in the recession time will watch TV and not go to restaurants. And we believe that given our recent wins in the cable industry, we will grow our activity. We enjoy substantial growth in 2008, and we expect to accelerate the growth in 2009, even in this tough environment. Emerging markets will continue to grow. We enjoyed the growth in 2008, and we expect additional growth in 2009. So, given all that, we believe that even the non-secured portion of our expected revenue is in good shape, because it addresses the need of the industry in this tough situation. So, we feel good about the fundamental of the business, our ability to weather the storm and our ability to generate growth beyond that. Tom Roderick - Thomas Weisel Partners: Great. Thanks, Dov. Tamar, a brief question for you on the backlog. I think you said it would have been up $50 million quarter-on-quarter with constant currency. What was the absolute level of backlog when you factor in currency? Can you give us the percentage of revenues coming from Sprint and AT&T on the quarter? Thanks. Tamar Rapaport-Dagim: When we looked in the backlog and said that it would have been nearly $50 million higher, we compared it to the June 30 rates. In terms of percentage of revenue for Sprint and AT&T, we're not disclosing it at this stage. We will provide the full numbers for the year in [20th]. Tom Roderick - Thomas Weisel Partners: Okay. Thank you.

Thank you, Tom.

(Operator Instructions). We'll take our next question from Jason Kupferberg with UBS. Please go ahead. Jason Kupferberg - UBS: Thanks. I wanted to touch on FX a little bit more and specifically on the operating margin impact here. I fully understand the revenue impact, and I get the non-operating impact in the balance sheet revaluation, but would have thought that some of the negative impact on the topline would have gotten reversed out on the cost side. But I guess maybe that's where your hedges come into play a little bit. If you can tear that apart a little bit and help us understand why there seems to be a net negative impact on your earnings even without taking into account the non-operating balance sheet evaluation that would be real helpful. Thanks. Tamar Rapaport-Dagim: Thanks, Jason, for the question. As we already said, some of the currencies that dominate the non-U.S. dollar activity on the revenue side also have impact on the expense side. So, for example, if you are looking at Canadian dollar, we have both revenue and expenses. However, in many of these currencies, the net exposure taking the revenue and expense in these currencies is actually a positive margin. What we're trying to do is, through our hedging program, mitigate that exposure sensitivity to the currency exchange risk. And indeed, if you're looking on Q4, the impact that you see coming from foreign exchange is mainly the revaluation of balance sheet, not the impact on the EBIT, not the impact on the operating margin. So, even though we cannot completely mitigate that impact with our hedging program, it does a pretty good job in terms of doing a much less of an impact on the operating margin. Jason Kupferberg - UBS: Okay. So you said for Q1, there will still be a little bit of an impact from revaluation, but it sounds like that won't be very much. Yet, you're saying the revenues are going to be the same as Q4 in constant currency. I guess that's where I'm getting a little bit confused. I don't see how the margins are being protected. Tamar Rapaport-Dagim: Beyond the issue of the foreign currencies, we need to understand that the interest rates are going down dramatically over this period as well as a way of actually investing the money, given the volatile terms in the financial markets. We haven't taken a more conservative approach in terms of how we invest our excess cash and run to safety in a way during the last two months. That, in addition to the fact that the fed funds are going down, we're putting the more conservative approach in our investments. Even though it may have some impact on the yield, it's impacting the EPS as well. Jason Kupferberg - UBS: Alright. On the sales cycle quickly, what I'm trying to get a handle on is how much of your uncertainty around fiscal '09 is because of things that you're already experiencing, versus dynamics that you suspect you might start to experience at some point in the future?

Well, I would say the majority of the uncertainty is regarding what might affect us during the year. And so far, we've not experienced any cancellation. We continue to sign deals. There is one unknown that we don't know and probably will know later; to what extent a new prospect appeals; to what extent we are able to get an inflow of new prospect? That's something that we'll take time to realize, and we cannot quantify it right now. And I would say, if we just look backward, it doesn't look so bad. And we see this sign, and we see connectivity continue. We have a very nice collection of cash from our customers. And so, the test was not so bad, excluding the foreign exchange. Moving forward, looking at what's going on, looking at the recession and looking at some maybe early signs of handset manufacturers that they project the reduction of their growth rate and looking at their activity, so there are some signs that might indicate a potential impact. We don't know. We want to be cautious. Jason Kupferberg - UBS: Okay. Thank you. Operator And we'll take our next question from Karl Keirstead with Kaufman Brothers. Please go ahead. Karl Keirstead - Kaufman Brothers: Hi, good afternoon. A couple of clarifications. You've said that the target we should use for operating margins in fiscal '09 should equal the fourth quarter of fiscal '08 margins. But I want to be very clear on what margin benchmark you're referring to in the fourth quarter. Are you talking non-GAAP operating margins before the $12 million restructuring charge? Maybe you could clarify. Tamar Rapaport-Dagim: Yes, we are guiding for Q1 for similar profitability to the operating line on the non-GAAP basis, which is 17.9%. Karl Keirstead - Kaufman Brothers: So, are you saying that's the assumption we could use for the full year fiscal '09 as well? Tamar Rapaport-Dagim: We are not guiding for the full year. We are managing our expenses and our internal plans in order to maintain profitability, and in order to keep a cautious outlook, when we are looking on the expense side. Karl Keirstead - Kaufman Brothers: Okay. Thanks. And then another quick clarification, just to be very clear, I know it has been hit on a couple of times, but if you take $0.08 FX hit in the September quarter, your $0.54 to $0.57 non-GAAP EPS estimate for the December quarter, what exactly is the FX hit you are anticipating there? If we estimate perhaps $0.02, is that about right? Tamar Rapaport-Dagim: It could be up to few cents, but we need to take in to consideration that we're doing forecasting based on mid-October rates, and as we know the volatility these days is such that it's moving drastically from one week to another. Karl Keirstead - Kaufman Brothers: Okay. Great. And then your fiscal '09 revenue guidance, does that include any revenue contribution from the acquisition you announced today? Tamar Rapaport-Dagim: It's insignificant for Q1. Karl Keirstead - Kaufman Brothers: Okay. And lastly the $12 million restructuring charge, you didn't touch on that. What is that? Is that the headcount reduction that you just alluded to today? Tamar Rapaport-Dagim: The reduction in force, yes. Karl Keirstead - Kaufman Brothers: Thanks very much.

Thank you Tamar Rapaport-Dagim: Thank you.

We'll take our next question from Sterling Auty with JPMorgan. Please go ahead. Sterling Auty - JPMorgan: Yes, thanks. So, I know you are not giving guidance for the full year, but based on the profitability, based on the comments in the press release about flat to low single-digit growth and trying to maintain the margins, would you expect EPS to increase through the year or is the FX that volatile that it could bounce around? Tamar Rapaport-Dagim: I think, one of the elements that you should take in to consideration is that the interest income, just because of the lower yields, we have seen deterioration from 5.25% Fed fund rates in summer of '07, and now we are at 1%. And given the conservative way of how we invest the money, there is definitely an impact on the finance income we are making. So, this is another factor to put in there. In terms of the tax, we are guiding to the same range of 13% to 15% and we do not see (inaudible) reason for that change. Sterling Auty - JPMorgan: Okay. Then again, up to $0.02 impact on FX in the December quarter that again would be from the balance sheet items, so it would flow through the other income line not above the line? Tamar Rapaport-Dagim: That's correct. Sterling Auty - JPMorgan: Okay. Then what was the total headcount reduction, so the $12 million for the restructuring. I missed that. It covered how many people? Tamar Rapaport-Dagim: It was about 500 people. Sterling Auty - JPMorgan: All right. Thank you.

We will take our next question from Marianne Wolk with Susquehanna. Please go ahead. Marianne Wolk - Susquehanna: Hi. Thanks. I have two questions. First of all, was there any cut back in work orders by your clients? And in the second question was, in the last downturn you were really successful in increasing demands for managed services by leveraging your balance sheet, I believe you signed Bell Canada in that time frame. Are you planning to do something similar? Is there any increase in demand for managed service, I assume them on your client base?

,: I'd say that, first of all, we established a special unit, headed by a management member that is focusing and building our offering and actually making our activity more efficient on one hand and actually building our capability of globalizing and increasing our selling capabilities. From what we've seen so far, a lot of interest by many customers to consider it, especially given the current situation. So, our expectation is to see a meaningful increase in the managed services activity in 2009. : I'd say that, first of all, we established a special unit, headed by a management member that is focusing and building our offering and actually making our activity more efficient on one hand and actually building our capability of globalizing and increasing our selling capabilities. From what we've seen so far, a lot of interest by many customers to consider it, especially given the current situation. So, our expectation is to see a meaningful increase in the managed services activity in 2009. Marianne Wolk - Susquehanna: Thank you.

Thank you.

We'll take our next question from Ted Jackson with Cantor Fitzgerald. Please go ahead. Ted Jackson - Cantor Fitzgerald: Thanks very much. And I also want to thank both of you for providing such a lucid description of what's impacting your business. I have two questions for you, very straightforward. One is, I'm curious if you could give the percentage of directory publishing revenue and kind of whether or not it grew or declined sequentially in the quarter. Tamar Rapaport-Dagim: Directory business accounts for approximately 9% of our business in 2008, and it's actually experiencing decline as we look forward into Q1. Ted Jackson - Cantor Fitzgerald: Okay. And then moving over to the licensing revenue, which was up nicely in the quarter, could you comment a bit about what drove the increase and what we can expect out of that as we look into first quarter? Tamar Rapaport-Dagim: What consummated that is the combination of the different wins we talked about this quarter, the MetroPCS, the debitel and so forth. So we had very good activity in terms of signing new deals that contributed to the license line. Then looking forward, we are not guiding for this number, and it depends on the number of new wins that we sign, as well as some level that we have from the ongoing projects that is recognized based on the percentage of completion. So it's hard to tell the combination of both, whether it will be better or slightly lower than what we had in Q4. Ted Jackson - Cantor Fitzgerald: Can you give us the geographic breakdown for revenues for the quarter? Tamar Rapaport-Dagim: When we're looking on the Q4 specifically, we're seeing Europe at about close to 20%. We see emerging markets slightly short of 10% already for the quarter. And the rest is mainly North America. Ted Jackson - Cantor Fitzgerald: Okay. Thanks very much. Tamar Rapaport-Dagim: Thank you.

Thank you, Ted. Operator: We'll take our next question from Larry Berlin with First Analysis. Please go ahead. Larry Berlin - First Analysis: Hi. What was the depreciation in the quarter? Tamar Rapaport-Dagim: It was about $25 million. Larry Berlin - First Analysis: Okay. Back to the FX issue: if you are hedging, does the hedge itself or losses from the hedge work to account to the revenue, so reducing revenue over time that would profit or increase your revenue at some point from the hedges? Tamar Rapaport-Dagim: What we're doing is actually hedging the net exposure. So, we're not hedging the subprime per se. We're looking in each currency what is the status of revenue minus expenses in that currency, and then actually after evaluating what's the net exposure, defining our hedging against that. Larry Berlin - First Analysis: Okay. Thank you very much.

Thank you, Larry.

And this will conclude today's question-and-answer session. I will now turn the conference back over to management for closing comments.

Our business remains strong. And as economic uncertainty leaves the condition and improves, we are in a position to continue our long history of growth. We are the choice and strategic partner for the leaders in our industry. Thank you and have a good night.

Ladies and gentlemen, this will conclude the Amdocs' fourth quarter 2008 earnings release conference call. We thank you for your participation, and you may disconnect at this time.