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Good day, ladies and gentlemen, and welcome to the Q3 2018 Amdocs Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes.
It is now my pleasure to hand the conference over to Mr. Matt Smith, Head of Investor Relations. Sir, you may begin.
Thank you, Brian. Before we begin, I'd 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 in its 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 with the SEC on Form 6-K.
Also, this call includes information that constitutes forward-looking statements. Although we believe the 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 fiscal year ended September 30, 2017, filed on December 11, 2017, and our Form 6-K furnished for the first quarter of fiscal 2018 on February 12, 2018 and the second quarter on May 25, 2018. Amdocs may elect to update these forward-looking statements at some point in the future. However, the company specifically disclaims any obligation to do so.
Participating on the call with me today are Eli Gelman, President and Chief Executive Officer of Amdocs Management Limited; and Tamar Rapaport-Dagim, Chief Financial Officer.
With that, I'll turn it over to Eli.
Thank you, Matt, and good afternoon to anyone joining us on the call today. We are pleased with our solid third quarter performance which was notable on several fronts. Revenue exceeded the $1 billion mark the first time and was in line with the midpoint of our guidance adjusting to currency.
We maintained a high win rate across our various business lines and operating regions and we made positive progress integrating our recent acquisitions of Vubiquity and UXP Systems within the broader Amdocs. This quarter, I’m also pleased to report some exciting developments with respect to our strategic initiatives in network function virtualization and media and entertainment.
I will provide an update on this important growth engines later in the call. But first, let me offer some color in regarding to our regional businesses activities in quarter three. Beginning with North America. Revenue grew on a sequential basis. As we supported the digital modernization and integrate carrier strategies of a broad based of wireless and pay-TV customers.
Regarding the business environment in North America, service providers continue to face fierce competition, resulting from the convergence of wireless and pay-TV offerings with content ownership and direct-to-consumer business models. As a result of this rapidly changing market dynamics, we see many opportunities to support the strategic requirements of our customers in North America, which we believe will translate to positive long-term growth trajectory in the region.
That said, we remind you over the many moving products that’s affecting our North American outlook and we expect sequential trends to fluctuate in the foreseeable future further before growth resumes in a steadier way. As a reminder, industry consolidation activity continues to present an additional source of uncertainty in our outlook, including T-Mobile planned merger with Sprint or others which may be contemplated in the future.
Moving to Europe, we delivered our fourth consecutive quarters of year-over-year growth, in spite of foreign currency movement, which negatively impacted our sequential performance. Along this highlights of the quarter, we were pleased to be selected to support the launch of Sky Italia, a new telco offering under multiyear managed services agreement that includes delivery of Amdocs open network or accessory on a cloud enabled platform.
As we are in the region, we were selected as a technology partner for MTS, the leading telecommunication group in Russia and the common ramp of in Independent states, CIS, where we are part of the project that will enable MTS to achieve greater level of sales service, a reduction in many processes and simpler on boarding of new partners in emerging areas such as IoT.
Regarding the outlook in Europe, we are on track to grow faster than the corporate average in fiscal 2018. Although we remind you that sequential trends could fluctuate due to factors such as foreign currency movements, and the project orientation of our customer engagement in the region.
Turning to the rest of the world. Growth continued at a solid pace in quarter three. During the quarter, we deployed an automated and intelligent operation capabilities for Vodafone India. We also partnered with Telstra in Australia to implement next generation OSS platform for its B2B line of businesses that would enable Telstra network demand to evolve towards virtualization, while maintaining the impact of its existing support system.
Additionally, we recently partnered with Amazon Web Services to deliver cloud based omni-channel routing and interaction management for Globe Telecom in the Philippines. This is our first award in collaboration with AWS, and is notable because it demonstrate that we’ve deep domain expertise necessary to move communication in media companies into the cloud environment.
Overall, our business in rest of the world is on track to grow on a constant currency basis in fiscal 2018, mainly thereby Asia and the surrounding specific region where activity continued to be stronger compared to Latin America. As a reminder, quarterly trends may fluctuate in the Rest of the World, primarily due to the project orientation of our customer engagements.
To summarize my insight on a regional basis, we are pleased with our execution for the year-to-date. With only the fourth quarter remaining, we’ve enough data points to indicate that our revenue from AT&T will probably decline in a double-digit rate in fiscal 2018. And yet, we still expect to meet our total revenue target for the full-year, as a result of a strong progress that we have made in new and existing customers in the broader North America, in Europe, and in Rest of the World.
We believe that this performance is a testament to our unique business model, our focus on execution and the innovation we’re bringing to customers. This trend has been especially evident during the period of rapid market changes we’ve seen in the last few years. Including that resulting from the AT&T's acquisition of Time Warner which we consider to be a singular industry event of size and magnitude that is unlikely to repeat in the foreseeable future.
Now let me make -- let me update you on regarding some positive and exciting development in the following strategic areas. Network Function Virtualization or NFV, and media and entertainment. Beginning with NFV. We are today excited to announce that Amdocs is supporting the commercial availability of Comcast, software defined wide area networks, SD-WAN, service for the enterprise businesses.
The SD-WAN offering leverages Amdocs leading energy portfolio, which brings orchestration, fulfillment and automation capabilities to service providers, while integrating a wide array of virtualized service functions for vibrant and diverse partner ecosystem.
Moreover, this is important milestone. It comes a year after the first -- the first time we told you that we're supporting Comcast to better help drive in SD-WAN and it serves to illustrate how small initial engagement may ultimately lead to a delivery of significant value to our customers.
Along these lines, we are also encouraged to have recently seen some pickup in the number of global service providers that are beginning to evaluate NFV, and we’re working hard to demonstrate to them that we should be the partner of choice to support their future requirements.
Turning to the media and entertainment. The post-merger integration of Vubiquity and UXP are going according to plan. And we are encouraged to have already seen an expansion in the pipeline opportunities relative to when we close this transactions earlier this year.
Along this line we're today pleased to announce that Verizon has selected Vubiquity's minute services and technology platforms to provide the processing and packaging of Verizon's vast video on-demand and pay-TV pay-per-view portfolio across the Fios multiscreen platform. This deal represent the expansion and extension of Vubiquity's existing relationships with Verizon and demonstrate that we are well positioned to compete the lines on the convergence of traditional service providers with content owners, OTT web players and the direct content to consumer business models.
To wrap up, we believe the long-term market dynamics I have outlined today, leave Amdocs well positioned for continued growth. Further details of reach will be provided in November. In the meantime, we enter quarter four with record 12 months backlog, and we’re on track to deliver non-GAAP EPS growth, in the mid to high single-digit for the 7th consecutive year in fiscal 2018.
On a personal note, the Board of Directors have today accepted my plan to retire as CEO at the end of fiscal year 2018. I feel very confident in the company's position and long-term outlook. And I believe now it's the right moment for me to hand over the reins of -- to my long time colleague and friend, Shuky Sheffer, who I’m pleased to announce will resume the position of Presidents and Chief Executive Officer of Randall effective October 1, 2018.
After 31 years with Amdocs, including eight years as a CEO, I believe this is a natural and timely move, which is well aligned with Amdocs net maturity and future strategic direction. I have every confidence this transaction will be a smooth one. Shuky is a verge on a fan books. What if you may be or maybe a familiar face to those of you who have attended our annual Analysts and Investors Day over the year.
I’ve no doubt that is deepened the stand with Amdocs and our market with serve our employees, our customers and our shareholders. Well, going forward. And I believe the Board has elected a strong leader whose previous experience also includes being the CEO of another listed company. Just as important, I’ve every confidence that Shuky will have the support of a deep bench of Amdocs veterans, who each day provide a strong leadership which is acquired across many areas of the company.
One of the many examples is our current CFO, Tamar Rapaport-Dagim, who I’m delighted to say, we'd be expanding her role to include that of Chief Operating Officer, where she will be responsible for ensuring the company has continued reputation, continued reputation for operational excellence. I’m pleased to have Shuky with us in the room today, and he will be available to take some Q&A later in the call. As for myself, I have gladly agreed to stay on the board where I still hope to make meaningful contribution to the company and its shareholders in the years to come.
With that, I will turn the call over to Tamar.
Thank you, Eli. Third fiscal quarter revenue of $1 billion was at the midpoint of our guidance range on a constant currency basis after adjusting for a $9 million negative impact from foreign currency movements relative to guidance. Our third quarter guidance range have included a minimum sequential impact from foreign currency fluctuations.
Our third fiscal quarter non-GAAP operating margin was 17.3%, unchanged from a year-ago and in line with the high-end of our long-term target range of 16.5% to 17.5%. Below the operating line, non-GAAP net interest and other expense were $3.2 million in Q3, primarily reflecting foreign exchange movements. For forward-looking purposes, we continue to expect non-GAAP net interest and other expense in the range of a few million dollars quarterly due to foreign currency fluctuations.
Diluted non-GAAP EPS was $1.03 in Q3 in line with the midpoint of our guidance range of $1 to $1.06. As we anticipated, our non-GAAP effective tax rate of 13.4% in Q3 was near the low end of our expected annual range of 13% to 17%. Diluted GAAP EPS was $0.64 for the third fiscal quarter below our guidance range of $0.71 to $0.81 due to nonrecurring restructuring charges primarily associated with recently completed acquisition and internal business realignment actions in North America net of tax effect.
Free cash flow was $1.8 million in Q3. This was comprised of cash flow from operations of approximately $164 million, less $36 million in net capital expenditures and other. Capital expenditure relating to the multiyear development of our new campus in Israel was immaterial this quarter. DSO of 89 days was flat quarter-over-quarter. We remind you that this item may fluctuate from quarter-to-quarter.
Total unbilled receivables decreased by $4 million as compared to second fiscal quarter of 2018. Our total deferred revenue both short and long-term increased by $11 million sequentially in Q3. The net balance of unbilled receivables and total deferred revenue reflects our high-level of transformation project activity and the resulting timing differences between revenue recognition and the invoicing of customers.
Our 12-months backlog, which includes anticipated revenue related to contracts, estimated revenue from managed services contracts, letters of intent, maintenance and estimated on-going support activities, was $3.33 billion at the end of third fiscal quarter, up $10 million sequentially from the end of the prior quarter. Our cash balance at the end of the third fiscal quarter was approximately $561 million.
During the third fiscal quarter, we repurchased $90 million of our ordinary shares. In total we have as of June 30 more than $725 million of authorized capacity for share repurchases to be executed as a company discretion going forward with no stated expiration dates.
As a reminder, we retain the flexibility to vary the level of share repurchase activity from quarter-to-quarter depending on factors such as the outlook for M&A, financial markets and prevailing industry conditions.
Now, turning to our outlook, we expect revenue to be within the range of $980 million to $1.02 billion for the fourth fiscal quarter of 2018. Embedded within this guidance is a negative sequential impact of approximately $5 million from foreign currency fluctuations as compared to Q3.
For the full fiscal year 2018, we now expect total revenue growth in the range of 2.2% to 3.2% as reported, compared with 2.3% to 4.3% previously. The midpoint of the new range is 50 basis points lower than the previous guidance due to currencies. We now expect positive impact from foreign currency fluctuations of approximately 0.5% year-over-year for the full-year of fiscal 2018 compared with our prior expectation for a positive impact of about 1%.
On a constant currency basis, we expect total revenue growth in the range of 1.7% to 2.7% for the full fiscal year 2018 compared with 1.3% to 3.3% previously. Additionally, our fiscal 2018 revenue outlook continues to incorporate an expected drag of roughly 0.5% from directory, which we anticipate will continue to decline in the full year.
We continue to expect our non-GAAP operating margins to be within a range of 16.5% to 17.5% in fiscal 2018. And we expect our non-GAAP operating margin to fluctuate at the higher end of this range in fiscal 2018. We expect the fourth fiscal quarter diluted non-GAAP EPS to be in the range of $0.95 to $1.01.
With respect to Q4, we expect our non-GAAP effective tax rate to be above the high-end of our annual target range of 13% to 17%. For the full fiscal year, we still expect on non-GAAP effective tax rate to remain within the same target range of 13% to 17% for the full-year.
Our fourth fiscal quarter non-GAAP EPS guidance also incorporates an expected average diluted share count of roughly 143 million shares and the likelihood of a negative impact from foreign currency fluctuations in non-GAAP net interest and other expense.
For the full fiscal year, we expect full-year diluted GAAP EPS growth of flat to negative 3% year-over-year compared to flat to positive 6% previously due to the nonrecurring restructuring charges recorded already in Q3. Additionally, we now expect diluted non-GAAP EPS growth of 5% to 7% year-over-year, which is narrowed around midpoint of our previous guidance of 4% to 8%.
With that, we can turn it back to the operator to begin our question-and-answer session.
Thank you, ma'am. [Operator Instructions] And our first question will come from the line of Tom Roderick with Stifel. Your line is now open.
Yes. Hi. Matt [indiscernible] on for Tom. Thanks for taking my question and congrats Eli on the pending retirement. That’s great news. I’m sure for you all, though, it brings some positive and a little bit of other news story, but congrats on that certainly. Looking at the business in some of the business and some of the commentary you made around North America, could you maybe dig in a little bit on what you're seeing now at AT&T that a lot of the overhang from the Time Warner deals, seemingly should be behind us and maybe what your discussions with AT&T have been around maybe where the projects and some of the things are working on in the next couple of years are headed?
So, Tom, obviously, I cannot give you a very detailed exposure to the dialogue we have constantly with AT&T at the highest level. I would give you a few data points. One is, first of all, it's not completely over, because the government decided to challenge AT&T. We actually don't believe personally the company we don't believe that they will be able to do that, but it does represent little bit of slowdown in there in the execution plan if you expected AT&T media to rocket like a spring being released. It takes a little bit longer time. And to remind you, we don't have media numbers from AT&T specifically, other than the business that we had originally with Vubiquity baked into the numbers. We believe this by itself will be over the next couple of years a growth engine, timing of which we really cannot predict or share right now with you. On other areas, which are indirectly affected, AT&T is a very big company and they see the growth engines, including Cricket, including Mexico. They have a lot of business in the enterprise, which is new area for us. If we will be able to get in there. And I think they’re also revisiting their strategy regarding mobility due to recent years of losing some market share. So altogether, we’re seeing in AT&T activities in many, many, many domains obviously from the network, NFV, 5G, first network and all that, all the way to Mexico and to other areas including enterprise in between. But other than that I really -- it's really hard for me to give you more tangible data without compromising AT&T information or without guiding really for specific customer which we -- which is something that we cannot do it. It would not be useful for you and not have been useful for us.
All right. Great. Thanks. And then a lot of good wins we saw some from press releases after the close today. Nothing specific on ONAP, but could you give us a little bit of an update in terms of how that's progressing? Are we moving towards being sort of a standardization across some of the larger carriers across the world or is it still a little bit in flux and you’re still pressing forward with the opportunities that you have now? Thanks.
So, Tom, basically if you read between the lines of the prepared remarks, we do see overall more opportunities and more initial phases. Unfortunately, all of them start very small. But fortunately, we have more and more major carriers, especially the early adopters because the people that make the decision now that see Amdocs as a major contribution to their journey into NFV. So I think that there is no question about NFV. I think we have a better share than anyone has in cooperation with this companies. And we see uptick in the number of activities we have. The big news of today is Comcast. Comcast is something we started a year-ago and one of the small whatever couple of million dollars project and that's became the backbone of SD-WAN. SD-WAN is basically the most popular enterprise service and enterprise is the growth engine of Comcast and many others. So to be the heart of the NFV domain for SD-WAN is a big deal regardless to also not only the numbers and the size of the project is the position. I believe once we will finish this project, it includes orchestration and activation and active inventory of this component, this is a base for additional services. So we are very bullish about it and you can hear it and our voice and likely we also got this time, which is quite rare, also the permission of Comcast to mention their name specifically. So we’re thankful for that. So this is a big news of the quarter, but the Telstra deal of the OSS next-generation is also NFV related. They’re ONAP follower and few other proof-of-concept box that we are doing all around Europe and all-around the world are also good indication that we are on the right track. As I said more than once, now we see more cases but as I say more than once. The one thing it's really hard for us to predict and it's not like we really want to hold it back from you, is the pace of the additional projects. But every time we have this data points that I just shared with you, it makes us a little bit more optimistic about NFV and the investments that we have made in these domain. So it is a very exciting thing for us.
Great. Thank you and congrats Shuky, Tamar on the added role and Eli on the retirement. Thank you.
Thank you, Tom. Thank you.
Thank you. And our next question will come from the line of Jackson Ader with JPMorgan. Your line is now open.
Great. Thank you. Good evening, guys. Thanks for taking my question.
Hi.
Eli, the Vubiquity managed services contract with Verizon. Can you help us how we should be thinking about maybe a Vubiquity managed services contract versus the legacy Amdocs managed services contract? How they're structured, how they're priced? Maybe term, that sort of thing.
Yes. Its slightly different, although there are some components that repeat itself. The idea is that instead of charging Verizon for every transaction on the -- what is called SVOD and TVOD which is the transactional video on-demand or subscription video on-demand, we kind of strike a deal with them that up to certain level, it all will included in a like in a retailer, okay? Like in a fixed-price, so to speak. So it is related to volume eventually, but we basically give them the whole service, packaging it in a certain commercial agreement and to certain period of time. This specifically line is actually including all the video on-demand and the pay-per-view of Verizon Fios, quite significant contract and it's a multiyear. I can't remember this how long we signed it for this time.
I'm not sure we are at liberty to say, but several years.
Okay, but several years right there.
Yes, okay. Got you.
So from this perspective similar, but it has some different components. And again, it's something that is I would not say customary, but it's something that Vubiquity did before, and we will may evolve this model later on with slightly different components, but we are very happy with this deal. It's a very important deal for us.
Sure. Okay. And then a quick follow-up. I think, Eli, you mentioned in your prepared remarks that Europe is expected to outgrow the broader corporate average. And I just want to clarify, is that after foreign exchange headwinds, or is that on a constant currency basis?
Yes, yes, both reported basis as well as obviously they’re for constant currency as well.
Okay, cool. Thank you, Tamar.
Thank you, Jackson.
Thank you. [Operator Instructions] And our next question will come from the line of Ashwin Shirvaikar with Citi. Your line is now open.
Thank you. Let me also start with congratulations, Shuky and Tamar for your added responsibilities in the case of Shuky obviously new responsibilities.
Thank you.
Eli, it's bittersweet. I'm very happy for you, but also will miss you. Every time we've spoken, I’ve learned a lot. So thank you for that. Wish you the best. I wanted to start by asking about there were some comments with regards to North America restructuring. And then there is some specific mention of T-Mobile and Sprint. So I wanted to kind of parse that a little bit more to see if you're making a general statement with regards to a deal or is there some financial information that we should be -- we should know with regards to either that transaction or any details on the restructuring?
So, Ashwin, there is no direct relation whatsoever between our expectations of how we can support T-Mobile and Sprint and between the restructure. And the restructuring is more related to some alignments we have done around recent acquisitions as well as the fact that we see the full dynamics of demand in terms of skill set, location, et cetera, within the business that we are seeing. For example, we are very excited to see the Comcast NFV deal. Obviously, that requires us to shift resources and build up capabilities around Philly [ph]. So this kind of changes of requirements also alignment internally and this is exactly what is [indiscernible].
Got it. And then the relationship with AWS that you are setting up, it's -- I mean, I just want to get into some details with regards to as you perhaps involve services like AWS more, how does that change the economics of your contract?
Overall it doesn't. It's just a component. We're not talking about this early on the specific project in the Philippines. In general, we are …
No -- yes.
… really aligning our product sets to be cloud agnostic, but primarily we are testing it and we are offering a lot of it. It's a default on AWS. We’ve also strong relation with Microsoft Azure and others. So we see -- in regular deals, we see the cloud management system as a component, we price it as part of the overall deal and it's just an engine, instead of using our own data center or the customer data center or the resourcing [indiscernible]. We will use the cloud management system from Amazon or from some other component. So the overall feature does not change. Specifically on project like this, when we team up with AWS, it's actually basically transforming certain components of Globe in this case on to the cloud. Some of it -- our applications, some of it adjacent application. So in this case we just price it based on the capacity that we are consuming from the cloud. The beauty of it is that we show on one end to the services like [indiscernible] our capability to do that and it's something that everybody and its [indiscernible] more or less need. And on that end, the fact that we had a very [indiscernible] started by the way on the engineering side and went over to the commercial side. It means that they will call us [technical difficulty] and they have sales people all over the place and we hope that we will have other customers that will actually require the same type of capabilities. So that's kind of the story about AWS, and it's very exciting relationship. We developed a lot of rapport based on our requirement from the cloud. We are high-end software, so simple to carry Amdocs application in the cloud. We started there and we’ve all the relationships out there into the type of the deals that we’ve now with Globe.
Got it. Thank you, guys.
Thank you, Ashwin.
Thanks.
Thank you. And I'm showing no further questions in queue at this time. So now it is my pleasure to hand the conference back over to Mr. Matthew Smith, Head of Investor Relations for some closing comments or remarks.
Thank you very much for joining the call today and for your interest in Amdocs. We look forward to hearing from you in the coming days. And if you do have any additional questions, please give us a call on the Investor Relations line. Have a great evening. Thanks.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program. You may all disconnect. Everybody have a wonderful day.