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MICROS Systems, Inc. (NASDAQ:MCRS)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 29, 2008, 9:30 am ET

Executives

Tom Giannopoulos – Chairman, President, and CEO

Peter Rogers – EVP, IR

Gary Kaufman – EVP, Finance and Administration, and CFO

Analysts

Dorson [ph] – Brean Murray

Dan Perlin – Wachovia

Gil Luria – Wedbush

Ross MacMillan – Jefferies

Kurt Miller [ph] – RCM

Louis [ph] – Delta Partners

Brad Reback – Oppenheimer

Corey Tobin – William Blair

Rick Johnson

Vincent Colicchio – Noble

Operator

Ladies and gentlemen, thanks you for standing by and welcome to the MICROS Systems, Inc. fiscal year 2009 first quarter conference call. During this presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded, Thursday, October 30, 2008.

I will now like to turn the conference over to Tom Giannopoulos who is the Chairman and Chief Executive Officer of MICROS Systems, Inc. Please proceed, sir.

Tom Giannopoulos

Okay. Thank you, Jason. And good afternoon everyone and again thank you for being with us as we are reviewing financial results for quarter one of fiscal year 2009. As always with me are Gary Kaufman, Tom Patz, Peter Rogers and we will commence with Peter and the disclaimer.

Peter Rogers

Thank you, Tom. Good afternoon, ladies and gentlemen. Some of our comments today are forward-looking statements involve risk and uncertainties, such as uncertain product demand and market acceptance, impact of competitive products and pricing on margins; the ability to obtain on acceptable terms the right to incorporate in MICROS’ products and services technology patented by others; unanticipated tax liabilities and the effect of terrorist activity and armed conflict.

MICROS undertake no duty to update any forward-looking statements to conform to actual results or changes in MICROS' expectations. Other risks and uncertainties associated with MICROS' business are identified in the Management's Discussion and Analysis of Financial Condition and Results of Operations and Business Investment Risks sections of MICROS' SEC filings. Tom?

Tom Giannopoulos

Thank you, Peter. As you can see from our press release this afternoon, we had a very good first quarter with record results for revenue and net income and EPS for the September quarter.

Revenue for the quarter was $244.069 million, an increase of 12.7% versus last year’s $216.482 million. That number met our budgeted numbers even with the slight negative effect of the euro to dollar relationship. As a reference for you, we had good growth in the North American distribution unit which is strictly POS business, that business grew 19.94% [ph] from last year. The EME region grew about 10% on year-to-year basis. South America region grew 10% as well. Asia-Pacific region grew 14.2%. The hotel business in the US grew more than 50% from last year's numbers. Major restaurants and retail business was flat from a year ago.

During the quarter, software revenue grew 21.8% from $30.851 million to $37.576 million. Service revenue grew 18.2% from $120 million to $142.8 million and the hardware revenue was flat slightly negative growth.

Gross margin was $125.944 million or 51.6%, which is a very good number versus last year's $113.242 million which was 52.3%. Hardware and service gross margin was a little lower than last year. Software was higher from 72.4% to 80.6%.

Expenses came in at $87.626 million or 35.9% versus last year's $80.313 million or 37.1%, this is on a non-GAAP basis. In percentage wise, it was better than last year. In terms of actual dollars, it was $3 million better then budgeted for the same revenue dollars for the first quarter.

Operating profit grew 16.4% from $32 million to $38 million and the percentage improved from 15.2% to 15.7%. As a result, main income again on a non-GAAP basis increased 14.3% [ph] from $24 million to $27.7 million and EPS increased 17.2% from $0.29 to $0.34.

Overall, very good results for the September quarter under any conditions and we are very pleased with the performance of all of the business units as they came in within budget, and I'll ask Gary to give you the details from the balance sheet.

Gary Kaufman

Thanks Tom. The highlights of the September 30 balance sheet are as follows.

MICROS had cash and investments of $388 million compared to $447 million in June. The primary reasons for the decrease were the total cash outlay of approximately $50 million for the Fry acquisition and the payment of approximately $14 million for income taxes in the first quarter.

During the quarter, we generated $29.7 million from operating activities while spending $3.4 million on property, plant and equipment and $10.4 million on purchase of common stock. During the quarter we purchased 347,000 shares for a total price of $10.4 million. Thus far in quarter two, we have purchased 248,000 shares for a total cost of $5.1 million. As of today the total number of shares remaining to be repurchased under plan number four is 1.542 million shares.

Total accounts receivable of $203 million is an increase of approximately $10 million over year end. Day sales outstanding as of September 30 was 74.9 days, an increase of approximately 7 days from year end. Domestic DSOs were 55.8 days, approximately the same as last quarter. International DSO were 94.3 days, an increase of 16 days. The international increase was due primarily to the timing of semi-annual maintenance billings both Europe and Asia.

The inventory balance of $53 million is a decrease of approximately $12 million from June. This decrease was due to large contract shipments in both US and (inaudible) during the first quarter. The inventory for these shipments was purchased and received during the fourth quarter of last year. Inventory turns for the quarter was 6.3 up from 6.2 at year end.

Deferred revenue of $122 million is an increase of approximately $7 million from the year end balance due to the timing of our maintenance billing in Europe and Asia. Remember September and March were the two quarters when this balance increased.

Maintenance items: Maintenance revenue for the quarter was $78.1 million, an increase of $1.5 million over the last quarter. Non-operating income for the quarter was $3.8 million, consisting of interest income of $3.3 million in currency transaction gain of $450,000. And with regards to taxes the forecasting purposes I suggest is 33% to the total year of non-GAAP and 34% for GAAP. Tom?

Tom Giannopoulos

Okay. Thanks. In summary we finished first fiscal year 2009 with excellent financial results. So, as far as guidance is concerned for the rest of the fiscal year, we will follow the lead of many other companies in forego. Any further guidance until conditions stabilize we are in good shape to weather the storm as they say. We have plenty of cash, we are profitable and we have many global customers' who'll continue to cut expenses, improve operations, use our cash wisely between the stock buyback program and continuing to look at value enhance in strategic acquisitions and Jason, we'll take questions now.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Andrey Glukhov from Brean Murray. Please proceed.

Dorson – Brean Murray

Hi, guys. This is Dorson [ph] for Andrey Glukhov. I just have a quick question. Given the environment where have you been seeing the most impact on the hotel side, the restaurant side and with that what are you bracing for and perhaps what are your opportunities? Thank you.

Tom Giannopoulos

The first quarter or so basically no impact whatsoever either on the hotel side or on the restaurant side. As a matter of fact the hotel business was excellent with over 50% growth. We are like anybody else with the present business conditions we are expecting business as usual for the short term, but we are apprehensive about what may happen in a little bit longer term.

Operator

Our next question comes from the line of Dan Perlin from Wachovia. Please proceed.

Dan Perlin – Wachovia

Thanks. Couple of questions, one is how much did FX benefit in the quarter?

Gary Kaufman

About $3 million, Dan.

Dan Perlin – Wachovia

Okay. And how much did the Fry acquisition contribute?

Gary Kaufman

Fry acquisition was about $5 million.

Dan Perlin – Wachovia

Okay. So, your organic growth in the quarter was about 8, am I right?

Gary Kaufman

Yes, plus or minus that.

Dan Perlin – Wachovia

Okay. The – one of the concerns we have been hearing in the market is that some of the third party leftovers were having problems getting financing. Are you seeing that impact in the business in terms of small business in the purchase equipment (inaudible)?

Tom Giannopoulos

In the first quarter and until basically the second or third week of October we hadn't seen anything. We didn't see any cancellations. We didn't see any delays. If you look at the business and you look at North America like I indicated they grew19.9%, that's totally restaurant business. If you look at the number from the dealers which is the street business which we've talked about before, they had a better – they had a good growth from last year. So, we haven't seen any of that. Obviously, the credit issues and the volubility of financing is there and is going to affect the business from my point of view. I don't know how long from now or how much.

Dan Perlin – Wachovia

Okay. And the idea of pulling the guidance, is that you are sitting back and looking at the business and just saying the ability to actually forecast with any meaningful certainty is the reason I'm going to pull it or are you pulling it because you are concerned about your attorneys' are basically – the counsel is telling you can't have a guided number out there when you feel like you might come below it?

Tom Giannopoulos

I don't ask our counsel for any advice but no – it's strictly from my point of view any – gives guidance nowadays that would a responsible thing to do. And we have no idea what's going to happen with the currency euro to changes of the day. So, it would be irresponsible to give any guidance, end of story.

Dan Perlin – Wachovia

And then I'll ask one more question – when you look at where your business sits today and you have whatever visibility you think you have in terms of your backlog, what is that telling you at least as we go into the near term? It sounds like hotel had a very strong quarter, accounts for flat and restaurants and retail, so may be that's a soft market area. But I'm just – I'm trying to get a sense of what you are just seeing in the market currently.

Tom Giannopoulos

Currently, we haven't seen any – we've had discussions with some of our customers' that they want certain discounting and so forth, but for the present time we haven't seen any cancellations of any of the activities that we have. But we should be really prudent and really careful about what might happen as the next fiscal year starts or calendar year starts and their budgeting process is for calendar year 2009.

Dan Perlin – Wachovia

Okay. Thank you.

Operator

Our next question comes from the line of Gil Luria from Wedbush. Please proceed.

Gil Luria – Wedbush

My question – quick one Burger King, how far are you into that roll out? Do you have some still left within those units that you need to install?

Tom Giannopoulos

We haven't signed the roll out with Burger King. We are in the pilot proving process of having x number of restaurants about between 30 to 50 as a pilot program and the roll out will begin after that which is like again October beginning of November.

Gil Luria – Wedbush

Have you shipped any units, recognized any revenue?

Tom Giannopoulos

We have recognized $1.5 million of revenue in that which is a very small amount of the overall revenue.

Gil Luria – Wedbush

Right. You gave us a couple of statistics. I was wondering whether you would be willing to complete the picture. If you would look at the – just the even the two major business lines hotel and restaurants. You mentioned hotels in the US were up 50%. Would you mid telling us what that was internationally? And then restaurants, US and internationally?

Tom Giannopoulos

It's very difficult because it's merged and the only thing I can have the (inaudible) number basically in major account hotel business in the US because we have a separate business unit for it. But overall the – like I said Europe grew 10% and Asia-Pacific. So, you can assume that the revenue growth for hotels internationally were in that range.

Gil Luria – Wedbush

Got it. Thank you.

Operator

Our next question comes from the line of Ross MacMillan from Jefferies. Please proceed.

Ross MacMillan – Jefferies

Thank you. Tom, since the end of September, we are now basically 30 days in, you mentioned a couple of times you had some conversations but no cancellations but customers' may be pressing you for discounts. Can you just describe may be collectively what else you are seeing out there right now? Is there anything else you can talk to which gives you incremental reason to take away the guidance? Thanks.

Tom Giannopoulos

Ross, you reduced the numbers anyway, so, but we from the time that end of September to now the only thing we have seen is the global meltdown and the approval or disapproval of the bailout and all the activity that is going on with the banks but I'm sure our customers' are having the same issues and so we are – to maintain a guidance of 1.1 that we've had from a year ago to now where things have changed like I said would be irresponsible.

Ross MacMillan – Jefferies

And may be I'll just follow up that on costs. You seem to be doing as you said a good job on achieving revenue targets on lower operating costs. Can you talk about how you are getting there and where do you stand in terms of taking a more formal stand substantially doing headcount reduction. Is that something that you are not considering yet or where are you there?

Tom Giannopoulos

The thing we can manage is as good managers is the bottom line and then look at expenses and especially – believe it or not we are still hiring an appreciable number of employees on the installation teams for all the activities that we have. I mean we have – we are looking for at least 100 installers as we speak for the business that we have in the books. So, from that point of view – but there is no we are not going to have a formal reduction, we are just going to be more emphatic in eliminating costs that are not value enhancing at this particular time in any corporation and including ourselves there is plenty of room to do so.

Ross MacMillan – Jefferies

And those 100 installation specialists, all that – so some of them will be after party [ph]?

Tom Giannopoulos

No. These are full time employees.

Ross MacMillan – Jefferies

Okay. Thank you.

Operator

Our next question comes from the line of Kurt Miller [ph] from RCM. Please proceed.

Kurt Miller – RCM

You guys have an incredible fortress like balance sheet. You Company gushes free cash flow. Help us think about how you would use that cash in that cash flow over the next 12 months between buying your stock which is now cheaper than it used to be, and potentially buying a company or companies which are all cheaper than it used to be?

Tom Giannopoulos

I guess – yes, but anyway we will continue to buy our stock which is very inexpensive at this particular time. But also being mindful of the fact that there is a recession out there and we need to have cash in hand for our rainy days as they say. At the same we are looking as always have for acquisitions which today are cheaper than before. We just completed the Fry acquisition in August timeframe. We are absorbing that into our capabilities and actively looking for other things to do with cash. So, we are doing all of the above and more emphatic now than ever before in our buyback stock program. And what we need – and when the Board meets again in November we'll ask for additional shares to be approved.

Kurt Miller – RCM

So, you are going to keep – want to make sure I'm clear, you are going to keep buying stock at a higher dollar or higher share?

Tom Giannopoulos

Higher share which makes it higher dollar, yes.

Kurt Miller – RCM

Thank you so much.

Operator

Our next question comes from the line of Louis [ph] with Delta Partners. Please proceed.

Louis – Delta Partners

Just wanted to go over the current – so, I understand why you guys aren't giving guidance. I mean there is a lot of stuff that's – a lot us –. But since you guys gave guidance on the last call, the dollar is strengthened by about 15%. So, just trying to understand the implications with the dollar effect. If you assume the dollar is going to be 15% stronger in your fiscal '09 versus '08, what would be the impact to your growth rate assuming at 15% which is probably reasonable given where we are. I'm just trying to understand the currency impact.

Tom Giannopoulos

In the August guidance, we said that the guidance of $1.75 billion to $1.1 billion was a predicated on the fact that the dollar to euro would be 1.40 and above. Anything below then we have to do something else to meet those particular numbers. Okay. And at that particular time, the ratio I think was 1:53, 1:54 something to that effect. Okay. So, but if the ratio became 1:4 and above, we have the capability because of the pipeline and so forth to meet the guidance that we had the 1.75, 1.075 and 1.1. Anything that brings it below 1.40 then we had to do other things including small acquisition to make up for the loss of the dollars as the relationship between the dollar and euro. Today it's at 1.29, yesterday or the day before it was 1.26, 1.25. So, it keeps varying at large percentages and it's dropped off. That's why we are being very careful and saying all that's are off and you got the guidance until things stabilize and then we can make certain decisions how far we are going to do. But our budget was based on 1.5, we said anything down to 1.4, we would cover and meet the guidance and that's the – that's where we are with those particular averages.

Louis – Delta Partners

Yes, I understand that. I just what I'm trying to understand just from a simplistic point of view 1% strengthening of the dollar has wide impact to your growth –

Tom Giannopoulos

But the dollar to euro – the dollar only affects the European business and that's the (inaudible) business, and the business is about between – I will tell you the exact number, there are 280 there are about euros. Okay?

Louis – Delta Partners

Okay.

Tom Giannopoulos

So, you can figure out from there when it drops what happens. It's not all of our business.

Louis – Delta Partners

Yes, I understand that. And can you talk about the emphatic – you said you had $3 million benefit from FX this quarter. What was the impact on operating income?

Gary Kaufman

That was in transactions, and it can go every quarter from nothing to $500,000 to $500,000 loss. It's just generated on when we bill ourselves, when we pay ourselves. And that's the primary reason for it. And of the 450 [ph] to the 451 [ph] bottom line this quarter.

Louis – Delta Partners

Got it. Okay. Thank you.

Gary Kaufman

You are welcome.

Operator

Our next question comes from the line of Brad Reback from Oppenheimer. Please proceed.

Brad Reback – Oppenheimer

Hi, guys, how are you?

Gary Kaufman

Fine.

Brad Reback – Oppenheimer

(inaudible) business in particular through the last cycle, it held up very well. What are your expectations around that going forward?

Peter Rogers

Brad, this is Peter. It will continue to grow. I mean we – if you look at our revenue last year, we did about $160 million for software licenses, and that generates on average about 22%. Of that the revenue we are starting to recognize, as I said the – we sold last year to year because of the warranty. So, we'll see that continue to increase. Now there being some slowing down of maintenance in the latter part of the year because of the dollar versus the euro. The last half of the year the euro was $1.57, so we are talking about $1.27 to $1.28, there is a negative translation effect in the last half of the year. But as you see software is up 21%, so we are adding more and more customers' in that base. We'll continue to grow moderated somewhat by the euro to the dollar and the English pound exchange rate.

Brad Reback – Oppenheimer

Great. And I know it's early in this economic cycle, but any thoughts you can give us, Tom, comparing this cycle, your expectations to this cycle versus the 2002 time period for your guys?

Peter Rogers

Brad, I think look back at that time period, we were really sorry pulled back comfortable spending in the spring of 2000. So, that could happen in the spring of 2009, the Company is pulling back. The CFOs are just stopping projects across the board and not just in our businesses. So, we are concerned about corporation in terms of capital spending decisions in spring. Now, the one thing that is different today versus 8.5 years, 9 years ago is really the credit crunch. As Tom said we haven't really seen that, yet but we anticipate that has to have some impact on corporations abroad. That's the major difference I believe – we believe.

Brad Reback – Oppenheimer

Great. Thanks a lot guys.

Operator

(Operator instructions) Our next question comes from the line of Corey Tobin from William Blair. Please proceed.

Corey Tobin – William Blair

Hi, good afternoon. The question just related to competitive environment and the material changes, are they continuing to have correctional prices or has there been any significant pricing pressure? And then a totally different topic, Tom, you mentioned no cancellations to date. Gary says to push out there haven't been any changes with respect to customers' desire to push back the time limit for installations? Thanks.

Tom Giannopoulos

For the fact in – on a competitive perspective, we haven't seen anything and we compete with the same players and the same accounts and so forth. Nothing different that we haven't seen in the past. In regards to cancellations versus pushbacks, we had seen – at least I know one push back of a major project that we've had upgrade in all the airports around the US and that has been pushed back by a couple of months, but not cancelled, but within actually within the fiscal year starting in the first quarter of January, it's been pushed back to March, April timeframe.

Corey Tobin – William Blair

Okay. Thank you.

Operator

Our next question comes from the line of Rick Johnson of (inaudible). Please proceed.

Rick Johnson

Yes. The $3 million of currency benefit, was it to the top line or the bottom line?

Tom Giannopoulos

That's the top line.

Rick Johnson

Okay. And the DSOs in Europe, I mean is that a concern or a big, big jump or is it just a stranger year-over-year timing effect?

Tom Giannopoulos

It's not that concerning from the aspect that in the two quarters in March and September they are higher because what they do is they bill their maintenance twice a year. And they bill it in the July timeframe and in the January timeframe, and they just don't – the people most of them don't pay for the first 90 days, and as a result you end up with these receivables at the end of September. Yes, it's always a concern when it goes up but this is cyclical.

Gary Kaufman

Also in September quarter, we are clearly – we are coming up a record June quarter in terms of collection, plus we do have the effect of summer in terms of customers under the occasion – so that's usually DSOs brought in September quarter versus June when they start to lean back down to the December quarter.

Rick Johnson

Yes. So, but all year over year what did those European receivables do?

Gary Kaufman

If you look back to let's say last September there were 79.2 and 74.2 total, and the international is 91 and 94 now. So, it's not different.

Rick Johnson

Okay. Thanks.

Gary Kaufman

Thanks.

Operator

Our next question comes from the line of Vincent Colicchio from MICRO Systems. Please proceed.

Vincent Colicchio – Noble

Vincent Colicchio from Noble. Good afternoon, guys. How would you compare the month of October the performance of the hotel market versus restaurants?

Tom Giannopoulos

Month of October?

Vincent Colicchio – Noble

Yes.

Tom Giannopoulos

Right now we have a lot more hotel business and I'm talking about between the two product lines, not between last year and a year ago. We have a lot more hotel business going on and we have restaurant business.

Vincent Colicchio – Noble

Does that mean you are trying to get to is the restaurant market less soft thus far in the new quarter than the hotel market?

Tom Giannopoulos

The restaurant market consists of major accounts which is and also a lot of street business because all of North America distribution is restaurants, small restaurants where they are in Boston, Chicago, Dallas and so forth. These are the districts that they manage. So, in those particular districts and areas you have a lot of small restaurant terrace that so far and also the dealers sell through them business at least in the quarter was good but we are concerned about what might happen the rest of this quarter and in 2009. When you look at the hotel business, it's substantial major account hotels whether it's the Marriott or (inaudible) and so forth and that business as of today continues very strong.

Vincent Colicchio – Noble

Okay. All the questions were answered. Thank you.

Operator

Our next question is a follow-up question from the line of Louis [ph] from Delta Partners. Please proceed.

Louis – Delta Partners

Thanks for taking my follow up. Just one last question relating to the hardware market. They started with difficulty [ph] this quarter. Could just talk a little bit more about that, I know you mentioned that – if just you go a little inside and what you guys are thinking about hardware margins going forward?

Peter Rogers

This is Peter. It's just the first quarter's mix issue. It does fluctuate. We have some larger and some major accounts shipments this September quarter with lower margin. The 32% plus is really in the normalized range, I mean last year which was higher that was not sustainable. For the full year, it should be 33% to 35% range.

Louis – Delta Partners

Great. Okay. Thank you.

Operator

At this time, we are not showing further questions. I'll turn the call back to you. Please proceed.

Tom Giannopoulos

Okay. Great. Thank you everybody and we will talk again in January, and good bye. Thanks Jason.

Operator

Ladies and gentlemen, that does conclude the today's conference call. We thank you for your participation and ask that you please disconnect your lines.

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