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Executives

A.L. Giannopoulos – Chairman, President, Chief Executive Officer

Gary C. Kaufman – Chief Financial Officer

Thomas L. Patz – General Counsel

Peter J. Rogers, Jr. – Executive Vice President, Investor Relations and Business Development

Analysts

Andrey Glukhov - Brean Murray, Carret & Co.

Louis Tomas - Delta Partners

Gil Luria – Wedbush Morgan Securities Inc.

Brad Reback – Oppenheimer & Co.

Ross Macmillan – Jefferies & Co.

Corey Tobin - William Blair & Company

Brian Murphy - Sidoti & Company

MICROS Systems, Inc. (MCRS) F2Q09 Earnings Call February 5, 2009 4:45 PM ET

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the fiscal year 2009 second quarter conference call. (Operator Instructions) I would now like to turn the conference over to Tom Giannopoulos, Chairman and Chief Executive Officer. Please go ahead, sir.

A.L. Giannopoulos

Thanks, Mike and good afternoon, everyone and thank you for being with us as we are here to review the financial results for our December quarter. That’s quarter 2 of our fiscal year 2009. As always with me are Gary Kaufman, Tom Patz, and Peter Rogers and we will begin with Peter and the disclaimer. Peter?

Peter J. Rogers, Jr.

Thank you, Tom. Good afternoon, ladies and gentlemen.

Some of the comments today are forward-looking statements that involve risks and uncertainties such as uncertainties on product demand and market acceptance, impact of competitive products and pricing on margins, the ability to obtain acceptable terms, the right to incorporate on MICROS products and service technology patented by others, benefits and tax liabilities and the effects of terrorist activity and armed conflict.

MICROS undertakes 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 discussion analysis, the financial conditions result of operations and business investment risks section of MICROS’ SEC filings.

Tom?

A.L. Giannopoulos

Thank you, Peter. Hopefully, you have a copy of our press release this afternoon. The financial results for the quarter were very much inline with our expectations. Considering the present economic conditions on the world, we were very pleased with the results for the quarter and year-to-date. So if we go down the line on the press release and start with the revenue.

To properly compare the Q2 revenue of $237.934 million with last year’s $243.952 million, we need to add to the $237.934 million about $17.758 million which represents the negative effect of the strengthening of the dollar versus other global currencies including the Euro, U.K. pound, etc. This adjustment would make the second quarter revenue $255.692 million, a 4.8% increase over last year’s $243.952 million. A 4.8% increase in today’s environment is huge from our point of view.

The same currency adjustment would make the year-to-date revenue for the first six months, $497.323 million, an 8% increase over last year’s $460.434 million and of course, the 8% growth for the first six months is spectacular as well.

The rest of the numbers for the quarter and year-to-date are excellent as well. For the December quarter, gross margin came in at 53.2% at $126 million, an improvement over last year’s 51.9%. Year-to-date, gross margin is at 52.4% versus 52.1% last year. The hardware margin was at 38.1% versus 34% last year. The software margin was at 81.4% versus 78.6% last year and the service margin was 53.2% versus 51.9% last year. These gross margin ratios are excellent and indicative of the fact that we’re not discounting to get the business.

Our operating expenses ratios for the quarter and six months improved as well to 35.4% and 35% respectively. As we have stated a number of times, we continue to manage expenses, discretionary and undiscretionary expenses, headcount, etc, mindful of the recessionary economies that we operate in.

The operating profit for the quarter was $43.312 million. This is non-GAAP operating profit or 18.2% of revenue, a very nice improvement over last year’s 16.1% and a 10% increase over last year’s $39.380 million. The 18.2% ratio is the best for the December quarter for a long time if not ever.

Net income for the quarter increased 6.3% and 10% over last year’s quarter and year-to-date numbers. An EPS increase from $0.34 to $0.37 which is an 8.82% increase and for the six months, EPS again without, on a non-GAAP basis increased from 63% to $0.71 which is a 12.7% increase. Of course, all of these numbers do not include the negative impact of the dollar strengthening in the past few months.

Considering the dismal business conditions, these are spectacular results and a great testament of the quality of our employees, the quality of our products, and the great relationships that we have with our customers. An interesting point to calibrate everybody regarding business around the world, the North American business channels show revenue and profitability improvement over last year’s numbers for the quarter and the six months. The same can be said about the Asia-Pacific region and South America region as well. Both showed revenue and profitability improvement over last year’s numbers as well. In the Europe and Middle East region on a Euro basis, the same thing can be said for improvement on both the revenue and the profitability in local currencies in the countries that they operate.

In other words, unlike other companies who have had small or large declines in revenue and net income, we have had positive revenue and net income across the board and hopefully, we can continue to do the same for the rest of the fiscal year.

Some additional numbers: days outstanding for the quarter was 66.1 days, a very nice improvement over September’s which was 74.9 days. Total cash and investments increased from $391 million in September to $399 million in December. These numbers do not include $5 million we spent on the stock buyback program in the quarter and $31 million which is negative impact as a result of translation.

I’ll ask Gary to give you the additional information.

Gary C. Kaufman

Thanks, Tom. The highlights of the December 31 balance sheet as they appear on the statement, it shows the cash is $391 million compared to $388 million at September 30, an increase of $3 million. During fiscal year 2009, we generated $54 million from operating activities while spending $8.6 million on property, plant and equipment, approximately $50 million for the acquisition of Fry, and $15 million for the repurchase of common stock. During the quarter, we purchased 248,000 shares for a total price of $5.1 million. As of today, there are 1.5 million shares remaining to be purchased under Plan 4.

The cash balance was also decreased by approximately $31 million due to the changes in the foreign exchange rate. Accounts receivable balance of $174 million is a decrease of approximately $18 million from June 30 and $29 million from September 30.

Days sales outstanding, as Tom said, as of December 31 were 66.1 days, a decrease of 9 days from the September quarter. Domestic DSOs were 51.8 days, a decrease of 4 days from the prior quarter. International DSOs were 81.4 days, down 13 days from September 30.

The inventory balance of $48 million is a decrease of $5 million from September 30 and a decrease of $17 million from prior year-end. The decrease is due to a corporate plan, inventory reduction program and the strengthening of the U.S. dollar. Inventory turns for the quarter were 7.6 turns, an increase of 0.3 turns from September.

Preferred revenue of $92 million is a decrease of $30 million from last quarter. This is the result of the timing of our international maintenance billing. June and December are the quarters when our deferred revenue balance decreases. Maintenance revenue for the quarter was $76 million, a decrease of $2.1 million from last quarter. The decrease is due to the change in the foreign exchange rates for the U.S. dollar versus other foreign currencies.

Non-operating income for the quarter was $2.2 million consisting primarily of $2.5 million of interest income offset by $300,000 of miscellaneous expenses. With regards to taxes for forecasting purposes, I suggest you use 33% for the total year for non-GAAP and 34% for GAAP.

Tom?

A.L. Giannopoulos

In summary, we know that business conditions are not good. We again will not give any guidance for Q3 or the rest of the year. It just doesn’t make any sense to do so. I can assure you we are working 24 hours a day, 7 days a week addressing the challenges that are presented to us. Our goal remains to maximize the revenue and net income lines whatever they are. We’re fortunate to have a strong balance sheet with plenty of cash, continuing positive cash flow and no debt. Times are difficult but it’s not the end of the world. Hopefully we’ll see some positive changes soon. Mike will take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Andrey Glukhov from Brean Murray. Please go ahead.

Andrey Glukhov - Brean Murray, Carret & Co.

First of all, Tom, the hardware margin, the hardware gross margin was excellent. Can you maybe elaborate what drove the strength in the quarter?

A.L. Giannopoulos

It was basically due to the mix both in channels and the type of products that we sold and then we got a couple of good deals out of it, also. Nothing other than that it’s probably higher than it will be in future quarters.

Andrey Glukhov - Brean Murray, Carret & Co.

It looked like, you did a nice job managing expenses and defending operating margins. How much slack is still left? You’ve been sort of watching the expenses for about three full quarters now and trying to take out the slack so how much is left?

A.L. Giannopoulos

Slack? We continue to, in this environment, we obviously continue to manage expenses, all lines of it. We’re looking at resources that are not critical to our immediate, future success. We’re addressing all expenses. There is room to be had when you have 18.2% operating margin in a difficult revenue quarter that’s spectacular so we’ll continue to watch expenses some more and hopefully we can get operating margins higher if our revenue stream stays the way it is.

Andrey Glukhov - Brean Murray, Carret & Co.

I guess, lastly, do you have the breakdown between domestic and international revenue and on that note, when you talked about geographies that were healthy; you did not talk about Europe. So maybe you can talk about the trends there versus what you’ve seen in North America.

A.L. Giannopoulos

Okay, the mix is North America was at 51.4% for the quarter and international was 48.6%. The trends, I don’t think that there’s anything different in trends between the various regions. The area that we always watch, that is always concerning of us as I said a number of times is street business, whether it is street business in North America or in Europe, the individual restaurateurs and so forth. If you see, the fact that we don’t have the growth that we plan for back in the August time frame, it’s because substantially the street business is not where we would like them to be or where we planned it to be. The rest of the business as of now is status quo and healthy.

Operator

Our next question comes from the line of Louis Tomas from Delta Partners. Please go ahead.

Louis Tomas - Delta Partners

I was just wondering, I think relating to the Fry acquisition, you guys made that about mid-quarter in the September quarter. I think you said on the last call, it added about $5 million to revenues. Is it fair to imply that contributed about $10 million this quarter?

A.L. Giannopoulos

On the October conference call, we said that Fry, dependent on the time frame that we acquired them; it would contribute about $30 million in the fiscal year. You can divide that by 3.5 and you can get the contributions of that on a quarterly basis.

Louis Tomas - Delta Partners

Okay, so about $8.5 million?

A.L. Giannopoulos

Right.

Louis Tomas - Delta Partners

Your margins look pretty good. What are your expectations going forward? I know you made the comment that you expect your hardware margins to be lower in future quarters.

A.L. Giannopoulos

Our gross margins, we’ll continue to keep them around the 52% area and that’s healthy and that’s very good. It varies because one quarter we may have good software versus hardware and so forth. But overall we have said, as a company, we would like our gross margins to be in the 50%-51%, anything that is about 52% is very good and it’s excellent and everybody should be happy with that number.

Louis Tomas - Delta Partners

What are you guys think about this quarter? We’re a little of a third of the way through the quarter. What do you guys see given the environment?

A.L. Giannopoulos

That’s asking me to give you guidance.

Louis Tomas - Delta Partners

It’s more not necessarily guidance but what you see?

A.L. Giannopoulos

I don’t know. I would hope we have about $482 million year-to-date for the first six months. There are analysts that have us at $944-$945 million. There are analysts that have us at $959-$960 million. If we can do something between $460-$480 million for the second half of the year assuming the present dire conditions from my point of view, I think we would have done very, very well. Keeping our profitability as it is, we would have done very, very well and everybody should be happy with those results.

Louis Tomas - Delta Partners

Just the last question, your inventories were a little bit year-over-year. Anything driving that, I know you referred to that a little bit on your commentary. Can you give a little bit more detail on what is driving that and what can you expect going forward?

A.L. Giannopoulos

The inventories will continue to decrease and like I said, they are down about $18 million since June. So they’re headed in the right direction.

Operator

The next question comes from the line of Gil Luria from Wedbush. Please go ahead.

Gil Luria – Wedbush Morgan Securities Inc.

Can you tell us, even on a relative basis, the comparison between the hotel business and the restaurant business? I know last time you called out that large hotel accounts in the U.S. had a very good quarter. Was there a continuation of that in the December quarter or can you carve it out by any other way that can give us a little bit of clarity on the relative performance between those two businesses?

A.L. Giannopoulos

If you compare now with last year, not compare with budgets or whatever, the restaurant business was up from last year, and I’m talking about six months year-to-date. The hotel business, and I’m talking about the hotel business units which is indicative because a lot of the hotel and restaurant revenue is also embedded in the regions, North America, South America, India, and AP. But the business units, the hotel, continue to be, we had a very nice increase from last year, almost like a 30% increase in the numbers from last year. It’s indicative that the accounts that we have in the hotel sector deploy all of our products in the major accounts or other accounts continue and we have not seen any disruption of those. When we look at the numbers and we compare them with last year and that’s the point that I try to make regarding North America, South America, we’ve seen positive gains in revenue. If the dollar to the other currencies hasn’t negatively impacted the division, we would have had a very nice increase.

Gil Luria – Wedbush Morgan Securities Inc.

Just another quick question. Apart from Fry’s, did you acquire anything else, anything small, any distributors in the last 3-6 months?

A.L. Giannopoulos

No, we have not done any acquisitions other than Fry.

Operator

The next question comes from the line of Brad Reback from Oppenheimer. Please go ahead.

Brad Reback – Oppenheimer & Co.

Tom, quick question as it relates to the structure of the business and the margin profile. You go back to the last cycle of 2001, 2002; this was a business that went from fairly profitable to just about break-even. What’s your expectation as it relates to margins this go-around without getting specific? I don’t want you to give us guidance but maybe you can help us understand the inherent profitability of the business going forward versus last cycle.

A.L. Giannopoulos

In general terms, if you look at our operating expenses and our break-even point, we were like in the $150 million so we have to get down to $150 million, below $150 million in revenue to have the same impact say as we did in 2001. We don’t see that happening. The concern is that we’re going to hit zero profitability because our business is all-together different and much larger than 2001. It would have to be a very catastrophic environment before we get to that particular level. Our goal is to, hold on just a second. Our goal is to beat your numbers.

Brad Reback – Oppenheimer & Co.

Talking about that, given Gary’s comment around the hardware margin in the quarter and the fact that it looks like the back half given currency in the macro environment will be lower than the front half, is it also safe to assume that $0.37 is likely the high water mark for quarterly EPS this year?

A.L. Giannopoulos

No, I’m not sure about the fourth quarter. I wouldn’t say that about the fourth quarter. Our goal really, if you look at the analyst and if you look at everybody, you’re the lowest guy at $946 million and our goal is to beat that number, to beat it substantially, but don’t raise your numbers, please.

Operator

The next question comes from the line of Ross Macmillan from Jefferies. Please go ahead.

Ross Macmillan – Jefferies & Co.

Tom, if I look at the last cycle, your hardware and software revenue excluding services and maintenance declined about 30% from peak to trough. That’s a much more severe decline than what I think you’re indicating today. I guess the question is, why is this cycle going to be so much better and then secondly, I just, as I’m sure you did, I know it’s a customer, but I listened to Starwood last week and they’re cutting their IT budget in half and see rev parks in the mid-20% decline range in January. It strikes me that the hotel business could still see further deterioration ahead of us. I’m just curious that it didn’t get jointed off here especially given your comments of expected positive revenue growth through the back half of the year.

A.L. Giannopoulos

Let’s start with the question first. You can look at the world different ways. If they’re cutting IT staff, it’s a great opportunity for us to go in there and take over certain things and increase revenue streams. What’s not good for you is good for somebody else. So that’s a positive indicator for us and it happens to others as well around us. Lots of companies have decreased staff. I just came from a trip and talking to various customers, so you can see that as a positive for us. The first part of the question was when you talk about in 2001 versus today or what?

Ross Macmillan – Jefferies & Co.

No, I did the peak numbers on a trailing 12-month basis. I think the peak was sometime in, on a trailing 12-mmnth basis in 2000 and then dropped out in ’01. But it was a 30% decline. I think the numbers that I am looking at now are more like 10% on the cycle. I understand that OPERA is a game-changing product in the market and perhaps we also have a more immediate need to upgrade older systems from the late ‘90s. I’m just trying to understand the points that make it different this time around.

A.L. Giannopoulos

This time around, we have much larger customers and rollouts happen and are scheduled to happen. We have a lot more products to sell to all of the segments of the business that we deal with. We haven’t seen a disruption or a dislocation or a delay of those rollouts so they will continue. That’s the only thing that I can say at this particular time. We’re hustling more than ever without really jeopardizing the business, the future of the business by discounting just to get a particular job to make the revenue number.

Operator

Our next question comes from the line of Corey Tobin with William Blair. Please go ahead.

Corey Tobin - William Blair & Company

A couple of things. The foreign exchange you talk about on the top line, what’s the impact of the operating income from foreign exchange?

Gary C. Kaufman

For the quarter, operating income was $2.5 million.

Corey Tobin - William Blair & Company

A $2.5 million benefit?

Gary C. Kaufman

No, negative.

Corey Tobin - William Blair & Company

Negative, due to the foreign exchange.

A.L. Giannopoulos

So that everybody understands, net income and EPS would have been higher if the bankers that you guys work for didn’t screw up the world.

Gary C. Kaufman

Cory, did you say net income or operating income?

Corey Tobin - William Blair & Company

I was asking operating.

Gary C. Kaufman

Operating’s $2.5 million, net income is $2.2 million.

A.L. Giannopoulos

We’re getting nothing for investing our millions that we have.

Gary C. Kaufman

Right, $399 million, we’re not making anything then.

Corey Tobin - William Blair & Company

But I was talking about the foreign exchange impact on the overall P&L, that’s what the $2.5 million is, right?

Gary C. Kaufman

Yes.

Corey Tobin - William Blair & Company

Next question just relates to the maintenance stream, can you comment on the attrition levels within the customer base in the maintenance? Are you seeing, what is the current or what is your typical attrition level that you’ll see both in hotels and restaurants? Is there an uptick at all?

A.L. Giannopoulos

We’re not seeing very much. There is pressure on us and there has been pressure on us and we’ve had meetings with customers asking us to reduce the rates or whatever it is, the total amount of maintenance for the calendar year 2009. Customers would say can you help us out; they’re obviously looking at all their vendors. In some cases and in many cases, we are doing that. We have found that. I think we did a similar type of thing in 2001 and these particular customers remember it three or four years later. So that’s my message. We’re helping our customers out and at the end of the day, they remember it. But it’s not significant.

Corey Tobin - William Blair & Company

Do you see outside of foreign exchange, staying on maintenance for a second, a lot of us look at that as recurring revenue, do you see a reason why that would tick down given some attrition and maybe some pressure, but there are new adds for new customers coming on, outside of foreign exchange, is there any reason to believe that that would tick down sequentially in any quarter?

A.L. Giannopoulos

We don’t see that.

Corey Tobin - William Blair & Company

Last one if I could, talking about the retail business, can you comment on the retail business and any trends you might be seeing there?

A.L. Giannopoulos

Retail business is not any better than the other business that we address. You know the combination of the various businesses that we manage for the quarter and year-to-date has been we’ve seen a very nice improvement. We don’t really know exactly what’s going to happen in the March quarter and also the June quarter as a result of the disastrous Christmas season and everything else that we read on the retail sector. So far, so good for us.

Corey Tobin - William Blair & Company

So you haven’t seen a March slowdown in that segment or at least more so than the other segments?

A.L. Giannopoulos

No. We’ve kind of supplemented a little bit with the acquisition of Fry so overall as total numbers, they’re doing okay.

Operator

The next question comes from the line of Brian Murphy from Sidoti & Company. Please go ahead.

Brian Murphy - Sidoti & Company

Tom, I think as of the last call, you said that you had only seen one scheduled deployment canceled or pushed out in the hotel space. Any change there in, any update in the rift there given what’s happened in hotels?

A.L. Giannopoulos

Honestly, no changes, whatsoever. None.

Brian Murphy - Sidoti & Company

Any sort of changes in the relative strength or weakness in your business in sort of quick-serve restaurants versus table-serve?

A.L. Giannopoulos

Quick-service, we obviously have had a couple major customers and those will continue at high speed, the rollouts and so forth, there are no delays there. The table service restaurant is here and there. Some of it is street business which I talked about before in the beginning of this conference call. The rest of the table service customers are, as we know, are struggling and that’s reflected in our numbers for the year-to-date and the future. Otherwise, we would be making $1.1 billion that we promised in the beginning of the year.

Brian Murphy - Sidoti & Company

Sort of just in the face of these declines in hardware and software, and I know maintenance is a large percentage of the service line, what’s the source of the relative strength of the service line there and do you expect that to continue throughout the year?

A.L. Giannopoulos

We talked about this before in the previous question. We don’t see the service line maintenance revenue being reduced substantially. Most of the contracts have been signed for calendar year 2009 now, the majority of them. So other than some concessions in agreeing to a reduction to help our customers out, we don’t see a major impact or a major change.

Operator

There are no further questions at this time, sir. I now turn the call back to you.

A.L. Giannopoulos

Thank you very much, everyone. It’s difficult times for all of us and like I said, hopefully, things will improve soon. Thank you very much. We’ll talk to you again in April. Thank you, Mike.

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Source: MICROS Systems, Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
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