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MICROS Systems, Inc. (NASDAQ:MCRS)

F4Q09 (Qtr End 06/30/09) Earnings Call

August 27, 2009 4:45 pm ET

Executives

Tom Giannopoulos - Chairman, President and CEO

Peter Rogers, Jr. - EVP, IR and Business Development

Gary Kaufman - EVP, Finance and Administration and CFO

Analysts

Andrey Glukhov - Brean Murray

Daniel Perlin - RBC Capitals Management

Liam Burke - Janney Montgomery Scott

Louie Toma - Delta Partners

Corey Tobin - William Blair

Ross MacMillan - Jeffries

Vincent Colicchio - Noble Fin

Operator

Ladies and gentlemen thank you for standing by. Welcome to the MICROS Systems, Inc Fiscal Year 2009 Fourth Quarter Conference Call. During the 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, August 27, 2009.

I would now like to turn the conference over to Tom Giannopoulos, Chairman and CEO. Please go ahead, sir.

Tom Giannopoulos

Okay. Thank you, George. Good afternoon, everyone, and thank you for being with us today, we are here to review the results of the fourth quarter and of course the end of our fiscal year 2009. With me are Gary Kaufman, Tom Patz, Peter Rogers, and we'll begin with Peter and the disclaimer.

Peter Rogers, Jr.

Good afternoon, Tom. Good afternoon, ladies and gentlemen. Some of the comments today are forward-looking statements that involve risks and uncertainties, such as uncertainties of product demand and market acceptance; the impact of competitive products and pricing on margins; the ability to attain on acceptable terms the right to incorporate MICROS products and services; technologies patented by others; environmental and health-related events, unanticipated 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's expectations. Other risks and uncertainties associated with MICROS's business are identified in the management's discussion analysis of financial conditions, result of operations and business investment risks sections of MICROS SEC filings. Tom?

Tom Giannopoulos

Okay. Thanks, Peter. As we indicated in our press release this afternoon, the fourth quarter results and the fiscal year results were indeed outstanding considering the business environment of the last 12 months.

Looking at the numbers on our press release, the highlights are as follows and I will only talk on a non-GAAP basis. The revenue for the year came in at 911.8 million, when adjusted for the foreign exchange negative impact, the revenue would have been 965.3 million, which is a positive 1.2 growth from last year's 954,184 million. To have a positive growth considering the recessionary times is truly remarkable from our point of view.

Gross margin for the quarter came in at 54%, gross margin for the year was at 53.1%, both these ratios were better than a year ago and both ratios are in essence record for us. Again, a very strong indicator of the half of our business. Gross margin for the hardware was 35.6, for the software 79.8, for service 53.2, all these ratios are at the high end as well.

Operating expenses, again on a non-GAAP basis, the ratios for the quarter – the ratio for the quarter was 34.2, for the year it was 35.4, both these were lowest in many years. Especially when you consider the slightly lower sales that we had.

Operating expenses in terms of dollars for the fiscal year came in at 323,136 million, and I'd say, 21.5 million reductions from last year’s 344, when operating expenses are reconciled on an equal basis versus fiscal year 2008. The reduction was 33.840 million which is a very good figure and as we've discussed with you a number of times.

When the reductions are annualized, expenses for this fiscal year 2010 should be around 300 million plus or minus 10 million and rather below. Still I believe we have room for further improvements on the expenses line.

Income from operations, the net result is that the income from operations for the fiscal year 2009 was better than last year’s, a 161.4 million versus last year's 156.5, a 17.7% of revenue versus 16.4% of revenue that’s extraordinary from our point of view.

Last year, as we all know, was a record year for us in sales and profitability and to be able to improve profitability, again points to the health of our business. Remember this doesn't beat in reduced expectations, this is producing more profit this year than a year ago, while still increase in our investment in R&D and product development.

The further down on the financial statement, the other income line, this is – interest income line was about half of last year’s 7.293 million versus 15.036 million. This is of course the result of lower interest rates on our cash.

Then finally, income before taxes was a 168.7 million, net income of 112.9. Both these figures would have exceeded last year’s performance, if it weren’t for the drop in the interest income line.

Finally, EPS this year of $1.38 versus last year’s $1.37.

As far as cash, our cash position at the end of June improved to 496 million from last March which was 440 million. During this quarter, during the July and August month and we have repurchased over 30 million worth on stock buyback program. So we are very close to the two million shares approved by our Board last February and as a result the Board approved another 2 million shares of – on the stock buyback program.

Overall, our cash position remains very strong. We continue to generate cash every quarter and of course as you know we had minimal debt.

Couple of other metrics, days outstanding improved from 75.8 days in March to [63.0] days at the end of June and from 67.5 days a year ago again to the 63.2 days. The domestic business is at 48%, the international business is at 52%, direct is 95, indirect is at 5%.

I'll ask Gary to give you the additional information on the balance sheet.

Gary Kaufman

Thanks, Tom. The highlights for the quarter and year as follows. MICROS had cash of 496 million at June 30, this is an increase of 56 million over the cash balance at the end of Q3 and an increase of 49 million over the balance of last year-end.

During fiscal year ‘09, we generated $153 million from operating activities while spending 55 million on acquisitions in the corresponding debt assumptions, 13 million on property, plant and equipment and a net of 137 million on short-term investments. Also, we spent 22 million on the repurchase of common stock.

During the fourth quarter, we repurchased 260,000 shares for common stock at a price of 6.8 million. For the entire year, we repurchased 717,800 shares with total price of 18.2 million. In addition, as Tom said, thus far in quarter one repurchased an additional 1.1 million shares at a cost of $30 million. That leads us for the 181,000 shares remaining to purchase on our program number four.

The accounts receivable balance of 157 million is a decrease of approximately 16 million from the March quarter and a decrease of 35 million from June 30, 2008.

DSOs at year end were 63.2 days, a decrease of 13 days from last quarter and a decrease of four days from last year-end. International DSOs were 75 days, down 29 days from our March quarter and down three days from June 2008. Domestic DSOs were 51 days down 4 days from last year-end.

The inventory balance of $40 million is a decrease of $2 million from last quarter and a decrease of $25 million last year-end. The total year decrease is due to both the success of the corporate inventory reduction program and the strengthening of the U.S. dollar. Inventory turns for the fourth quarter were 8.1 turns, the highest in many years.

Deferred service revenue of 112 million is a decrease of approximately 13 million from March. This is the result, of the timing of our international maintenance billing, June and December are the quarters when our deferred revenue decreases. When compared to last year, deferred revenue is down $3 million, this is due to a negative foreign exchange effect of approximately $10 million on the total balance.

Miscellaneous items. Maintenance revenue for the quarter was 80.7 million, an increase of 4.3 million from the March quarter, the total year maintenance revenue was 311.2 million, an increase of approximately 20 million from fiscal year ‘08.

Non-operating income expense for the quarter was a $1.2 million expense. We had $1.1 million net interest income offset by 900,000 of currency loss and a $1.3 million charge for the write down of the auction rate securities.

As far as income taxes for the next year, for fiscal year ‘10, we recommend the use of tax rate of 32.5% for the GAAP numbers and 32.2% for the non-GAAP.

Tom?

Tom Giannopoulos

Okay. Thanks, Gary. In summary, looking back to fiscal year 2009, we had a very strong revenue performance, great results in operating expenses, income from operations and EPS.

In regards to fiscal 2010 and guidance, we will again take the cautiously optimistic approach, we took last year, we will affirm the First Call numbers published as of this morning when I looked at the numbers, they were around 910 million in revenue and around $1.39, $1.40 for EPS.

In regards to fiscal year 2010, some commentary here, we're encouraged by the latest stream of good news regarding the improved business conditions, such as the positive GDP growth in France, Germany and Japan. We’re encouraged by the additional good news, increased factory output, increase consumer confidence, the slowing down of the jobless claims, the big jump in sales of new homes, et cetera.

We are encouraged by the fact that none of our customers have cancelled any ongoing rollouts that we had with them. We are encouraged by the increase we have seen in the last couple of months in the RSP activity for our systems and services. Still, we’re mindful of the fact that the recession in the U.S. is still going on, unemployment continues to rise, but the positive news about – maybe tied to the stimulus spending by the government. We’re mindful of the fact that the economic news very positively or negatively, almost weekly. So as I stated, we will remain cautiously optimistic. If conditions improve, we think we can do better.

George, we’ll take questions now.

Question-and-Answer Session

Operator

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

Andrey Glukhov - Brean Murray

Yes. Thanks for taking the questions. Good Q4 guys. Well, first of all, Tom, can you give us a little bit more color particularly, on what you’re seeing in the hotel business given that some of the RevPAR data continues to see some pressure. So what would you expect in terms of business from new rollouts or upgrades from some of your large existing accounts?

Tom Giannopoulos

The figures in regards to occupancy rates and RevPAR rates are not really exactly what the hotels are expecting or used to, we know that. What we know about our business is the ongoing rollouts that we have with our major customers here in the States, where basically our business was very healthy in the fourth quarter and around the world that business continues.

Initiatives that we have had to get some additional business for the future and not necessarily for this fiscal year, fiscal year 2010, but for the future had slowed down, but in due time we believe those will catch up and we will do the necessary work that we need to do to capture that business and maintain the revenue stream and in that particular segment of our business.

In summary, existing business continues to be healthy. What we need to do further down the road eight months from now to capture the business that has been delayed.

Andrey Glukhov - Brean Murray

Thanks. Then Gary, the maintenance revenue certainly was very healthy in the quarter, looking at the sequential increase, did you guys have any kind of catch up that you recorded in that line?

Gary Kaufman

It was just a normal billing.

Andrey Glukhov - Brean Murray

Okay. Then lastly, Tom, since this is probably going to come up; the First Call consensus right now is $1.48 for 2010, I think you mentioned $1.40 in your commentary. I mean are you comfortable with the actual First Call number?

Gary Kaufman

I noted the numbers yesterday and not at this afternoon, I know it changed a little bit. So we’re comfortable whatever the numbers are –

Andrey Glukhov - Brean Murray

Okay.

Operator

Our next question comes from the line of Dan Perlin from RBC Capitals Management. Please go ahead.

Daniel Perlin - RBC Capitals Management

Thanks and very good quarter. What would be FX impact if we just isolated it for the quarter?

Gary Kaufman

Okay. To talk in the revenue for the quarter, it was 16.9 million.

Daniel Perlin - RBC Capitals Management

Okay. Then, while I have got there, do you give the backlog number? I know you release yearly, but not quarterly?

Gary Kaufman

Yes. The backlog number is roughly 225 million at this point at the end of the year.

Daniel Perlin - RBC Capitals Management

Okay. Then, Tom, last time we met, you made a comment that some of the larger hotels, we’re actually revaluating their internal IT systems and that was giving you the opportunity to start to have discussions with them. Has that trend continued since kind of I guess the middle part of July when you spoke last?

Tom Giannopoulos

The meetings continue full steam ahead, I’m not sure exactly how fast it’s going to – and into additional revenue stream, but the meetings have continued.

Daniel Perlin - RBC Capitals Management

Okay. Then can you update us on what you’re seeing in your street business and you sound pretty encouraged and certainly the numbers would support that. I’m just wondering if you’re starting to see things pickup a little bit or picks not really a noticeable trend here?

Tom Giannopoulos

You wouldn’t really know by – because remember this is a summer month, lot of the purchases were done in the May timeframe as it is. So, I wouldn’t put any creditability on what’s going on. All we know is, from some – from major accounts, the RSP activity has increased.

Daniel Perlin - RBC Capitals Management

Okay. Then I thought I also heard you say in your prepared remarks that you thought, we should be thinking about operating expenses for 2010, in the ballpark of 300 million. I mean, I think you said plus or minus 10 million. Was that right?

Tom Giannopoulos

That’s what I said, yes.

Daniel Perlin - RBC Capitals Management

Okay. I thought I want to make sure. So, do you have a need kind of operating margin target north of 20 now or should we be kind of trying to still mange in that with some of the incremental expenses that you might be thinking about?

Tom Giannopoulos

Let's say, what I have said over and over again is, when business is good the company's target is to be close to 20 and when we get to 20, go beyond that. To the 17.7% that we produced this year is the best that we have produced under very dismal business conditions for anybody to expect to do better than that will not really be fair.

Daniel Perlin - RBC Capitals Management

Got it. Okay. Excellent. Are you guys finding these opportunities from an acquisition standpoint that you wouldn’t have made the otherwise seeing – given some of economic dislocation?

Tom Giannopoulos

I always look at acquisitions, valuations have – are favorably at this particular time, so we’ll see what we can do.

Daniel Perlin - RBC Capitals Management

Okay. Then just a last question. If you were to characterize kind of the strength, would you say you had more strength in your international markets or your U.S. revenues? Then I will hang up, thank you.

Tom Giannopoulos

I would say – well, I can say that the Asia Pacific area was on target versus original budget that we had. EMEA was a little weak for obvious reasons because a lot of those, France and Germany and UK especially affected substantially by the currency exchange and the dollar – the strengthening dollar and also the UK pound. The North American business was sharply on a reconciled basis as well.

Daniel Perlin - RBC Capitals Management

Thank you. Great quarter.

Tom Giannopoulos

So was the South American business.

Daniel Perlin - RBC Capitals Management

Okay.

Tom Giannopoulos

Next?

Operator

Our next question comes from Gil Luria from Wedbush. Please go ahead.

Gil Luria - Wedbush

Yes, Gill Luria. Thank you. First, on the hotel business, the RevPAR has been down a lot up until now on a year-over-year basis, but it seems like the level of activity of hotels rolling out your product has not really slowed down. I think you’re still even growing in that business. What rate of decline in RevPAR for next year do you think? Will you be able to absorb and continue to rollout at the same rate before hotels start being a little more cautious about spending money?

Tom Giannopoulos

You know that decision would have been made by the hotels as we speak. I think, well, we all know that still the recession continues and it will continue over next – next number of months. So quarter one and quarter two, we have to be very careful about it. I think that budgets will come in, in calendar year 2010. I think by that particular time, RevPAR and occupancy rates will have improved.

From our point of view, the existing contracts that we have and the existing rollouts that we have continue very strongly. New hotels are coming in line, especially at the economy-size tops of hotels. So the big decision will be if the economy improves – even in today’s news, in the second quarter, the drop was the smallest in the last 18 months. So if the economy improves, I believe that hotels – I mean the RevPAR will increase and their occupancy rates will increase. The hotels would begin to spend monies on IT projects, but they are delayed at this particular time.

Gil Luria - Wedbush

Then on the restaurant side, I think you’re emphasizing some of your hosted products more. Do you have any big rollouts for hosted products coming up soon?

Tom Giannopoulos

Not really, I mean not big, no. We have – our product -- hosted product on the restaurant side is first of its kind. So a lot of our existing customers and a lot of our new customers are looking at it. We have presentations on this daily. So we’ll see where that leads.

Gil Luria - Wedbush

Last question, your first – I know you’re not guiding for the first quarter. But if you average the last five years, it looks like the first quarter revenue declined 7% or 8% on average. Is that reasonable for us to expect something along those lines for first quarter revenue this year?

Tom Giannopoulos

The number of 7% is very correct, and yes.

Gil Luria - Wedbush

Thank you.

Tom Giannopoulos

The answer is yes.

Operator

Our next question comes from Liam Burke from Janney Montgomery Scott. Please go ahead.

Liam Burke - Janney Montgomery Scott

Thank you. Good afternoon, Tom. Tom, on the – just to touch on the restaurant business again, the previous question was about hosted services. Are there – you mentioned there are no new initiatives on the hotel side. How about on the restaurant side just generally, both outside of the hosted business?

Tom Giannopoulos

I mean the existing business that we have, including the big rollout that we have with a major QSR (inaudible) continues. The street business and the U.S. business, it’s up and down. There is nothing there that is not known to everybody. There is – the project that we have with one other major chain continues very well, and we expect to some appreciable revenue from that entity. The rest of it is basically selling and introducing our product and improving the capability of our products, so that when business returns to normal we’ll have competitive advantage versus our competitors.

Liam Burke - Janney Montgomery Scott

Thank you. On the retail business, how did that do in 2009 as vis-à-vis your expectation?

Tom Giannopoulos

That did pretty well, about 85-thereabouts percent of their budget, which as you will recall the budget for all our businesses a year ago was set before the disaster of the September, October, November timeframe. So we’re happy with their performance to date for last year. Their expectations for this year, fiscal year 2010, include a very small growth, as it does for all our other businesses, as we are cautiously optimistic.

Liam Burke - Janney Montgomery Scott

Thank you.

Operator

Our next question is from [Louie Toma from Delta Partners]. Please go ahead.

Louie Toma - Delta Partners

Hey, guys, nice quarter. I was wondering if you could give us what the pro forma tax rate was for the quarter.

Gary Kaufman

Tax rate for the quarter was 33.2.

Louie Toma - Delta Partners

33.2? Okay. Thank you.

Operator

Our next question comes from Corey Tobin from William Blair. Please go ahead.

Corey Tobin - William Blair

Hi, good afternoon. A quick question on street business one more time, if I could, particularly in the restaurant space. I think last quarter you had talked about that being down fairly substantially. What was the – I guess this quarter, what was the growth or decline on the street restaurant business in the fourth quarter?

Peter Rogers, Jr.

It’s Peter. The fourth quarter, the June quarter, in terms of street restaurant business in North America is probably down around 13, 15%. We’re just still seeing weakness. I mean the restaurant revenue, it was growing in the U.S., up about 2% through July, but restaurateurs across the board, non-major accounts, are still very cautious in terms of upgrading, not on the unit builds. So it’s actually just very uneven. In certain markets, we’re seeing the recovery other ones. But in the June quarter, it’s reflecting some of the drop in (inaudible) probably around 13, 15% in North America.

Corey Tobin - William Blair

All right, great. Then last one if I could. Can you give us any commentary on the linearity in the quarter? I mean did it start off at a particular level on increase or decline as the quarter progressed out? Thanks.

Tom Giannopoulos

From a June quarter, it was normal. April, May and June were 20-20 and – I mean 20-30 and whatever the difference is for June. So that’s normal for us. No, it was not unusual from linearity point of view.

Corey Tobin - William Blair

Okay. Then you’re speaking of revenue or you’re speaking of bookings?

Tom Giannopoulos

I’m speaking about revenue for the quarter.

Corey Tobin - William Blair

Okay. Was there any noticeable uptick in bookings or orders as the quarter progressed that was outside of the normal trend you see?

Tom Giannopoulos

Nothing that we can be excited about basically.

Corey Tobin - William Blair

Excellent. Thank you.

Operator

Our next question comes from Ross MacMillan from Jeffries. Please go ahead.

Ross MacMillan - Jeffries

Thanks. First question on the operating expense commentary, the 300 million plus or minus 10 million. Then I think you said that there were other things that you’re looking at on the cost side. Could you just talk about what are some of the other areas that you think you may be able to reduce costs might be? Thanks.

Tom Giannopoulos

All areas that make up operating expenses line, including reconciling headcount across the board and looking at anything that we purchase from vendors and reconciling those figures and then just eliminating operating expenses. It forces basically – as we all know, it forces management to look at the operating expenses line very carefully and eliminate anything that is not needed or required for our future growth, (inaudible) or minus the investment that we’re doing in product development, which continues on the same basis as before.

Ross MacMillan - Jeffries

I noticed that R&D was up actually sequentially by about a million or so, sort of broke of trend of declining in the prior couple of quarters. Was that in relation to any specific projects or how should we think about R&D? Is that going to be now sequentially growing? Are you adding hedge to that line item? Thanks.

Gary Kaufman

In the current quarter, the fourth quarter, there was a one-time charge of $750,000 for some software that we had developed that we’re not going to need. So we’ve wrote it off. So if you take the 750 out, you’ll be more in line with the other quarters.

Ross MacMillan - Jeffries

That’s great. Then, Tom, just when you comment around IT activity has picked up, is it just a function of the uncertainty on close rates or the sales cycle that makes you kind of (inaudible) to kind of take those into numbers? I’m just trying to reconcile that with the commentary around the sort of 9, 10 million? Do you feel okay with that for fiscal ‘10 in comparison to the RFP activity being up? Thanks.

Tom Giannopoulos

Generally speaking, obviously it’s an indication of things taken up. I mean the economy has been in a bad shape for almost a year now, if not longer, December – some say December of 2007. We hopefully are coming to the end, and there will be some growth, positive growth. So what do we see is some renewed activity. Is that going to translate to immediate business, who knows at this particular time. You still have to go through the process. I think overall, everybody is feeling a little bit better than they did six months ago. Whether this will continue, it still needs to be seen and depends whether you are an optimist or pessimist. We all read the same articles. Our job is to continue to look at every opportunity that exists and do the best that we can to do to get that business and then address our cost structure on an ongoing basis which we’re doing. Whatever happens, happens.

Ross MacMillan - Jeffries

Very good. Thanks a lot.

Operator

Our next question comes from Vincent Colicchio from Noble Fin. Please go ahead.

Vincent Colicchio - Noble Fin

Nice quarter, guys. Tom, did your win rates changed in any measurable way on the restaurant chain side or the retail side in the quarter?

Tom Giannopoulos

I don’t know. It’s very difficult to tell. I mean I’ve discussed with you in the past that the major account restaurants business unit or department had a very good quarter and a very good year. The North America distribution channel, which includes all the various offices that we have in the States, had a good year versus last year, but it didn’t have or it didn’t come very close to the budget numbers that we had. That’s a reflection basically of what we all call street business. Where the individual restaurants are – basically didn’t expand, didn’t open another restaurant or did not purchase any additional equipment because they’re struggling to make a profit themselves. So, I can’t – it’s not an exact science here.

Vincent Colicchio - Noble Fin

And, Gary, could you breakout interest income and interest expense?

Gary Kaufman

Yes. Let’s see, interest income for the quarter was 1.167 million, interest expense was 77,000 for the year; interest income was 8.682 million and interest expense was 894,000.

Vincent Colicchio - Noble Fin

Thank you. My other questions are answered. Thanks, guys.

Operator

(Operator Instructions)

Tom Giannopoulos

Okay. George, anything else?

Operator

There are no further questions.

Tom Giannopoulos

Okay. Thank you everyone and we’ll talk to you again in October. Thank you. Bye, bye.

Operator

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

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