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MICROS Systems, Inc. (NASDAQ:MCRS)

F1Q10 (Qtr End 09/30/09) Earnings Call Transcript

October 29, 2009 4:45 pm ET

Executives

Tom Giannopoulos – Chairman, President and CEO

Peter Rogers – EVP, IR and Business Development

Gary Kaufman – EVP, Finance & Administration, and CFO

Analysts

Mayank Tandon – Signal Hill

Corey Tobin – William Blair & Co.

Joe Laurette [ph] – Wedbush

Terry Tillman – Raymond James

Ross MacMillan – Jefferies

Dan Perlin – RBC Capitals

Liam Burke – Janney Montgomery Scott

Brad Reback – Oppenheimer

Brian Murphy – Sidoti & Co.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the fiscal year 2010 first 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 today Thursday, October 29th of 2009.

It is now my pleasure to turn the conference over to Mr. Tom Giannopoulos, Chairman and CEO. Please go ahead, sir.

Tom Giannopoulos

Thanks, Shanna, and good afternoon, everyone, and thank you for being with us today. Again this is the conference call for the financial results for quarter one, September quarter of fiscal year 2010. As always with me are Gary Kaufman, Tom Patz, Peter Rogers, and we'll begin with Peter and his new disclaimer.

Peter Rogers

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 in 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 and analysis of financial condition and results of operations and businesses risks, investment risks sections of MICROS SEC filings. Tom?

Tom Giannopoulos

Okay. Thanks, Peter. Looking at the financial results for the quarter shown in our press release this afternoon, other than the revenue line which is compared to a record number from last year’s September quarter, the rest of the results are excellent. Even the revenue line of $212.473 million was one better than our own budgeted number. And number two, when adjusted for the Euro and UK Pound versus the Dollar, this year’s rate versus last year’s rate, the real difference is minimum.

The rest of the financial results are gross margin for the quarter came in at 54.8%, which is an all-time record for us, obviously a very good indicator. In the expenses, the R&D figure of $10.869 million was higher than last year’s $10.363 million consistent with our strategy of continuing to invest in product and services for the future, even in these difficult times.

Total operating expenses were at $77.089 million. These are all non-GAAP numbers excluding the stock option expense. And this number of $77 million was $10 million less than the year ago, again consistent with our strategy. We had a record operating profit of $39.423 million, an 18.6% versus revenue – versus last year’s $38.318 million which was up 15.7%.

The rest of the financial results down the line there, income before taxes at $40.467 million or 19% of revenue, a record number; net income of $27.267 million 12.83% ratio, again a record; and finally EPS of $0.34 for the quarter which was equal to last year’s $0.34 EPS as well.

Additionally, during the quarter, we generated another $50 million of cash, $30 million of which we used to buy back around 1.1 million shares during the September quarter. As a result, our cash now is at $525 million up from $501 million last June, still we continue to have practically no debt. Days outstanding were at 72.2 days lower than last year’s 74.9 days, and again a record low number for the September quarter as well.

Some additional information of interest, domestic versus international revenue, the ratio now is at 47% domestic and 53% international. The international operations, this is EME, Asia Pacific and South America, all exceeded their budgeted numbers both in revenue and IBT. Hopefully, this is a good sign that these regions are coming out of recession ahead of US, or in the case of Asia Pacific, they are growing a bit faster than what they had planned few months back.

In North America, profitability was higher. Revenue was off small amount from our budgeted numbers. And the retail business exceeded both revenue and profit budget numbers as well.

And I will ask Gary to give you some of the financial information.

Gary Kaufman

Thanks, Tom. The highlights of the balance sheet are as follows. MICROS had $525 million of cash at September 30th, an increase of $28 million from the June 30 year-end balance. During the quarter, we generated $42 million from operating activities, while spending $1.7 million on property, plant and equipment and net of $10 million on short-term investments and $30 million on the repurchase of common stock.

During the quarter, we purchased 1.1 million shares of common stock for the $30 million. Currently we have Board approvals to purchase an additional 2.2 million shares. During the quarter, we also received $4.9 million from the exercise of stock options along with the corresponding tax benefit of $2.2 million.

The accounts receivable balance of $170 million is an increase of $13 million from June 30th. Days sales outstanding at September 30th were 72.2 days, an increase of 9 days from last quarter. International DSOs were 93.2 days, an increase of 18 days from June. The primary reason for this increase was due to the timing of the international maintenance billing, a large percent of the July 1st billings were not collected as of September 30th. Domestic DSOs remains the same as last quarter at 51 days.

The inventory balance of $38 million is a decrease of $2 million from last quarter. The decrease is due to the continued success of the corporate inventory reduction program. Inventory turns for the quarter were 7.7 turns down from 8.1 turns last quarter. Deferred revenue of $142 million is an increase of $30 million from June 30th. The increase is due mainly to the timing of our international maintenance billing, September and March are the two quarters on our deferred revenue increases.

Maintenance revenue for the quarter was $85.4 million, an increase of $4.7 million over last quarter. Non-operating income for the quarter was approximately $700,000. Net interest income was $1.1 million. This was partially offset by the write-off of approximately $400,000 for the impairment of auction rate securities. And looking forward, income taxes forecast for the remainder of the fiscal year ’10 is 33% for GAAP and 32.5% for non-GAAP. Tom.

Tom Giannopoulos

Thank you, Gary. In summary, under weak, poor or static business conditions, take your pick, we had a very, very good quarter, a record gross margin, record income from operations from percentage point of view and better in total dollars from last year, record EPS for the September quarter, cash now stands at $525 million, which is a record number as well. Thank you MICROS employees and clients worldwide.

When business conditions around the world improve, we will be in a very good strong position for the future. In the meantime, and as we have stated in previous conference calls, we will continue to make the company more efficient, continue to invest heavily in new products and services, we believe our approach will pay big dividends when business conditions improve and revenue growth returns to normal again.

As far as guidance is concerned, we will stay with the guidance we gave you in our conference last August, which was revenue at around $910 million for the fiscal year, which ends in June of course and EPS of $1.39 to $1.40 for the fiscal year as well.

To change our guidance at this time, will not make any sense. We are aware that there are some published numbers revenue and EPS which are much higher than our guidance, we believe these numbers to be very optimistic. Presumably, they are based on substantial and sustained economic turnaround which is not evident to us at this particular time.

And Shanna, we will take questions now, please.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Mayank Tandon with Signal Hill. Please go ahead.

Mayank Tandon – Signal Hill

Thank you, good evening. Tom just wanted to get a sense from you on the software and hardware side. Clearly, you had a pretty big drop-off quarter-over-quarter from the fourth quarter. Wanted to get a sense if that maybe now signaling a bottoming for you, and if you can grow off these levels as you enter a more seasonally strong period?

Peter Rogers

Mayank, it’s Peter. In terms of the software revenue, I think as we look into some of the out quarters, it will increase a bit the next couple of quarters then probably hopefully and the spring starts to pickup, because Tom said that we are not seeing a strong sign of any recovery yet. So I am not looking for a big jump off in the coming quarters on software.

Mayank Tandon – Signal Hill

Would you say the drop-off from the fourth quarter was purely seasonal or were there other factors involved that may also be something to consider as we model out?

Tom Giannopoulos

It’s purely seasonal for a summer quarter. That’s normal to have a drop from the June quarter to the September quarter.

Mayank Tandon – Signal Hill

Great. And Tom, you also mentioned that you are seeing and at least some signs of stabilization if nothing else. Are clients starting to talk about a budget flush or at least in terms of spending priorities for next year, would that give you some confidence that maybe you will start to see an uptick sooner than you would have expected maybe several months ago?

Tom Giannopoulos

That’s a very difficult question to answer. From my point of view, nothing has changed from three or four months ago. Budget times are coming obviously for fiscal – for calendar year 2010 for most of our customers. As I indicated in our August conference call, there is appreciably more dialog between ourselves and either existing customers or potential customers, hopefully will translate to something sometime soon.

Mayank Tandon – Signal Hill

Not to nitpick, but just – have you seen any kind of improvement on a month-to-month basis as you went through this quarter?

Tom Giannopoulos

Not really, no.

Mayank Tandon – Signal Hill

Okay. And then just I wanted to ask you also about renewal activity, just as you back to customers and they decide to renew, what kind of pricing trends are you seeing, and also maybe if you could comment on competition?

Tom Giannopoulos

The renewals are normal. The pricing, obviously there is always a pressure on pricing. And from a competition perspective, when you have a fewer number of opportunities available, then competition is more fierce than it would have been any other time. So all of the above basically apply, and so that’s why it’s recessionary time, and we need to be very careful about what we do.

Mayank Tandon – Signal Hill

Is the pricing degradation worsening or has that at least stabilized?

Tom Giannopoulos

It’s not worsening as evidenced by our gross margin. But they – this – like anything else in difficult times, the competition and the available opportunities are less, and we will handle each opportunities that we have appropriately. In certain cases, we will just not going to degrade our business model, we just go out there and get a business, which is not profitable for us.

Mayank Tandon – Signal Hill

Great. Thank you, that’s helpful.

Operator

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

Corey Tobin – William Blair & Co.

Hi, good afternoon. Two quick ones if I could, first a housekeeping question. Gary, could you just repeat what you said regarding the tax rate?

Gary Kaufman

Yes, it’s going to be 33% for the year on GAAP and 32.5% on non-GAAP.

Corey Tobin – William Blair & Co.

Okay. And then, Tom, just to your prepared remarks if I could, I thought I heard it correctly you said that basically the US business was quite good in the retail space. What was it – what were the comments regarding the other parts of the US business? Did I hear it right when you said the revenue was lower than expected overall?

Tom Giannopoulos

Yes, for the North America business, yes, the revenue – the profitability was higher, it’s unbudgeted and revenue was slightly off than budget. That does not include the retail business which is separate. This includes basically restaurants, hotels, the L&E business units, and the small acquisitions that we have in the hospitality sector.

Corey Tobin – William Blair & Co.

And you mentioned in the past that that street business has been the area that’s most volatile in terms of in recent quarters. Is this still the case, and then would you say that business has bottomed at this point specifically I am referring to the street restaurant business?

Tom Giannopoulos

Obviously, and the primarily reason that the North America business is off from a revenue perspective versus budget is the street business. I wish I had the right glasses to know whether it’s bottom or not.

Corey Tobin – William Blair & Co.

Okay, great, thank you.

Tom Giannopoulos

(inaudible) GDP growing at 3 point something percent will change things.

Corey Tobin – William Blair & Co.

So is the – I guess final one on this point, it was the street business as you look at it up, flat or down versus the June quarter. And I would assume we – you would expect to see it down just because of the seasonality. Is that correct, you expect to see it down and how exactly did it come in versus June quarter?

Tom Giannopoulos

It was down versus the June quarter for sure. It was down versus a year ago as well. And I am not – I don’t know that it will be done quarter-to-quarter in the December quarter.

Corey Tobin – William Blair & Co.

Okay, great, thank you.

Operator

Thank you. Our next question comes from the line of Joe Laurette [ph] with Wedbush. Please go ahead.

Joe Laurette – Wedbush

Thank you, Joe Laurette. Thanks for taking my question. On your hotel business in your last fiscal year grew – grew – even this thing grew while RevPAR for hotels was down high teens. Now that RevPAR is starting to decline at least at slower rates, is that business still on a global basis still growing?

Tom Giannopoulos

For the first quarter, it was flat from a year ago. However, from an overall business perspective, yes, last year we had a very good year. It grew year-to-year even in that difficult environment. This year we have budgeted for the same number that we had budgeted last year. We didn’t anticipate any growth. The only thing I can say is the existing accounts that we are working with. We are continuing to – to rollout all on properties and so forth on co-plan, so the – our hope was and our hope remains to have the same volume of business this fiscal year than we had last year. And if that goal is accomplished, it would be a fantastic success.

Joe Laurette – Wedbush

Can you tell us what specifically was the currency impact on revenue this quarter?

Gary Kaufman

The currency impact was flat – about $10 million.

Joe Laurette – Wedbush

And then in terms of operating expenses, $77 million, up a little bit from the fourth fiscal quarter. If you want to update what the guidance – your guidance is for the year, I think last time you said $300 million plus or minus $10 million. Do you expect now to be maybe on the higher end of that given this current run rate?

Tom Giannopoulos

Well, the current run rate is it translates to $308 million. If you add my $10 million – when I talked about $300 million plus or minus $10 million, you are talking about $318 million plus or minus. And that’s what I would – if I were working on a business model, that’s the number that I would be using.

Joe Laurette – Wedbush

$318 million plus or minus $10 million.

Tom Giannopoulos

No, $318 million plus or minus – $304 million. Not $10 million from the $318 million.

Joe Laurette – Wedbush

Got it. And then maybe just – I want to clarify in the last conference call, I think Andre asked you if you are comfortable with earnings per share consensus of $1.48, and I think you said yes. Was that a misunderstanding or were you just caught a little off-guard?

Tom Giannopoulos

No, it was a huge misunderstanding. I said $1.39 was the guidance. He said, if the conditions improve and so forth, would you be comfortable with $1.48, and I said yes. If the conditions improve, of course, it would be, because it makes sense at that particular time based on the revenue and the R&D expenses and so forth. There is always a big “if” which you guys tend to disregard and that is business conditions improving. And business conditions have not improved really.

Joe Laurette – Wedbush

Got it. Thank you, Tom.

Tom Giannopoulos

Thank you.

Operator

Thank you. Our next question comes from the line of Terry Tillman with Raymond James. Please go ahead.

Terry Tillman – Raymond James

All of our questions have been answered. Thanks.

Operator

Thank you. We will proceed to the next question. And it comes from the line of Ross MacMillan with Jefferies. Please go ahead.

Ross MacMillan – Jefferies

Thank you. On maintenance, you saw a very nice sequential increase this quarter, I think 6%, which I assume is partly reflecting the two year ago hardware sales. So I guess the question I had is, now that we are at this higher level, as we think about maintenance growth this year – last year grew 7%, is that a similar type of growth rate we should think about, because it is starting the year at a higher growth rate, so I guess I am just trying to think about how to model maintenance this year? Thanks.

Tom Giannopoulos

Ross, the way I model maintenance, I mean, first we have a very large base, so you take into account currency. But looking back for several years, I would probably add about $2 million per quarter is probably a good way to model that. The Q that number does raise overtime, there maybe a couple of adjustments. So that’s probably a good way to model Q1 plus $2 million a quarter.

Ross MacMillan – Jefferies

Okay. And then just on – just going back to guidance, I guess I want to be clear $910 million on revenue, $1.39 to $1.40 – and so the expense the OpEx, pre stock-based comp before was $300 million plus or minus $10 million, we should now think of more $318 million for that number for the year plus or minus $3 million or $4 million?

Tom Giannopoulos

Yes.

Ross MacMillan – Jefferies

Great, thank you.

Operator

(Operator instructions) Our next question comes from the line of Dan Perlin with RBC Capital. Please go ahead.

Dan Perlin – RBC Capitals

Thanks. So a couple of questions, one is, service margins in the quarter were incredibly strong, looks like the highest in the company’s history. And I am wondering is that a function of maybe laying off last year some of the service margin or the maintenance price increases and then starting to put them back in place as we start this year?

Tom Giannopoulos

Yes, I think it’s a combination of all, but it’s a combination of all.

Dan Perlin – RBC Capitals

Okay. Just seeing the – it was over 56%, so sequentially you had a huge bump up.

Tom Giannopoulos

But I think you cannot model and take that number and then model it as the guidelines for the rest of the year and so forth. With – we will forget to remember the guidelines that we have issued longtime ago that the operating – I mean the gross margins for the company buy our stock on the basis that the gross margin is 49% to 50%. We are now at 50%. The number that we should be using right now should be closer to 53.5% to 53% when you model the numbers and not any higher than that from my point of view was 35% expenses, because that translates to 18% operating profit – 18% operating profit in today’s environment, I mean come on, give me a break, no too many people generate that. But please don’t push me –

Dan Perlin – RBC Capitals

I am not – I am not trying to push you higher, I just was impressed with that margin.

Tom Giannopoulos

It’s an impressive – with impressive employees and clients.

Dan Perlin – RBC Capitals

Absolutely. Let me ask you the question more directly then. Perhaps when we had thought you had said that with some of your clients given their difficulties, you were foregoing the annual maintenance pricing increases which were somewhere around I don’t know 3% to 4%. I am wondering if you are re-implementing those, maybe not necessarily to reflect the 56% margin of services. But are you structurally putting those back in the business?

Tom Giannopoulos

If I answer that question over this conference call, I would have a 1000 customers or 100,000 customers calling me asking for a discount. So I will forgo answer of this.

Dan Perlin – RBC Capitals

Fair enough. One of the things we have been hearing was that there were some prolonged implementation cycles in your hotel chain, is that kind of false information or is that something you are staying?

Tom Giannopoulos

I didn’t get the first part of your question, I am sorry.

Dan Perlin – RBC Capitals

I am sorry. Wondering if some of the information we have been hearing was that there were some prolonged implementation cycles at some of the large hotel chains, and I was wondering if that in fact are you seeing that with some of your clients or is that kind of false information?

Tom Giannopoulos

Prolonging delays.

Dan Perlin – RBC Capitals

A little bit delays, not cancel, but delays.

Tom Giannopoulos

Honestly in our business we have not seen any of that.

Dan Perlin – RBC Capitals

Okay.

Tom Giannopoulos

It’s that we have -- now, we have not seen any of that.

Dan Perlin – RBC Capitals

And then the deferred service revenue increased 16% year-on-year, and you’re just saying that’s a function of the timing of the international billing, so we should – should we expect to see that in that in kind of the December quarter, or are we going to see that in the March quarter?

Gary Kaufman

You will see that again in the March quarter.

Dan Perlin – RBC Capitals

In March, okay, got it. And then, while I have got you Gary, can you give me the maintenance revenue number again, I actually just missed it.

Gary Kaufman

The maintenance revenue number is $143.768. That serve –

Dan Perlin – RBC Capitals

And then – say again.

Gary Kaufman

Not, the maintenance number is $85.438 million.

Dan Perlin – RBC Capitals

Okay. And then the last question I have was as it pertains to the street business and I understand and they are not getting in better, are you seeing through your channel through the financing side is there – is there any kind of third-party restaurant market coming back, and is it available to the street business do you think or is that still really difficult?

Tom Giannopoulos

There is no change.

Dan Perlin – RBC Capitals

Okay. Super. Thank you, good quarter.

Tom Giannopoulos

Thank you. Thank you for that. Dan you are the first one to say that.

Operator

Thank you. Our next question comes from the line of Liam Burke with Janney Montgomery Scott. Please go ahead.

Liam Burke – Janney Montgomery Scott

Thank you. Good evening, Tom. Tom you mentioned outside the US, foreign markets are doing better than US for obvious reasons. Asia Pacific is continuing to grow. What segment – is one segment is better than another in these markets or is there anything in particular that’s doing better than that?

Tom Giannopoulos

There is no segmentation. I mean not really, not between hotels and restaurants and so forth, the answer is not really. All the – we have variances obviously in Europe, but Germany has done better, and France, UK not as much, because they are still in really in a bad state.

But overall, the European operations exceeded their budgets and so did the Asia Pacific, as you know, there is growth there in most countries especially in emerging India and China, but their growth rates has been halved from 16, 17 to 608 but still growth. Japan still little bit on a stationary kind. So overall the region – and also the South America did well, but it is not one segment versus the other.

Liam Burke – Janney Montgomery Scott

Thank you.

Operator

(Operator instructions) Our next question comes from the line of Brad Reback with Oppenheimer. Please go ahead.

Brad Reback – Oppenheimer

Hi guys, how are you?

Tom Giannopoulos

Hi Brad.

Brad Reback – Oppenheimer

So Tom, as I look at the numbers for this year is going to be – it appears to be a meaningful margin acceleration from what should get reported this year versus last year with the great expense controls. As we think about the business going forward in our recovery type of scenario in 2011 and beyond, do you see this is a scenario where expenses for a period of time grow at the same rate of revenue or slightly below or where they remain meaningfully below revenue growth and come into significant margin expansion on a go-forward basis as well?

Tom Giannopoulos

I will repeat what I said a number of times. When you are talking about 2011 and make clear that we are in the recovery revenue growth times, as we’ve always said that we would like to get our operating expenses closer to the 30% from the 35%, 36%. And we would like to see our operating margins closer to 20 or about 20 and below 20. But that’s one we have revenue growth 15% to 16% per year as we did before and that’s a doable business model for us when the recovery begins.

Brad Reback – Oppenheimer

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Murphy with Sidoti & Co. Please go ahead.

Brian Murphy – Sidoti & Co.

Hi, thanks for taking my question. Gary, I just want to make sure I am thinking about this the right way. Maintenance as a percentage of overall service revenue, would you expect that percentage to decline over the balance of the year?

Gary Kaufman

Yes it would. I mean it was a little high this quarter, so yes.

Brian Murphy – Sidoti & Co.

Makes sense. Okay, thank you.

Operator

Gentlemen, there seems to be no further questions at this time.

Tom Giannopoulos

Okay, thank you, everybody. We will talk to you in the January-February timeframe, and thank you, Shanna.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you very much for your participation, and we ask that you please disconnect your lines. Have a wonderful evening everyone.

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