MICROS Systems, Inc. F2Q10 (Qtr Ending 12/31/09) Earnings Call Transcript

Feb. 4.10 | About: MICROS Systems, (MCRS)

MICROS Systems, Inc. (NASDAQ:MCRS)

F2Q10 (Qtr Ending 12/31/09) Earnings Call Transcript

February 4, 2009 4:45 pm ET

Executives

Tom Giannopoulos – Chairman, CEO and President

Peter Rogers – SVP, IR & Business Development

Gary Kaufman – EVP, Finance & Administration, and CFO

Analysts

Corey Tobin – William Blair

Gil Luria – Wedbush

Mayank Tandon – Signal Hill

Ross MacMillan – Jefferies

Liam Burke – Janney

Eric Lemus – Raymond James

Brian Murphy – Sidoti & Company

Vincent Colicchio – Noble Financial

Operator

Ladies and gentlemen, thank you standing by. Welcome to the Micro System's Inc. second quarter fiscal year 2010 conference call conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. (Operator instructions) As a reminder this conference is being recorded Thursday, February 4, 2010.

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

Tom Giannopoulos

Thank you, Sarah. And good afternoon, everyone. Thank you for joining us. As you know, this is a conference call to review the financial results of our December 2009 quarter. This is the quarter number two of our fiscal year 2010. Here with me are Gary Kaufman, Tom Patz, Peter Rogers. We'll begin with Peter and the disclaimer.

Peter Rogers

Good afternoon, Tom. And good afternoon, ladies and gentlemen. Some of the comments today are forward-looking statements involve risks and uncertainties such as uncertainty of product demand and market acceptant, impact of competitive product in pricing and margin, the ability to obtain on acceptable turns, the (inaudible) incorporate and Micros products and services. Technology patent by others, environmental and health related event, unanticipated tax liabilities, the effects of terrorist activity and armed conflict.

Micros undertakes no duty to update any forward-looking statements to confirm to actual results or changes to Micros expectations. Other risks and uncertainties associated with Micro's business are identified in the management's discussion and analysis of financial condition and results of operation and business investment risk section for Micro's SEC filings. Tom?

Tom Giannopoulos

Thank you, Peter. Looking at the financial results for the quarter and showing in our press release this afternoon, generally, we had a very good quarter with revenues, net income and EPS, exceeding expectations. With business additions still on the challenging side, we continue to work on improving the bottom line, continue our increase investment in developing new products and services and we believe, when revenue growth returns, this strategy will serve us well for the future.

Looking at the numbers on the second page of the press release, our revenue for the quarter was 25.647 million, better than expected and some 13 million better than the September quarter. Gross margin for the quarter came in 124 million or 55.4%, which is a very excellent ratio. As a matter of fact, it's a record gross margin ratio for our company. Year-to-date gross margin is at 55.1% versus last year's 52.5%, a very nice improvement over the last year.

Operating expenses on a non-GAAP basis, excluding the stock option expense, came in at actual dollars of 81 million with 35.9%, versus last year's 83.5 million or 35.3%. Income from operations as a result was a very excellent 19.5% or 43.976 million, higher than last year's 42 million, especially the percentage which last year was at 17.94%, even on the lower volumes that we had.

Income before taxes at a very healthy 19.7% or 44.3 million, which is from a dollar perspective, almost the same as last year's. Net income was at 29 million or 12.87% versus 29.299 million last year. First six months net income stands at 55.684 million or 12.7%. UPS as a result is $0.36 this quarter, the same as a year ago. Overall, we believe these are great results, again considering the business conditions.

Regarding our cash, we continue to generate cash at a very good rate and as always our debt is very minimal. During the first six months of the fiscal year, we generated close to a 100 million. Cash position now is at 531.532 million, excluding cash for the stock buy-back program and the acquisition of PIG. Days outstanding were at 59.4 days, down from 72 days in the September quarter and down from 66.1 days a year ago. Like I stated already, very excellent financial results across the board.

In regards to the note in our press release about the Japanese subsidiary, we'd like to make the following couple points. Number one, this was the fraudulent act of a single individual, a Japanese subsidiary. Number two, a detailed investigation conducted by internal and external resources have confirmed that no other subsidiaries or other macro personnel were involved and number three, we're confident that we have sized the financial impact correctly and have captured the full extent of this issue.

I will ask Gary to give you the additional details from the balance sheet.

Gary Kaufman

Thanks, Tom. The highlights of the balance sheet are as follows: Micro's had $531 million of cash at December 31, an increase of 6 million from the September 30 quarter end. Year-to-date, we generated $86 million from operating activities while spending 4 million on property plant and equipment, 29 million for the purchase of PIG and net of 19 million on short-term investments and 35 million on the repurchase of common stock.

During quarter two, we purchased 160,000 shares of common stock for a total price of 4.6 million and a total of 1.3 million shares for 35 million year-to-date. Currently we have board approval to purchase an additional 2 million 020 shares. During the fiscal year, we also received $7 million for the exercise of stock options, along with the corresponding tax benefit of 2.7 million.

The accounts receivable balance of 149 million is a decrease of 21 million from September 30th. Day sales outstanding at December 31 were 59.4 days, a decrease of 12.8 days from last quarter. International DSOs were 67.8 days, a decrease of 25.4 days from September. The primary reason for this decrease was due to the timing of the international maintenance billing. Net DSOs remain the same as last quarter at 51 days.

The inventory balance of 37 million is a decrease of 2 million from last quarter and 3 million from June. The decrease is due to the continued success of corporate inventory reduction programs. Inventory turns for the quarter were 8.3 turns, up from 7.7 last quarter. Deferred revenue of 118.4 million is a decrease of 23.4 million from September 30th. This decrease is due mainly to the timing of our international maintenance billing. December and June are the two quarters when our deferred revenue decreases.

Miscellaneous items, maintenance revenue for the quarter was 88.8 million, an increase of 3.1 million over last quarter. Non-operating income for the quarter was approximately $400,000. Net interest income was approximately $800,000. As for income taxes, our forecasted tax rate for fiscal year 2010, the total year is 33% for GAAP and 33% for non-GAAP. Tom?

Tom Giannopoulos

Thanks. In summary, we had a very good quarter with great numbers on gross margins, net income and EPS. We continue to generate positive cash flow. We made a very important acquisition during the quarter of TIG. This acquisition allows us to offer complete end-to-end solutions to our hotel customers for distribution placement, marketing of hotel room, inventory through websites and alternative distribution platforms.

The major rollouts we have in place continue at a good pace. A couple of major rollouts, which had been delayed, a year or so ago are picking up steam again. We continue to invest in new products and services. When business conditions improve and revenue growth returns, we'll be in great shape to increase our market share in all three of our business segments.

In regards to guidance, we'll stay with our guidance we gave the last August and which we repeated in the October conference call. Revenue at around 910 million for the fiscal year 2010. EPS at $1.39 to $1.40 for the same period and of course, if business conditions improve, we hope they will do better.

And Sarah, we will take questions now, please.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Corey Tobin with William Blair. Please proceed with your question.

Corey Tobin – William Blair

Hi. Good afternoon. A couple of quick ones, if I could. First, did you happen to have the maintenance and the services split on the revenue line?

Tom Giannopoulos

Corey, like Gary said, it was 88.8 million for maintenance this quarter up from maybe 5.7 in the first quarter 88.8 million.

Corey Tobin – William Blair

Great. Thanks. A quick question on visibility. Any changes to visibility in the channel, specifically in the street restaurant business?

Gary Kaufman

Not significant, nothing. It's the same as always. I think business conditions are challenging, as I indicated before. And the street business this particular time is struggling as they have for the past 12 months.

Corey Tobin – William Blair

And how about on maintenance, any change with respect to trend and maintenance renewals?

Tom Giannopoulos

We haven't seen any trends, no.

Corey Tobin – William Blair

Okay. Great. If I could on the situation in Japan, any additional color you can give as respect to exactly what happened there and how it was discovered?

Tom Giannopoulos

Standard and tunnel controls triggered what was going on and we investigated ultimately the individual confessed and that's basically what happened. We've obviously expedited – we engaged both local price one of house Coopers personnel in Japan and here, and legal counsel as well, and so we feel we have a good handle of the whole situation and hopefully it's behind us.

Corey Tobin – William Blair

Okay. Great. Thank you.

Operator

Thank you. And our next question comes from the line of Gil Luria with Wedbush. Please proceed with your question.

Gil Luria – Wedbush

Thank you. Just as a follow-up to that. The time line you're suggesting is quite aggressive to be – have your 10-Q up by February 16. You say you've recently uncovered it, that the investigation is substantially complete. What gives you the confidence – what have your auditors told you in terms of whether in the process, are you going to have to share this with the SEC? What gives you the confidence that February 16 is doable for the Q?

Gary Kaufman

This is Gary. Basically first off, I was over there working with the auditors and we have wrapped up the financial part of the review substantially as of today and we wanted to get that done by today in order to have this call. And from here on in, it's just a little documentation and price water house feels very comfortable with us getting it out by the 16.

Gil Luria – Wedbush

Great. Could you help us isolate the trends between the U.S. and international within your numbers, which – what was the breakdown was in the quarter?

Gary Kaufman

The breakdown was 53% international and 47% domestic.

Gil Luria – Wedbush

Great. And then one more question. A couple of – there's a couple of companies out there that are doing some interesting things that seem like they're products that you could offer. One of them is your competitive radiantly system has gotten involved in transaction processing. They've become an also you committed [ph] the restaurant that's added a pretty much substantial amount of revenue in a short period of time for them. Would you want to get involved in that? The other one, open table had a very successful IPO, the revenues quite quickly and it seems like they do thing that you guys can do and your sleep. Do either of those two products seem like something you would want to be offering in your future?

Tom Giannopoulos

We're always looking at opportunities to improve, you know, our product portfolio and so forth. Do we want to compete with specifically with what you mentioned? We always instituted. It needs to be consistent with our gross margin expectations and so forth and in some cases we – so it's for the future. Specifically, I can't talk about the IPO of open table and I can't talk about their growth opportunities, and so forth, but we always look at ways to enhance our revenue stream and with all opportunities, like developing our own products or making the right acquisition. So far, I believe our strategy has worked very well.

Gil Luria – Wedbush

Got it. Thank you.

Operator

Thank you. And our next question comes from the line of Mayank Tandon from Signal Hill. Please proceed with your question.

Mayank Tandon – Signal Hill

Thank you. Tom, you indicated that you've seen some of the rollouts that were on hold and now we picked up steam that was your last comments in your prepared remarks. I mean, are you – is that may be a sign of the margin that things are getting a little bit better than they have been and that might be a good leading indicator for future growth numbers?

Tom Giannopoulos

We are hoping, we all read the same things about the same business in the quarter, GDP last quarter and so forth. You know, the encouraging thing is that at least in the case of these two specific customers, they had delayed a rollout. They were doing one or two other than five or six and they have assumed the original rollout schedule that we had a year and a half ago, to recall in one of the conference calls, I did mention that a couple of customers had delayed. So is that a trend? You know, we all hope that things will improve and so I hope it's a trend of better things to come.

Mayank Tandon – Signal Hill

And as you talk to IT execs within your verticals, did you see any kind of budget flush at the end of the quarter and as you looked at budgets that have been firmed up for this year, are they looking better than may be you taught when you went into the fiscal year?

Tom Giannopoulos

I think the idea of the objectives, that we're all cautiously optimistic, because we still rely on their executives the CEO's and so forth to improve their IT budgets. I know in certain cases, properties that have been delayed and have been scheduled now for one of the upgrades for our systems and these process have been delayed for a couple of years. So that's an encouraging sign, but we still have a long way to go to talk from, from a point of view of substantial growth.

Mayank Tandon – Signal Hill

And then just finally one more question from me. If I look at your guidance, it would suggest that you're going to have a little bit better revenue in the second half versus the first half, but your EPS would be essentially flat. Maybe you could just comment on that in terms of what we should be thinking about for OpEx in the second half versus the first half?

Tom Giannopoulos

My guidance basically reiterates what we said, last August. And I don't want to go too far away from it and because at this particular time, business conditions still remain challenging, so we'll just stay with the numbers that we have.

Mayank Tandon – Signal Hill

Are your OpEx plans still – I think you have said last quarter, around 320? Or correct me if I'm wrong, but I thought that was the number. Is that still the target in terms of operating expense for the full year?

Tom Giannopoulos

Yeah, correct.

Mayank Tandon – Signal Hill

Great. Thank you.

Operator

(Operator instructions) And our next question comes from the line of Ross MacMillan with Jefferies. Please proceed.

Ross MacMillan – Jefferies

Thanks. Tom, the software sequential growth was a lot higher than the hardware sequential growth. Is that – is there some information there regarding the strength in hotels relative to the restaurant sector? Could you comment on that?

Tom Giannopoulos

I mean, yes, we would, you know, the rollouts talked about continuing basically the hotel side rather than the restaurant side, so the answer to your question is yes.

Ross MacMillan – Jefferies

And then, when you look at trends, they're definitely getting better or, I guess, worse because they're still negative. Do you have a view as to how correlated IT decision within the hotel industry is to those RevPAR trends? In other words, is it continue to improve when we got into lets say positive territory leader this year, not for the full year, but maybe for Q3 or maybe just Q4, is that a policy thing in terms of how you view IT standing within the hotel sector?

Tom Giannopoulos

Of course. Also updating the technology is important and in certain cases, where our rollouts continue, customers are continuing to upgrade all of the technology with and then they have to do it regardless of their RevPAR or occupancy rates. But at the end of the day, as we all know, if the RevPAR increases and occupancy rates increase, means they have more money to spend and it's easier for IT directors and CIO's to get money budgeted from their CEOs and Operational Managers of the hotel.

Ross MacMillan – Jefferies

And then just one for me, on symphony specifically, can you just maybe talk to the kind of level of industry interest in that. Right now it's obviously still early, but it seems quite a differentiated product. I'm just curious as to the level of customer interest to staff.

Tom Giannopoulos

Well, I have to be careful but the competitive information that I've seen, but I think, I'll just summarize it by saying the interest is high. We have already a number of customers on this particular product, one of which is substantial business going on as we speak and, you know we feel like we have a great product for future.

Ross MacMillan – Jefferies

Great. Thanks a lot.

Operator

Thank you. And our next question comes from the line of Liam Burke with Janney. Please proceed with your question.

Liam Burke – Janney

Thank you. Tom, I know the quick service portion of your restaurant market, you're restaurant market is a lot smaller. You mentioned table service was weak, which is consistent with the industry expectations. How is quick service doing first half of the year?

Tom Giannopoulos

Well, only quick service, of course, we had a substantial contract with one of the major players and we continue with the deployment and additional work with them and we'll use them obviously as a reference for additional business there. But from a RSP point of view, we are seeing better activity in the last two or three months than we have seen in the last eight or nine months, early part of – calendar year 2009. So, we have good reference installations. We have a good product that is fully featured. So it bodes well for the next 18, 20 months.

Liam Burke – Janney

Great. And on the retail side, are you okay with the results of the first half of the year?

Tom Giannopoulos

The retail side had an increase – percentage increase from one year to another. It was practically the only business unit that did so, so far so good.

Liam Burke – Janney

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Eric Lemus with Raymond James. Please proceed with your question.

Eric Lemus – Raymond James

Great. Thank you, guys. I just want to follow-up on your table service restaurant space. As far as the hardware is concerned, what's your best guess as far as the age of the software, whether and do you think there's some sort of a timeframe as to a timing point for the replacement cycles for the business?

Peter Rogers

Eric, this is Peter. That's a very good question. Difficult to answer. We have a large space. I think the best way to say is probably, I wouldn't say this is scientific, but it's somewhere say an average of 5 or 6 years. But what's happening is in this recession past year to customers are just holding their platforms a little longer, our products are really rock solid, so they do have an extended longevity and I think that's what we're seeing in the restaurant marketplace. Hesitate to say there's a tipping point, but if there is a tipping point at point of time there's probably more function of overwhelm employment start to return positive which should really give our customers with the restaurant tours and confidence that business is picking up. And I can't forecast that at this point.

Eric Lemus – Raymond James

Right. Okay. And then I think you might have mentioned this before, but I just wanted to see with you guys stand as far as the Starbuck's rollout and how has that tracking gone forward?

Peter Rogers

I can't mention the name specifically, but I can tell you that it's going on very well.

Eric Lemus – Raymond James

Okay. Great. That's all I had. Thank you.

Operator

(Operator instructions) And our next question comes from the line of Brian Murphy with Sidoti & Company. Please proceed.

Brian Murphy – Sidoti & Company

Thanks for taking my question. I don't know if this is for Tom or Gary, but it looks like R&D expense is down year-over-year and sequentially for the first time in several years. Can you just give us some color around that? And I mean, are we sort of on a run rate now for R&D expense to be flat versus fiscal 2009? Thanks.

Tom Giannopoulos

We'll be online if not a little more than we were for last year. We capitalized some in this quarter by $750,000. So that made a blip and caused a difference between last quarter and this quarter.

Brian Murphy – Sidoti & Company

Got it. Thank you.

Operator

Thank you. And next we have a follow-up question from the line of Cory Tobin with William Blair. Please proceed.

Corey Tobin – William Blair

One quick follow-up if I may. With respect to hardware, seems like somewhat margin have trended lower the last three or four quarters, especially comp against this quarter last year. Can you just remind us what percentage of the hardware is contract manufactured and would you say the decline in margin that we're seeing is more related to pricing pressure or more tied to an increase in the cost of the systems? Thanks.

Tom Giannopoulos

Corey, the contract – our terminals and manufacturing for our GES contract manufacturing, it's probably about 70% of our hardware would come through our PC workstations manufactured by GES. In terms of margins, we always said margin is going to bounce around 3 to 355, so within the historical norm. It is very price compare with clay industry, the rest of our marketplace had a bit of an impact there. But it's really right in with the historical norm. You know, we got over 45, we're just not there was probably was just too high. Where we're at right now is probably a good way to model.

Peter Rogers

Yeah. It's not the cost. It's not the cost. It's from a pricing side.

Corey Tobin – William Blair

Got it. Great. Thank you.

Operator

Thank you. And our next question comes from the line of Vincent Colicchio with Noble Financial. Please proceed.

Vincent Colicchio – Noble Financial

Tom, you've done several acquisitions in the retail side recent quarters. Could you remind us what your acquisition priority would be at this point in time?

Peter Rogers

I'm not sure that we have any priority. We're looking at various number of companies that will round off, let's say, our product offerings and they have to meet certain guidelines from a point of view of being accretive and having good products and something that is required of our customers. So whether that's on the hotel side, the restaurant side or the retail side, as you know, we have a list of potential acquisitions. We're looking at them and you just – we just have to strike the right price with them. So that's our strategy.

Vincent Colicchio – Noble Financial

Okay. My other questions were answered. Thanks.

Peter Rogers

Thank you.

Operator

Thank you. And we have a follow-up question from the line of Mayank Tandon with Signal Hill. Please proceed.

Mayank Tandon – Signal Hill

Thank you, Tom. I just want to talk a little bit longer about the margins. I think you said before that, you think you can take your operating cost structure down to about 30% of revenue. And I was just wondering what kind of growth rate does that assume? Can you get there on – trim growth or do you get back to a normalized growth rate of, say, low double digits to achieve that kind of level?

Tom Giannopoulos

Well, you have to have growth to achieve those particular levels. You can't just continue to do it. So growth has to be close, not necessarily be over 10%, but it has to be close to 10%. On flat revenue growth, as we have had the last year over year and a half, I think it's admirable that we have performed as well as we have performed. We all hope for top revenue at which time I think our overall performance can improve. I feel from my point of you we should buy stock on the basis that we can produce mid teens operating margins, gross margins in a 52% to 53% area and then manage our expenses around the 34%, 35% ratio of gross revenue.

Mayank Tandon – Signal Hill

But the 30% target that you have, I mean, what is your timeframe for that? Is that a three-year plan? Five-year plan?

Tom Giannopoulos

The 30% target is a target we would like to achieve and it depends obviously when we make acquisitions, we have to observe our acquisitions and make sure that their cost expense ratio falls in line with our overall guidelines. So it's a long-term target that we have, whether it's 3 years, 3 years or 5 years. It's always good to have a target of what we need to accomplish. But I think at the end of the day, if we were honest and with any acquisitions, we can probably bring our operating expenses to the below 35% time line ratio.

Mayank Tandon – Signal Hill

Great. That helps. Thank you.

Operator

Thank you. And, Mr. Generalopolis, there are no further questions in queue. So I'll turn the conference back to you.

Tom Giannopoulos

Thank you, everybody. And we'll talk to you again in April. Thank you.

Operator

Thank you. And, ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and you may now please disconnect your lines.

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