MICROS Systems CEO Discusses F1Q2011 Results - Earnings Call Transcript

Oct.29.10 | About: MICROS Systems, (MCRS)

Micros Systems (NASDAQ:MCRS)

F1Q2011 Earnings Call

October 28, 2010 4:45 p.m. ET

Executives

Tom Giannopoulos – Chairman, President & CEO

Peter Rogers – EVP, IR & Business Development

Cindy Russo – EVP & CFO

Analysts

Mayank Tandon – Signal Hill Capital

Ross MacMillan – Jeffries

Liam Burke – Janney Capital Markets

Gil Luria – Wedbush Securities

Eric Lemus – Raymond James

Brian Murphy – Sidoti & Company

Operator

Ladies and gentlemen, welcome to the fiscal year 2011 first quarter conference call. [Operator Instructions.] As a reminder this conference is being recorded Thursday, October 28, 2010.

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

Tom Giannopoulos

Thanks operator, and good afternoon everyone. Thank you for being with for another fiscal year. As a reminder, this is the conference call for Q1 of our fiscal year 2011, which started in July. Here with me are Cindy Russo, Tom Patz and Peter Rogers, and we will commence with Peter and the disclaimer.

Peter Rogers

Thank you. Good afternoon, ladies and gentlemen. Some of the comments today are forward-looking statements that involve risks and uncertainties, such as levels of product demand and market acceptance, impact of competitive products and pricing on margins, the ability to obtain on acceptable terms the right to incorporate in MICROS products and services, technology patented by others, 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 businesses are identified in the Management’s Discussion and Analysis of Financial Condition and Results of Operations and Business and Investment Risks sections of MICROS SEC filings.

Tom?

Tom Giannopoulos

Thank you, Peter. Looking at the financial results for the quarter and as shown in the press release this afternoon, revenue grew 10.4% from $211 million to $233.4 million, a very healthy double-digit growth considering the conditions. The $233.4 million is the second highest quarter ever for us. On a constant currency basis you could add another $2.6 million to the number. That would have brought the revenue to $236 million.

Gross margin for the quarter came in at 54.2%, or $126.42 million, versus last year's 54.8%, or $115.826 million. The 54.2% number is way above the norm for a Q1 for us. Hardware gross margin at 32.3% versus 35% last year, software at 79.1% versus 78% last year and service at 55.8% versus 56.7% last year. Overall a very good gross margin performance for a Q1.

Total operating expenses - this is on a non-GAAP basis without the stock option expense - expenses were at $76.97 million, or 32.98% versus last year's $76.928 million, or 36.39%, a very nice improvement from a ratio perspective.

Income from operations, again on a non-GAAP basis was at $489.485 million, or 21.2%, versus $38.898 million, or 18.4% last year. And honestly for Q1, the 21.2% ratio is a very good number.

Net income for the quarter at $33.381 million. This is again on a non-GAAP basis versus $26.643 million. That's a 25.3% increase from last year, and EPS at $0.41 versus $0.33 last year. That's a 24.2% increase from last year.

Additionally, our cash position increased from $605 [million] in June to $680 [million] at the end of the quarter. Cindy will give you some additional numbers here. We continue, of course, to have no debt.

Days outstanding for the quarter were down to 60.4 days, which is a record low number for a Q1.

The split between domestic and international is at 49.63% is domestic, 50.37% is international.

In Q1 most of the business entities exceeded their budgeted numbers.

Cindy?

Cindy Russo

Thanks Tom. The highlights of the balance sheet for the quarter are as follows. MICROS has $680.9 million of cash and investments at September 30, an increase of $75.7 million from the June 30 year end, and an increase of $156.2 million from the same quarter last year.

During the first quarter we generated $34.8 million from operating activities, while spending a combined $4.6 million on property plant and equipment and internally capitalized software. Also, $7.7 million for the purchase of investments.

During the September quarter as seen on our balance sheet, the company spent $1.5 million to pay down its international line of credit, and also received $10.7 million from the exercise of stock options and the related tax benefits.

The accounts receivable balance of $156.7 million is an increase of $3.6 million from the June quarter and a decrease of $10.7 million from the Q1 fiscal 2010. As Tom stated, days sales outstanding at quarter end were a company first quarter record at 60.4 days, compared to 71.3 days last year. International DSOs were 79.8 days, down 11.8 days from our prior September quarter. Domestic DSOs were a company all-time record - 43.3 days, down 2.6 days from our last release and down 7.7 from a year ago.

The inventory balance of $35.6 million is an increase of $500,000 from last quarter and a decrease of $3 million from last year. Inventory turns from the first quarter were 8.8, another Q1 record, up from 7.6 turns in the prior September quarter.

Deferred revenue of $147.9 million is an increase of approximately $23.4 million from June 2010 and an increase of $6.1 million from last year's September quarter. The increase is due mainly to the timing of our international maintenance billing. As you'll recall, September and March are the quarters when our deferred revenue increases.

A few additional items related to the income statement are as follows. Recurring maintenance and hosting related revenues during the quarter were $92.6 million, an increase of 3.1% from June and 7.7% from the first quarter last year.

The foreign exchange impact on total revenues for the quarter was a decrease of $2.7 million, which reduced our earnings per share for the quarter by approximately $0.015.

Non-operating income for the quarter was $0.3 million. This figure includes $1.2 million in interest income, offset by $1.1 million in interest expense, a currency loss of $0.9 million, and a net recovery of $0.1 million on our holding s of auction rate securities.

As far as income taxes for the current year, we recommend that you continue to model a tax rate of approximately 32.5%.

Tom?

Tom Giannopoulos

Thanks Cindy. In summary, obviously we're encouraged with the double-digit revenue growth for the quarter. Our [inaudible] level, the management of our operating expenses, and the cash in hand all are good news for us for now and for the future.

As far as the future is concerned, we all know that global economic conditions remain challenging and fickle. The hospitality industry we serve has had improving financial numbers each and every month in 2010, which is good news for us. The outlook overall now is modestly better than it was a year ago, and as far as guidance is concerned, we'll stay with our annual basis guidance we gave last August.

The guidance last August was for revenue between $1 billion and $1.005 billion and the net income guidance that we gave in August was $140 million to $142 million. Although we had a good first quarter, and better than expected, from our point of view it is premature to revise our year end guidance at this time, so we'll stay with the August guidance.

Operator, we'll take questions now.

Question-and-Answer Session

Operator

[Operator Instructions.] Our first question comes from the line of Mayank Tandon with Signal Hill Capital. Please go ahead.

Mayank Tandon – Signal Hill Capital

Just a few questions. First, could you provide us some color in terms of how the three verticals did - hotels, restaurant, and retail?

Tom Giannopoulos

We don't do that on a normal basis, but as I said before the majority of the business units met their budget that we had, obviously since we exceeded expectations. The restaurant business did very well. The hotel business did very well as well, and retail met their objectives.

Mayank Tandon

I know in the past street restaurant business was sort of sluggish and just wondering if you've seen any incremental improvement in that side of the business.

Tom Giannopoulos

In the past, yes, but in the first quarter if you look at the North American distribution unit, which is substantially street business, they were up from last year's number by 10.49%. So is that a long-term indicator of some sort? We really don't know. But we did better this quarter than we did a year ago.

Mayank Tandon

And on the hotel side, the global hotel chains are all reporting better RevPAR numbers. How long does it typically take for that to spill over into your business?

Tom Giannopoulos

Well, we still have ongoing contracts with the hotel chains, so from our point of view we continue to see constant revenue growth. We don't see any delays that we saw a year ago from rollouts that we've had. And you're right, as we've said before, occupancy rates and revenue per available room are increasing. Occupancy rates may be increasing because they're discounted, but at the same time the revenue per available room is increasing. It hasn't really reached the pre-recession levels, but they're increasing. And you can see that from the numbers that the hotel chains are announcing.

Mayank Tandon

And just as you look at the quarters coming up, do you have any expectation based on feedback from your clients of any kind of budget flush in the December quarter? And can you also remind us of the seasonality in your quarterly growth, especially 2Q and 3Q.

Peter Rogers

In terms of budget flush, no. That may happen with some accounts, but it's not something we really know in advance. In terms of seasonality, the September quarter is clearly our slowest quarter because it is summer time in the northern hemisphere and Europe goes on holiday for about six weeks. So it's just normally a quarter of fewer installations. And December's generally a good quarter. March always is a bit off, and then June's the strongest.

Operator

Our next question comes from the line of Ross MacMillan with Jeffries. Please go ahead.

Ross MacMillan – Jeffries

Your SG&A line was down sequentially pretty materially, and in fact it was flat year-over-year. Tom, can you just maybe add some color to what's going on there. Was there some headcount reductions, or is there some additional program of cost-reduction?

Tom Giannopoulos

No, we haven't had appreciable head reduction. If anything from a year ago our headcount is up. Generally speaking, and as we've done before, that reflects actions that we're taking and continue to take to make the organization more efficient. So that's reflected basically on the results. I think for the future, we are in a hiring mode and continue to hire businesses returning a little bit to normal. So we're enjoying the hard work that we've done in the past 18 months in regard to cost reductions, but not necessarily headcount reductions.

Ross MacMillan

And then just on the mix, the revenue mix. Clearly software growth was incrementally stronger this quarter. Interestingly, hardware decelerated. Is that reflective of maybe relative strengths in the hotel business relative to restaurants and retail in the quarter, or is there anything else you could add to help us understand that deceleration in the hardware growth?

Tom Giannopoulos

Nothing specific. It depends really on the contracts that we have in a typical quarter, so if we have a contract that requires more hardware it's reflected in the numbers, but there is no trend here other than contracts that we deliver the particular quarter.

Ross MacMillan

And this last one just on the cash. Obviously you continue to generate a lot of cash and you have talked about M&A before. Are you still looking to augment the business with maybe something of scale, or maybe put another way, what is the planned use for the cash that continues to grow on the balance sheet?

Tom Giannopoulos

We're continuing to look at companies, both within the segments that we are in, which is hotels, restaurants, and retail, and we have a list of X number of those. And of course we're looking at businesses outside those particular three segments, and again we have a list. Hopefully we can do something soon and that's our primary focus in regards to our cash other than the stock buyback program that we have. We are working very hard to identify and close deals in the M&A area.

Operator

Our next question comes from the line of Liam Burke with Janney Capital Markets. Please go ahead.

Liam Burke – Janney Capital Markets

Tom, specifically on the product line, is Simphony rolling out the way you expected, or how did it perform this quarter?

Tom Giannopoulos

Simphony's rolling out, yes, as expected, if not better. Doing well, and from a competitive point of view I'm not going to say anything more. But we're very pleased with where we are and especially the contracts that we have had rollouts on are doing great.

Liam Burke

And you did mention hardware margins were down year-over-year. Is that a function of just the hardware mix that you saw this quarter or is this -

Tom Giannopoulos

Absolutely yes.

Operator

Our next question comes from the line of Gil Luria with Wedbush Securities. Please go ahead.

Gil Luria – Wedbush Securities

To follow up on the question on Simphony, are you seeing demand for that product beyond the rollout of the ubiquitous coffee chain? Are there other restaurants, specific types of restaurant chains, that see value in a SAS delivery of that core POS system?

Tom Giannopoulos

Absolutely. I mean the industry and technology trend basically is centrally hosted, centrally delivered solutions, SAS or whatever, and I think that's a great opportunity for us for existing chains that are not maybe using our own products where we can penetrate those particular chains because we have a product that addresses and makes their operations more efficient and less costly. So yeah, we see a lot of activity beyond just the coffee client.

Gil Luria

And then in terms of other products that you can sell with a similar centralized delivery, what other products are you working on to deliver in a similar way in your product roadmap?

Tom Giannopoulos

Well, you know, the OPERA product of course has been a centrally hosted solution for a long time now - 4 or 5 years - and we have a lot of customers that are centrally hosted both in the states, in Europe, and in Asia-Pacific and in South America.

We have four hosting centers and many of the major chains are using - not all their hotels but a good percentage of their hotels are already in a hosted environment in our data center in Frankfurt, in our data center here in Virginia, and so forth. So that's a product that's been around for a while. There's obviously always improvements and as the communications become more cost effective I think ultimately the majority of these owned properties will go into a hosted environment.

We have other products as well besides Simphony which is on the restaurant side. There are other products such as mymicros product, which collects information, does analysis, and so forth for the overall operations. In the restaurant environment that has been delivered in a hosted environment now for three or four years.

We have other products such as loss-prevention, online ordering, and online delivery, a number of products that we have been delivering from a centrally hosted environment over the past five years.

Gil Luria

Final question, just a longer-term question. It seems like regardless what the rate of recovery is now, we're past the point of a crisis, you're back to double-digit growth. What is it now that keeps you up at night? What's the major threat to either one of your major verticals that you worry about?

Tom Giannopoulos

What keeps me awake at night is my Boston Celtics losing to Cleveland last night after they beat the Heat. But anyway, what was the second part of your question?

Gil Luria

What are the threats you see coming down the line to the hotel business or the restaurant business? Any type of new competition that you see coming down the road? New startup technologies? Anything like that that you see that you're keeping an eye on?

Tom Giannopoulos

I think the competing technology that would jeopardize our business would have been the centrally hosted solutions and whether we're going to be there first or second or not be there at all, and I think we have great solutions, both on the restaurant side, on the hotel side, and now on the retail side. So we're really first in play. So we are always cognizant of the fact that you have competition and we're aware of it and luckily we have the capability financially to meet those threats. That's what keeps me awake at night besides my Boston Celtics.

Operator

Our next question comes from the line of Eric Lemus with Raymond James. Please go ahead.

Eric Lemus – Raymond James

Last quarter you gave us some detailed plans on your three large end segments of restaurants, hotels, and retail broadly speaking. At this point with a quarter under your belt, if there's any sort of notable upside in the rest of the year, what segment do you think would be most apt to deliver the upside?

Tom Giannopoulos

It would probably be hotels.

Eric Lemus

Hotels, okay. And another question, as far as your online ordering, how meaningful do you guys see this? I know you guys have been doing a lot of development in this area. Have you seen any sort of payoff? And could this meaningful revenue contributor be more a required checkbox thing or more of a necessary needle-mover?

Tom Giannopoulos

It's a feature or a product that we need to have basically to meet the needs of our customers. So their online delivery, online ordering is something that came into major play, especially when our gas prices in the U.S. were in the $4-plus and customers would not go out to restaurants and so forth, so restaurants came up with alternative solutions of providing that capability. So our products - are they going to drive substantial revenue? Not necessarily, but they're needed to fill the offering for our customers.

Eric Lemus

And then just one last question. As far as your RFP activity on the restaurant side, how does it look for the rest of the year in terms of visible opportunities? Any meaningful wins you could talk about year-to-date, or do you see your restaurant growth more being driven around install base refurbishments?

Tom Giannopoulos

It's both. It's really existing customers. Some of them that had delayed rollouts are picking up their rollout plan, but I think it's all those things. It's existing customers buying products. There is activity on the RFP side for new customers, and I think our Simphony product is something that is attracting a lot of new discussion, and for us new opportunity.

Operator

[Operator Instructions.] Our next question comes from the line of Brian Murphy with Sidoti &Company. Please go ahead.

Brian Murphy – Sidoti & Company

Tom, in the past your hardware revenue has been a pretty good proxy for the performance in the restaurant business, and with the street business up 11% I'm just trying to figure out what accounts for the difference. You mentioned it would have to do with the mix and the account rollouts. I think there's no hardware associated with the coffee chain rollout. Is that what's depressing that hardware growth number this quarter?

Peter Rogers

Now when you look back a year ago in the international side we had a very sizable order that grew hardware revenue internationally and that was down a bit this year, so there's really an offset from U.S. demand versus international demand. That's really the main differential.

Tom Giannopoulos

And don't forget that for the past 12 months we had a major QSR customer that we will deploying hardware as well.

Operator

We are not seeing any further questions at this time. I would now turn the call back to you.

Tom Giannopoulos

Okay, thanks everyone, and we'll talk to you again in January, and go Boston Celtics. See you.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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