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MICROS Systems Inc. (NASDAQ:MCRS)

F2Q11 Earnings Call Transcript

January 27, 2011 4:45 pm ET

Executives

Tom Giannopoulos – Chairman, President & CEO

Peter Rogers – EVP, IR & Business Development

Cindy Russo – EVP & CFO

Analysts

Mayank Tandon – Signal Hill Capital

Alan Weinfeld – Kern Suslow

Dan Perlin – RBC

Gil Luria – Wedbush Securities

Bhavan Suri – William Blair

Eric Lemus – Raymond James

Ross MacMillan – Jefferies

Liam Burke – Janney

Brian Murphy – Sidoti & Company

Vincent Colicchio – Noble Financial

Operator

Ladies and gentlemen, welcome to the fiscal year 2011 second quarter conference call. During the presentation, all participants’ lines will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Thursday, January 27, 2011.

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

Tom Giannopoulos

Thanks, Sarah, and good afternoon, everyone. Thank you for being with us. As we all know, this is the conference call to review the financial results of our second quarter. This is the December quarter of our fiscal year 2011, which of course started in July 1st of 2010.

As always, here with me are Cindy Russo, our CFO, Tom Patz; and Peter Rogers, and we will commence with Peter and the disclaimer.

Peter Rogers

Thank you, Tom. Good afternoon, ladies and gentlemen. Some of the comments today are forward-looking statements that involve risks and uncertainties such as uncertainties 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 expectations. Other risks and uncertainties associated with MICROS business are identified in the management’s discussion and analysis of financial condition, results of operations and business and investment risk sections of MICROS SEC filings. Tom?

Tom Giannopoulos

Yes. Thanks, Peter. Looking at the financial results for the quarter and the year-to-date, the six months, and as shown in our press release this afternoon, all key numbers, and that is revenue, income from operations in terms of dollars, income from operations in terms of ratio versus revenue, net income, EPS, all were record numbers for Q2 of any of our fiscal years, pre or post-recession. And all these numbers exceeded our budgeted numbers and any outside expectations.

Specifically, if you look at the press release and we go down the numbers there, Q2 revenue came in at $247.177 million, a 9.5% increase over last year’s $225.647 million. If we were to add back about $2.8 million, $2.857 million is the exact number of negative impact from foreign exchange, revenue would have been $249 million or a 10.78% increase.

Year-to-date for the first six months of our fiscal year, revenue came in at $480.531 million, a 9.9% increase over last year’s $437.048 million. The negative impact of foreign exchange in the first six months was $5.623 million, so the revenue would have been $486.154 million, which is an 11.24% increase year-to-year six months.

Overall, I’m pleased with the revenue performance for the quarter, and also for the first six months. There was better than budgeted growth in almost all of our business units. North America did well, with a nice pick up in the street business. South America did very well. EAME, this is the Europe, Africa, Middle East region, did well. This is on a euro basis, despite all the euro zone problems in the last six months that business unit did very well, and the Asia-Pacific did better than expected as well.

Gross margin for the quarter further down on the press release numbers came in at $137.370 million, a very nice 55.6% ratio versus last year’s $124.979 million, which was 55.4%. We continue to maintain our gross margin close to 55% ratio even in these transitional business times, which is very healthy from our point of view.

Total operating expenses on a non-GAAP basis for the quarter were $83.400 million, and the ratio is 33.7%, and that is an improvement over last year’s ratio of 35.9%. For the first six months, operating expenses ratio was as improved from 36.1% a year ago to 33.37% this year.

As a result, income from operations again on a non-GAAP basis came in at $53.997 million, which is a very good 21.9% of revenue. That’s the best number ever for us. Last year, in the second quarter, the ratio was 19.5%.

Year-to-date, our income from operations ratio is 21.5%, $103.481 million versus 19%; $82 million that we did last year, so from an income from operations perspective, dollar-wise and percentage-wise, spectacular performance.

Net income of $36.931 million and EPS of $0.45 for the quarter, both numbers substantially better than expected, a 27.2% improvement from last year’s $29 million, this is non-GAAP again. And, of course, EPS, there was a 25% increase from $0.36 last year to $0.45 this year. The six months year-to-date performance net income was up 26.27% from $55 million to $70 million. And EPS was up 23.2% from $0.69 to $0.85, that’s down on the bottom of the page.

Our cash position has improved steadily from about $610 million in June to $680 million at the end of our September quarter to about $720 million at the end of the December quarter, and again, we have no debt whatsoever.

Additionally, days outstanding are now at a record low number of 52.9 days. And the international is at 52%. Domestic is at 48%. These numbers are consistent with previous numbers on previous quarters. It doesn’t change very much around the 50% mark. And I’ll ask Cindy to give you the additional information.

Cindy Russo

Thanks, Tom. The highlights of the balance sheet for the quarter and the year are as follows

MICROS had $720.3 million of cash and investments at December 31, an increase of $115.2 million from the June 30 year-end and an increase of $189.5 million or nearly 36% from the same quarter last year.

Year-to-date, we have generated $81.8 million from operating activities, while spending a combined $8.1 million on property, plant and equipment, and internally capitalized software, and $29.1 million for the net purchases of investments.

During the six months period, the company received $21.3 million from the exercise of stock options and related tax benefits and spent $6.4 million on the repurchase of common stock. In Q2, we purchased a total of 145,000 shares, which leaves us an additional 3.5 million shares still available to purchase.

The accounts receivable balance of $145.3 million is a decrease of $7.8 million from the June quarter, and a decrease of $11.4 million from Q1 fiscal 2011.

As Tom stated, the days sales outstanding at quarter end were a company record at 52.9 days compared to 59.4 days last year. International DSOs were 66.7 days, while domestic DSOs were a company all-time record low of 39.3 days, down 4 days from our last release and down 11.2 from a year ago.

Our inventory balance increased slightly in the quarter to 38.3 million in anticipation of customer rollout. Inventory turns for the second were 8.6, a company Q2 record. Deferred revenue of $125.2 million is an increase of approximately $6.8 million from last year’s December quarter.

A few additional items related to the income statement are as follows; as Tom said on the revenue side, the domestic versus international split for the quarter was domestic 48%, international 52%. Year-to-date, the segment division stands at domestic, 49%, and international, 51%. Maintenance and hosting related revenues for the past six months grew 8.7% from the prior year to $190.3 million or 58.1% of MICROS service revenues.

Our recurring revenue for the quarter was $97.6 million, a 9.6% increase over the same quarter last year. For the six month period foreign exchange had a negative $5.6 million impact on our total revenues, reducing our earnings per share by $0.02. This figure includes a $2.9 million or $0.01 decrease in the Q2.

Non-operating income, excluding non-GAAP items was $1.9 million. This figure includes $1.5 million in interest income, offset by $0.1 million in interest expense, $0.3 million in other income and a currency gain of $0.2 million. 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, we had very, very good financial results for the quarter and the first six months. We expect to continue this type of performance in the second half of our fiscal year. Business conditions, at least for the industries we serve, are expected to improve, especially in calendar year 2011.

As far as guidance for the rest of the year, we will remain cautious as far as revenue is concerned and stay with original guidance that we gave last August as far as revenue, which was between $1 billion and $1.005 billion.

In regards to guidance on net income, we’re going to increase that by $5 million. So, we’re going to go from $140 million, $142 million, which was guidance that we gave last August to $145 million to $147 million as far as net income is concerned.

Sarah, we’ll take questions now.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Mayank Tandon with Signal Hill Capital.

Mayank Tandon – Signal Hill Capital

Hi, thank you. I just wanted to get a little bit more clarity in terms of how the different segments performed relative to last quarter. So, if you could maybe provide some more details, specifically, maybe in terms of the street business. You said it rebounded, but maybe some numbers around that would be helpful.

Tom Giannopoulos

We can’t really give you specific numbers, but they exceeded both our internal budgeted numbers that we have and also the external numbers that we had planned for. So, the North America distribution channel is on budget. And originally, just to give you a reference point, the budget number was a 24% increase from a year-ago, so, you can say that the first half year-to-date, they are going at the rate of 24 plus per cent.

Mayank Tandon – Signal Hill Capital

That’s the street restaurant business, right?

Tom Giannopoulos

That’s the street restaurant business with various districts like Houston, Los Angeles, San Francisco, and Boston, Chicago, and so forth, which is substantially local business, which, we call, of course, street business.

Mayank Tandon – Signal Hill Capital

What about the hotel segment and retail, maybe some color on how they’re performing relative to your budget?

Tom Giannopoulos

Retail again, retail was above budget, and hotels were a little bit below budget as a couple of rollouts that we’ve had going had slowed down, and waiting for the pickup of the calendar year 2011.

Remember, our fiscal year is basically, first half, of course of 2010, where business conditions were not really substantially better, and calendar year 2011, which is a second half of our year, that’s where everybody is expecting that business is going to improve substantially, meaning the US government is talking about GDP going from 2.6 to 3.2, so, the retail is doing better than budgeted.

And the hotel business for the reasons I’ve talk to you about a little slow in the first half. We’re hoping to pick up and come close to our budget, internal budget in the second half.

Mayank Tandon – Signal Hill Capital

When you look at your Simphony SaaS platform, you obviously had very good success with Starbucks. Could you talk about any incremental opportunities that you have maybe captured in recent months or quarters that could be a driver going forward?

Tom Giannopoulos

Again, I cannot talk specifically about customers other than those that we have announced in press releases for obvious reasons, but the success that we’ve had with the customers that you mentioned, and well, of course, we have another rollout going on with an entity that manages airports and travel plazas and that’s going very well. And we have a lot of negotiations going on with major chains, because the flexibility of the product and the capability of the product, which is second to none at this particular time, so, hopefully in the ensuing months, we will be allowed to make some announcements of successes that we’ve had.

Mayank Tandon – Signal Hill Capital

I just have one more question on the P&L, the litigation reserve. Could you comment on that in terms of what is the reason for recognizing that in this quarter and maybe provide some color around that?

Tom Giannopoulos

It’s still in litigation, so I can’t really talk very much about it. I can tell you, it’s something from a cancellation of a dealer in the early 2000, 2001, and we decided to take the reserve now, period.

Mayank Tandon – Signal Hill Capital

So, is this a one quarter phenomenon or are we going to see this in the future quarters?

Tom Giannopoulos

This is it. This is one quarter phenomenon and we have no other litigation going on with any other dealers.

Mayank Tandon – Signal Hill Capital

Okay, thank you.

Operator

Thank you. And our next question comes from the line of Alan Weinfeld from Kern Suslow.

Alan Weinfeld – Kern Suslow

Could you talk a little bit more about some of the other businesses that are I think rounding out some of the strong performance like some of the property management systems at resorts and maybe some of the ballparks made any inroads at of the World Cups, the Women’s Soccer World Cup coming up, or say Olympic possibly in 2012 coming up or Winter 2014?

Tom Giannopoulos

I’ll talk about specifically about the London Olympics. There is one of our major customers already has a contract regarding certain things, like the athlete village in the London Olympics, so, there is opportunity for us there. Even if it’s only two years away, it still hasn’t crystallized into a particular contract.

From a point of view of sports arenas, we have announced a few of them. We have a great majority of the ballparks in the US are MICROS customers, including, let’s say their New Meadowlands arena, which is the New York Giants, New York Jets’ arena and others in the states.

Our business there is very robust and we have very great relationships with the food service providers in these venues, so we’re very pleased, and that business unit is doing very well and exceeded their budgeted numbers for the quarter and for the first half. So, like I said, the ladies or women’s cup and so forth, it’s premature. But, if history repeats itself, we’ll get a great share of those venues as our customers.

Alan Weinfeld – Kern Suslow

When you discussed the geographies, you didn’t address Latin America or possibly the Africa, Middle East, or maybe your biggest opportunity internationally is Asia, particularly, China. I know between you and your channel dealers in 135 countries, how is the performance in those areas of the world to more emerging markets?

Tom Giannopoulos

Well, I did mention that South America did well in my remarks. The South Africa falls in the EAME region. EAME is Europe, Africa, Middle East, so that’s covered in that particular distribution business unit. So, we do well in South Africa with both on the restaurant side and on the hotel side.

In Asia-Pacific, of course, like everybody else, the great opportunity is in China and India. Their growth rates are double-digits in both those particular countries. Most of our business really is with the US companies expanding. US companies who are our customers expanding in those particular countries, and so we get that business automatically. The great opportunity for us in both India and China and other emerging countries is to go up to the local business, which, of course, we have strong initiatives to do so.

Alan Weinfeld – Kern Suslow

Great, thank you.

Operator

Thank you. And our next question comes from the line of Dan Perlin with RBC Capital Markets.

Dan Perlin – RBC

Couple things first on the software gross margin. The second was the highest in the company’s history, and it certainly caught me off-guard, although you guys had kind of telegraphed that software would be strong in the quarter, I’m wondering what’s driving the margin in particular, in this quarter?

Peter Rogers

Dan, it’s Peter, we just had a higher proportion of MICROS internally developed software versus third-party in the quarter, driven by a large rollout, so it’s really a one quarter phenomenon. And Q3, Q4, I’d model the software margins back at the 79% range, that was very good, but that’s the driver just a higher proportion than normal.

Dan Perlin – RBC

So, the big rollout that you kind of talked about you can’t name. Can you give us a sense? I think last time when we talked, you were close to 5,000 locations. Are you done with that rollout in most parts? And if not, why not also have software margins at similar levels going into the third quarter?

Peter Rogers

Well, we’re actually with that rollout 7,000 sites with US rollouts completed. We’re starting to rollout in Canada. So going forward, the next couple quarters, we just want to have that big license recognition.

Dan Perlin – RBC

So just so I’m clear, the 7,000 in the US have already been recognized in December?

Peter Rogers

December quarter, yes.

Dan Perlin – RBC

Correct. And then the service component of that was also recognized in December quarter?

Peter Rogers

Starting of those, remember, on that account it’s on an annual basis, so the product rate recognition of that, it’s not a one…

Dan Perlin – RBC

But it started in December and was in your service revenue?

Peter Rogers

I’m sorry. Repeat the question?

Dan Perlin – RBC

I think I got the answer, I’m okay. The Canadian piece of the business, can you give us a sense of size relative to the US at 7,000, this other one has how many exactly?

Peter Rogers

Approximately 800 in Canada.

Dan Perlin – RBC

So, materially small. And that would ultimately drive the comments around margins coming down in the back half of the year?

Peter Rogers

That’s correct.

Dan Perlin – RBC

The other thing I was interested in is as we think about your guidance increasing net income by $5 million, you’d be at least our number is by about $3 million in the quarter. I’m wondering how we should be positioning our thinking around what’s going to drive the net income in the back half of the year. It doesn’t sound like it might be hotels, but maybe restaurants and retail, is that a fair assessment or do you suspect something is going to pop in any other segments?

Tom Giannopoulos

It’s all of the above and also the gross margin that we are enjoying at this particular time, that, and of course, the continuing control of our expenses, so all that will drive.

Dan Perlin – RBC

And the idea is you can manage the expenses and then the revenues, (inaudible), but right now, you’re remaining conservative?

Tom Giannopoulos

Right.

Dan Perlin – RBC

Okay. On the online reservation business, I think you’ve talked about in the past, partnering with Vein [ph] or something like that, are you moving forward with any of those initiatives or are we still kind of in the wait and see mode?

Tom Giannopoulos

We are moving, that’s competitive information, so we haven’t given up.

Dan Perlin – RBC

And then I’ll ask just one more kind of bigger picture question. I’m wondering how you guys are thinking about retrofitting or changing the hardware configuration of your product if at all to accommodate for more mobile payments having an NFC reader? You’ve seen a lot more of that. I know you guys have an integrated swipe box, so are you going to partner with somebody, you’re going to have to do that, and could that create cycle for you guys?

Tom Giannopoulos

We understand the industry trends and the technology trends and we have a group of engineers working on addressing those particular issues, so hopefully, we’ll have the right solutions for our customers.

Dan Perlin – RBC

Thank you.

Operator

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

Gil Luria – Wedbush Securities

I wanted to ask about your product pipeline. I think you just mentioned one of the interesting products you’re going to bring to market, online reservation, but just even focusing on the restaurant side, what other products beyond the core point of sale offering are you successful with right now, what other products you intend to introduce over the next couple of years?

Tom Giannopoulos

If you look at the industry trends, we’re talking about centrally hosted solutions, delivered and back office capability, e-commerce initiatives and mobile devices and social network capabilities this is what’s driving from an industry trend and also from a technology trend or trends and we are working on all of them.

So, both on the hotel side and on the restaurant side, we have a centrally hosted solution which is a truly centrally-hosted solution, meaning they work around the world; they just don’t work in a particular area addressing latency issues that you would have. We have contracts already or customers already who, let’s say, host the application or we host the application for them here, and they’re running restaurants in Berlin, or Prague, or any place, Las Vegas, etc.,

So we are continuing to develop products that address industry trends, making sure that our customers benefit by them. And also the social trends that we see around today so we’re continuing to enhance and develop products both on the restaurant side, on the retail side, and on the hotel side that are state-of-the-art as they say and what the industry needs or what the industry demands.

Gil Luria – Wedbush Securities

So I think most of that is self explanatory, but could you give us some example of what a product that would exploit the trend around social networking would look like. Which part of social networking would be relevant to what you do and it could help your customers?

Tom Giannopoulos

Go ahead.

Peter Rogers

The acquisition we made a year ago TIG Global, they provide Web site development, creative, and the management of hotels. In terms of comments from the various groups, in terms of blogs, also then setting up Facebook accounts for their hotels to help manage information flow outwards. We actually through that group just signed our first retail customer to provide the same type of capability.

And in calendar year 2011, we’ll be introducing a product for restaurant chains; ultimately will go the individual restaurants. So the TIG acquisition combined (inaudible) acquisition, a couple years ago really a strategic positioning us to beyond just being an enterprise resource platform provider providing a whole series of e-commerce and social networking tools that customers in all verticals will want and we’re doing that today.

Gil Luria – Wedbush Securities

Got it. As you talk about shifting more to your hosted solution, it sounds like that’s really the product that you’re leading with now. And so when other software companies have gone through this transition in the past, it’s depressed revenue and margins in the short-term and pushed some of those out.

Should we expect the same phenomena with MICROS or would you sit down and then talk to restaurant about selling them the Simphony hosted product versus selling them a software license upfront? How do you think about making the economics the same, are you selling it at the same level of economics, over what timeframe do you want to make sure that its break-even?

Tom Giannopoulos

I agree with you, if you were to just go in and sell a hosted solution instead of license solutions, then you would see a dramatic drop on your revenue stream in the beginning, which, of course, would pick up and it would be a much more profitable business, let’s say, three or four, five years down the road.

Fortunately, the industries that we serve have a lot of franchisee business, and they’re not really interested in being part of a hosted environment of the franchisor. So, there is good balance, from our end, we are managing it, good balance between hosted solutions and license selling solutions, so we don’t see the phenomenon that you identified, which I’m very familiar with. So, hopefully, we will continue to drive our license revenue upward and at the same time building a hosted long-term recurring revenue business.

Gil Luria – Wedbush Securities

Great, thank you.

Operator

Thank you. And our next question comes from the line of Bhavan Suri with William Blair. Please proceed.

Bhavan Suri – William Blair

Hey, guys, thanks for taking my question. If you could, just wondering about RFP activity in the restaurant business, have you sort of seen that pick-up and what does the competitive environment look like when you are doing the RFPs?

Tom Giannopoulos

This is the same question that we ask all in every conference call. RFP activity is better than it was a year ago, much better than it was two years ago, and the competitive situation remains the same. There are competitors out there we compete with, and so, yes, there is a lot more RFP activity because, obviously, business is improving, we’re told, and then you can see that in our revenue growth, so, the answer to your question is, yes, there is more RFP activity.

The next big step from our point of view will be upgrades of products that we installed in any of these three industries that we serve, four, five years ago, because the upgrade cycle is coming for those particular customers of ours.

Bhavan Suri – William Blair

Tom, that brings me to my next follow-up question which is, you are releasing a new version of the point-of-sale product I guess in the next six months. Any sense of when that might be coming out and then are you beta testing that with folks today and what is the acceptance…?

Tom Giannopoulos

I’m talking about Simphony, which we released a year ago plus or minus. And that is the product that we’re installing at Starbucks. We’re doing a lot of obviously, peripheral work with Simphony regarding the e-commerce initiatives and mobile devices, social networking and so forth that Peter talked about. But the major release on the POS side is Simphony, which is a truly centrally hosted solution that I talked about before, and it will generate good revenue over the next five, six years.

Bhavan Suri – William Blair

And then just turning to the hotel business for a second. Obviously, with the chains, you’ve done a nice job. But, as the business improves, as RevPAR improves, and occupancy rates improve, any sense of what the independent opportunity looks like and how do you expect that to grow especially in the non-US markets this calendar year?

Tom Giannopoulos

Obviously, it is going to grow. The independent especially whether it’s in the US or overseas have not been spending very much money, because of the difficulty of the business.

And as you said, as RevPAR and occupancy rates improve, and have improved in the last 12 months, occupancy rates have improved because of the substantial discounting but now healthily RevPAR is increasing, which means the discounting is not as strong as it was before, so as they get more monies, obviously, they will have to upgrade their technology, and that’s an encouraging sign for us for the future.

Bhavan Suri – William Blair

And if you were to guess, or I mean I’m assuming you know, what percentage of independents today have you penetrated, what’s the market there like and what does penetration rates look like…

Tom Giannopoulos

Our independent business, it’s very small, its market share less than 15%, while in the major chains our market share is a lot higher than that. So there is opportunity in the independent business once they begin to spend monies and buy product.

Bhavan Suri – William Blair

All right. And then just one quick one, for the quarter, could you give us some sense of how much money may have gone from what would have been the hardware sale or maintenance into the service line, meaning, what hosting growth came from sort of a switch from licenses to hosting?

Peter Rogers

On hardwares, that have no impact on hardware, people buy hardware so there is no impact there, really minimal.

Bhavan Suri – William Blair

Okay. And from the software side?

Peter Rogers

Well, I’m talking about software and service, it’s really what I call minimal migration, where there is a loss there. Remember we’ve been in the SaaS business with software for about five years, so, probably about 10% or 12% of our software related revenue we have is the function of license we sold in previous years. As Tom said, it’s really just a natural regression, but a gradual change.

Bhavan Suri – William Blair

Great, thanks, guys.

Operator

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

Eric Lemus – Raymond James

Thanks, guys for taking my question. Most of my questions have actually been answered, but just one question as far as your hardware revenue growth. We’re beginning to see your business mix have been shifting more towards software in the current revenues, but we’ve seen that hardware revenue will be picking up a little bit more notably; can we interpret this as any reflection on as far as recovery on the restaurant side? Thanks.

Peter Rogers

Eric, in terms of hardware, yes, I mean, we’re starting to see it grow somewhat, understand we do bring up some new platforms. There was a slight price reduction, so part of the growth, on a math that the unit count is a bit higher. But yes, I mean, the large deal we just recently did really didn’t have any hardware behind it, because we’re just software only, the customer kept the hardware, but clearly as the restaurant business starts to pick up we’ll see the hardware start to increase with that as we’re seeing today.

Eric Lemus – Raymond James

Great, thank you.

Operator

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

Ross MacMillan – Jefferies

Thanks a lot. Tom or Peter, just so I am clear on the Starbucks business, now, that you’ve hit that milestone, can we assume that there was full quarter of the ratable revenue recognition in Q4, or was it actually only a partial quarter. I am just trying to understand the timing of that, given that it’s a bigger recurring element than your typical customers?

Tom Giannopoulos

You mean Q2?

Ross MacMillan – Jefferies

Yes, calendar Q4, sorry.

Tom Giannopoulos

Some of the allowable revenue was recognized in the December quarter, there is additional revenue that can be recognized later on. So not all of it was recognized in the December quarter, and of course, there is additional business to be had in Canada and the U.K., and hopefully ultimately we can get the hardware business as well.

Ross MacMillan – Jefferies

And then just on the hotel side, obviously that’s being maybe a little softer. I had question just on that, which as you had some ongoing rollout at certain brands, at two hotel groups within the top five hotel groups globally. I am not clear as to whether either of those or any of those brands that you’ve rolling out are complete, and you need to basically re-compete for brand business within those large groups or whether it’s really that there is more to do in those actual brands so that there’s still effectively more penetration to go for there, can you add any color to kind of where you are with those two large top five groups? Thanks.

Tom Giannopoulos

A lot of points to your question. Before when I was talking about the hotel business being soft a little bit, I was only talking about North America, and I was not talking about the rest of the world. The major accounts that we have globally continue. Obviously, they’re not building as many hotels or they have not built as many hotels in the last 12 months, and that’s where you see the shortage as far as the revenue is concerned, but those continue to be exclusive customer of ours, we’re selling them additional products and services.

So, once business recovers and they build the same number of hotels that they were building pre-recession, then that business will pick up. So, we haven’t discontinued any of our rollouts. We haven’t lost any of those particular customers. If anything, we have renegotiated new deals with them to centrally host some of their hotels. So, business is good.

Ross MacMillan – Jefferies

Last one from me just on the large resorts/casino business. I presume the North American market remains pretty challenging, but has there been growth in any other parts of the world? Are there any new projects that you may be part of in the relatively near future?

Tom Giannopoulos

Well, in the casino business, the opportunities basically are in the individual casinos, whether they are Indian tribe casinos or casinos have been built oversees in Macau and so forth, having relationship with Las Vegas entities. So, they’re very much going there and they have some problems of licensing and et cetera, et cetera. So, that business is slow at this particular time, hopefully, it will pick up. But, the encouraging thing is, we have survived and produced good numbers in the last three years without those initiatives going very strong, so it’s a pent up demand from our point of view, so next couple of years, it’d be great.

Ross MacMillan – Jefferies

Okay, great. Thank you.

Operator

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

Liam Burke – Janney

Good evening, Tom. Tom, Fry seems to be coming up. Peter mentioned it on some of the applications in terms of the social networking side. There were some contracts announced during the quarter on the retail side, is Fry taking a bigger part in not only retail or other applications within the other verticals?

Tom Giannopoulos

It’s fulfilling the vision that we had when we bought them. And they’re producing good revenue stream. They’re highly profitable. So, it was a very good acquisition for us. And we’re using them not only for just the retail particularly, but extending their capabilities into their restaurant and hotel side, so, it was a very good acquisition; continues to do so, and they’ll continue to do very well.

Liam Burke – Janney

Great. On the services side, gross margins were lower, is that just a quarterly fluctuation, where you have to add expenses, as the revenue does continue to grow?

Tom Giannopoulos

Right.

Liam Burke – Janney

Thank you.

Operator

Thank you. And our next question comes from the line of Brian Murphy with Sidoti & Company. Please proceed.

Brian Murphy – Sidoti & Company

Hi, thanks for taking my question. One more follow-up on Simphony, Tom, you mentioned that you are in negotiations with some large restaurant chains; can you talk about the opportunity for Simphony on the street side of the restaurant business?

Tom Giannopoulos

Ultimately, our goal is to end up with one product that replaces all the other three different products that we have. So, we can sell, and we are doing that today, we are selling Simphony on premise for specific street customers that want it.

So, hopefully, in six months down the road, we will only have one product rather than three or four that we have today. That will apply from the low end of the spectrum, individual, one single say terminal for a small restaurant or to on-premise capabilities, to hosted solutions, and that’s the vision that we’ve when we came up with the product, so to meet the requirements of every segment of the restaurant business.

Brian Murphy – Sidoti & Company

But what are the thoughts in terms of the (inaudible) of the market that maybe are still on cash registers. With those lower initial outlays, does it help penetration for that tier of the market maybe with some lower price hardware attached to it?

Tom Giannopoulos

Of course, that’s also part of the vision.

Brian Murphy – Sidoti & Company

Okay, 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

Yes, just one question, Tom. I am curious if there’s any pricing improvement in any of your businesses. I’m particularly interested in what’s going on the street side, given how tough pricing was in a recession?

Tom Giannopoulos

Every negotiation is different. I can’t really say across the board that there is pricing improvements. But, we do a very good job obviously maintaining our gross margin to the level, higher level than we advertise, and so we just don’t give business away, but every opportunity is different.

Vincent Colicchio – Noble Financial

Thanks.

Operator

Thank you. And we have a follow-up question from the line of Dan Perlin with RBC Capital Markets. Please proceed.

Dan Perlin – RBC Capital Markets

Thanks. Just quickly, Pete, did you guys get a chance to raise your maintenance fees this year? I think you typically did that in January?

Tom Giannopoulos

No, we didn’t.

Dan Perlin – RBC Capital Markets

So, that’s about three years you haven’t done it, is that right?

Tom Giannopoulos

Correct. We have not done it for three years. Correct.

Dan Perlin – RBC Capital Markets

Okay, thank you.

Operator

Thank you. And Mr. Giannopoulos, at this time I’m showing there are no further questions. So, I’ll turn the conference back to you to continue with the presentation or closing remarks.

Tom Giannopoulos

Okay. Thank you very much, everyone. We’ll talk to you in April, and in the meantime, root for the Steelers. Thank you very much and we’ll see you then. Bye-bye.

Operator

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

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