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MICROS Systems Inc (NASDAQ:MCRS)

F3Q 2011 Earnings Call

April 28, 2011 4:45 p.m. ET

Executives

Tom Giannopoulos - Chairman, President & CEO

Peter Rogers - EVP, IR & Business Development

Cindy Russo - EVP & CFO

Analysts

Alan Weinfeld - Kern Suslow

Eric Lemus - Raymond James

Liam Burke - Janney Capital Markets

Mayank Tandon - Signal Hill Capital

Bhavan Suri - William Blair

Operator

Ladies and gentlemen, thanking for standing by. Welcome to the MICROS Systems fiscal year 2011 Third 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) It is now my pleasure to turn the conference over to Tom Giannopoulos, Chairman and Chief Executive Officer of MICROS Systems, please go ahead, sir.

Tom Giannopoulos

Thank you, Alan, and good afternoon everyone. Thank you for being with us this afternoon. As we all know this is the conference call to review the financial results of our third quarter, March quarter of our fiscal year 2011, which of course, started last July and ends June 30th of this year.

Here with me are Cindy Russo, our CFO; Tom Patz, Peter Rogers, and we will begin with Peter and the disclaimer.

Peter Rogers

Thank you, Tom. Good afternoon, ladies and gentlemen. Some of the comments today are forward-looking statements 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 obtain on acceptable terms; the right to incorporate in MICROS products and services; technology patented by others; environmental, climate 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

Thanks Peter. Looking at the financial results for the quarter and the year-to-date, nine months year-to-date and as shown in our press release this afternoon, overall, it was a very good quarter with the record results of revenue, net income and EPS. We had double digit revenue from a year ago, which remains our goal.

Specifically, Q3 revenue came in at $253.193 million at 10.54 increase from last year’s to $29 million, year-to-date nine months of our fiscal year revenue is $733 million which is a 10.15% increase over the last year’s $666 million, the majority of our business units, North America, in the Asia Pacific, South America and so forth have had double digit revenue growth for the quarter and the nine months year-to-date, which is very encouraging for our next fiscal year 2012.

Gross margin increased again for the quarter it was at 55.84% or a $141 million versus 54% last year over a $124 million. While the nine months gross margin is at 55.22% versus 54.81% last year continue to have excellent performance in our gross margins.

Operating expenses, total operating expenses without the stock option expense improved from 35.4% last year to 34.3% this year, which is quarter-to-quarter and from 35.9% nine months last year to 33.7% nine months this year.

As a result, income from operations again on a non-GAAP basis for the quarter, it was $54.4 million or 21.5% versus 43% made in last year with 18.8% last year. And then of course, income from operations increased 26% quarter-to-quarter, year-to-year for the same quarter.

And for the nine months income from operations is $157.860 million or 21.51% versus $126 million or 18.9%, an 25.27% increase on a year-to-year basis. Net income came in at $40.338 million versus $31.756 million last year, that’s a 27% growth from quarter-to-quarter. And for the nine months net income stands at $110.648 million versus $87.442 million, which is a 26.5% increase.

EPS was $0.49 for the quarter versus $0.39 last year, plus 25% and $0.34 for the nine months versus dollar $0.08 last year, it’s a 24% increase. And we are pleased with the financial results overall.

Additionally, our cash position has improved by a $197.6 million to $802.7 million that’s from the beginning of our fiscal year July 1st. And that this number do not include dollars that was spent on the stock buyback program. And of course, as we all know, we have no debt.

Days outstanding stand at 62.2 days which is a record below for our third quarter and additionally are international to domestic split for revenue is at 54% international, 46% US, last quarter was at 52% international and 48% US and Alaska. Cindy to give you additional numbers.

Cindy Russo

Thanks Tom. The highlight for the balance sheet for the quarter and the year are as follows. MICROS had $802.7 million of cash and investments at March 31st. An increase of $197.6 million are nearly 33% from the June 30th year end. And then increase of $215.4 million from the same quarter last year. Approximately 58% of cash investment reside outside of our domestic segment, each division generated more than 30% increase in the nine months period. From the cash flow perspective year-to-date, we have generated $152.6 million from operating activities, while spending a combined $12.1 million on property, plant and equipment, and internally capitalized software, and $43.2 million for the net purchases of investments.

During the nine months period, the company received $30.2 million from the exercise of stock options and related tax benefits and spent $11.9 million on the repurchase of common stock. In quarter three, we purchased a total of 119,000 shares, which leaves us an additional $3.4 million shares still available to purchase.

The accounts receivable balance of $175 million is an increase of $22 million from the June quarter, due to the timing of our maintenance billing Q1 and Q3 are the quarters where you will see increases in both our AR and deferred revenue balances.

As Tom stated, the days sales outstanding at quarter end were a company third record at 62.2 days compared to 63.5 days last year. International DSOs were 83.4 days, while domestic DSOs were 40.9 days down 6.8 days from a year ago.

Our inventory balance of 35.7 million is a decrease of 2.7 million from the prior quarter. Inventory turns to the third quarter were 9.1, another company Q3 record. The combined current and long term deferred revenue balance of $166 million is an increase of approximately $40 from December 31st and an increase of 41.5 million from June 30th.

A few additional items related to the income statement are as follows, the maintenance and hosting related revenues for the quarters were nearly 10% from the prior year to $98.3 million. Non operating income to the quarter excluding non-GAAP items amounted to 700,000 this figures includes 1.3 million and interest income offset by 0.3 million in interest expense 0.1 million in another income and currency loss of a half million dollar. The non-GAAP tax rate of 26.3 for the quarter includes the one time benefit realize for the exaggeration of tax rate. Going forward we recommend that utilize the normalize rate of 32% for Q4 to come up with a full year rate of 31%. Tom?

Tom Giannopoulos

Thanks, Cindy. In summary, very excellent financial results for the quarter and the nine months year to date in the business environment which is very unstable to say the list improving, yes, but still very unstable or transitory as we’ve had Chairman said yesterday. We are encouraged and pleased with a double digit revenue growth, we have achieved year to date in all three of our verticals, hotels, restaurants and retail, our SaaS platform and enabled products are doing well and we continue to increase the revenue coming from these products. As far as guidance for the rest of the year it’s concerned, we’ll keep the revenue guidance of billion to a billion 005 which we gave last August, we’ll not change them. However, we are increasing our net income guidance to $151 million to $152 million which is up from the $140 to $142 that we gave last August and not from the $145 million to $147 million adjustment that we made last quarter.

And Alan, we’ll take questions now.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question will comes from the line of Alan Weinfeld from Kern Suslow. Please proceed with your question.

Alan Weinfeld – Kern Suslow

Congratulation guys on the, really doing great job and I guess top environment at least half of your articles.

Tom Giannopoulos

Thank you.

Alan Weinfeld – Kern Suslow

Specifically in the month of March, we have seen a few companies that are somewhat competitive with you, have some deals, post into the second quarter of multi million dollar of variety and some others, just fairly close at the last minute of the 31st. Could you elaborate a little bit what you saw as the activity ended in last few weeks and why you were able to close them in time, this shows that following results today.

Tom Giannopoulos

Yeah Alan, I don’t think we have had any last minute adjustments positive or negative, we didn’t sign anything in the last minute, we didn’t see any cancellations at last minute. Our pipeline is pretty solid, we know from almost from one quarter to another quarter where our revenues going to be and it’s planned way months ahead, so we do not rely on last minute signings or last minute cancellations.

Alan Weinfeld – Kern Suslow

Great. In the hotel business it seems more of the change that you service our doing business online or to smart phones that any other kinds of communication, but they are not getting what the traditional way of picking up the phone call and looking for the best rate, just looking for the best rate over any hotel within a certain location. Does any of those factors, making a hotel fall, even if the rates are widely inconsistent help your product set?

Tom Giannopoulos

Well, of course. I mean we provide software that help our hotel customers with pricing rooms, pricing based on occupancy rates, also they have better visibility using our products with what they need to do in regards to filling out their hotel space, so we provide all the new smart phones and the capability of making reservations from your smart phone other that the tradition phone. So, the move away from the traditional phone to the new devices is basically helping us with additional revenue streams.

Alan Weinfeld – Kern Suslow

Great, good luck in the last quarter.

Thomas Giannopoulos

Thank you.

Operator

Our next question will come from the line of Eric Lemus with Raymond James. Please proceed with your question.

Eric Lemus – Raymond James

Hi guys, thanks for taking the question. Following along with the hotel business, you guys have, obviously have a lot of contracts with many of the leading brands in the market. Are you guys seeing anything incrementally in terms of speed to which hotels are going to upgrade their place to their home ground or Legacy Systems?

Thomas Giannopoulos

The majority of those entities, they have their Home Ground Systems. I think right now they’re looking for a replacement the speed in which they’re going to do that, I think varies from one of the entity to another. At the end of the day, they will need to do something with replace in all Legacy System because those Legacy Systems unfortunately for, they do not have all the features and functionality that they need especially as most of the business now is going to happen on the internet.

Eric Lemus – Raymond James

Okay.

Thomas Giannopoulos

But the seed would vary.

Eric Lemus – Raymond James

Okay. And a firm update on the retail strategy in Europe, more so about the Italian (inaudible) business and what kind of opportunities either organically or inorganically you guys are seeing in Europe with the retail business specifically?

Thomas Giannopoulos

It’s an expansion for us, as we, the original strategy of course was to take the products internationally. And the small acquisitions that we made, out issued, let’s say as a number of employees there, they can help us grow faster. And so, if we have the same, basically the same business model where a lot of the retail customers that headquartered in the state, are having or have expanded internationally. And the best to service them there is to have an infrastructure in place. And that’s what we’ve done and will continue to do.

Eric Lemus – Raymond James

Okay, great. Thanks, guys.

Operator

Our next question will come from the line of Liam Burke with Janney Capital Markets. Please proceed with your question.

Liam Burke - Janney Capital Markets

Thank you, good afternoon, Tom. Tom, on the restaurant side, I know that the quick service have been holding its own, and table service have been lagging. Are you seeing any pick up on the table service side?

Thomas Giannopoulos

Not really, especially, I mean, not really, especially as everybody wonders about the impact of the gas prices and so forth. And so, we haven’t seen any pick up. But what we have seen is an interest in our centrally hosted solution, which of course ultimately represents a lot of savings for our customers. So, there is a lot of activity in looking at our Symphony product. And I think, ultimately I see that as a good indicator of pent up demand, that’s going to materialize maybe 6 to 8 months down the road.

Liam Burke - Janney Capital Markets

So, I mean, just a follow on with that. The blended base of life cycle of some of these products has been deferred. And there’s a fairly large embedded base. And you think Symphony would be able to sort of accelerate the upgrade cycle there?

Thomas Giannopoulos

I think, Symphony would be the right product to accelerate the cycle because they’ve authorized a centrally hosted solution that is a cost saving solution for our customers.

Liam Burke - Janney Capital Markets

Great, thank you, Tom.

Thomas Giannopoulos

That’s all right.

Operator

Our next question will come from the line of Mayank Tandon with Signal Hill. Please proceed with your question.

Mayank Tandon – Signal Hill Capital

Thank you and good evening. Tom, you talked about the restaurant side. What about the hotel segment and the retail segment, especially in the wake of last quarter, I think you mentioned the hotel segment was a little bit weak domestically. How has that trended this quarter?

Thomas Giannopoulos

I mean, you’re talking about the March quarter, right?

Mayank Tandon – Signal Hill Capital

Yes.

Thomas Giannopoulos

I got it. It’s still weak from our point of view. I mean, I’m talking about the hotel segment. So, hotels are not really expanding in the US and they have curtailed, substantially curtailed their expansion programs that they established, let’s say 2 or 3 years ago, especially for China and India. And some of the, the unrests that we have seen in the last month and half are delaying those particular expansion plans even though those expansion plans have been halved, from my point of view. And majority of the hotel chains in the US, they’re growing some in the US. They are building new hotels but majority of their growth is going to come from expansion, expansion in overseas. And that overseas expansion has been propelled a little bit because of the, of all the events that we have seen in the last 45 days, including the earthquake in Japan.

Mayank Tandon – Signal Hill Capital

What about the retail segment?

Thomas Giannopoulos

Retail segment is doing better, was doing better from the activity, will continue to do so. I think there the big question factor there is the price of gas and what that means in regards to the consumer having monies to spend on buying things from retail stores and whether that’s going to have a drastic impact on the retail business being propelled as well.

Mayank Tandon – Signal Hill Capital

So, saving with all these headwinds you still think that your double digit growth is still doable?

Thomas Giannopoulos

We wouldn’t put it down if we didn’t think so.

Mayank Tandon – Signal Hill Capital

Sure, that helps. And I wanted to also ask you about maintenance pricing, I think there has been talk that you would consider doing a maintenance price increase. You haven’t done one in many years. Is that still a part, have you implemented that yet or is that something we could expect maybe sometime this year?

Thomas Giannopoulos

We did not do anything for this calendar year. For most of the customers, I had renewed maintenance contracts. We do not do an increase. We’ll have to look and see what we are going to do in the next round of issuing maintenance contracts. But, we did not do the agreed upon contractually increase that we have. But because we didn’t think it would be the appropriate thing to do with our customers.

Mayank Tandon – Signal Hill Capital

If you were to do on though, it will then be on a rolling basis, right? As contracts renew you will implement the pricing increases, is that correct?

Thomas Giannopoulos

Correct, yes.

Mayank Tandon – Signal Hill Capital

Okay, great, thanks. Good quarter.

Thomas Giannopoulos

Thank you.

Operator

(Operator Instructions) Our next question will come from line of Bhavan Suri with William Blair. Please proceed with your question.

Bhavan Suri – William Blair

Hey, guys, thanks for taking my question. Tom, just it will be great, if you could provide a little update on the new sales team in North America. I know you had us change their house by doing, and how does it do versus budget?

Thomas Giannopoulos

The hotel chain, like I said, the versus budget, that were, the team of course, is doing well under the circumstances. The hotel business unit which sells to just independent hotels in the States, they do not meet budget. But they were about equal to little bit less than equal to last year March quarter. But so far it’s not a question of our capability, it’s a question whether customers are buying.

Bhavan Suri – William Blair

And then on the restaurant side I think, you did have a sales change their rate, or call couple of months ago?

Tom Giannopoulos

Yes, we had a business unit management change, yes.

Bhavan Suri – William Blair

And so how do versus their budget on the restaurant side?

Tom Giannopoulos

About a little bit last, but better than last year.

Bhavan Suri – William Blair

Okay and then just turning to the retail business still roughly about 20% revenue. How much of that is made up of services from Fry and TIG versus -- the point of sale software things like that is a way of sort of breaking that out or thinking about those?

Tom Giannopoulos

About 60 to 65% is from the POS and the rest it is from the other two entities that you talked about.

Bhavan Suri – William Blair

And I think with the hosting and what not?

Tom Giannopoulos

That correct.

Bhavan Suri – William Blair

Great, great, and then finally just update on the sort of acquisition strategy you’ve been sort of laying other thought process maybe acquiring on institution (inaudible) company something like that any update there at all?

Tom Giannopoulos

We are still looking and I don’t want to say anything over the phone for competitive basis and also from the evaluation basis, but as you know as we said, we have a lot of cash in our strategy it is to make a couple good acquisitions and we are working towards that goal.

Bhavan Suri – William Blair

Great, thanks.

Operator

And there are presently no further questions from the phone line at this time.

Tom Giannopoulos

All right. Thank you everyone and we’ll talk to you in August, but in the meantime please root for the (Saltecs), see yeah, thank you.

Operator

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

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