MICROS Systems CEO Discusses F1Q12 Results - Earnings Call Transcript

Oct.28.11 | About: MICROS Systems, (MCRS)

MICROS Systems, Inc. (NASDAQ:MCRS)

F1Q12 (Qtr End 09/30/2011) Conference Call

October 27, 2011 04:45 pm ET

Executives

Tom Giannopoulos - CEO

Cindy Russo - CFO

Tom Patz - EVP

Peter Rogers - EVP, IR

Analysts

Rahul Bhangore - Bhavan Blair

Al Weinfeld - Davis Securities

Liam Burke - Janney Capital Markets

Dan Perlin - RBC Capital Markets

Fatima Boolani - Jefferies

Eric Lemus - Raymond James

Arvind Rajamohan – Oppenheimer

Vincent Colicchio - Noble Financial

Dan Perlin - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal year 2012 first quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded, Thursday, October 27, 2011. I would now like to turn the conference over to Tom Giannopoulos, Chief Executive Officer.

Tom Giannopoulos

Thank you, Alan, and good afternoon, everyone. Thank you for being with us. As a reminder, again, this is the conference call to review the financial results for our first quarter. This is the September quarter of fiscal year 2012. And that fiscal year started July 1st. Here with me as always 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 uncertainty for 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's products and services, technology patented by others, environmental and health-related issues, unanticipated tax liabilities and the effects of terrorist activity and armed conflict.

MICROS Systems 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, analysis of financial condition results of operations and business and investment risk sections of MICROS' SEC filings. Tom?

Tom Patz

Okay, thanks, Peter. Looking at the financial results for the quarter from our press release this afternoon, we had a very excellent quarter with record revenue, net income and EPS. All these numbers are records for the second quarter. Revenue for the quarter grew almost 10% from $232 million to $256 million. The $256 million was the second highest quarter in our history.

Gross margin ratio for the quarter came in at 56.3% or a $144 million plus versus last year's 54.18%, some $126.453 million. Income from operations on a non-GAAP basis was $56.43 million versus last year's $49 million. That's a 14% increase year-to-year. The ratio of income from operations for this year was 21.98 and last year was 21.19. So that was a very good improvement there. And all of these numbers are excellent numbers as well.

On a non-GAAP basis then, net income which is at the bottom of the page there on the press release came in at $39.294 million, a 17.71 increase of the last year's $33.381 million. And then EPS growth again on a non-GAAP basis grew from $0.41 to $0.48, which is a plus 17% or sudden growth. Our cash position, cash and investments increased versus last year and Cindy Russo will give you the details of the cash.

Our days outstanding came in at 62.1, not a record, but pretty close, which speaks well for our ability to get paid even in this difficult business environment. Cindy?

Cindy Russo

Thanks, Tom. The highlights of the balance sheet for the quarter are as follows. MICROS had $778.9 million of cash and investments at September 30, an increase of $98 million or 14.4% over the same quarter last year. And the decrease compared to Q4 of fiscal year '11. In addition to an adverse impact of foreign exchange amounting to $35.4 million, the first quarter cash movement also includes the repurchase of $25.4 million in common stock.

During the quarter, we purchased the total of 576,000 shares at an average price of $44.13 per share. There is currently Board authorization to purchase an additional 2.4 million shares. From a cash flow perspective, we generated $19.6 million from operating activities, while receiving $10.4 million from the net maturity of investment.

MICROS capitalized $1.8 million in internally developed software cost. While spending $4.1 million on property, plat and equipment, as we continue to invest in our global posting infrastructure. The company's cash split between these segments a U.S. 41%, international 59%. Day sales outstanding at quarter end were 62.1 days. Domestic DSOs were Q1 record 42.2 days. While international DSOs were 80 days inline with last year's record 79.8.

The inventory balance of $40.5 million is an increase of $2.3 million over the June prior, primarily attributable to the timing of shipments from international manufacture. Inventory turns in the period were 8.5 compared to 8.8 a year ago. The combined current and long-term differed balance of a $155.7 million has increased $9.1 million since our last release. The increase is mainly due to the timing of our international maintenance selling. As you recall, September and March are the quarters when our differed revenue increases.

A few additional items related to the income statement are as follows. On the revenue side the segment split for the quarter was domestic 44%, international 56%. Maintenance and hosting related revenues for the quarter grew 12.8% from the prior year to a $104.5 million or 40.7% of total revenue. The SaaS and hosting portion of our current revenues grew 36.7% over the parallel quarter, as MICROS continues to grow its base with these offerings.

Non-operating income for the quarter was $2.4 million. This figure includes $2 million in interest income offset by $0.2 million in interest expense and a currency gain of a $0.5 million. The Q1 non-GAAP tax rate of 32.9% reflects the impact of certain discrete items recognized in accordance with FIN 18. We recommend that you continue to model a 31% to 32% full year tax rate as stated last quarter. Tom?

Tom Giannopoulos

Thanks, Cindy. In summary, we are very pleased with the results for the first quarter. There are lot of opportunities for our products and services in all three of our segments. We just need our governments to make certain decisions, such as the Eurozone decision that they made last night. Then MICROS can continue to grow globally, so that we can meet our goal of $2 billion by 2015, 2016.

As far as guidance is concerned, we will stick with the guidance that we have, that we gave you last August for the year which was revenue of $1.111 and EPS of $2.09. No sense change in those numbers today. And Alan will take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Bhavan Suri with William Blair.

Rahul Bhangore - Bhavan Blair

This is actually Rahul Bhangore in for Bhavan. Thanks for taking my question. Could you comment on the demand environment specifically by region?

Tom Giannopoulos

The demand environment across all regions is probably about the same, because, all of them have same opportunities and the same issues. I would say the U.S. is recovering some what faster and then would Asia Pacific next, South America next, and EAME last, as EAME is struggling with their debt issues and the Greek issue and so forth. But the same slightly is one is better than the others, but not very much difference between the four.

Rahul Bhangore - Bhavan Blair

And last quarter, Tom, you commented that you were in negotiations with some of your major hotel customers in the U.S. Could you give us an update on how those are progressing?

Tom Giannopoulos

They are progressing very well. And that's all I can say at this particular time.

Operator

Our next question will come from the line of Al Weinfeld with MICROS Systems.

Al Weinfeld - Davis Securities

This is Al Weinfeld. I'm from Davis Securities. I don't work for MICROS. Just curious if, geographically, you can give us a more numbers than just 56% internationally Europe, North America, Asia, do you have any of those?

Tom Giannopoulos

I mean, we don't really segregate the number away, but I can give you an overall number. Let see Europe and North America about the same. If you look at the $256 million, 30 of that about is from Asia Pacific, and about 10 to 15 is from South America and the rest of it is particularly between Europe and North America.

Al Weinfeld - Davis Securities

And did you see any particular difference quarter-to-quarter, and what you call the street business globally in restaurants?

Tom Giannopoulos

The right answer for that particular question is that there was some optimism around the world in the beginning of our quarter. So if you go back to the July timeframe there was optimism that the global recession was coming to an end, and GDP growth rates were being revised a little bit upward, and then the continued problems with the debt.

The military activities that they would had around the world are tempered those expectations, let's say, and that optimism. And in the later part of the quarter, the optimism existed in the beginning of the year. The unemployment in the U.S. stayed the same about 9% regardless of how much money the government supposedly spent on the recovery program.

So, in the last month or so, it was encouraging today to see that the GDP growth of U.S. is the 2.5%. And it's encouraging to see that the Europeans are coming to a decision on how to handle the debt of the various countries that belong to be the Eurozone. So, overall the optimism that existed in the beginning of the quarter has faded. And hopefully the news that we've gotten today and yesterday will give us some additional hope that the business is going return.

Now if you look at the press releases from our customers, on there financial results. The majority of them are basically showing gain in all the metrics, revenue, profitability, revenue per available room, occupancy rates which hopefully speaks well for the next nine months for us for a fiscal year.

Operator

Our next will comes from the line of Liam Burke from Janney Capital Markets.

Liam Burke - Janney Capital Markets

Tom, Cindy in her prepared statements mentioned nice growth in the SaaS part of the business. Are you seeing any, I mean, obviously, it is a healthy growth. Are you seeing acceleration there? Are you seeing any customers' preference to SaaS versus a typical software license??

Tom Giannopoulos

The issue there from what we see is very simple. The issue is that because of the difficult business environment, our customers will traditionally would have purchased a up-front system license and are shifting over to a SaaS model, so that they don't have all of the up-front cost.

Is not happening let's say, in the big droves, but it is happening slowly, but surely. So while for the long-term this is fantastic for us. We have the right products and we have the right infrastructure in place. The short term, it will affect your volume of business or your revenue, while your profitability is not really affected. So we do see an inflammation from our customers to buy a SaaS system rather than buy license system up-front.

Liam Burke - Janney Capital Markets

Do you think you're pulling in any sales? Is somebody is saying, well, I could keep this system another year, things are a little soft. I'll wait till next year? The fact that you could go on a less up-front more pay as you go basis, are you be able to pull-in any more sales?

Tom Giannopoulos

Yes, obviously yes. But that's either you don't have that sale at all, or you have some of it, on a SaaS model. Still I think, as we were discussion the other day, you need to manage this transition from license revenue to SaaS model or let's say subscription, whatever your monthly revenue. Otherwise you'll just going to have a large drop in your revenue stream up-front.

Liam Burke - Janney Capital Markets

And how is the retail business moving along? You've had some acquisitions, you've integrated them, its sort of slowly growing in that space?

Tom Giannopoulos

They've met their objectives or their budget objectives in the September quarter as they did last year. We need to grow them faster internationally. We're building an infrastructure there to do that. But, overall, year-to-date they're meeting, let's say the expectations that we had when we acquired them.

Operator

Our next question will comes from line Dan Perlin from RBC Capital Markets.

Dan Perlin - RBC Capital Markets

Cindy, what was the FX benefit in the quarter?

Cindy Russo

The exchange rate compared to Q4 was actually a decreasing revenue of $4 million, and a decrease of about our earnings per share about $0.01 compared to Q4.

Dan Perlin - RBC Capital Markets

So, it was $4 million of revenue and it cost you $0.01 in the quarter?

Cindy Russo

And earnings per share.

Dan Perlin - RBC Capital Markets

The services revenue line looked like it dipped down a little bit more than it has over the last several years on a sequential basis. Is there anything to call out there? Was there an implementation push? Everything else on that line is typically recurring, so I'm just wondering what, if anything, we should be thinking about with that line right now.

Cindy Russo

As Tom was just stating, we are carefully managing the mix of software license sales and the recurring revenue from a SaaS model. And as you can see from the quarter we had larger software sales. So it's a constant manage of that, because all of the SaaS revenue is recorded in the service line.

Dan Perlin - RBC Capital Markets

And what was the absolute dollar of SaaS revenue? I know you gave a growth rate, but you didn't get the absolute number?

Cindy Russo

$17.3 million.

Dan Perlin - RBC Capital Markets

$17.3 million. Was that up 30% sequentially or was that year-over-year?

Cindy Russo

It was up 0.07 year-over-year. It was about 7% over prior quarter.

Dan Perlin - RBC Capital Markets

The SG&A was also up absolute dollars and on a percentage basis, more than I've seen in a bit. And I'm just wondering is that in preparation of anything in particular we need to be thinking about? Are there more dollars needing to be spent on Simphony? How should we think about that?

Cindy Russo

The percentage is consistent with Q3 of last year. The dollars is up for total operating expense is compared to Q4. And it's primarily hiring more people and investing in R&D continued efforts.

Dan Perlin - RBC Capital Markets

Right. You said it was comparable to third quarter of last year?

Cindy Russo

Well if you look at the percentage, the percentage is the same as Q3. And then when you look at this fair amount there was only a slight increase in dollar compared to Q4 of total operating expenses.

Dan Perlin - RBC Capital Markets

Right. Revenues were down and SG& A was up $3 million sequentially. So, that tells me you're looking at something. I'm just wondering if that's indicative of anything.

Cindy Russo

Yes, we are continuing to invest in the infrastructure. And this inflation we are hiring quite a few people.

Dan Perlin - RBC Capital Markets

So, has the hiring plan for the year more in the implementation side, or is there something else that you're staffing up for?

Tom Giannopoulos

It's on the development side.

Dan Perlin - RBC Capital Markets

On the development side, okay.

Cindy Russo

And it's also the hosting group.

Dan Perlin - RBC Capital Markets

Are you also planning to ramp prices a bit within the maintenance stream when that comes up for little bit?

Tom Giannopoulos

Absolutely, yes.

Cindy Russo

Yes, basically the plan for is to start in January 1.

Dan Perlin - RBC Capital Markets

And is that generally thought of as something that's holistic across the entire international and domestic front or is that selective?

Tom Giannopoulos

Korat, it's holistic across the board.

Dan Perlin - RBC Capital Markets

And then just lastly, if I could just get your sense on the competitive environment now that you have Radiant and NCR, have you seen anything, is there some disruption in the market? Are you creating some opportunities in pockets where you guys might be able to see some business opportunities that maybe didn't otherwise exist prior to that deal?

Tom Giannopoulos

We haven't seen anything different, of course, they are just merged, let's say. So we have not seen anything different in the marketplace. And that's all really I can comment on this.

Operator

Our next question will come from the line of Fatima Boolani for Jefferies.

Fatima Boolani - Jefferies

Just wondering if you could provide, a little bit more detail around the strength in the software and hardware area.

Peter Rogers

Fatima, I think in terms of hardware that fluctuates quite a bit. We just had a very favorable product mix in the first quarter. So very pleased with those margins but I wouldn't model at that level from next quarter. I say model them at 35 because those things to fluctuate based on product mix and where there are shift around the world.

In terms of this software margin being up this than normal, what we're really seeing is that internally developed software is probably accounting for about 93% of our sales, through back up years. It was probably around 87%, 88%. The good news we're just having high proportion of internal results that has time margins.

We are having lower software materialization versus the higher revenue mix that brings down cost of sales a couple of points. I think the best thing to model software for the rest of the year though just thought the 80% level because that does fluctuate.

Operator

Our next question will come from the line of Eric Lemus from Raymond James.

Eric Lemus - Raymond James

Most of my questions have been answered, but if we could just get an update on the restaurant business. Was there any sort of additional Simphony wins that you didn't talk about? If you just give us some relative strength of the business on National accounts versus the street business?

Tom Giannopoulos

The National accounts' is a lot of negotiations but really there is no buying of this particular time because of the caution that they have. Everybody is talking to us. We are talking to them about this Symphony product which would be a very nice solution, and or upgrades. But right now really, it is all talks and no action. And I think it's going to be on this cautionary path probably for the rest of this calendar year.

Eric Lemus - Raymond James

And then just an update on growth expectations for the year. In each one of your main businesses, is there any main area that potentially sees some upside relative to where your guidance is, whether it be in the retail, hotel or restaurant?

Tom Giannopoulos

I think the upside would be on the hotel side, especially if we are successful with the initiatives that we have with the entities that we are negotiating with.

Operator

Our next question will comes from the line of Arvind Rajamohan from Oppenheimer.

Arvind Rajamohan – Oppenheimer

Can you guys talk about your plans for restaurant reservation product? I know in the past you've talked about either developing that in-house or partnering. And then also on the same topic, can you give us update on how your online hotel reservation product is going?

Peter Rogers

The restaurant reservation product were really in development. So I don't have anything much to say about it at this point. We're looking some time in 2012 for that. The hotel reservation product, that's the product we have come myfidelio. And actually having very good success and that's the product we use that connects the hotels with the global distribution system, the online travel agencies, as Expedia, Priceline, Orbitz'.

But that product line is doing very well, we've actually introduced it here in North America and get very good market acceptance. Highly secure, fast, lower cost than the comparative offerings. And it's been bundled in with our hotel offerings and very good success, especially here in North America.

Arvind Rajamohan – Oppenheimer

Then just lastly, can you guys give us an update on the potential X vertical you were looking at?

Tom Giannopoulos

It's going well. I don't want to disclose any more on that.

Operator

(Operator Instructions) Our next question will comes from line of Vincent Colicchio from Noble Financial.

Vincent Colicchio - Noble Financial

Most of mine were answered as well. Tom, I think last quarter you said on the acquisition front that multiples looked pretty fairly rich to you. Is there any change there, and perhaps you can give us an update of what you're looking at these days?

Tom Giannopoulos

There is no change to the multiples, we have a couple of candidates but we having serious discussions with and we're still looking for something on the fourth vertical, which, like I said a minute ago, I don't want to talk anymore about, especially on this conference call. But we are hopeful and optimistic that we are going to have something in the beginning of the new calendar year 2012.

Vincent Colicchio - Noble Financial

Something meaning an acquisition in a new vertical, is that what you're saying?

Tom Giannopoulos

No, in an acquisition.

Operator

We do have a follow-up question from the line of Dan Perlin from RBC Capital Markets.

Dan Perlin - RBC Capital Markets

Cindy, I just wanted to follow up on the FX again. It is negative $4 million in this quarter and it cost you $0.01. Last quarter it was $17 million and it didn't cost you anything. Can you just reconcile that for me?

Cindy Russo

Well it all depends upon the current exchange rates and drop throughout the world. It's typical, that you have when you have a decrease in revenue. You normally have a decrease in your earnings. And last year it was actually the opposite because of the different currencies and the way they move. We're located all around the world and we deal with all different currencies.

Dan Perlin - RBC Capital Markets

So the $17 million in the fourth quarter that you were talking about had no impact on earnings because of the mix?

Cindy Russo

Because, of the mix of the different currencies.

Dan Perlin - RBC Capital Markets

Okay. But the Euro and the Pound are like 30% of your mix and everything else is almost to minimize. I guess, will take it off line. I just don't understand that. Unless you're spending it on something, I'm fine with that. But if the answer is it is just mix, I don't understand that. So we can follow up off-line.

Operator

At the present time there are no further questions from the phone lines.

Tom Giannopoulos

Alan, thank you. Thank you everybody. We'll talk to you in January. Thanks again.

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. Have a great day everyone.

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