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MICROS Systems Inc (NASDAQ:MCRS)

F1Q08 (Qtr End 9/30/07) Earnings Call

October 25, 2007 4:45 pm ET

Executives

Tom Giannopoulos - Chairman and CEO

Gary Kaufman - CFO

Tom Patz - EVP of Strategic Initiatives, General Counsel

Peter Rogers - SVP of IR

Analysts

Ross Macmillan - Jefferies & Co

Corey Tobin - William Blair & Company

Dan Perlin - Wachovia Securities

Brad Reback - CIBC World Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the MICROS Systems Fiscal Year 2008 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 25, 2007. I would now like to turn the conference over to Mr. Tom Giannopoulos, Chairman and CEO. Please go ahead, sir.

Tom Giannopoulos

Thanks, Anthony, and good afternoon everyone. Thank you for being with us. Again this is the financial results of our Q1, September quarter, of our fiscal year 2008. With me, as always, Gary Kaufman, Tom Patz and Peter Rogers, 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 involve risk and uncertainties such as uncertainty of product demand and market acceptance, impact of competitive products and pricing and margins, the ability to obtain under acceptable terms the right to incorporate in MICROS products and services technology patent by others, and anticipated tax liability 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, Financial Conditions and Results of Operations, and Business Investment Risks sections of MICROS' SEC filings. Tom?

Tom Giannopoulos

Thank you, Peter. Our press release this afternoon, the financial highlights are as follows; revenue for the quarter came in at $216.482 million, it’s an increase of 24.6% over last year of $173 million, a very healthy increase, especially for a first quarter, exceeding consensus expectations and our own budgeted number. Last year, Q1 revenue growth was 14.3% quarter-to-quarter from $162 million to $173 million. So, the 24.6% is a very nice growth rate from last year to this year.

Gross margin for the quarter was at 52.3%, that’s the highest first quarter percentage ever, and a very good improvement over last year’s Q1. Last year's Q1 was at 51%. Operating expenses for the quarter on a non-GAAP basis were at $80.313 million, that’s 37.1% versus last year’s percentage, which was 37.5%, a good improvement here as well.

Income from operations, again on a non-GAAP basis, it was up $32.929 million or 15.2% versus last year’s $23 million or so, which was 13.5% and a 41.1% increase year-to-year from Q1 last year to Q1 this year. Overall, all the numbers and percentage and so forth was a very good improvement from last year as well.

Net income on a non-GAAP basis, $24.307 million, a 40% increase over last year’s $17 million. EPS at $0.58, substantially better than expectations, and an increase of close to 35% over last year’s $0.43. Cash increased from $329 million at the end of June to $365million. Our debt remained the same, less than $3 million thereabouts. Overall, for Q1, which is substantially seasonable for us, as you know, we had great financial results on all our numbers, and Gary will give you the rest of the numbers.

Gary Kaufman

Thanks, Tom. The highlights of the September balance sheet are as follows. The cash balance of approximately $365 million is an increase of $36 million over the June 30, 2007 year-end balance. During the first quarter of fiscal year 2008, we generated $34 million from operating activities, while spending $600,000 on internally developed software, $12 million on acquisition, and $4 million on property, plant and equipment.

As for the stock repurchase plan, we did not buyback any shares in the first quarter. However, in the month of October, we have repurchased approximately 233,000 shares at a total cost of $14.9 million. Since the inception of our Plan Two, we have repurchased 2 million shares at a total cost of $90 million. This completes the repurchase of the authorized shares under Plan Two. Our intention is to obtain approval for another stock buyback program at the next Board of Directors meeting, which will be held in November. The company also received $12 million from the exercise of stock options in quarter one, along with an additional $5 million from the realized tax benefit from stock option exercises. The accounts receivable balance of approximately $190 million is an increase of $10 million over the June year-end balance. The increase is due primarily to the billing of maintenance service agreements in July that were not paid yet as of September 30th. Today, days of sales outstanding increased to 79 days from 73 days at June 30th. Domestic days sales outstanding increased from 65 to 67 days, and international days sales outstanding increased from 82 to 91 days.

Inventory increased from $48 million to $52 million at September 30th. This increase is mainly due to MICROS’ preparing for an increased sales volume in the subsequent quarters. Our inventory turns in September were 6.6 time. Prepaid expenses of approximately $32 million increased $5 million from June, primarily due to annual prepayments, corporate insurance and various hardware and software support contracts.

You will note a new line item on the balance sheet titled income taxes payable, non-current. This was established in order for MICROS to be in compliance with the new FIN 48 regulation. The balance in the account is $11.9 million at September30th.

Deferred service revenue of approximately $105 million, increased $18 million over last quarter due to the timing of our maintenance billing. As you recall, March and September are the quarters when our deferred revenue increases.

And a few miscellaneous items, maintenance revenue for the quarter were $68.2 million, an increase of $4 million over quarter four. Interest income for the first quarter was $3.5 million, and the income tax rate for quarter one on GAAP basis was 33.5%. The tax rate on a non-GAAP basis is 32.3%. For forecasting purposes, I suggest you to use the same rates for the entire year, Tom?

Tom Giannopoulos

Thank you, Gary. In summary, we had a very good start to our fiscal year, much better than planned. As we stated in August, we will no longer provide quarterly guidance. We are reaffirming the guidance for the fiscal year that revenue of $910 million to $915million, non-GAAP net income from $109 million to $111 million; non-GAAP EPS, $2.59 to $2.62, and it’s too early in the year, from our point of view, to make any changes to these numbers. So we will stick with these numbers for another quarter. And Anthony, we will take questions now please.

Question-and-Answer session

Operator

(Operator Instructions) And our first question comes from the line of Ross Macmillan with Jefferies & Co. Please go ahead, sir.

Ross Macmillan - Jefferies & Co

Thank you, congratulation on a strong quarter. Can you just maybe talk a little bit about what drove the strength in hardware this quarter? It was almost flat sequentially, which is highly unusual relative to seasonal trends? Thanks.

Tom Giannopoulos

Nothing specific, we had a couple of good contracts that we signed that we have announced. Some of the hardware was delivered and installed during the quarter. So it’s generally business as usual.

Ross Macmillan - Jefferies & Co

Would you expect the hardware number there for it to be potentially more lumpy this year, and therefore not necessarily following traditional seasonality?

Tom Giannopoulos

Who knows? Not really. We had some, like I said some contracts in the first quarter. I think overall the performance of the hardware both from a percentage perspective and a gross margin perspective will remain per our expectations, and per the traditional numbers that we have had in the past. We don’t see a substantial upside or a downside from that segment of the business.

Ross Macmillan - Jefferies & Co

And just in terms of your guidance then, obviously no change here, but given that you would be planned, I guess, if things play up the remainder of the year, -- the two plan are better than we should, I guess, assume that the guidance would be going higher.

Tom Giannopoulos

As we have done in the past, you can assume that, but that – that’s why I’m not committing that today.

Ross Macmillan - Jefferies & Co

Okay. Thank you.

Operator

And your next question comes from the line of Corey Tobin with William Blair & Company. Please proceed with your question.

Corey Tobin - William Blair & Company

Hi. Good afternoon, guys. Congrats on a great quarter. A quick numbers question and then onto a big picture. We have had two very strong quarters here for hardware gross margins, uncharacteristically strong, frankly, and just curious, are we setting a new mark here in terms of what we think – we should be thinking about in terms of where that metric would be? Do you expect it to trend back to the low to mid 30s here going forward?

Tom Giannopoulos

It should be between, you know, overall for the year, will even out. I think, the overall numbers, and the promises, and the commitments and what we think can workout at somewhere between 34 and 36.

Corey Tobin - William Blair & Company

Okay.

Tom Giannopoulos

So that -- 38 maybe at the high side, and I think the number is around 35.

Corey Tobin - William Blair & Company

Okay (indiscernible) sorry…

Tom Giannopoulos

That’s what you should plan on.

Corey Tobin - William Blair & Co

Great. And the other side of the coin on the software margin that piece might have been a little bit below we have seen in the past, anything going on there in particular?

Tom Giannopoulos

No, not really. But if you look at the three segments, and look at hardware, as an example, it grew from last year this time Q1; it grew 19.9% from $54 million to $64 million this quarter. And service, if you look at service, the numbers that we have published, it went from $91.8 million last year to $120 million this year, that’s a 31.5% growth. If you subtract, what I consider subscription type of revenue that really could belong into the software segment, the service revenue could have, let’s say, grown 28%, from $91.802 to $116 or $117 million. And if you take that $3 million, $3.2 million, and you reclassify it as software, then software really grew not 11.2% as our numbers show from last year to this year, but 21.95% from $27.757 million last year to almost $34 million this year. And then if you go back a year ago, a year ago to a year before that, our software didn’t grow any in the summer quarter. So this, whether you look at it as an 11.2% growth or as a 21.95% growth, that’s a very good growth for a first quarter, which is seasonable from our point of view.

Corey Tobin - William Blair & Co

And then Tom just carrying through that thought – this -- we would hear this last quarter as well if there was again the shift to this the hosted software piece. Should we expect – shouldn’t we, say, expect it see that they continue to the rest of this year, at least, if not longer?

Tom Giannopoulos

But at the same time the software overall is going to continue to grow as Q2 December quarter, and of course the June quarter, where we sell a lot more of our software licenses in anticipation of the summer season and so forth, when they come into play. So I think from our point of view, the 11.2% or 21% growth is a very good Q1 growth from a software perspective.

Corey Tobin - William Blair & Co

And that’s great. And one last one, and more of a big picture question. It seems like the business here, you know, continues to defy some of the economic, I have understand, do you attribute this to just the fact that you have such a strong competitive position in the hotel space? Or are you taking greater than expected share in the restaurant space, or how exactly do you sort of characterize, if you will, the strength that you are seeing when some of the individual end markets that you are selling into haven’t necessarily put up those robust numbers? Thanks.

Tom Giannopoulos

The keyword here is hustle, and I will stay with that. Of course, we’ve the products; we’ve the distribution in place. We’ve an infrastructure that nobody else has in our industry from a competitive perspective. We’ve good products. We’ve great people. We’ve a good client base. They like what we're doing, they like our products and you add hustle to it, that’s the key to success.

Corey Tobin - William Blair & Co

Thanks. Congratulations. Thanks.

Tom Giannopoulos

Thank you

Operator

Your next question comes from the line of Dan Perlin with Wachovia Securities. Please proceed with your question.

Dan Perlin - Wachovia Securities

Thank you. And again, really excellent quarter and obviously (indiscernible) difficult times. Tom, I just have a question about some of the things you've mentioned in the past about trying to get incremental operating leverage, and I’m just looking at the total operating expenses still running around 37.1. So, you definitely saw a year-over-year improvement. I’m wondering if we should start to see that simply accelerate this year or is that something that you are comfortable with kind of the 40, 50 basis point kind of year-over-year improvement.

Tom Giannopoulos

Starting with a better overall percentage ratio than last year even from 37.5 to 37.1 is a nice improvement, especially for a September quarter. Our goal still remains to get it down to 35%, and as we leverage the overall organization better and continue to do so,  we'll get that down to the 35% and that's our kind of immediate goal before we get down to 30% at some particular time.

Dan Perlin - Wachovia Securities

Okay. And then not to harp on the hardware question so much, but I’m just curious as to are there -- typically hardware associated with really the restaurant business, so was the – was that consistent, I guess, in the orders this quarter? And if the answer is yes, I am just wondering what that ultimately tell us about the end market. Because the concerns have consistently been about weakness in restaurants, but you have such a strong hardware number in this quarter, and it is coming from restaurants, and it would just seems to fly in the face of that?

Tom Giannopoulos

Peter?

Peter Rogers

Dan, the hardware's up 19%, as Tom said earlier we had some contracts that came in, when we talk about what the consumer spending in terms of restaurants, we are in a global marketplace, and we have grown a distribution. So just to focus on the U.S. consumer really misidentifies, really the market opportunity we have. And we’re really expanding the distribution [of our share] in a lot of new countries to the first-time users. So we are much less susceptible to a slowdown of particular market consumer. And I think investment people look at the breadth and the depth of the product line and the distribution channel.

Dan Perlin - Wachovia Securities

Does PCI compliance has any impact on your business, and would that have been a reason for hardware spike up a little bit?

Tom Giannopoulos

The PCI compliance is not really adding a lot of volume to our business. It’s really the traditional replacement of old systems that we have had. As I have said a number of times before, that replacement cycle was delayed because of a post-Y2K, the 9/11 event delayed installation or replacement of those products in the 2004, 2005 period. We are replacing those. We will continue to replace. And of course we are adding to our market segments because whether they're on the restaurant side, on the retail side or on the hotel side, we are adding products to cover all the segments of those industries, low end, mid tier and high end. As a result, we have expanded our market potential substantially.

Dan Perlin - Wachovia Securities

Are you seeing in the current environment…?

Tom Giannopoulos

Compliance yes, it’s not making a difference between the numbers.

Dan Perlin - Wachovia Securities

Okay. I’m just wondering in the current environment, when there is so much distress around other companies, and you look out at acquisition opportunities, are you finding that that list is getting larger than it has been, let’s say last year outside of maybe your distributor network?

Tom Giannopoulos

Well, in the pre sub-prime issues and so forth, valuations were very expensive especially as the private equity firms were coming in and so forth. So it was difficult at that particular time. Since the March, April, May timeframe and so forth, valuations have been, have come down, still it's not to what we would like to pay in some cases. But we're still, you know, we're always looking, its obviously, it’s a more opportunistic time today than it was in the March timeframe, but valuations still are, still high from our point of view.

Dan Perlin - Wachovia Securities

Okay. And then one last quick question. Gary, you mentioned something about your inventory build, I didn't necessarily I think 52 to 47 was a huge build, but it sounded like there was a vote of confidence there in anticipation of some future growth. So, is that, am I reading that statement correctly? Your order flow looks, your pipeline for orders are very strong and as a result, you're building your inventories a bit?

Gary Kaufman

You interpreted it correctly.

Tom Giannopoulos

You are a wise person

Dan Perlin – Wachovia Securities

You are right. All right. Then I'd better stop. Thank you.

Tom Giannopoulos

Thank you.

Operator

And we have a follow-up question from the line of Corey Tobin with William Blair & Company. Please proceed with your question.

Corey Tobin - William Blair & Company

Hi. I have just one quick follow-up, if I could. On the heels of that, just related to visibility, in the past, I think we’ve talked about a couple of months worth of visibility in the restaurant segment, and then obviously little bit longer, given the planning rollout schedule needed for the hotel space. Any change to that? I’m assuming it's moving in your favor but how would you gauge it today?

Tom Giannopoulos

Nothing has changed. No. Same visibility.

Corey Tobin - William Blair & Company

And then any -- do you happen to know the split between domestic and international this quarter?

Tom Giannopoulos

Yes, the domestic business was at 45% and the international at 55%.

Corey Tobin - William Blair & Company

And you've said in the past that you didn’t expect it to go too much further than those two metrics, is that still an accurate reflection of what you are seeing today?

Tom Giannopoulos

Right.

Corey Tobin - William Blair & Company

So this is probably peak in terms of where international will go?

Tom Giannopoulos

Right.

Corey Tobin - William Blair & Company

Okay, great. Thank you.

Operator

And our next question comes from the line of Brad Reback with CIBC World Markets. Please proceed with your question.

Brad Reback - CIBC World Markets

Well, hi, guys. How are you?

Tom Giannopoulos

Fine. Hi Brad.

Brad Reback - CIBC World Markets

Just a quick sort of high-level question on the hotel business, I think you have addressed it a little bit, but maybe you can give us a little high-level update on future business opportunities, how the pipeline looks on that front as opposed to contracted business that you are executing on?

Tom Giannopoulos

We are still -- we are substantially involved with the upgrades and new contracts that we are getting. So, and those global hotel chains that don't use our products today, I think we have made substantial inroads in regards to getting their business at sometime down the future, maybe a couple of years down the road. And as you know, the majority of the global chains use our products. We have plans in place, and rollout plans in place to replace the older with the newer. And whatever other global hotel chains remain that do not use our products; I think we have made substantial inroads with them for the future.

Brad Reback - CIBC World Markets

Okay. And if we look at the operating model going forward, in the past you guys have very correctly continued to invest in growth. Would it be correct to assume, given the fast start to the year that you will use some of this upside to invest in growth and maybe we should continue to think about traditional margin expansion than greater margin expansion because of that hiring?

Peter Rogers

Brad, its Peter. No real change. I mean, we will hire as need be, so it’s not because we are doing better we are going to hire that much faster. It’s really just driven by market-by-market need in terms of personnel. But if people check the website, we have lot of job positions open, and just because I am making more money, we are going to hire a lot more people, it’s really driven by the demand that we see.

Brad Reback - CIBC World Markets

Got it. Great. Thank you very much.

Operator

And Mr. Giannopoulos, there are no further questions at this time. I will now turn the call back over to you.

Tom Giannopoulos

Okay. Thank you everyone. We will talk to you in January. Have a happy holidays and thanks Anthony, bye, bye.

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 line.

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