MICROS Systems F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

Oct.25.07 | About: MICROS Systems, (MCRS)

MICROS Systems Inc (NASDAQ:MCRS)

F1Q08 (Qtr End 9/30/07) EarningsCall

October 25, 2007 4:45 pm ET

Executives

Tom Giannopoulos - Chairman andCEO

Gary Kaufman - CFO

Tom Patz - EVP of StrategicInitiatives, 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 youfor standing by and welcome to the MICROS Systems Fiscal Year 2008 FirstQuarter Conference Call. During the presentation, all participants will be in alisten-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions). As areminder, this conference is being recorded Thursday, October 25, 2007. I wouldnow like to turn the conference over to Mr. Tom Giannopoulos, Chairman and CEO.Please go ahead, sir.

Tom Giannopoulos

Thanks, Anthony, and goodafternoon everyone. Thank you for being with us. Again this is the financial resultsof our Q1, September quarter, of our fiscal year 2008. With me, as always, GaryKaufman, Tom Patz and Peter Rogers, we will commence with Peter and thedisclaimer.

Peter Rogers

Thank you, Tom. Good afternoon,ladies and gentlemen. Some of the comments today are forward-looking statementsinvolve risk and uncertainties such as uncertainty of product demand and marketacceptance, impact of competitive products and pricing and margins, the abilityto obtain under acceptable terms the right to incorporate in MICROS productsand services technology patent by others, and anticipated tax liability and theeffects of terrorist activity and armed conflict. MICROS undertakes no duty toupdate any forward-looking statements to conform to actual results or changesin MICROS' expectations. Other risks and uncertainties associated with MICROS'business are identified in the Management's Discussion and Analysis, FinancialConditions and Results of Operations, and Business Investment Risks sections ofMICROS' SEC filings. Tom?

Tom Giannopoulos

Thank you, Peter. Our pressrelease this afternoon, the financial highlights are as follows; revenue forthe quarter came in at $216.482 million, it’s an increase of 24.6% over last yearof $173 million, a very healthy increase, especially for a first quarter, exceedingconsensus expectations and our own budgeted number. Last year, Q1 revenuegrowth was 14.3% quarter-to-quarter from $162 million to $173 million. So, the24.6% is a very nice growth rate from last year to this year.

Gross margin for the quarter was at52.3%, that’s the highest first quarter percentage ever, and a very goodimprovement over last year’s Q1. Last year's Q1 was at 51%. Operating expensesfor 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 aswell.

Income from operations, again ona non-GAAP basis, it was up $32.929 million or 15.2% versus last year’s $23million or so, which was 13.5% and a 41.1% increase year-to-year from Q1 lastyear to Q1 this year. Overall, all the numbers and percentage and so forth wasa 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 thanexpectations, and an increase of close to 35% over last year’s $0.43. Cashincreased from $329 million at the end of June to $365million. Our debt remainedthe same, less than $3 million thereabouts. Overall, for Q1, which issubstantially seasonable for us, as you know, we had great financial results onall our numbers, and Garywill give you the rest of the numbers.

Gary Kaufman

Thanks, Tom. The highlights ofthe 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-endbalance. During the first quarter of fiscal year 2008, we generated $34 millionfrom operating activities, while spending $600,000 on internally developedsoftware, $12 million on acquisition, and $4 million on property, plant andequipment.

As for the stock repurchase plan,we did not buyback any shares in the first quarter. However, in the month ofOctober, 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 2million shares at a total cost of $90 million. This completes the repurchase ofthe authorized shares under Plan Two. Our intention is to obtain approval foranother stock buyback program at the next Board of Directors meeting, whichwill be held in November. The company also received $12 million from theexercise of stock options in quarter one, along with an additional $5 millionfrom the realized tax benefit from stock option exercises. The accountsreceivable balance of approximately $190 million is an increase of $10 millionover the June year-end balance. The increase is due primarily to the billing ofmaintenance service agreements in July that were not paid yet as of September30th. Today, days of sales outstanding increased to 79 days from 73 days at June30th. Domestic days sales outstanding increased from 65 to 67 days, andinternational days sales outstanding increased from 82 to 91 days.

Inventory increased from $48million to $52 million at September 30th. This increase is mainly due to MICROS’preparing for an increased sales volume in the subsequent quarters. Ourinventory 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 onthe balance sheet titled income taxes payable, non-current. This wasestablished in order for MICROS to be in compliance with the new FIN 48regulation. The balance in the account is $11.9 million at September30th.

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

And a few miscellaneous items,maintenance revenue for the quarter were $68.2 million, an increase of $4million 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 rateon a non-GAAP basis is 32.3%. For forecasting purposes, I suggest you to use thesame rates for the entire year, Tom?

Tom Giannopoulos

Thank you, Gary. In summary, we had a very good start toour fiscal year, much better than planned. As we stated in August, we will nolonger provide quarterly guidance. We are reaffirming the guidance for thefiscal year that revenue of $910 million to $915million, non-GAAP net incomefrom $109 million to $111 million; non-GAAP EPS, $2.59 to $2.62, and it’s tooearly in the year, from our point of view, to make any changes to thesenumbers. 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 ourfirst question comes from the line of Ross Macmillan with Jefferies & Co.Please go ahead, sir.

Ross Macmillan - Jefferies & Co

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

Tom Giannopoulos

Nothing specific, we had a coupleof good contracts that we signed that we have announced. Some of the hardwarewas delivered and installed during the quarter. So it’s generally business asusual.

Ross Macmillan - Jefferies & Co

Would you expect the hardwarenumber there for it to be potentially more lumpy this year, and therefore notnecessarily following traditional seasonality?

Tom Giannopoulos

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

Ross Macmillan - Jefferies & Co

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

Tom Giannopoulos

As we have done in the past, youcan 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 fromthe line of Corey Tobin with William Blair & Company. Please proceed withyour question.

Corey Tobin - William Blair & Company

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

Tom Giannopoulos

It should be between, you know, overallfor 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 highside, 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 thecoin on the software margin that piece might have been a little bit below wehave seen in the past, anything going on there in particular?

Tom Giannopoulos

No, not really. But if you lookat the three segments, and look at hardware, as an example, it grew from lastyear 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, itwent 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 thatreally could belong into the software segment, the service revenue could have, let’ssay, grown 28%, from $91.802 to $116 or $117 million. And if you take that $3million, $3.2 million, and you reclassify it as software, then software reallygrew 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 goback a year ago, a year ago to a year before that, our software didn’t grow anyin the summer quarter. So this, whether you look at it as an 11.2% growth or asa 21.95% growth, that’s a very good growth for a first quarter, which isseasonable from our point of view.

Corey Tobin - William Blair & Co

And then Tom just carryingthrough that thought – this -- we would hear this last quarter as well if therewas again the shift to this the hosted software piece. Should we expect – shouldn’twe, 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 softwareoverall is going to continue to grow as Q2 December quarter, and of course theJune quarter, where we sell a lot more of our software licenses in anticipationof the summer season and so forth, when they come into play. So I think fromour point of view, the 11.2% or 21% growth is a very good Q1 growth from a softwareperspective.

Corey Tobin - William Blair & Co

And that’s great. And one lastone, and more of a big picture question. It seems like the business here, youknow, continues to defy some of the economic, I have understand, do youattribute this to just the fact that you have such a strong competitiveposition in the hotel space? Or are you taking greater than expected share inthe 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 youare selling into haven’t necessarily put up those robust numbers? Thanks.

Tom Giannopoulos

The keyword here is hustle, and Iwill stay with that. Of course, we’ve the products; we’ve the distribution inplace. We’ve an infrastructure that nobody else has in our industry from acompetitive perspective. We’ve good products. We’ve great people. We’ve a goodclient base. They like what we're doing, they like our products and you add hustleto 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 theline of Dan Perlin with Wachovia Securities. Pleaseproceed with your question.

Dan Perlin - Wachovia Securities

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

Tom Giannopoulos

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

Dan Perlin - Wachovia Securities

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

Tom Giannopoulos

Peter?

Peter Rogers

Dan, the hardware's up 19%, asTom said earlier we had some contracts that came in, when we talk about whatthe 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 thedistribution [of our share] in a lot of new countries to the first-time users. Sowe are much less susceptible to a slowdown of particular market consumer. And Ithink investment people look at the breadth and the depth of the product line andthe distribution channel.

Dan Perlin - Wachovia Securities

Does PCI compliance has anyimpact on your business, and would that have been a reason for hardware spikeup a little bit?

Tom Giannopoulos

The PCI compliance is not really addinga lot of volume to our business. It’s really the traditional replacement of oldsystems that we have had. As I have said a number of times before, that replacementcycle was delayed because of a post-Y2K, the 9/11 event delayed installation orreplacement 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 segmentsbecause whether they're on the restaurant side, on the retail side or on thehotel side, we are adding products to cover all the segments of thoseindustries, low end, mid tier and high end. As a result, we have expanded ourmarket potential substantially.

Dan Perlin - Wachovia Securities

Are you seeing in the currentenvironment…?

Tom Giannopoulos

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

Dan Perlin - Wachovia Securities

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

Tom Giannopoulos

Well, in the pre sub-prime issuesand so forth, valuations were very expensive especially as the private equityfirms 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, havecome down, still it's not to what we would like to pay in some cases. But we'restill, you know, we're always looking, its obviously, it’s a more opportunistictime today than it was in the March timeframe, but valuations still are, still highfrom our point of view.

Dan Perlin - Wachovia Securities

Okay. And then one last quickquestion. Gary, you mentioned something about your inventory build, I didn't necessarilyI think 52 to 47 was a huge build, but it sounded like there was a vote ofconfidence there in anticipation of some future growth. So, is that, am Ireading that statement correctly? Your order flow looks, your pipeline fororders 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'dbetter stop. Thank you.

Tom Giannopoulos

Thank you.

Operator

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

Corey Tobin - William Blair & Company

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

Tom Giannopoulos

Nothing has changed. No. Samevisibility.

Corey Tobin - William Blair & Company

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

Tom Giannopoulos

Yes, the domestic business was at45% and the international at 55%.

Corey Tobin - William Blair & Company

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

Tom Giannopoulos

Right.

Corey Tobin - William Blair & Company

So this is probably peak in termsof where international will go?

Tom Giannopoulos

Right.

Corey Tobin - William Blair & Company

Okay, great. Thank you.

Operator

And our next question comes fromthe line of Brad Reback with CIBC World Markets. Pleaseproceed with your question.

Brad Reback - CIBC World Markets

Well, hi, guys. How are you?

Tom Giannopoulos

Fine. Hi Brad.

Brad Reback - CIBCWorld Markets

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

Tom Giannopoulos

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

Brad Reback - CIBC World Markets

Okay. And if we look at theoperating model going forward, in the past you guys have very correctlycontinued to invest in growth. Would it be correct to assume, given the faststart to the year that you will use some of this upside to invest in growth andmaybe we should continue to think about traditional margin expansion thangreater 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 aregoing to hire that much faster. It’s really just driven by market-by-market needin terms of personnel. But if people check the website, we have lot of jobpositions open, and just because I am making more money, we are going to hire alot more people, it’s really driven by the demand that we see.

Brad Reback - CIBC World Markets

Got it. Great. Thank you verymuch.

Operator

And Mr. Giannopoulos, there areno further questions at this time. I will now turn the call back over to you.

Tom Giannopoulos

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

Operator

Ladies and gentlemen that doesconclude the conference call for today. We thank you for your participation andask that you please disconnect your line.

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

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

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!