MICROS Systems F2Q08 (Qtr End 12/31/2008) Earnings Call Transcript

MICROS Systems Inc. (MCRS)

F2Q08 (Qtr End 12/31/2008) Earnings Call

January 31, 2008 4:45 pm ET

Executives

Tom Giannopoulos - Chairman, President and CEO

Gary Kaufman - EVP, Finance and Administration and CFO

Tom Patz - EVP, Strategic Initiatives, and General Counsel

Peter Rogers - EVP, IR and Business Development

Analysts

Alan Weinfeld - Henley & Company

Corey Tobin - William Blair & Company

Dan Perlin - Wachovia Securities

Allen Stevens - Private Investor

Ross MacMillan - Jefferies

Brad Reback - Oppenheimer

Vincent Colicchio - Noble Financial

Brian Murphy - Sidoti & Company

Gil Luria - Wedbush

Presentation

Operator

Welcome to the fiscal year 2008 second quarter conference call. (Operator Instructions)

I would now like to turn the conference over to Tom Giannopoulos, Chairman and CEO. Please go ahead, sir.

Tom Giannopoulos

Thank you, Seema, and good afternoon, everyone. Again, thank you for being with us to review our Q2 December quarter financial results of our fiscal year 2008, which ends in June.

I am speaking to you from California. And back in our headquarters as always are Gary Kaufman, Tom Patz and Peter Rogers. Hopefully, we'll not have any communication problems, but if I drop out for any reason, Gary Kaufman will take over until I get back on the phone.

And we will begin with Peter Rogers and the disclaimer. Peter?

Peter Rogers

Good afternoon, ladies and gentlemen. Some of the comments today are forward-looking statements that involve risk and uncertainties such as uncertainty 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; 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 Conditions and Results of Operations and Business and Investment Risks sections of MICROS' SEC filings.

Tom?

Tom Giannopoulos

Okay. Thank you, Peter. We had a great quarter. The numbers from our press release indicate substantially exceeding expectations and our budgeted numbers in all categories. We're very pleased with the results for the quarter and very pleased for the results of the first six months of our fiscal year.

The financial highlights are as follows. Revenue for the quarter increased 28.5% from $189 million last year to $243 million this year. Hardware revenue increased 21% from $55.4 million last year to $67 million this year. Software revenue increased 35.9% from $32 million last year to $44.5 this year. And service revenue increased 30% from a $101.6 million last year to $132 million this year. All great numbers and great percentage increases as well.

For the six months of the fiscal year, revenue has increased 26.7% from $363 million last year to $460 million this year. Hardware revenue has increased 20.5% year-to-year. Software revenue has increased 24.6% year-to-year, and service revenue has increased 30% year-to-year. Again, spectacular numbers!

Gross margins for the quarter and the six months came in consistent with our expectations in all three categories: hardware, software and service. Overall gross margin, 51.9% for the quarter and 52.1% for the six months; again, excellent performance.

We had great improvement in non-GAAP operating expenses as well. Operating expenses for the quarter were at $87 million without the stock option expense, which is a 35.7% ratio versus revenue versus last year's 37.4%. And year-to-date, the expense ratio is 36.4% versus last year's 37.5%.

Income from operations on a non-GAAP basis increased 41.7% from last year quarter-to-quarter, and the ratio to revenue improved substantially from 14.6% to 16.1% for the quarter and from 14.1% to 15.7% for the six months.

Net income as a result (inaudible) B004, 1.57 stock option expense increased to $28 million from $20 million, a 40.8% increase, and EPS increased by 38.8% from $0.49 to $0.68, much better than expectations and our own budgeted numbers.

Our cash position has increased from $329 million in June to $387 million at the end of December. And year-to-date, we have spent almost $46 million-plus for our stock buyback program. Debt remains at an insignificant $2.5 million to $3 million, and days outstanding 62 days, which is an all time low number.

For the quarter, the North America revenue was at 46.5% and the international revenue was at 53.5%. And year-to-date, North America revenue was at 48% and international was at 52%, which is consistent with numbers in the past.

And I will ask Gary to give you the additional numbers from the balance sheet. Gary?

Gary Kaufman

Highlights of the December 31, 2007, balance sheet are as follows. The cash balance of approximately $388 million is an increase of $59 million over the June 30th balance and an increase of $23 million over that of the first quarter.

During the first six months, we generated $65 million from operating activities while spending $1.4 million on the internally developed software, $12 million on acquisitions, $7 million on property, plant and equipment and $28 million on the repurchase of stock.

During the quarter, we repurchased 424,000 shares at an average price of $66. In the month of January, we purchased an additional 287,000 shares. It should be noted that during quarter two, we completed purchasing the 2 million shares authorized to be repurchased in plan number two, and we are now authorized to repurchase an additional $1 million shares under plan number three.

The company also received $20 million from the exercise of stock options along with an additional $10 million in the realized tax benefit on stock option exercises. The accounts receivable balance of $169 million is a decrease of $21 million from the September quarter.

Days sales outstanding for the quarter decreased from 79.2 days to 62.6 days. As Tom stated, this is a new record for MICROS. International days sales outstanding decreased from 91 days to 71 days as all three international regions recorded a significant improvement. Domestic days sales outstanding decreased from 67 days to 53 days, also a significant improvement.

The inventory balance of $53.4 million is an increase of $1.5 million over the September balance. However, despite the dollar increase, inventory turns increased to 7.4 turns from 6.6 turns the previous quarter.

Deferred service revenues decreased approximately $24 million due to the timing of maintenance. As you recall, December and June are the quarters when our deferred revenue decreases. In fact, the December balance is usually the lowest of the year, because a large percent of our maintenance agreements renew on January 1st.

Now, for some additional miscellaneous items, maintenance revenue for quarter four was $71.9 million, an increase of $3.7 million from the last quarter. Maintenance revenue for the first two quarters combined was $140 million. This compares to $109 million in the first two quarters of FY '07 or an increase of 28%.

Interest income for the quarter was $3.7 million. For forecasting purposes, I would recommend using a tax rate similar to last year for the total FY'08.

On January 8th, MICROS announced the two-for-one stock split. January 22nd was the record date for the determination of shareholders entitled to receive the additional shares. The ex-dividend date is scheduled for February 5th.

Finally, on our GAAP income statement, we were required to take an additional $3.2 million charge, $0.05 per share in quarter two related to the 120,000 stock options granted to Tom Giannopoulos, Chairman and CEO during the quarter.

Stock option charges are normally taken over a 36-month period of MICROS. However, in this case, since Mr. Giannopoulos is of retirement age, the entire charge has to be taken immediately upon grant in accordance with the terms of the option plan. For the next quarter, I would recommend using $0.07 per share for the stock option charge.

Tom?

Tom Giannopoulos

Okay. Thank you, Gary. In summary, Q2 was a great quarter for us. We had great revenue growth. Our margins are on target. Our expenses are improving even further. Our profitability has improved greatly. We exceeded consensus expectations.

In the quarter, we signed a number of new customers, including Accor Hotels, which is second or third largest hotel company, depending how you look at rooms or number of hotels. We've been authorized to disclose now that Burger King Corporation has selected us as their exclusive POS supplier for their 775 corporate stores.

We signed Omni Hotels both for OPERA Reservations and OPERA PMS and others, which some of them we have announced this quarter and some of them we have not announced.

In regards to guidance and as indicated in our press release this afternoon, for the March quarter, Q3 quarter of the fiscal year, revenue guidance for the quarter is between $228 and $232 millions. Net income guidance on non-GAAP basis is between $26.8 million and $28.4 million. Net income on GAAP basis is between $23.8 million and $25.2 million. EPS guidance on non-GAAP basis between $0.63 and $0.67. EPS guidance on a GAAP-basis between $0.56 and $0.59.

In regards to guidance for the rest of the year, because I'm sure that question is going to be asked, if business conditions do not get any worse, we feel we can meet the fourth quarter revenue number that is out there. And I believe that number is around $250 million.

And, Seema, we'll take questions now please.

Question-and-Answer Session

Operator

(Operator Instructions)

Tom Giannopoulos

Hello.

Operator

(Operator Instructions)

Tom Giannopoulos

Hello.

Operator

Hello.

Tom Giannopoulos

Guys, can you hear me? Hello.

Peter Rogers

We are here, Tom. I don't --.

Tom Giannopoulos

Operator?

Operator

Yes.

Tom Giannopoulos

How about you guys call through the operator.

Peter Rogers

Operator, are you there?

Operator

Yes, I am.

Tom Giannopoulos

Okay. We'll take a question now, please.

Operator

(Operator Instructions) Our first question comes from the line of Alan Weinfeld from Henley & Company. Please proceed with your question.

Alan Weinfeld - Henley & Company

Hi, guys. I was just --.

Gary Kaufman

Operator, we cannot hear the questions.

Operator

One moment.

Alan Weinfeld - Henley & Company

Is this better?

Operator

Mr. Weinfeld, your line is open. Please proceed with your question.

Alan Weinfeld - Henley & Company

Yes. Can you hear me now? Can you hear me now?

Tom Giannopoulos

Operator, it's not working.

Peter Rogers

Let's go to the next question.

Alan Weinfeld - Henley & Company

Hello.

Operator

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

Corey Tobin - William Blair & Company

Hi, Tom.

Operator

Mr. Tobin, your line is open.

Corey Tobin - William Blair & Company

Yes, hello. Tom can you hear me. Peter? Hello?

Operator

One moment, gentlemen.

Corey Tobin - William Blair & Company

Yes, hello. Tom can you hear me. Peter? Hello?

Gary Kaufman

Corey?

Corey Tobin - William Blair & Company

Yes.

Gary Kaufman

This is Gary Kaufman.

Corey Tobin - William Blair & Company

Gary, how are you?

Gary Kaufman

We can hear. I can hear.

Corey Tobin - William Blair & Company

Okay, good. Let me start off, if I may, I am still sort of digesting. Tom, what you mentioned in the guidance… I just wanted to be clear. So, are you saying we should estimate sort of the low end of next quarter being $228 million, $230 million -- somewhere in that range? And then $250 million would be sort of the low end of what you are thinking for Q4, or could you provide some additional clarity around that, please?

Tom Giannopoulos

For Q3, the March quarter, our guidance is between $228 million and $232 million. For Q4, if business conditions do not change dramatically, then I think we are going to meet the number that is out there, and that number is around $250 million.

Corey Tobin - William Blair & Company

Okay. And so, I guess the question I would ask you is: one, in your comment on business. I think you originally said if businesses does not get worse -- Is there something to imply that the business -- I mean Q2 was a very strong quarter, and your guidance was obviously strong as well. Did something happen toward the end of the quarter, whatever that would make you think that the rest of the year is going to be materially worse in the first part of the year?

Tom Giannopoulos

Nothing has happened. We haven't had any cancellations. We've had the rollout that we have planned for Q3 and Q4 are in full steam ahead. I am just being cautious because everybody is talking about the recession and depression and everything else. So, I want to give you guidance for the third quarter and tell everybody that if nothing changes dramatically that is beyond our control, we'll meet the $250 million. And as result, we'll exceed the guidance that we gave from an annual point of view that was in $910 million to $915 million. We'll exceed it by $38 million to $40 million.

Corey Tobin - William Blair & Company

Okay. So, if I take $228 million alone for next quarter or $250 million, I get to about $938 million. So, is that where we should think it was kind of being the --?

Gary Kaufman

Corey, I don't want to tell you, but that's the number that's going to be there. Okay. I am telling you that -- and that's why we gave third quarter guidance only. We feel confident about third quarter. And if things don't change that's outside of our control, we'll do the $250 million, which then would make it $938 million.

Corey Tobin - William Blair & Company

Understood, great. So, now moving away from it now just quantitatively, could you just spend a second talking about the various end markets and what sort of trends you are seeing there? Obviously, hotels remain very strong. Has there been any change in the domestic restaurant space and/or international restaurant space?

Gary Kaufman

We have not seen any change in our business, obviously, from the fantastic four that we had in December. We expect a great quarter in the third quarter -- obviously a good quarter -- and the fourth quarter as well. We have not had any cancellations. We haven't had anything to change our bullish outlook for the rest of the year from a business perspective.

Corey Tobin - William Blair & Company

Excellent. Great. I'll jump back in the queue. Thank you.

Gary Kaufman

Next question, please.

Operator

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

Dan Perlin - Wachovia Securities

Thanks, and congratulations on what is truly an outstanding quarter and a pretty lousy tape but the question that I have is: Really, I'm wondering are you pulling business in any way, shape or form -- are orders coming in more quickly as implementations happening more quickly than what you would have thought and that was contributing to this --?

Tom Giannopoulos

We have not sold any business from future quarters to make the December quarter. So, good --.

Dan Perlin - Wachovia Securities

It's just so strong. I just wonder what the trend is, because it flies so much in the face of what we hear?

Tom Giannopoulos

Business is good.

Dan Perlin - Wachovia Securities

Well, maybe can we talk a little bit more specifically about, you know, software numbers were up considerably. Those typically are related to fairly large clients or sizable clients that you are winning. And I am wondering -- ?

Tom Giannopoulos

Well, I don't think we've got any new large contract in the December quarter. This is just normal business.

Dan Perlin - Wachovia Securities

Normal business?

Tom Giannopoulos

Just selling to -- all the hotel installations that we're doing. We didn't have a single contract like an ORS Reservation System contract with a particular customer that would have pushed the revenue higher. This is just normal business.

Dan Perlin - Wachovia Securities

Okay. And is it safe to assume that, at some level, that most of the software revenues ultimately coming from hotels on the upgrade cycle here, because $40 million sequential improvement, whether it's not a big client and it's broad-based, is a considerable jump for your company in any one quarter?

Tom Giannopoulos

And as we have said before, the rollouts continue. We're signing new customers that are adding to our revenue growth. So, nothing has slowed down, and we are doing more and more of the installations that we had planned. We have signed two years ago and a year ago. And it's time, as we've said all along for the past two or three years, that hotels are doing their full rollouts, and that's how the revenue is so good.

Dan Perlin - Wachovia Securities

And so we also saw a considerable growth in hardware continuing to be strong. And I am wondering is that reflective of Burger King, or are we yet to see some of the rollouts of those corporate stores?

Tom Giannopoulos

We have not collected a single dollar from the Burger King contract that I just talked about because that's a corporate business. Of course, we still do franchisee business with Burger King, both in the US and substantially overseas, like UK and so forth, that are kind of exclusively our customer there, but that's part of the revenue that is going on. So, you are not seeing in the December numbers any of these Burger King contracts that I just talked about.

Dan Perlin - Wachovia Securities

Okay.

Tom Giannopoulos

That's probably four, five months out before we have any revenue stream coming from that contract.

Dan Perlin - Wachovia Securities

Okay.

Tom Giannopoulos

It'd be really, say, fiscal 2009 revenue stream.

Dan Perlin - Wachovia Securities

Okay. We saw a little bit of a decline in the services margin, gross margin on the year-over-year basis. Can we talk to that point just a bit?

Tom Giannopoulos

Yes. Well, yes, there is --.

Dan Perlin - Wachovia Securities

I guess is there anything specific left-off where the service is sold in the quarter or --?

Tom Giannopoulos

There is nothing significant there. It is the holidays between Thanksgiving and Christmas holidays, or you have some inefficiency in installations and so forth. And as a result, the service revenue margin suffers. But there is no special reason for that.

Dan Perlin - Wachovia Securities

I'll ask one more question, and then I'll jump back in queue. Are you seeing, as we look at the makeup of your revenue, a big shift into hotels away from restaurants as we move into the December quarter and then we go into the back half of the year?

Tom Giannopoulos

No, percentage wise, no. The business is as good on the restaurant side as it is on the hotel side.

Dan Perlin - Wachovia Securities

Okay, great. Thank you very much.

Tom Giannopoulos

Yes.

Operator

Our next question comes from the line of Alan Weinfeld with Henley & Company. Please proceed with your question.

Alan Weinfeld - Henley & Company

Thanks. Can you hear me now?

Tom Giannopoulos

Yes.

Alan Weinfeld - Henley & Company

Great. Congratulations, real amazing quarter, especially on the software side, with the margin and with the growth. I know you guys have always not looked at the fast-food industry on the corporate side because the margins were not high enough. What the Burger King offered you on the corporate side versus the franchise side -- if you to do their 725 restaurants, and will this be a landmark deal and the fact that you may move into a possible McDonald, Wendy's or the lots of other chains that probably need your work in the fast-food corporate side?

Tom Giannopoulos

Well, in the past, the margins in the fast-food clients were at the low end, than we would like to have, strictly because the offerings three or four, five years ago were strictly hardware with minimum software, but the business model has changed.

There are a lot of software purchases for the -- the system today consists of hardware. It consists of POS software, and it consists of back-office and centrally hosted software solutions that increases the software content of the other offerings. As a result, it increases the gross margin for a particular location. So, it's become more attractive to us in that respect.

Is this a landmark? When that will get us McDonald's and so forth? We'll take them one at a time.

Alan Weinfeld - Henley & Company

All right. Are you seeing any specific international business in the Far East surrounding the Olympics? Is there anything incremental you're working there since there is so much work still to be done?

Gary Kaufman

That data was included basically in the quarter. What you see overseas, of course, is that our customers, the Marriotts of the world and the Starwoods of the world and Hyatts and so forth are building or expanding in these locations.

One of our international customers is Starbucks, and their growth potential, as we see in their numbers, the other day is not so much growth domestically but substantial growth internationally. So, there is revenue to be had, but the Olympics revenue is still to come from my point of view.

Alan Weinfeld - Henley & Company

Great. Thanks very much.

Operator

The next question comes from the line of Ross MacMillan with Jefferies. Please proceed with your question. Our next question comes from the line of Allen Stevens, a private investor. Please proceed with your question.

Allen Stevens - Private Investor

Hi, guys. Could you hear that?

Tom Giannopoulos

Yes.

Allen Stevens - Private Investor

Great quarter. Just in terms of looking at the overseas revenues and everything else, is it the currency or due to any currency shifts or changes in those helping the cash flows? Have you hedged those currencies over your contracts, dollar contracts and then that's the way you book them in?

Tom Giannopoulos

Gary, you want to take that.

Allen Stevens - Private Investor

No, I'm sorry.

Tom Giannopoulos

Gary, are you there? I'll answer you then. In certain areas, the revenue is in dollars, and there is no risk basically from currency fluctuations and so forth. Our budgets for Europe are established on whatever the euro to dollar ratio is at the beginning of the year. So, there is a small favorable [tax] in the revenue stream, but it's not significant.

Allen Stevens - Private Investor

Just wanted to follow up on the international business, the breakdown between European versus sort of the Asia and things like that. So [it seems that] you think that Europe is going be slowing down like US did maybe in the next six months. Could you break out what the percentage of international revenues on Europe versus like Asia, maybe South America or that's evenly spread across?

Tom Giannopoulos

I can tell you overall that the South American revenue is in the $45 million area. So, it's not that big. Asia Pacific revenue overall from a budget perspective, and a year perspective is in the close to $100 million, plus or minus, and the EAME revenue is in about $300 million.

Allen Stevens - Private Investor

Have you not seen any slowdown in any of the European bills and everything else that's going on?

Tom Giannopoulos

No, we have not seen. As a matter of fact, EAME, which is Europe, Africa, Middle East had a great quarter, great first half. As I have indicated in the past, we have expanded our presence in Eastern European countries of the past like Romania, Bulgaria and so forth. We have opened offices there. And some of those countries, if not all of them, are joining the European Union. We'll be dealing in euros, et cetera, so our revenue there is solid.

Allen Stevens - Private Investor

Thank you very much.

Operator

Our next question comes from the line of Ross MacMillan with Jefferies. Please proceed with your question.

Ross MacMillan - Jefferies

Thanks. Tom, if I look at the first-half growth rate, it's like high 20% range. Clearly, your guidance for the third quarter and the comment on $250 million for Q4 implies pretty sharp deceleration even adjusting for acquisitions in the back half of last year. Should we just read that as conservatism, or are you actually anticipating that growth is slowing here?

Tom Giannopoulos

It's not deceleration. It's consistent with the numbers that we gave you last year. And we are not really subtracting from the third quarter or the fourth quarter, for we have over-exceeded the first six months. So, it's consistent with our numbers that we gave last year and made a point last August that each quarter has certain pattern, and we'll stay with that. And so, from my point of view, it's not a deceleration. It's consistent with what we gave before. You want to take that as conservatism, so be it.

Ross MacMillan - Jefferies and Co.

Okay, great. And just on the international versus domestic, clearly -- and I'm just looking at a sequential number. The majority of the growth this quarter was international. Is there any way you to contrast the Americas or North America with international in terms of how you see demand right now?

Tom Giannopoulos

I think both international and domestic businesses are in accordance with our budgeted numbers. Okay? So, from year-to-year, they vary. The demand is more one year in North America, and in the next year, in EAME. So, there is nothing that you can read from that other than we have planned conservative for the numbers in North America, and I think our plan is coming true. And so, there is nothing inconsistent with what we have planned.

Ross MacMillan - Jefferies and Co.

Great. Thank you. Good quarter.

Tom Giannopoulos

Thank you.

Operator

Our next question comes from the line of Brad Reback from Oppenheimer. Please proceed with your question.

Brad Reback - Oppenheimer

Hi, guys, how are you?

Tom Giannopoulos

Fine.

Brad Reback - Oppenheimer

Tom, as you look at your business going forward, look to the medium term and then the longer term, what type of metrics do you look at to get a sense of how to invest longer term as it relates to hiring sales and marketing, et cetera?

Tom Giannopoulos

Well, the metrics that we look, of course, is our overall direction that we've had for four, five years now that we wanted to be a $1.1-billion company by the end of fiscal year 2009. If you look at from the time we announced that goal, it was like 17% to 18% annual growth year-after-year in the past six or seven years. That's the guiding light that we have from an investment point of view.

In regards to resources, we will finish this year the numbers that we talked about. And so, the $1.1 billion is a doable thing. As a matter of fact, we've kind of upgraded the number a little bit higher now. So, we're managing our businesses from a point of view of additional resources and any small acquisitions that we need to make to meet that goal that we established five or six years ago.

Brad Reback - Oppenheimer

Would you like to share what the new number is for 2009?

Tom Giannopoulos

Not today.

Brad Reback - Oppenheimer

Fair enough.

Tom Giannopoulos

Good try, nice try there.

Brad Reback - Oppenheimer

And how about on the hiring front? Has it gotten incrementally easier at all to hire quality service people?

Tom Giannopoulos

It's not easier. It's a challenging thing for all of us. But hopefully, the good thing about the slowdown in the US is that you have resources becoming available, but we have the right resources right now. We continue to hire. We have substantial number of openings, between contracting, using contractors and so forth. We're not short of installers, although it remains a challenge for us to continue to hire the people that we need to hire.

Brad Reback - Oppenheimer

And last question. I know it was along time ago, but if you go back to the early 90s, when there was a meaningful recession -- a normal, we'll call, recession -- what types of things did you guys see there that proceeded that recession or gave you a hint that it was on the horizon?

Tom Giannopoulos

Well, really in the 90s, I think the company grew substantially. Our growth from between '92, '93 to the end of '99 was in the 30%-plus annual growth. The slowdown came in the 2000 in the post-Y2K and so forth year 2000, and then it was affected by 9/11. So, the slowdown years that we had were 2000, 2001, and 2002.

We continue with our investment in new products and so forth, and that decision in shortcutting investment in product development was a wise one because we developed products that our customers are buying and using today.

So, with the amount of slowdown in the 90s, from a company perspective, we grew 33% per year. We've managed wisely that 2000 and 2001, and the recession that was at that particular time 2002. And so nothing else I can add to that.

Brad Reback - Oppenheimer

No worries. Thank you very much.

Tom Giannopoulos

Yes.

Operator

The next question comes from the line of Vincent Colicchio with Noble Financial. Please proceed with your question.

Vincent Colicchio - Noble Financial

Nice quarter, guys -- really a nice job. There is a question for you, Tom. Hello. Can you hear me?

Tom Giannopoulos

Yes.

Vincent Colicchio - Noble Financial

Has there been any discernible change in the mix on the restaurant side between casual dining, which we all have heard a lot of weakness about and QSR in the quarter compared to where you were in the previous quarter?

Tom Giannopoulos

We've had a number of units -- excuse me here a second.

Vincent Colicchio - Noble Financial

Hello.

Tom Giannopoulos

No, there hasn't been any. I mean we've had a number of new contracts and new customers in fiscal year 2008 that we'll be delivering products to and the street business has been very good. And so, there hasn't been anything significant.

Vincent Colicchio - Noble Financial

Okay. On the casino side, you've talked about having a nice pipeline there. Have there been any discernible changes there in terms of your pipeline?

Tom Giannopoulos

Excuse me. Can you repeat the question please?

Vincent Colicchio - Noble Financial

Yes. On the casino side, you've talked about having a nice, healthy pipeline. Has there been any discernible change there?

Tom Giannopoulos

No, nothing. We continue to deliver on the large casino business that we've had, MGM Mirage, and so forth. And we are trying at a lot of the Indian casinos, especially in Midwest. So, no slowdown there, the business is good there as well.

Vincent Colicchio - Noble Financial

Okay, thanks a lot. That's all my questions for now. Thanks.

Tom Giannopoulos

Thank you.

Operator

Our next question comes from line of Brian Murphy with Sidoti & Company. Please proceed with your question.

Brian Murphy - Sidoti & Company

Hi. Thanks for taking my call. Tom, beyond your existing hotel rollouts at the high end of the market, what kind of traction are you getting with economy in limited services hotels? I know the penetration rate in that segment is much lower. And now that you have your products for that segment and you are targeting that segment, what kind of traction are you getting there?

Tom Giannopoulos

Well, a couple of things have happened in this particular fiscal year. A, when we made the acquisition of RedSky, we inherited, let's say, a number of salespeople, and we have directed those sales persons to go up to the economy type of hotels. So, we're getting good traction there.

And then, of course, at the same time, we have our major customers, Carlson and Hyatt, et cetera, also have economy type of hotels or brands. And we are getting that business now as well, because we do have a product, whether it's OPERA Xpress or OPERA Lite or hosted OPERA product as well.

So, we are doing two things. A, signing the low-end economy type of hotels with our major customers. And then we have a sales force now in the US covering all of the US geographically. That goes up to the low-end business -- including Best Western, where we are a qualified vendor or supplier for them and others' local business.

Brian Murphy - Sidoti & Company

And could you give us a rough sense of what kind of market share you have in that segment now?

Tom Giannopoulos

No more than 15% to 20%. It's still very low.

Brian Murphy - Sidoti & Company

Great. And may be one for you, Gary, on the acquisition front, how would you characterize the target environment out there and can you give us any color on the acquisition pipeline?

Gary Kaufman

First off, we have only closed one deal this year, and that was at the very beginning of January. As far as the prices going down, they really haven't come down much. They still seem to be pricey. And as you know, we consider ourselves to be fairly cheap. So, we don't overpay for them. But I can also say we are talking to several people right now, but that doesn't mean we'll close any of the deals.

Brian Murphy - Sidoti & Company

Great. Thanks very much.

Tom Giannopoulos

Yes.

Operator

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

Corey Tobin - William Blair & Company

Hi, just two follow-ups if I could, real quick. Gross margin in software, it seems like we've taken a step down from the very high levels we saw really recently as last year. And I would think with the outperformance in this quarter, we might see a little bit more there, of course, to the gross margin side. Should we think of sort of the current level as the right level for the software margins here or is there room for expansion there?

Tom Giannopoulos

76%, 78% should be the guidance. When we add the 80%, it was because we had that large contract that we signed with Fairmont for their reservation system, $4.5 million-something worth of business a year ago, a year-and-a-half ago. So, I think from the software perspective, anywhere between 75% and 80% is a great performance.

Corey Tobin - William Blair & Company

Great. Okay, good. And finally, the AR coming down as much it has, is there anything particular going on here? I mean there obviously is some corporate initiatives underway, but what in particular are you doing to drive down AR to the degree that it was, and what should we expect to see happen there next quarter?

Tom Giannopoulos

Our customers like our products, and they pay on time.

Corey Tobin - William Blair & Company

I like that. Where should we expect to see it next quarter?

Tom Giannopoulos

Gary?

Gary Kaufman

I would say that if you go around the 65-day area, that's probably correct.

Corey Tobin - William Blair & Company

Great. Thank you.

Operator

(Operator Instructions)

Next question comes from the line of Gil Luria from Wedbush. Please proceed with your question.

Gil Luria - Wedbush

Thank you for taking my question. I wanted to ask, in your hotel business, you have a lot of visibility because you're doing the rollouts and upgrades there. In your restaurant business, what would you consider your length of visibility, 90 days, 180 days?

We heard 90 days is very good visibility from a lot of companies, with 180 starting to be murkier. And is this why you reversed course on not providing quarterly guidance? I think you said in the August call that you move away from providing quarterly guidance and now you've gotten back to that.

Tom Giannopoulos

Well, two elements to your question. Number one, the visibility there is with certain customers that we have, rollout is going on. The visibility is very good. We continue to do new restaurants and outbreak their system or installing brand new systems. So, the visibility is very good.

There is a lot of street business on the restaurant side with our districts and dealers. I mean the visibility there is that contract can be signed within 30 days and be installed within 30 days. So, visibility is in that range.

In regards to the guidance, the reason we've changed the guidance is to make sure that you guys understood that the Q3 looks good. And if things don't change, Q4 looks very good.

Gil Luria - Wedbush

Usually, you don't have seasonality in the March quarter, at least not over the last few years, but it looks like you are going to have seasonally down quarter in the March quarter. Is that because you had the kind of incremental business in the December quarter?

Tom Giannopoulos

No, I talked about this before. Nothing was moved from form the third quarter to the second quarter. And what I said before is the number that is out there for Q3 and Q4 are $230 million and $250 million. And we are sticking with those particular numbers.

Gil Luria - Wedbush

Got it. In terms of Burger King rollout, will you displace --?

Tom Giannopoulos

Which by the way, it means -- I made the point here. If those numbers are met, then the annual revenue will be $938 million, $940 million versus a guidance that we gave a year ago of $910 million to $915 million.

Gil Luria - Wedbush

Absolutely. In terms of the Burger King rollout, are you going to displace all of those? I think you said 775 units.

Tom Giannopoulos

All corporate stores in the US are exclusively now will be replaced with our system. And that rollout will start sometime five months down the road.

Gil Luria - Wedbush

Great. You said you didn't make any acquisition since January. Does that include distributors or have you bought any distributor?

Tom Giannopoulos

No, we have not bought anything.

Gil Luria - Wedbush

And one last question. I don't know if, Peter, you're willing to breakout hardware, software and services between US and international?

Peter Rogers

No, we don't have that right now.

Gil Luria - Wedbush

Got it. Well, thank you very much.

Operator

Mr. Giannopoulos, there are no further questions at this time. I will turn the call back to you. Please continue with your --.

Tom Giannopoulos

Okay, great. Thank you very much, everybody, and we'll talk to you in April. Thank you. 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.

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: [e-mail]. Thank you!