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MICROS Systems Inc. (NASDAQ:MCRS)

F3Q08 (Qtr End 03/31/2008) Earnings Call

April 30 2008 4:45 pm ET

Executives

Tom Giannopoulos - Chairman, President and CEO

Peter Rogers - EVP, IR and Business Development

Gary Kaufman - EVP, Finance and Administration and CFO

Analysts

Corey Tobin - William Blair & Company

Dan Perlin - Wachovia Securities

Nick Statham - Micro Systems

Brian Murphy - Sidoti

Operator

Welcome to the MICROS Systems Inc. fiscal year 2008 third quarter conference call. (Operator Instructions)

I would now like to turn the conference over to Tom Giannopoulos, President and CEO of MICROS Systems Inc. Please go ahead, sir.

Tom Giannopoulos

Okay. Thanks Ken and good afternoon, everyone. Thank you for being with us to review financial results of our March quarter three of our fiscal year which ends in June.

As always are Gary Kaufman, Tom Patz and Peter Rogers. And we will commence with Peter

Peter Rogers

Thank you, Tom. 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; 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; unanticipated tax liabilities and the effects of terrorist activity and armed conflict.

MICROS undertakes no duty to update any forward-looking statement to conform the actual results or changes in MICROS's 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. As you can see from our press release this afternoon, we had a great quarter, in fact a record quarter for our March quarter and the second highest quarter of any quarter in our history. Considering the seasonality of our March quarter and the not so favorable general business conditions this is really a very impressive performance.

Revenue for the quarter was up 18.3% versus last year’s $200 and the revenue for the quarter was at $237, $187 million. Gross margin came in at 52.4% same as last year, a very good ratio. Operating expenses came in at 36.2% or $85.884 million this is non-GAAP basis, an improvement over last year’s 36.9%. Operating profit of $38.375 million or 16.2%, a very good ratio, an improvement over the last year’s 15.4% ratio and an increase of 23.9% over last year’s $30.997 million. Net income for the quarter came in at $27.961 million, an increase of 25.1% over last year’s $22.346 and EPS of $0.34 or 25.9% increase over last year’s $0.27.

For the nine months year-to-date, the results are excellent as well. Revenue increased 23.7% from $564 million to $697 million. The hardware revenue increased 17.4% from the $168 million to $197 million, software revenue increased 19.8% from $94 million to $113 million, and the service revenue increased 28.4% from $301 million to $386 million. Gross margin for the quarter improved slightly from last year. From a year-to-date point it improved from 51.86% to 52.2% and the gross margin for software, hardware, and service all improved year-to-date as well.

Operating profit again on a non-GAAP basis year-to-date improved from 14.58% to 15.87%. The operating profit year-to-date has increased 34.6% from $82 million last year to $110 million this year. Net income increased 34.7% from $59 million to $80 million and EPS year-to-date increased 32.9% from $0.73 to $0.97.

Our cash and investments position increased from $387 million at the end of December to $444 million at the end of March from June to March cash and investments have increased by $122 million from $322 million to $444 million and at the same time we've spend $66.4 million for the stock buyback program and some small acquisitions that we made over the past six months to seven months. Debt is down to less than $2 million when we include capital leases.

With three-fourths of our fiscal year behind us some additional data year-to-date revenue for the North America segment which includes Canada has increased by 21.8% all of it substantially organic growth. From the international segment perspective, the EAME region has increased also 21.8% and that's in Euros. Asia Pacific region has increased 18.9%, South America region increased 13.2% and all of these are fantastic growth rates across the board.

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

Gary Kaufman

All right. The highlights of the March 31, 2008 balance sheet are as follows. MICROS had cash and investments totaling $444 million at March 31, compared with total of $387 million at December 31, an increase of approximately $57 million.

During the first nine months, we generated $129 million from operating activities, while spending $10.2 million on property, plant and equipment, $12.8 million on acquisitions, $1.7 million on internally developed software and $53.4 million on the repurchase of common stock.

During the quarter we purchased 795,600 shares on an after stock split basis for a total price of $25.2 million. Year-to-date we purchased 1643,000 shares. Under the current plan there are approximately 823,000 remaining to purchase. The company also received $27 million on the exercise of the stock option, along with an addition of $11 million from realized tax benefits on the stock option exercise.

Finally, the company had net proceeds of $17.3 million from the purchase and sale of investments. The accounts receivable balance of $193 million is a increase of $23.5 over last quarter. This is primarily due to the timing of the international maintenance billing. A large majority of the six month maintenance invoices issued in January were not collected as of March 31st.

DSOs for the quarter were 73.3 days up from the record low of 62.6 days last quarter. Domestic DSOs increased from 53 days to 55 days. While international DSOs increased from 71 to 90 days.

The inventory balance of $61.5 million is an increase of $8 million over last quarter and an increase of $13.7 million over June 30th. The year-to-date growth is due primarily to the initial stocking of new products primarily the Workstation 5 and we have $6 million worth of that inventory. Acquisition inventory of $3.5 million and the effect of foreign exchange was about $2.5 million.

Inventory turns for the quarter were 6.2 turns, down from the 7.4 turns last quarter. Accrued expenses of $126.8 million increased approximately $8 million over the December quarter due primarily to an increase in payroll related accruals and to a lesser extent foreign exchange.

Deferred service revenues increased approximately $42 million over last quarter due to the timing of maintenance billing. As you recall, March and October are the quarters when deferred revenue increases. In first the miscellaneious items maintenance revenue at the quarter was $74.8 million an increase of $2.9 million over the last quarter which is an increase of 4%. Maintenance revenue for the first nine months was $214.9 million compared to $169.4 million for the first three quarters of last year.

Interest income for the quarter was $4.2 million. And for tax forecasting, I recommend that you use a tax rate similar to last year. Tom?

Tom Giannopoulos

Okay. Thanks Gary. From a business point, the planned rollouts of our products for all our major customers continue as schedule. The rollouts of our POS and PMS products to the Carlson properties continue. The rollouts of our products through Windham properties continue. We are doing some 15 properties per month now, will shortly move up to 30 properties to 50 properties per month.

We will continue to do some 25 to 30 properties per month for the IHG Hotels. There are large two, Hyatt and Marriott, and others continue as well. Our Burger King relationship continues to grow. There roll out of our symphony product continues at the HMSHost properties.

In summary, we had a very healthy Q3 performance year-to-date. Through nine months we have done very, very well. We have been very careful with our expenses, headcount additions, and projections as a result of a general business conditions. We are looking forward to the conclusion of our fiscal year 2008 and as part of the next fiscal year to get to the 1.1 billion goal which we established seven to eight years ago.

In regards to guidance, we are mindful of the fact that general business conditions have gotten much worse since we spoke last January. We are mindful of the fact that our business has continued strong regardless. Still we have increased our fiscal year revenue guidance from $910 million to $915 million that we gave last August to augur $930 million now and how much of the $930 million will depend on whether conditions stabilize, get better, or get worse and for the record the $930 million figure represents an 18.5% increase over last year’s $785 million. Kim, we will take questions now please.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Corey Tobin of William Blair & Company. Please go ahead.

Corey Tobin - William Blair & Company

Hi, good afternoon everyone. I want to just talk about, Tom's, comments towards the end regarding the general business environment. It sounds like a bit more of a cautionary tone across the board. Can you give us some highlights please or if additional detail if you could regarding what do you mean by, when you say more challenging business environment. Outside of the macro headlines it seems like last quarter you were still very positive on the business as you are now. Are you seeing anything specific in your business that will afraid you to be more cautious here as we look forward to the June quarter?

Tom Giannopoulos

Specifically, in our business we have not seen anything specific, and as I indicated the rollouts that we had planning on schedule with many of our customers whether restaurants, hotels or retail continue. Nothing has been cancelled, but I would think that not to ignore what's going on the macro level would be, from my point of view, foolish.

Corey Tobin - William Blair & Company

So with respect to current customers and rollout I understand there is nothing decelerating anything with respect to bookings or to sales level?

Tom Giannopoulos

Nothing, to-date, the bookings activity continues. The percentages that I gave you from the North America region and also the other regions indicates the strong demand for our products. In the past nine months we have not seen anything that would change our mind regarding the last quarter, but in reality I would really be a fool to sit here and not worry about what might happen.

Corey Tobin - William Blair & Company

Okay. So last quarter, I think as you look towards the June quarter, there were some comments made at the general level compared with the consensus estimate that time and it clearly seems like there is a little bit of shift now is that just simply the more conservative or again there is nothing in the base business to sort of support deceleration, am I getting it correctly?

Tom Giannopoulos

Well, according to the statement that I made on January conference call was unless business condition, general business conditions, worsened since that particular time, unless they worsened then we feel comfortable we can deliver on the numbers that were published, even though those were not our numbers basically. But, so the question is, have the conditions worsened micro or otherwise since January 31st.

Specifically in our business we haven’t seen any delays, we haven’t seen any cancellations. We have not seen any delays in the sales activities, but that doesn’t mean that its not going to happen in the next two months, or whatever. So, yes we have been very conservative period.

Corey Tobin - William Blair & Company

Very good. Thank you.

Operator

Thank you very much. Our next question comes from the line of Dan Perlin of Wachovia Securities. Please go ahead.

Dan Perlin - Wachovia Securities

Thanks. Hey, I just wanted to Tom follow-up on that question as you might expect. And last thing you said there Tom was nothing in the next two months, which implies I don’t know if am catching you in a quick statement there but that would imply that April seems to be running pretty well. Can you just give us some sense of what the trends are thus far in April because my understanding of your business is usually have a very good visibility, at least one quarter out, and here we said two months out from really closing your books. So if you can…

Tom Giannopoulos

I will make it, yeah, from a trends perspective, there is nothing there a period.

Dan Perlin - Wachovia Securities

Okay.

Tom Giannopoulos

You have to consider A that I am increasing the forecast from 9/10, 9/15 to 9/30 and above.

Dan Perlin - Wachovia Securities

Yup.

Tom Giannopoulos

And I have also indicating how much above 9/30 which is a conservative approach will depend weather conditions get any worse. There is always the probability and the possibility that some customer because of what is going on around the world will decide in May and in June. We haven’t seen anything to date in April. We’ll decide in May and June to postpone rollouts and delays, I can not control that. But I would also be at full from my point of view to project numbers that are foolish.

Dan Perlin - Wachovia Securities

No, I understand. Is there anything that rolling off from an acquisition distributors, RedSky, anything like that we are going to be thinking about as we go into the fourth quarter?

Tom Giannopoulos

We made an acquisition of a dealer in the let’s say Ohio Indiana area. It’s going to add some revenue we don’t have any other acquisitions, in play at this particular time.

Dan Perlin - Wachovia Securities

And there is nothing really rolling like you’re and reverse swing going into the…

Tom Giannopoulos

Not between now and the end of June.

Dan Perlin - Wachovia Securities

Right.

Tom Giannopoulos

We are working, as always on acquisitions. We have two or three targets at play and we have a lot of cash as we all know that. So, that’s why I feel very comfortable about the next 18 months then period.

Dan Perlin - Wachovia Securities

Okay. And then, it’s just -- you know, I know we’re going to beat the force for a while but the implied earnings number within the guidance is around $0.35 which would be down on a year-over-year basis and it sounds like trends are still holding up on well sequel. So, is it just nothing that -- I mean it looks like if we look at this in like inventory terms and the DSOs, I mean all those things seem to get worse into this quarter relative to last but there is no business trend that sounds like it's negative.

Tom Giannopoulos

Business is as good as ever, nine months year-to-date they have been fantastic and I am really going back to where we promised last year $910 million to $915 million and what we are promising today which is a lot more than $910 million, $915 million and I have been -- I am cautious about it because I really don’t know what might happen. I read the same headlines like everybody else. I read headlines about, you know, travel being postponed and all the other things that we all read. So, for me to sit here and tell you business is wonderful or business will do wonderful -- business has been wonderful but business will remain wonderful, I would either be lying to you or I'd be a fool. So, I am taking the conservative way out.

Dan Perlin - Wachovia Securities

Okay. I think that’s fair. Well, let’s talk about some things real quickly that you can control like your cost. You mentioned headcount rationalization potentially. The cost as a percentage of revenue, your total operating expense are actually up sequentially and I am wondering what actions maybe you are taking specifically to achieve your goal to get that number down to 35% or below.

Tom Giannopoulos

Yeah, most of the costs are headcount control and eliminating contractors that we have and replacing them with our own -- let's say installers or individuals across the board. Looking at those expenses are easy to take care of without affecting customer.

Just continue to add revenue producing employees, which we still are looking for like 180 as we speak believe or not. Continue to look and add to the rolls revenue producing employees and not adding to the rolls other headcount which is not really basic. Continue to invest in development and product development which I never cut and then eliminate from my point of view non-discretionary expenses that are not basic to the next two months or three months.

Dan Perlin - Wachovia Securities

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Gil Luria of [Micro Systems]. Please go ahead.

Nick Statham - Micro Systems

Hi. This is actually Nick Statham for Gil. My question is I am sure not if you already mentioned this, but can you give us the breakdown of international versus US for the quarter?

Tom Giannopoulos

International, I think was 56% and domestic was 44%.

Nick Statham - Micro Systems

Thank you. We had in the quarter a very impressive services growth on an annual basis. Is that the mid 20% growth range, is that something that you would be comfortable in stating that going forward we can expect that?

Gary Kaufman

Definitely yes.

Nick Statham - Micro Systems

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Brian Murphy of Sidoti. Please go ahead.

Brian Murphy - Sidoti

Hi. Thanks for taking my question. Tom, if the economy heads out, like you fear where would you expect to see the most impacts? Could be restaurants or hotel side?

Tom Giannopoulos

I think most likely I would say the hotel side, because they can easily differ the roll out. They already have our product installed this, most of them some of them, a majority of these roll outs are upgrades, so they can delay the upgrade from our Fidelio version 6 through the OPERA product for two or three months period. But I think it would be mostly the hotel side. So far we have not seen anything and we haven’t had any indications whatsoever that that’s going to change.

Brian Murphy - Sidoti

I see. Could you give us some update on the specialty retail business, how is that been trending and sort of what are your expectations for that business going forward?

Tom Giannopoulos

That business in year-to-date has increased 18%, this is and I am only talking about the US version and so far so good. Their profitability is up from last year and as we have communicated a number of times the key is to we have established now in our organizations and in three other regions would both management and sales personnel and the key to the growth of that business substantial growth to their business is to grow internationally and right now we are on the schedule we had established about 18 months ago.

Brian Murphy - Sidoti

Got it. And on the restaurant side do you have any opportunities with EAME and Asia?

Gary Kaufman

They are exclusive customers, yes. They are a customer internationally.

Brian Murphy - Sidoti

Okay, thank you. That’s all from me.

Operator

I don’t have any further questions at this time Mr. Giannopoulos.

Tom Giannopoulos

Well thank you very much everybody and we’ll talk to you in August. Thank you.

Operator

Ladies and gentlemen good day and we ask that you please disconnect your line. Thank you.

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