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MICROS Systems, Inc. (NASDAQ:MCRS)

F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

August 28, 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

Andrey Glukhov – Brean Murray

Gil Luria – Wedbush

Vincent Luciano [ph] – Global Financials

Brad Reback – Oppenheimer

Ross MacMillan – Jefferies & Co.

Dan Perlin – Wachovia

Corey Tobin – William Blair & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal year 2008 fourth 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, August 28, 2008.

I will now like to turn the conference over to Tom Giannopoulos. Please go ahead, sir.

Tom Giannopoulos

Okay. Thanks, Alex. Don’t worry about that mispronunciation of my name. My wife has the same problem. Anyway, good afternoon everyone and thank you for being with us as we are reviewing financial results for the fourth quarter and our fiscal year 2008, which as you know ended last June. Here with me as always are Gary Kaufman, Tom Patz, Peter Rogers and we will commence with Peter and the disclaimer.

Peter Rogers

Thank you, Tom. Good afternoon, ladies and gentlemen.

Some of our comments today are forward-looking statements involve risk and uncertainties, such as uncertain 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 effect of terrorist activity and armed conflict. MICROS undertake 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 Condition and Results of Operations and Business Investment Risks sections of MICROS' SEC filings.

Tom?

Tom Giannopoulos

Yes. Thanks, Peter.

As stated in our press release this afternoon, the revenue, net income and EPS, all were record numbers for the quarter and for the fiscal year. The fourth quarter results turned out to be much better than anticipated. On an annual basis, the following highlights should be mentioned. Fiscal year revenue of $954.2 million exceeded our original estimate of $912.5 million that we established in our guidance a year ago. Revenue for the year grew by 21.4% from $785.7 million last year to the $954.2 million this year. This is spectacular year-to-year growth considering.

The gross margin of $501,199 came in at 52.5%, represents an improvement over last year’s 52.4% and indeed is the best percentage ever for a fiscal year. Hardware margin came in at 35.4% which is excellent. Software margin at 79%, excellent as well. And service margin came in at 53.2%, again excellent numbers for all three elements there.

Income from operations was $156, 532 or 16.4% of revenue compared to last year’s $124 million or 15.9%. Income from operations increased 25.6% from FY ’07 to FY ’08, even with some additional several million of expenses associated with Sarbanes-Oxley regs. All these figures of course are on a non-GAAP basis.

Income before taxes increased to 18% of revenue at $171 million plus versus last year’s 17.3% at $135 million. Income before taxes increased 26.5% from ’07 to ’08. As a result, net income increased 25.6% from $91 million to $114 million for the year and EPS increased close to 25% year-to-year as well. All are terrific results for the year.

All four regions, North America, South America, EMEA, and Asia Pacific, had very good year. The individual business units, restaurants, hotels, leisure and entertainment, and retail, all had better than planned results as well. The domestic to international mix remained about the same at 43.6 domestic and 56.4 international.

Our cash and cash investments position now is at $447 million which is an increase of about $117 million from last year’s $330 million. This is after spending $74 plus million during the fiscal year on the stock buyback program and during the year we purchased about 2.3 million shares on the stock buyback program.

The total debt stands at an all-time low mark of $1.7 million. Days outstanding came in at 67.5 days which is the third lowest number ever for that particular parameter and I will ask Gary to give you the additional information of interest from the balance sheet, Gary.

Gary Kaufman

Okay. I’ll add to Tom’s comment. The highlights of the June 30, 2008 balance sheet are as follows: MICROS had cash and investments totaling $447 million compared to $444 million at March 31.

During fiscal year ’08, we generated $164 million from operating activities which compares to approximately $115 million in FY ’07. This year we spent $13 million on property, plant and equipment; $16 million on acquisitions; $1.9 million on internally developed software; and $74 million on the repurchase of common stock.

During the quarter we purchased 685,000 shares for a total price of $20.8 million. For the entire year, we purchased 2.3 million shares for a total price of $74.3 million. Thus far in quarter one, we have purchased 309,000 shares for a total cost of $9.2 million. The total number of shares remaining under plan number four is 1.8 million.

The company also received $27.9 million from the exercise of stock options along with an additional $11.1 million from the realized tax benefits on stock option exercises. Overall, our cash and investment balance increased $117 million over last year.

Total accounts receivable of $192 million is a decrease of $1 million from quarter three. Days sales outstanding as of June 30 were 67.5 days, a decrease of 5.8 days from the prior quarter. Domestic DSOs were 55.5 days, same as last quarter; while international DSO decreased to 78.2 days, down from 89.8 days at the end of March. When compared to the June 30, 2007 balance, corporate DSOs decreased 5.7 days going from 73.2 to 67.5.

The inventory balance of $64.6 million is an increase of $3.1 million over last quarter due entirely to an accumulation of product for a large delivery in July. Inventory turns were 6.3, up 0.1 from the March quarter. When compared to June of FY '07, our inventory increased approximately $16.8 million due primarily to inventory for a $5 million large U.S. order shipped in July, $3.2 million from foreign exchange, $3 million of inventory for international sales made in July, and a $5 million increase due to inventory buildup for a new hardware product, the Workstation 5.

Deferred revenue of $115 million is a decrease of approximately $7 million from last quarter. The decrease is primarily due to normal timing of maintenance billing, offset by some jobs that were invoiced but not eligible for revenue recognition. Therefore, we have to defer the revenue.

Some other miscellaneous items: Maintenance revenue for the quarter was $76.6 million, an increase of $1.8 million over the last quarter. For the total year, maintenance revenue was $292 million, an increase of $58 million or 25% over last year. Non-operating expense for the quarter was $4.5 million, consisting of $3.2 million in interest income and $1.6 million from a grant we received from the Irish Development Agency for adding employees to the Ireland workforce over the past 5 years.

Taxes, I would recommend using a rate between 34% and 34.3% for GAAP earnings and about one point lower for non-GAAP earnings. The increase is due to tax law changes in several countries around the world.

And finally, MICROS will file its 10-K tomorrow. Tom?

Tom Giannopoulos

Okay. Thank you, Gary.

In summary, we had an excellent fiscal year. Number one, our revenue growth was substantial year-to-year. Our profitability has gone up very nicely as well. We keep introducing new products in all of the business segments. We just announced the Fry acquisition which is very strategic for us, for our retail business. We still have and generate a lot of cash. We have no debt. We completed the last stock buyback program which we announced last November and as you know announced a new one for 2 million shares a couple of months back.

As far as guidance for the fiscal year 2009, some analysts have already published revenue numbers and so forth in the – revenue numbers in the $1.043 billion to $1.091 billion to $1.092 billion which is an average of $1.078 billion.

Per our press release this afternoon, we are increasing/adjusting these numbers from a range of $1.075 billion to $1.100 billion for an average of $1.084 billion, and of course with the associated increases in the net income and EPS as shown in the press release, both sets of numbers representing healthy increases over last year’s results considering the difficult business environment everyone is in. If the Euro stays around the 1.4 ratio, our long-term goal of $1.1 billion is very doable in fiscal year 2009.

As many of you know, we established $1.1 billion goal back in 2002-2003 timeframe. It was an aggressive goal then, as it represented a very healthy 17% plus annual growth, especially since 2001, 2002, and 2003 were very difficult years for the industries we serve. Our focus though on the $1.1 billion goal made us innovative, made us proactive, indeed paranoid about meeting this goal.

We have introduced new products. We have expanded into new segments of the verticals we serve, thus increasing the size of available market opportunities for our company. We have supplemented our organic growth with strategic acquisitions which allowed us to expand into new verticals and into new geographical areas. We have acted upon many initiatives, all driven by the $1.1 billion goal. We are now 10 months away from meeting this important goal for our company.

As I said previously, if the euro/dollar cooperate and stay around 1.4, the goal is there to be had as they say. So we can focus basically on our next goal and our next goal is $2.5 billion in five years, five years from the end of next year – $2.5 billion by 2014. This is our new goal that we are establishing today for the next five years.

Thank you again for being with us today. Thank you for investing in MICROS and being interested in MICROS. Thank you MICROS customers and MICROS employees for yet another record year. And Alex, we’ll take questions now.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Andrey Glukhov from Brean Murray. Please go ahead.

Andrey Glukhov – Brean Murray

Yes, thanks. Congratulations guys on the solid quarter here. Tom, maybe you could give us a little bit more granularity on the restaurant business. Maybe what percentage of the revenue it was for the full year and if you could maybe drill down and talk about major account restaurants versus independent restaurant spending that will be really helpful?

Tom Giannopoulos

Andrey, the revenue for restaurant is about 60% of the overall $954 million. The major account business unit in the States for the year were up 40% from last year, exceeding their budget substantially. So we didn’t see a slow down in the business there. And as you know, the various major accounts that we have under contract continue to buy our systems.

In regards to globally, a lot of the business on the restaurant side is also street business as well. And if you look at our North American business, they increased very nicely from last year and the year before where they were practically flat and that’s the North America distribution channel. So overall, the business is healthy and we haven’t seen any slowdown in the business.

Andrey Glukhov – Brean Murray

And one housekeeping, if you happen to have the foreign exchange contribution to the top line from a year-on-year perspective?

Tom Giannopoulos

Yes. It was around $44 million.

Andrey Glukhov – Brean Murray

Perfect. Thank you.

Operator

Our next question comes from the line of Gil Luria from Wedbush. Please go ahead.

Gil Luria – Wedbush

Thank you. Of your 13% to 15% top line growth guidance, how much of that is based on an acquisition? How much of that is organic?

Tom Giannopoulos

Obviously, we have this Fry acquisition which was said is going to contribute about $30 million for next year. We are hedging here because we really don’t know exactly what the dollar and euro are going to do.

From my point of view, the commitment that I have made long time ago was the $1.1 billion and that’s the driving force. And so organic versus acquisition, as I’ve said a number of times before, means nothing to me. We’re driven by the $1.1 billion goal and if the euro and dollar cooperate, then we will make that goal and feel comfortable about it.

Gil Luria – Wedbush

Sure. If you take that $30 million out, that takes the growth rate down probably around 9% to 12% range and that is probably lower than the organic growth that you had this year. Is that a reflection of a slowdown or are you being extra conservative as you were when guiding for this quarter?

Tom Giannopoulos

It is not a reflection of a slowdown, although we should be cognizant of the fact that there is, although today’s reports were a little bit positive. But at the same time, it is making sure that we hedge against what the dollar and what the euro are going to do.

Gil Luria – Wedbush

If you do see more of a slowdown in your own business, not in the economy necessarily, will you accelerate cost cutting? Have you already accelerated cost cutting or are you just engaged in the usual level of expense control that you have been doing over the last few years?

Tom Giannopoulos

We have been looking at expenses very strongly right now, whether it’s accelerating – I'm not sure about that term really applies. But there is cost reduction that can be had especially in an environment as it is today. So we are looking at all the aspects of that and substantially we are looking at basically hedging against what the euro and the dollar are going to do.

Gil Luria – Wedbush

Got it. A couple of quick questions, could you breakdown the $4.5 million of other income?

Gary Kaufman

Yes, I did that. There was $1.6 million from the Irish Development grant that we received and the remainder was interest income.

Gil Luria – Wedbush

The Irish grant, is that something that you will get every five years, every year or just a one-time thing?

Gary Kaufman

This was as a result of the five years. We have signed up for another one but I can't tell you five years from now whether we are going to get it or not.

Gil Luria – Wedbush

One last question then on the minority interest, that has usually been a negative item, could you remind us what business that is and what happened to turn that into positive?

Gary Kaufman

We have various and sundry ownerships around the world where we do not own 100%. That was basically a true-up for the entire year. There were one or two subsidiaries that were upside down for the quarter but it was primarily a true-up.

Gil Luria – Wedbush

Thanks so much.

Operator

Our next question comes from the line of Vincent Luciano [ph] from Global Financials. Please go ahead.

Vincent Luciano – Global Financials

Don’t worry, Tom, they hamper [ph] my name too. Nice quarter. A question on the Fry transaction, was that all cash?

Tom Giannopoulos

Yes. It’s in this quarter.

Vincent Luciano – Global Financials

Where we stand today, we’re about halfway through the September quarter. Would you say there’s no change in business tone for your hotel, restaurant, and retail businesses from what you experienced in the just reported quarter?

Tom Giannopoulos

So far, this quarter, yes, we haven’t seen any difference.

Vincent Luciano – Global Financials

Okay. Software margins in the quarter were a little bit higher than I was expecting. Should we expect that to come off as we move into the new year?

Gary Kaufman

We should model back in that 77% to 80%. As I’ve said in the fourth quarter, we just had more internally developed software and that drives the margin. But for planning next year, I would keep the software margins in 77% to 80%, in par with our novel [ph] expectation.

Vincent Luciano – Global Financials

Okay. I’ll go back in the queue. Thanks, guys.

Operator

Next question comes from the line of Brad Reback from Oppenheimer. Please go ahead.

Brad Reback – Oppenheimer

Hey, guys. How are you?

Tom Giannopoulos

Hi, Brad.

Brad Reback – Oppenheimer

I know you don’t give quarterly guidance anymore, but as the previous caller just indicated, you’re halfway through the September quarter here. Can you give us any sense on maybe how you expect the quarter is to play out, given the very difficult comps you have here in September and December? Should we expect traditional type of seasonality from June to September, down in the 10% range as opposed to last year which was only down a few percentage points?

Tom Giannopoulos

First, you made me lose a bet because I said nobody is going to ask about guidance, quarterly guidance. Everybody here said, “Yes, they will.” So you made me lose a bet.

Well, I don’t know exactly what the question was. The quarter looks consistent with the past. It’s seasonal obviously because of the summer months and the vacations in Europe, etc. But so far, so good.

Brad Reback – Oppenheimer

Okay. And then, Gary, quick question as it relates to the impact of currency on profitability. If the dollar does continue to strengthen, obviously it’s pretty easy for us to see what the impact is on the top line. Could you give us some sense of how your cost structure is laid out and what potential impact that might have on the bottom line?

Gary Kaufman

This year, it was about $8 million favorable, okay? So the average for the year was in the mid-150, so I think you can calculate down from there, just to give you a feel.

Brad Reback – Oppenheimer

Okay. So about 20% of the revenue upside translated into EPS upside?

Gary Kaufman

It’s $44 million out of the $984 million for the year.

Brad Reback – Oppenheimer

Yes. Okay. That’s great. Thanks a lot guys.

Gary Kaufman

Thank you.

Operator

Our next question comes from the line of Ross MacMillan from Jefferies & Co. Go ahead, sir.

Ross MacMillan – Jefferies & Co.

Tom, you mentioned that if the dollar/euro cooperates, you think you can do $1.1 billion? I think you said if it – I guess average stays at of 1.40 or above. We are actually above that right now. So I am assuming that you’ve built a bit of dollar strength here in your guidance. Obviously, your midpoint is below $1.1 billion and you said that if it is at 1.40, it would be $1.1 billion. So is that the right way I’m thinking about it, that you’ve clearly built in some assumption about a stronger dollar for the remainder of the year?

Tom Giannopoulos

Right, right. You’re right. But if it stays around 1.4, the $1.1 billion is in the bag as I said.

Ross MacMillan – Jefferies & Co.

Right, that makes sense. And then just on the margin for next year, unfortunately your tax rate is slightly higher – your guided tax rate slightly higher than I had modeled, but any color on what the margin assumption is? Is it still around 100 basis point margin expansion or is it slightly less because you’ve got the drag from FX embedded in your guidance as well? Thanks.

Peter Rogers

Ross, Peter. Yes, it would be slightly less. If we’re looking historically, gross margin increase 50 basis points from a leverage at operating expense is 50. I think probably in the range – we would probably be about 60 to 70 basis points total for the year, anticipating the slight headwind with the appreciation of the dollar versus the euro.

Ross MacMillan – Jefferies & Co.

Yes, that makes sense. And then – Tom, I’m just curious. If you take domestic North America hotels, you’ll probably have a challenging time over the next year if there is still room supply coming on and if anything price seems probably going to be stable to down, i.e., RevPAR trends are going to be tricky.

Is that something you think has an influence on the pace of deployments or do you just think hotels are going to keep deploying at the rate to which they committed, regardless of that?

Tom Giannopoulos

At this time, they are continuing to deploy whatever it is that the deployment schedules that we have had. We have not seen any delays obviously, as indicated by good performance in Q4. Will that change down the road? I have no idea. But right now, we have not seen any, we have not been asked to; if anything, in certain cases we have been asked to accelerate deployment. And in most cases, people will tell you this is a good time to invest in technology to reduce cost and improve operations.

Ross MacMillan – Jefferies & Co.

Very good. Thanks very much. Congrats.

Tom Giannopoulos

Thank you.

Operator

Our next question comes from the line of Dan Perlin from Wachovia, go ahead.

Dan Perlin – Wachovia

Thanks. Since you have (inaudible), can you go ahead and give us the backlog number, the year-end backlog number?

Gary Kaufman

The yearly backlog number is basically three month's worth of sales right now. So it’s around where the quarter is which would be – very close, $250 million in that area.

Dan Perlin – Wachovia

$250 million and how should – you are saying that is three month's worth of sales?

Gary Kaufman

Roughly, yes.

Dan Perlin – Wachovia

Okay. And as you look at the implementation schedules that you have got in place right now, what kind of visibility do you have going over to 60 to 90 days? Do you feel pretty comfortable in 60 day around? Do you feel comfortable in 90 days, and then things start overly lose their visibility [ph] or what are you thinking?

Tom Giannopoulos

In our visibility, it’s probably through – it’s four to five months.

Dan Perlin – Wachovia

Okay. In the last quarter Tom, one of things in another call I’ve mentioned this, but last quarter, one of the things you said you were most uncertain about was the 10% to15% of your revenues that come from the street business, and you had given us a couple of rough metrics around that last quarter. Can you give us something this quarter as well, was that up 15%, 20%?

Tom Giannopoulos

The street business is still in the 15% range. We did not see any slowdown in the fourth quarter and the bookings so far in this particular quarter have been very healthy.

Dan Perlin – Wachovia

Okay. And Gary, are there any other Irish Development like grants that we need to be aware coming that you might hit that milestone in 2009 and any one of those quarters, or is that –

Gary Kaufman

That is a one-time event at least for the next several years.

Dan Perlin – Wachovia

Okay. But are there other ones that are not necessarily the Irish Development but something else that we need to be thinking about?

Gary Kaufman

There is nothing else.

Dan Perlin – Wachovia

Okay. And then the Fry acquisition, if I understand it, the majority of the revenues are going to fall into the service line, is that correct?

Tom Giannopoulos

Correct, if not all of it, yes.

Dan Perlin – Wachovia

Not all of it, but the majority of that will fall into service?

Tom Giannopoulos

All of it. Most of all of it will fall into service.

Dan Perlin – Wachovia

Okay. And then the percentage of your internally developed software which drove your software margins much, much higher, was there a product mix associated with that? Are they selling more of your internally developed products as opposed to external? And I know Peter gave the guidance to stay with what we’ve historically thought of, but there had to be something else driving it.

Gary Kaufman

Dan, in the fourth quarter, internally developed software represented 90.5%, so the third part was only 9.5%. We generally see that in the fourth quarter, we have a much higher rate of internally generated software which does help the margins. But that’s the fourth quarter, it is really – you’re just above the trend line. Next year, I think just from our perspective, margins in the 77% to 80% range are appropriate.

Dan Perlin – Wachovia

Okay. And then you also talked about in the past and I think you mentioned it briefly in the call, you had been looking to hire a fair of number of people for implementation and training, and that’s still in the works?

Tom Giannopoulos

That’s still going on, yes.

Dan Perlin – Wachovia

Okay. So there’s no – demand wouldn't [ph] have slowed in order for you to push that away, so that’s encouraging. Okay. I think that’s it. Thanks very much.

Tom Giannopoulos

Alex?

Operator

Our next question comes from the line of Corey Tobin from William Blair & Company. Please go ahead.

Corey Tobin– William Blair & Company

Hi guys, just a couple of quick ones if I could. You mentioned, Tom, that major accounts for restaurants in the U.S., did I hear it correctly, up 40% year-over-year?

Tom Giannopoulos

Yes.

Corey Tobin– William Blair & Company

Okay. So with that, I guess which divisions came in – given that was such a high number, which divisions would you say came in below the corporate average, if you will?

Tom Giannopoulos

JTECH, for example, is on the negative but it’s a small entity and the rest of them were above the original target which was 16.5% [ph].

Corey Tobin– William Blair & Company

Okay, I didn’t catch that. What percentage?

Tom Giannopoulos

The rest of them came up above the target which for them was 16.5% year-to-year growth.

Corey Tobin– William Blair & Company

Got you. Great. And then, shifting gears, the U.S. hotels based on your comments, I am assuming no sign of any change in buying patterns there.

Tom Giannopoulos

Not to date.

Corey Tobin – William Blair & Company

Excellent. Finally, last full question, given the timing of the RedSky acquisition and no larger ones after that outside of Fry, I’m assuming there's no contribution from acquisitions in the quarter. Is that right?

Tom Giannopoulos

That’s true for the fourth quarter. Yes.

Corey Tobin – William Blair & Company

Okay, great. Congratulations. Thanks.

Operator

We have no more questions at this time.

Tom Giannopoulos

Okay. I would like to thank all of you for attending and I'd like to urge all the analysts, please do not raise my guidance above the numbers I’ve given you. Thank you very much. I’ll see you in October. 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 lines.

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