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MICROS Systems (NASDAQ:MCRS)

Q3 2012 Earnings Call

October 23, 2012 5:00 p.m. ET

Executives

Tom Giannopoulos - Chairman, President, and Chief Executive Officer

Peter Rogers - Executive Vice President, Investor Relations and Business Development

Cindy Russo - Executive Vice President, Chief Financial Officer

Tom Patz - Executive Vice President, Strategic Initiatives, and General Counsel

Analysts

Gil Luria - Wedbush Securities

Mayank Tandon - Needham & Company

Dan Perlin - RBC Capital Markets

Tom McCrohan - Janney

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the fiscal year 2013 first quarter conference call. [Operator instructions.] It is now my pleasure to turn the conference over to Mr. Tom Giannopoulos, chief executive officer at MICROS Systems. Please go ahead sir.

Tom Giannopoulos

Thank you operator, and good afternoon everyone. Thank you for attending today’s conference call. Again, to remind everyone, this is the first quarter of our fiscal year 2013, July 2012 to September 2012. As you know, our fiscal year 2013 goes from July 1 to June 30, 2013.

Here with me as always are Cindy Russo, our CFO; Tom Patz, our legal counsel and also EVP of strategic initiatives; and Peter Rogers, our EVP of investor relations. And we’ll begin with Peter and the disclaimer.

Peter Rogers

Thank you, Tom. Good afternoon, ladies and gentlemen. Some of the comments today are forward-looking statements that involve risks and uncertainties such as uncertain product demand and market acceptance, impact of competitor products and pricing on margins, ability to obtain on acceptable terms the right to incorporate in MICROS products and services technology patented by others, environmental and health related events, unanticipated tax liabilities, and the effects 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’ businesses are identified in the management's discussion analysis of financial condition, results of operations, and business investment risk sections of MICROS' SEC filings.

Tom?

Tom Giannopoulos

Thanks, Peter. Looking at the press release, our financial results for the quarter were very good, considering the business conditions that continue to be less than favorable over the past months. Revenue increased from $256,558,000 to $299,851,000, a 16% increase, some of it coming from organic growth and the rest coming from the acquisition of Torex, which we closed last May.

Hardware revenue was up from $48,409,000 to $63,759,000, a 31.7% increase. It’s a good news and a bad news story here, as you will see from the gross margin numbers. Software revenue was down from $33 million to $30 million, and service revenue was up from $174 million to $205 million, a 17.4% increase. But again, a good news, bad news story here recording the gross margin.

Gross margin came in on a non-GAAP basis at $153,373,000. That’s 51.1%. Last year it came it at $144,416,000, or 56.24%. Gross margin was negatively affected by the Torex acquisition and of course soft business conditions in the U.S. and Europe. And also total operating expenses were affected by the same factors, Torex and business conditions.

The bottom line on this page is that net income was $46,407,000 versus last year’s $39,204,000, an 18.1% increase. A very healthy increase percentage. And then EPS, at $0.57 versus $0.48 of last year, again, an 18.75% increase. Very good financial results across the board, exceeding our own expectations that we had budgeted.

Our cash stands at $650 million and then I will ask Cindy to give you the additional balance sheet information. Cindy?

Cindy Russo

Thanks, Tom. The highlights of the balance sheet are as follows. As Tom stated, cash and investments at September 30, 2012 totaled $615.6 million. In the first quarter of fiscal 2013, MICROS generated $6 million from operating activities while receiving $12.5 million from the net maturity of investments. Cash from operations in the quarter reveal the impact of tax prepayments and movements in our accrued expenses.

On the financing end, the company received $5.7 million from the exercise of stock options and the related tax benefits and spent $13.2 million on the repurchase of common stock. During the first quarter, we purchased a total of 2,000 shares at an average price of $47.63 per share. Thus far in Q2, MICROS has repurchased 195,000 shares of common stock, leaving board approval for an additional $1.2 million to be purchased by August 2013.

The company invested $3.8 million in property, plant, and equipment in the quarter, while capitalizing approximately $1 million in internally developed software costs. MICROS cash split by segment stands at U.S. and Canada 59%, international 41%.

Days sales outstanding at quarter end reflect the company’s new global sales mix, with over 60% of revenues coming from our international subsidiaries. DSOs at Q1 were 73.2 days, consisting of international DSOs at 84.9 days and U.S. Canada days sales outstanding of 54.7.

Net inventory on hand at September 30 totaled $48.9 million, an increase that represents stock purchased to satisfy our international hospitality and retail backlog. Inventory turns in the period were a company Q1 record 9.5, up from 8.5 in Q1 2012.

The combined current and long term deferred revenue balance of $194.7 million has increased $39 million, or 25%, year over year and represents our continued investments in recurring revenue streams that are of value to our customers.

Turning to the income statement, I will give you some more detail pre- and post-Torex integration, but it’s important to note that as we continue to merge the operations of these companies in the coming months, it will be difficult to segregate our financials for quarter comparisons.

First, on a constant currency basis, MICROS sales increased 20.1% year over year, affected by a foreign exchange decrease amounting to $8.2 million. This currency fluctuation negatively impacted earnings per share by $0.02.

Revenues from our Torex subsidiary now officially rebranded under the MICROS name were approximately $48 million in the quarter. As I briefly mentioned, the revenue split by segment for the quarter was U.S. and Canada 39.5%, international 60.5%.

Total recurring revenues for the quarter increased 37.1% from the prior year to $138.7 million, or 46.2% of total revenues. Before the impact of the Torex acquisition, organic recurring revenues grew 12.1% on a constant currency basis. The staff and hosting portion of recurring revenues grew to $19.5 million in the quarter.

Gross margins in Q1 were driven down by the addition of Torex retail into our consolidated financials, and reflect the opportunities that we have as a company to expand margins and leverage our existing infrastructure in the coming quarters. As you are also aware, on a U.S. GAAP basis, we have some acquisition accounting in place that will wind down by year end so that the Torex operating margins match its true cash flows.

Total operating expense in the quarter as a percentage of revenue were down 320 basis points from the parallel quarter to 31.1% due to a mix of cost cutting initiatives and management’s review of discretionary spending. I would continue to forecast 32-33% for the remainder of the year as we continue down the road of Torex integration and product strategy.

Organic operating margin in the period, before the addition of the Torex acquisition, is equal to the company’s Q4 2012 record 24.8% of revenues. Nonoperating income for the quarter was $0.8 million. This figure includes $1.3 million in interest income offset by $0.2 million in interest expense. The currency loss this quarter amounted to $700,000.

Finally, the first quarter effective tax rate of 24% includes a one-time release of FIN 48 reserves, cash reserves. MICROS’ full year 2013 effective tax rate is now expected to be approximately 28-29% on a GAAP and non-GAAP basis.

Tom?

Tom Giannopoulos

Thanks Cindy. In summary, we had a good start to our fiscal year 2013. Business conditions, while not getting better, maybe they have stabilized a bit. I’d like to point out an article last week from USA Today that talked about jobs in restaurants and hotels pick up, and the hospitality industry is recovering, along with the economy. An article last week also from the Financial Times talked about strong U.S. data going to [unintelligible] in the economy.

The last four days, we held a MICROS users conference here in downtown Baltimore. Some 400 customers showed up all the way from Hong Kong, Australia, Europe, etc. That’s 252 more than we had two years ago. They were very complimentary of our products and product strategy for the future. They all thought we’re on the right track on both restaurant and hotels, products and product strategy.

We have additional work to do with Torex in regard to gross margin and expenses, but we believe we have the right management team to do so. For the time being, we will keep our guidance that we gave last August, and that is revenue of $1.300 million to $1.325 million, and non-GAAP EPS of $2.00 to $2.44.

So operator, we’ll take questions now.

Question-and-Answer Session

Operator

Thank you, sir. [Operator instructions.] And our first question is from the line of Gil Luria of Wedbush Securities. Please proceed.

Gil Luria - Wedbush Securities

Torex, $48 million. Sounds like it’s a little more than I think you previously discussed. How does this impact your forecast for the year, and what parts of the business are doing particularly well?

Peter Rogers

When we announced buying Torex back in May, we thought it would be somewhere in the $150 million range. Just in terms of understanding the revenues that we can report off higher levels than anticipated. Now, the fact is that Torex had $48 million from their first quarter. It was actually a large percent of a total that was anticipated.

As the rest of the year goes in, remember the first quarter for MICROS is actually seasonally adjusted the lowest quarter. The Torex contribution probably still in that range, but as a percentage of the business, drops the following quarters as MICROS just has a higher revenue base in the December and additional quarters. And that will positively impact our gross margins.

Gil Luria - Wedbush Securities

And then there was a much-publicized agreement between Starbucks and Square during the quarter and some of the technology that Square is introducing around the geosensing that it has at Square retailers, are you working with Square to integrate geosensing into your point of sales? How is that technology going to work at Starbucks.

Tom Giannopoulos

I’ll have Tom Patz answer that question, since he manages the Starbucks relationship.

Tom Patz

You raised an interesting question. Really there’s a bigger question as well. In terms of integrating, whether it’s with Square or whether it’s with one of the countless other noble payment providers, it’s a relatively straightforward engagement for us. The reality is right now we have actually over 100 payment drivers to different payment processors. Adding Square or some of the new entrants into the market is straightforward. We’ve already done that work for Starbucks, and as you know Starbucks continues to embrace and deploy Simphony around the world, now that it’s been fully deployed in the United States, Canada and the U.K. and Ireland.

The bigger picture item - and we’ve been getting a lot of questions and emails, and seeing a lot written over the last few months, really. Since Square and some of the other entrants - and even beyond Square. Some of the POS iPad providers. There’s a lot of discussion, and probably now’s as good a time as any to really kind of address that.

Clearly there is a move to certain mobile hardware and less expensive hardware. To date, the impact on our business has been very, very limited. Let’s put this all in perspective. They obviously have three general verticals: restaurants, hotels, retail. Restaurants right now are about 37% of our total business. Hotels are about 37% of our total business. And retail is about 26% of the total business.

Most of the hardware and all of the MICROS workstation hardware, of course, is in the restaurant vertical, that 37%. And so about 8% of our total business is the MICROS workstation business. So there’s been lots of discussions that tablets will fully replace POS workstations in the next few years, and what impact that will have on us.

Obviously we acknowledge that mobility solutions will continue to proliferate. We actually think they’ll also very much complement rather than replace the fixed workstation scenario. We think in many restaurants, especially the larger footprint restaurants, still want, for security and reliability purposes, a traditional fixed workstation. Additionally, as long as people continue to use cash, you’ll need some form of workstation.

In short, again, what we’re seeing is that the mobility solutions are supplementing our workstations to date, not replacing them. Clearly though, what’s irrefutable is that hardware revenue per restaurant cycle continues to slowly decline as hardware pricing naturally declines. This is nothing new. We and others in our industry have been competing effectively in this cost squeezing environment for decades. So we all agree that hardware will continue to get smaller and less expensive.

What is our strategy, though, to continue to grow in the restaurant space? Let me note four items. First, all of our restaurant solutions now run on the iPad, and any open system has it for that matter, not just iPad. In fact, we’re ready for the new Microsoft Windows 8 devices. Our flagship [res] product now runs on the iPad. Our next-generation file POS system, Simphony, runs on the iPad.

And in fact, we’re very excited because we’ll introduce our multitenant Simphony POS in January. And that will allow us to offer an entry level POS to a segment of the marketplace where we’ve never played, because the total cost of ownership was too high.

Just let’s take North America for a moment. There are approximately 650,000 establishments in North America that serve food. We have a footprint of approximately 120,000. Of the 650,000 establishments, only about two-thirds we consider our real, addressable market. That’s establishments that would have the budget to implement one of our solutions.

So to start with, the tier four, tier five establishments not in our addressable market would literally use pen and paper, calculators, or electronic cash registers. However, with the declining cost of certain hardware and hardware peripherals, and use of less-expensive mobile technology and tablets, the addressable market for our products actually continues to expand. In fact, we think it will expand another 150,000 sites over the next few years.

Second, we’ve expanded our mobile technology software offer. In fact, just at the trade show, the users conference Tom made reference to earlier, this past week, we introduced our new mobile analytics and operations apps, which we literally received standing ovations on. So the customer base is very, very excited about that.

Third, also at our users conference earlier this week, we introduced our new MICROS purpose built hospitality tablet solution. This goes to market first quarter of 2013. First calendar quarter. This has been designed expressly for the hospitality space, so capable of working outdoors and under wet conditions, and in the brutal kitchen environment. Customers were also very excited about this when we showcased this product at the show.

And finally, fourth and finally, we’re continuing to expand our efforts in ecommerce and consumer facing applications. And to enhance the focus on that, we created a new ecommerce business unit a few months back, and this allows us to offer a variety of consumer facing applications to our customers, including now websites, various consumer apps, and online ordering.

One case in point, earlier this year, with Bertucci’s, which is a fantastic Italian food chain with over 90 locations, we designed and built a new online ordering solution. As part of that, we did all the look and feel of their website and we designed a unique order flow that actually took into account all of their menu items. And they have a big menu. And the solution also takes credit cards and integrates completely with the POS.

And as part of that, after that went off very well, Bertucci’s asked us to design and deploy a consumer facing smartphone based mobile ordering app, which we did. And that’s met with rave reviews.

So just in summary, we have one final point. We acknowledge that there are literally dozens of startups with POS on an iPad, and many of those startups consist of bright people with bright ideas, but we’re not sitting still on that. We have bright people with bright ideas as well. And we have literally thousands of managers and investment in domain expertise in the core POS product.

So I think there’s a general impression that these applications are simple, can be written quickly. That’s just not true. The requirements of the customer go well beyond basic transaction processing and our system really comprises a full-blown ERP, which now comprises, of course, all the ecommerce elements. Okay?

Gil Luria - Wedbush Securities

Very, very helpful. I just want to follow up on one segment of what you said, which is it sounds like you’re planning on what you referred to as a multitenant hosted, meaning a product that you can sell to a brand new segment, a segment you’ve never addressed before, that will be more recurring pricing as opposed to up front plus maintenance, and therefore be very competitive with any of these new entrants. And this is, again, through an incremental segment that you haven’t addressed before. Did I hear that correctly?

Tom Patz

You absolutely did. And that’s going to be introduced, again, in January.

Operator

And our next question is from the line of Mayank Tandon of Needham & Co. Please proceed.

Mayank Tandon - Needham & Company

Tom, I wanted to sort of focus a little bit on the quarter in terms of if you could comment on the trends you’re seeing across the three verticals, restaurants, hotels, and retail. You gave guidance back in late August, and just wanted to see how you’re fairing in each segment versus your initial expectations.

Tom Giannopoulos

Well, the summer months basically was an anomaly. A little bit below expectations in all three areas. However, when you look at our business and you look at the Asia-Pacific region, it had a very good quarter. Grew up more than 24-25%. If you look at the South America, they had a very good quarter. They grew very nicely as well. They grew 20.7%.

If you look at EMEA, for a number of reasons, but mostly because we know that the EMEA is in a very difficult situation with all the countries close to default and all the discussions that they have had the past X number of months, and the reduction of GDP growth from Germany and France, etc. They were down a little bit. But when you exclude Torex, they were down. When you include Torex, obviously, they were up.

And then North America distribution, this is the street business as we call it. We’re down a little bit, which is indicative, basically, of the uncertainty that exists in the United States, but which I don’t think is going to fix itself until after the election and depending on what the election is and what the decisions might be regarding taxes and resolving the deficit issue and so forth.

So the restaurant business overall, I would say we haven’t seen any large negotiations going on. There’s a lot of talk about the next-generation product, the Simphony product. There was a lot of talk about the Simphony product during the users conference, which was yesterday and the day before and the day before. There’s a lot of interest. This is CIOs that we had invited. They had a lot of interest, but nobody’s buying yet. Everybody’s basically in a wait and see position.

If you look at the hotels, you kind of have the same situation other than the negotiations that we’ve been continuing to have with the hotel chains that we talked about before. There’s no major rollouts scheduled.

OPERA 9, which we introduced a couple of years ago, we’ve continued to show that particular product, and we showed it again at the users conference. It is gaining momentum and rave reviews about its capabilities. And I think that particular product ultimately will end up in rollouts of the existing customer base that we have and add to the revenue stream, which would be the same thing with Simphony on the restaurant side.

On the retail side, it’s the same situation. And still people are in a wait and see attitude, and they’re not going to spend any money until maybe a new president is installed or a new government, and all the European situation is resolved, or the Middle East situations are resolved. So everybody’s waiting to see what China ultimately is going to do, what India ultimately is going to do, and so forth.

Mayank Tandon - Needham & Company

Just on the big deals you mentioned, so the two hotel deals and of course the large restaurant opportunity that I believe you’ve mentioned, Tim Horton’s. Can you give us a sense in terms of when you would expect those deals to be up and running and start impacting the P&L?

Tom Giannopoulos

One of them should be impacting the P&L pretty soon, and I can’t mention anybody.

Cindy Russo

It primarily affects next fiscal year’s finances.

Tom Giannopoulos

The others, we have a development cycle to go through, so there will be some dollars coming in from development, but in regards to actual revenue from installations, they’ll most likely be 9-12 months past the signature date.

Mayank Tandon - Needham & Company

But you still feel pretty confident that both these hotels are committed to going live with you?

Tom Giannopoulos

We have not heard anything different. We’ve had meetings over and over again, so we continue to have meetings and discuss pricing. We have been told there is no other choice but us. So we’ll continue to do that.

Mayank Tandon - Needham & Company

Cindy, you mentioned the margins, ex-Torex. I think you said 24.8% operating. Is that correct?

Cindy Russo

Yes.

Mayank Tandon - Needham & Company

And then what would that be on a gross margin front ex-Torex?

Cindy Russo

The gross margin perspective, if you just look at the organic business, excluding Torex, it would be 54.8%.

Mayank Tandon - Needham & Company

And that’s a function of just more hardware impacting versus the fourth quarter of fiscal ’12, on an organic basis?

Cindy Russo

Yes. We have hardware, and it’s more of the third party versus the MICROS.

Operator

And our next question is from the line of Dan Perlin of RBC Capital Markets. Please proceed.

Dan Perlin - RBC Capital Markets

I just want to follow up back on the [twelve] deals again. It sounds like you’re recognizing revenues from these guys a little bit, obviously not installation, but to the extent that there’s development going on, and it’s taking a while. I’m just wondering, has this kind of turned into more of a codevelopment project with the clients, more so than maybe you had anticipated? Or is it really just a function of people who are concerned about all these things you talked about, Tom, and they’re not ready to release a sizable budget into next year.

Tom Giannopoulos

It’s not a codevelopment issue here, and Tom Patz is our representative in these large deals. I’ll ask him to give you the answer.

Tom Patz

I can’t get into all the specifics. What I can tell you is, as you know, we are in advanced negotiations with multiple hotel companies. These are not simple 10-page contracts that can be completed in just over a few weeks. These are massive contracts, with many, many moving parts that involve many, many constituencies within the different companies. The development items alone literally comprised over 1,000 pages of documentation that we’re in the process of developing.

Now, back to your point, is it codevelopment? The answer is no, it is not. We are developing for the multiple customers we’re in negotiations with independently, and those enhancements will be incorporated into the base OPERA version 5, OPERA 9 code.

And this is a large negotiation. It is going to take a lot of time. The one good additional thing that I can say is that the hotel chains have formally started the process of socializing the OPERA initiative with the ownership community, because they do need to get final approval there, and those processes have started. And the reception thus far has been quite positive. The [unintelligible] groups really see the value in OPERA, and in fact many of them currently use OPERA in some of their other [unintelligible].

Dan Perlin - RBC Capital Markets

I want to ask a question about this user conference you guys had. I may have missed what you we resaying, but was this open for retail, hotel, and restaurant clients?

Tom Giannopoulos

No, it was restaurant and hotels.

Dan Perlin - RBC Capital Markets

And was the appetite for those clienteles - these are obviously much larger chains - to go towards a hosted solution? Or are they still open to the engagement with a license structure? And I ask that just because software represents [unintelligible].

Tom Giannopoulos

It’s both. It depends. I have to say this, but it depends on the ownership groups that they have, but you know, our job at the end of the day is to provide to our customers solutions that can do basically the cloud computing and centrally hosted, and be able to provide SaaS capability, which we’re doing, and let them make their decision depending on their own criteria, and also, the relationship they have with the ownership groups.

Dan Perlin - RBC Capital Markets

And then Cindy, what was the cause for the weakness in software in the first quarter? I didn’t get that.

Cindy Russo

Software revenue decreased within the company. Additional Torex, most of their revenue, primarily service driven and hardware.

Dan Perlin - RBC Capital Markets

No, I mean on a year over year basis it was down.

Peter Rogers

The drop in software demand really is more just a function of the lull that we saw in North America and Europe in the quarter. Europe was affected clearly by the Olympics, especially the U.K. is a big piece. Basically the U.K. shut down for a month there. And really just saw a drop in overall demand in restaurants around the September quarter. And I think that’s where we [unintelligible] the drop in software.

Dan Perlin - RBC Capital Markets

And then I think maybe I just mismodeled how Torex was supposed to roll in, but it was much heavier on the expense side. You guys are pretty good about getting a lot of expenses out of the way early in the year and then kind of have a better back half. Is there something else that surprised you as you thought through how Torex was going to get layered into the business? Or is it just a function of trying to get this thing cleaned up early on in the year and then you can have some leverage on this in the back half?

Peter Rogers

It is a matter of getting cleaned up. As you saw, we did have some reduction in force, which we took in terms of a severance cost, so probably more in this quarter. So there’s an intense focus in the European management team to rightsize the organization but at the same time, growing the business base. But that’s taking a lot of time.

We clearly see the fact that Torex was a larger contribution over MICROS in the first quarter. Margins along with the MICROS that really brought the weighted average down. But as Cindy said, the organic MICROS margins were about 54.8%, right in the range of 55%.

I said that we’d get stronger in the December quarter and the out quarters. Torex is still at the same run rate, but as the percent of the business drops, so from an overall mix, as we see a pickup in software demand, that will help bring the margins up.

But I think overall gross margins for the year will probably be in that 52-53% range, because still Torex does have a lower gross margin structure. And it will take a while to get those margins up.

Operator

And our next question is going to be from the line of Tom McCrohan of Janney. Please proceed.

Tom McCrohan - Janney

Quick question on adjusting the numbers for Torex. I think you said $48 million for the quarter. I’m assuming obviously there was nothing Torex-related last year in the numbers, and I just kind of adjusted the $48 million. It looks like your revenue is kind of flat to down a little bit. So I just want to confirm. Torex just closed recently, so there was nothing in last year’s numbers really for Torex, correct?

Peter Rogers

We closed Torex May 31, so we clearly had no revenue a year ago. Yes, if you look on our quarter revenue, the base MICROS was down slightly, but if you then do it in constant currency, it was up maybe a couple of points. Currency cost us $8.2 million in the quarter, clearly because of the difference versus a year ago versus the pound and all the other currencies. But we just saw slower growth, clearly reported it, even in constant, really with the slowdown we saw in Europe and North America in the September quarter.

And going back, in the restaurant business last year September and the year before, we actually had two years of double-digit growth in the North American distribution channel. So we just think it’s a momentary lull. I think really back to Tom, some of the uncertainty, well known in terms of fiscal cliff and other things, clearly affected terms of the U.S. and clearly problems in Europe are well-known.

Tom McCrohan - Janney

And Peter, in terms of organic revenue growth, I think you said in your prepared remarks, 12% for the quarter, is that correct?

Peter Rogers

No, organic revenue growth on a constant currency basis was 1.4%.

Tom McCrohan - Janney

1.4%? Okay, I thought I heard 12%. And so just trying to think about what your guidance implies in terms of organic revenue growth. So if you adjust for Torex, it looks like the high end of guidance is about 8%, if I’m doing the math correct. And that’s not adjusted for currency. So maybe you could just talk in the context of how you think organic revenue growth is going to trend for the balance of the year based on the comments about you seeing the environment strength stabilize a little bit. You just had a user conference, so that gave you some insights on how that might trend. So if you could just talk about organic revenue growth and how you think that’s going to trend.

Tom Giannopoulos

If you take the guidance that we gave last summer, and you subtract from it the projected Torex numbers, you get down to a number that shows you versus last year what the organic growth is going to be. If you do that calculation, I think it shows that the organic growth that we need, with the Torex acquisition in place, is like 6-7%.

Our goal would be to have 10% growth. All along, we’ve said that we would like to grow the company in these difficult times somewhere between 9-11%, double digit, close to double digit. And our goal is to continue to do that. So absent any disaster in the marketplace, we should be able to do better than the 6-7% that we talked about and close to 10% organic growth plus the Torex numbers, whatever they turn out to be.

Tom McCrohan - Janney

That was really helpful, Tom, how you talked about your competitive advantage vis-à-vis Square and some of these emerging payment companies. And those four points that you laid out were helpful. I thought you were going to throw out there the dealer network as well. So I was wondering if you could just comment on that. It seems, from an outsider looking in, that your strong dealer network is an extreme competitive advantage vis-à-vis some of these emerging players. And so if you can just talk about that? Maybe I’m wrong, but it seems like that’s a real advantage that you have to defend against new entrants.

Peter Rogers

Tom, I’ll take that. If you look at our distribution channel in general, first of all we’re direct in over 60 countries around the world. We have approximately 50 international distributors. We [unintelligible] Canada. In the U.S. we have about 28 direct sales offices and approximately 45 dealers. Well-established distribution.

The nature of restaurant ownership is still pretty local. Independent restaurateurs running their own business. We provide a complete platform, provide the hardware and install it and provide the support. And the fact that ownership is local, people like to have people locally selling and servicing the systems.

And so our dealer channel knows the business well, and if I’m a restaurateur on a Friday night in Philadelphia, and the system goes down, we can be there in an hour. The poor restaurant’s not resigned to calling a 800 number asking for hardware support. Having local sales and service is paramount, because we’re providing that mission-critical support to that entrepreneur’s livelihood, whether a single restaurant, chain, or a large casino, having that local service is important.

Now, we’ve backed that, clearly, with a 24-hour help desk running here in Columbia and other parts of the world. But that dealer channel, and our direct sales channel, we have knowledgeable sales people understanding the business, selling service and systems, city by city, state by state, country by country. And that’s one of the strong competitive strengths that MICROS has built over 30 years.

As Tom said earlier, we back that up with thousands and thousands of man hours of programming knowledge in our software, really supplemented by world-class local sales and support.

Operator

And ladies and gentlemen, this concludes the Q&A session. Mr. Giannopoulos, I’ll turn the call back to you for your closing comments.

Tom Giannopoulos

Thank you everyone. Thank you for being with us again, and we’ll see you in January. Thank you.

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