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| MCRS > SEC Filings for MCRS > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
We are a leading worldwide designer, manufacturer, marketer, and servicer of software and systems for the global hospitality industry (including, e.g., hotels and restaurants) and the specialty retail industry. In addition to our software and hardware products, we offer an extensive array of related services to our customers, including, e.g., implementation, training, and support. We distribute our products and services directly and through our domestic branch offices and our international subsidiary offices, as well as indirectly (both domestically and internationally) through a network of independent dealers and distributors.
We manage our business geographically and are organized and operate in two reportable segments for financial reporting purposes: U.S. and International. International reportable segment operations are primarily in Europe, the Pacific Rim and Latin America. For purposes of applying Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," management views the U.S. and International reportable segments separately in operating our business, although the products and services are similar for each segment. In each of these two reportable segments, we have developed an infrastructure through which we license and sell all of our products and services. While the products and services that are sold must be customized to address local issues, laws, tax requirements and customer preferences, the products and services are substantially similar worldwide.
We have been and continue to be adversely affected by the current global recession. We believe that weakened consumer spending, coupled with difficulties in obtaining credit (including the cost of credit) have negatively affected our customers' abilities to acquire or open new hospitality and retail venues, and also limit their willingness and ability to make significant capital expenditures on new systems and system upgrades. In light of the very challenging and uncertain conditions, we continue to implement actions to enhance our liquidity and maintain a solid balance sheet. Several of these actions are as follows: (i) reducing certain discretionary expenses; (ii) reducing certain rates for third party contractors; (iii) tactically implementing headcount reductions in certain departments; and (iv) tactically implementing hiring freezes in certain departments.
Forward-looking statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of specified factors, including those set forth in the section titled "Business and Investment Risks; Information Relating to Forward-Looking Statements," in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the Fiscal Year ended June 30, 2008 and in Part II, Item 1A, "Risk Factors" in this report.
Examples of such forward-looking statements include:
· Our assumptions regarding the materiality of any subsequent adjustments to the purchase price of our acquisitions during the relevant period;
· Our expectations regarding the effect of the adoption of various accounting pronouncements;
· Our expectations regarding the impact of competition on product and service margins;
· Our statements regarding the effects of Euro fluctuations (and other currency fluctuations) on our financial performance;
· Our expectation that customers with which we do the largest amount of business will change from period to period;
· Our belief that our reserve against future indemnity expenditures will be sufficient;
· Our belief that any liability from ongoing legal proceedings will not have a material adverse effect on the Company's results of operations or financial position or cash flows;
· Our expectations regarding the future course of the three legal proceedings described in this report;
· Our statements about the effects of larger customer orders on our quarterly earnings and revenues;
· Our statements regarding the costs associated with maintaining compliance with applicable legal, financial, and industry requirements and standards;
· Our beliefs regarding the effects on our results of operations or financial position of any current legal proceedings in which we may be involved;
· Our expectations regarding effective tax rates in future periods, and the effects of tax audits in certain jurisdictions;
· Our expectations about the adequacy of our cash flows and our available lines of credit to meet our working capital needs, and our ability to raise additional funds if and when needed;
· Our beliefs regarding impairment of our investments in auction rate securities, and our intention and ability to retain those investments under current market conditions;
· Our expectations regarding our exposure to interest rate risk; and
· Our expectation that we will evaluate our need to invest in instruments to protect against interest rate fluctuations and our exposure to such interest rate risk.
Results of Operations
The results of our operations were adversely affected by the strengthening of U.S. dollar against foreign currencies as 52% of our total revenue for the nine months ended March 31, 2009 was generated by our international segment. The results were also adversely affected by a slow down in demand from our customers which we believe was due to the uncertainties arising from the current U.S. and global economic conditions. All references to share data in this Item 2 have been adjusted to reflect the two-for-one stock split effected on February 5, 2008.
Revenue:
Three Months Ended March 31, 2009:
An analysis of the sales mix by reportable segments was as follows (amounts are
net of intersegment eliminations, based on location of the selling entity, and
include export sales):
Three Months Ended March 31,
U.S. International Total
(in thousands) 2009 2008 2009 2008 2009 2008
Hardware $ 24,358 $ 32,813 $ 18,399 $ 32,476 $ 42,757 $ 65,289
Software 11,458 14,189 16,864 23,721 28,322 37,910
Service 66,445 57,830 68,142 76,158 134,587 133,988
$ 102,261 $ 104,832 $ 103,405 $ 132,355 $ 205,666 $ 237,187
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An analysis of the total sales mix as a percent of total revenue was as follows:
Three Months Ended
March 31,
2009 2008
Hardware 20.8 % 27.5 %
Software 13.8 % 16.0 %
Service 65.4 % 56.5 %
100.0 % 100.0 %
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For the three months ended March 31, 2009, total revenue was approximately
$205.7 million, a decrease of approximately $31.5 million, or 13.3% compared to
the same period last year due to the following:
· The unfavorable foreign currency exchange rate fluctuations, for substantially
all foreign currencies against the U.S. dollar, negatively affected total
revenue by approximately $21.3 million;
· Hardware and software revenue, without giving effect to currency translation,
decreased by 29% and 16%, respectively, compared to the same period last year.
We believe these decreases were due to a slow down in demand from our customers
as a result of the adverse U.S. and global economic conditions.
· The decreases noted above were offset partially by additional services revenue
generated by Fry, a company which we acquired in August 2008.
The international segment revenue for the three months ended March 31, 2009 decreased by approximately $29.0 million compared to the same period last year. The unfavorable foreign currency exchange rate fluctuations negatively affected international segment revenue by approximately $21.3 million. Without giving effect to currency translation, hardware revenue decreased 32% and software revenue decreased 14%, respectively, compared to the same period last year. As stated above, we believe these decreases excluding the impact of foreign currency exchange rate fluctuations were due to a slowdown in demand from our customers because of the adverse U.S. and global economic conditions. These decreases were partially offset by an 8% increase in overall services revenue, without giving effect to foreign currency translation, compared to the same period last year, which was due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customer (primarily through purchase of additional services).
U.S. segment revenue decreased approximately $2.6 million for the three months ended March 31, 2009 compared to the same period last year. The decrease in U.S. segment revenue was due primarily to a 26% decrease in hardware revenue and 19% decrease in software revenue, both compared to the same period last year. These decreases were substantially offset by additional services revenue generated as a result of the acquisition of Fry in August 2008 and an overall increase in services revenue which was due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through purchase of additional services). We believe the decreases in hardware and software revenues were due to a slowdown in demand from our customers because of the uncertainties arising from the overall current U.S. and global economic conditions.
Nine months ended March 31, 2009:
An analysis of the sales mix by reportable segments was as follows (amounts are net of intersegment eliminations, based on location of the selling entity, and include export sales):
Nine Months Ended March 31,
U.S. International Total
(in thousands) 2009 2008 2009 2008 2009 2008
Hardware $ 86,026 $ 99,292 $ 76,570 $ 98,092 $ 162,596 $ 197,384
Software 38,668 43,847 65,426 69,431 104,094 113,278
Service 206,934 164,283 214,046 222,675 420,980 386,958
$ 331,628 $ 307,422 $ 356,042 $ 390,198 $ 687,670 $ 697,620
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An analysis of the total sales mix as a percent of total revenue was as follows:
Nine Months Ended
March 31,
2009 2008
Hardware 23.7 % 28.3 %
Software 15.1 % 16.2 %
Service 61.2 % 55.5 %
100.0 % 100.0 %
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For the nine months ended March 31, 2009, total revenue was approximately $687.7
million, a decrease of approximately $10.0 million, or 1.4% compared to the same
period last year due to the following:
· The unfavorable foreign currency exchange rate fluctuations, for substantially
all foreign currencies against the U.S. dollar, negatively affected total
revenue by approximately $36.6 million;
· Hardware and software revenues, without giving effect to foreign currency
translation, decreased by 14% and 2%, respectively, compared to the same period
last year. We believe these decreases were due to a slow down in demand from our
customers because of adverse U.S. and global economic conditions.
· The decreases described above were offset partially by additional services
revenue generated by Fry, a company we acquired in August 2008. Additionally,
overall services revenue, without giving effect to foreign currency translation
and Fry, increased by 6% due to the continued expansion of our customer base
coupled with increased recurring support revenue from existing customers
(primarily through purchase of additional services).
The international segment revenue for the nine months ended March 31, 2009 decreased by approximately $34.2 million compared to the same period last year. The unfavorable foreign currency exchange rate fluctuations negatively affected total revenue by approximately $36.6 million. Services revenue, without giving effect to foreign currency translation, increased 6% and software revenue, also without giving effect to foreign currency translation, increased 4%, both compared to the same period last year. The increase in service revenue was due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through purchase of additional services). The increases in services and software revenue were partially offset by a 14% decrease (without giving effect to foreign currency translation) in hardware revenue. As stated above, we believe the decrease in hardware revenue was due to a slowdown in demand from our customers because of adverse U.S. and global economic conditions.
U.S. segment revenue increased approximately $24.2 million for the nine months ended March 31, 2009 compared to the same period last year. The increase was primarily the result of additional services revenue generated as a result of the acquisition of Fry in August 2008 and the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through purchase of additional services). This increase was partially offset by 13% decrease in hardware and 12% decrease in software revenues, both compared to the same period last year. We believe these decreases were due to a slowdown in demand from our customers because of adverse U.S. and global economic conditions.
Cost of Sales:
Three Months Ended March 31, 2009:
An analysis of the cost of sales was as follows:
Three Months Ended March 31,
2009 2008
% of % of
Cost of Related Costs of Related
(in thousands) Sales Revenue Sales Revenue
Hardware $ 26,284 61.5 % $ 42,882 65.7 %
Software 6,565 23.2 % 7,648 20.2 %
Service 61,767 45.9 % 62,398 46.6 %
$ 94,616 46.0 % $ 112,928 47.6 %
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For the three months ended March 31, 2009 and 2008, cost of sales as a percent of revenue were 46.0% and 47.6%, respectively. Hardware cost of sales as a percent of related revenue for the three months ended March 31, 2009 decreased 4.2% compared to the same period last year primarily as a result of a decrease in freight costs, and an overall improvement in margins on substantially all hardware product sales.
Software cost of sales as a percent of related revenue increased approximately 3.0% compared to the same period last year primarily as a result of (1) an unfavorable change in sales mix, (2) lower margin realized on third party software sales compared to same period last year, and (3) an increase in capitalized software amortization expense as a percent of software. These increases in software costs were partially offset by a 10% increase in the sale of Opera suite software products compared to the same period last year. Sales of Opera suite software products (and other internally developed software applications) generally generate higher margins than sales of third party software.
Service costs as a percent of related revenue decreased approximately 0.7% compared to the same period last year due to lower travel costs, substantially offset by lower margin realized on Fry services revenue compared to MICROS' services revenue, excluding Fry.
Nine months ended March 31, 2009:
An analysis of the cost of sales was as follows:
Nine Months Ended March 31,
2009 2008
% of % of
Cost of Related Costs of Related
(in thousands) Sales Revenue Sales Revenue
Hardware $ 104,099 64.0 % $ 127,105 64.4 %
Software 20,963 20.1 % 25,671 22.7 %
Service 199,090 47.3 % 180,783 46.7 %
$ 324,152 47.1 % $ 333,559 47.8 %
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For the nine months ended March 31, 2009 and 2008, cost of sales as a percent of revenue were 47.1% and 47.8%, respectively. Hardware cost of sales as a percent of related revenue for the nine months ended March 31, 2009 decreased 0.4% compared to the same period last year primarily as a result of a decrease in freight costs, partially offset by lower margin realized on the combined sale of Workstation 4 and Workstation 5 during the nine months ended March 31, 2009 compared to the same period last year. Workstation 5 was released in October 2007 and is the larger version of the Workstation 4.
Software cost of sales as a percent of related revenue decreased approximately 2.6% compared to the same period last year. The decrease in the software cost of sales was primarily as a result of a 25% increase in the sale of Opera suite software products compared to the same period last year. Sales of Opera suite software products (and other internally developed software applications) generally generate higher margins than sales of third party software.
Service costs as a percent of related revenue increased approximately 0.6% compared to the same period last year due to lower margins generally realized on Fry services revenue compared to MICROS' services revenue, excluding Fry.
Selling, General and Administrative ("SG&A") Expenses:
SG&A expenses, as a percentage of revenue, for the three months ended March 31, 2009, were 31.3%, a decrease of 0.7% compared to the same period last year. This decrease was primarily due to our ability to manage our variable costs, partially offset by unfavorable leveraging of fixed costs as a result of lower revenue during the three months ended March 31, 2009 compared to same period last year.
SG&A expenses, as a percentage of revenue, for the nine months ended March 31, 2009, were 31.1%, a decrease of 1.4% compared to the same period last year. This decrease primarily was due to our ability to manage our variable costs and lower share-based compensation expense compared to the same period last year.
Research and Development ("R&D") Expenses:
R&D expenses consisted primarily of labor costs less capitalized software development costs. An analysis of R&D activities is as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
(in thousands) 2009 2008 2009 2008
Total R&D incurred $ 10,729 $ 10,782 $ 32,057 $ 31,233
Capitalized software development costs (469 ) (400 ) (702 ) (1,759 )
Total R&D expenses $ 10,260 $ 10,382 $ 31,355 $ 29,474
% of Revenue 5.0 % 4.4 % 4.6 % 4.2 %
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Depreciation and Amortization Expenses:
Depreciation and amortization expenses for the three months ended March 31, 2009 increased approximately $0.9 million to approximately $4.2 million compared to the same period last year. The increase was primarily due to additional depreciation expense incurred on capital expenditures made since March 31, 2008 and the acquisition of Fry.
Depreciation and amortization expenses for the nine months ended March 31, 2009 increased approximately $1.8 million to approximately $12.6 million compared to the same period last year. The increase was primarily due to additional depreciation expense incurred on capital expenditures made since March 31, 2008 and the recent acquisition of Fry.
Share-Based Compensation Expenses:
We account for our option awards in accordance with SFAS No. 123(R), "Share-Based Payment." The estimated fair value of awards granted under the stock option program are measured as of the date of grant, and non-cash share-based compensation expenses, adjusted for expected pre-vesting forfeitures, are recognized ratably over the requisite service (i.e., vesting) period of options in the consolidated statements of operations. In addition, for the three and nine months ended March 31, 2008, non-cash share-based compensation expenses, adjusted for expected pre-vesting forfeitures, also were recognized for the non-vested portion of awards that were granted before the effective date of SFAS No. 123(R) as those options vested. The SG&A expenses and R&D expenses discussed above include the following allocations of non-cash share-based compensation expense:
Three Months Ended Nine Months Ended
March 31, March 31,
(in thousands) 2009 2008 2009 2008
SG&A $ 2,953 $ 3,373 $ 10,364 $ 12,645
R&D 233 243 654 799
Total non-cash share-based compensation
expense 3,186 3,616 11,018 13,444
Income tax benefit (825 ) (801 ) (2,644 ) (3,315 )
Total non-cash share-based compensation
expense, net of tax benefit $ 2,361 $ 2,815 $ 8,374 $ 10,129
Impact on diluted net income per share $ 0.03 $ 0.04 $ 0.10 $ 0.13
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During the three months ended December 31, 2008 and 2007, we granted to our Chairman, President, and CEO, A.L. Giannopoulos, options to purchase 150,000 shares and 240,000 shares, respectively. In accordance with the terms of the option plan, any options that he holds that have not yet vested at the time of his retirement will vest immediately upon his retirement as he is over the retirement age of 62. Mr. Giannopoulos has not retired, but because he was over the age of 62 at the time he received the options, we recorded 100% of the non-cash share-based compensation expense related to the options granted to Mr. Giannopoulos during the nine months ended March 31, 2009 and 2008. As a result, we recorded approximately $0.8 million (approximately $0.5 million net of tax benefits or $0.01 diluted earnings per share) for the nine months ended March 31, 2009 and approximately $3.2 million (approximately $2.0 million net of tax benefits or $0.02 diluted earnings per share) for the nine months ended March 31, 2008 related to options granted to Mr. Giannopoulos.
Non-operating Income:
Net non-operating income for the three months ended March 31, 2009, was approximately $1.3 million, a decrease of approximately $2.1 million compared to the same period last year. The decrease was due to a decline in interest income of approximately $2.5 million due to overall lower interest rates earned on cash and cash equivalents.
Net non-operating income for the nine months ended March 31, 2009, was approximately $7.2 million, a decrease of approximately $3.3 million compared to the same period last year. The decrease was due to a decrease in interest income of approximately $4.0 million due to overall lower interest rates earned on cash and cash equivalents.
Income Tax Provisions:
The effective tax rate for the three months ended March 31, 2009 and 2008 was 29.5% and 32.5%, respectively. The effective tax rate for the nine months ended March 31, 2009 and 2008 was 32.7% and 33.3%, respectively. The effective tax rates for the three and nine months ended March 31, 2009 and March 31, 2008 were less than the 35.0% U.S. statutory federal income tax rate primarily due to decreases in certain unrecognized tax positions as a result of the expiration of statutes of limitations, the mix of earnings from jurisdictions that have a lower statutory tax rate than the U.S., and from the phase-in of the deduction for domestic production activities under the Internal Revenue Code. These benefits were partially offset by the non-deductible nature of certain non-cash share-based compensation items, other non-deductible compensation items, non-deductible foreign withholding taxes and the inclusion of foreign income in our U.S. tax base. The decreases in tax rates as compared to the same periods last year were primarily attributable to decreases of certain unrecognized tax positions as a result of the expiration of statutes of limitations, changes in the mix of earnings from foreign jurisdictions included in our U.S. tax base and other non-deductible compensation.
We have reviewed our uncertain income tax positions in accordance with FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109." We are currently under audit in certain major taxing jurisdictions, with open tax years beginning in fiscal year 1999. It is reasonably possible to estimate that within the next 12 months we will decrease unrecognized tax benefits by approximately $1 million to $6 million due to the expiration of statutes of limitations, settlement of issues with tax authorities and other events. Based on current estimates, this estimated decrease in unrecognized tax benefits could increase earnings by approximately $0.5 million to $2 million as a result of its impact on the effective tax rate. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. Further, over the next twelve months, it . . .
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