MICROS Systems Inc. (MCRS) reported adjusted earnings (excluding the effect of amortization of Torex intangibles but including stock-based compensation expenses) on a proportionate tax basis of 67 cents per share for the third-quarter of fiscal 2014, beating the Zacks Consensus Estimate of 61 cents. Moreover, on a year-over-year basis earnings increased 15.5%, primarily due to higher revenue base, lower tax rate and lower share count.
Revenues
Revenues of $348.9 million increased 10.8% year over year and came above the Zacks Consensus Estimate of $333.0 million. The year-over-year improvement in revenues was primarily attributed to growth across all its business segments, specially hardware (driven by increase in demand for food and beverage) and strong sales implementation. Also, the year-over-year expansion was driven by strong growth in terms of geography and verticals (especially in food & beverage and hotels).
By business verticals, revenues from food & beverage came in at $139.0 million, up 15.9% from the year-ago quarter. Revenues were positively impacted by site upgrades from Microsoft’s (MSFT) XP software and new client additions.
Hotel revenues came in at $132.2 million, increasing 14.3% from the year-ago quarter primarily attributable to higher adoption of its OPERA enterprise solution. However, revenues from the retail business declined 2.2% from the year-ago quarter and came in at $77.7 million.
Segment wise, Service revenues came in at $231.1 million, up 8.11% from the year-ago quarter. Hardware revenues came in at $78.6 million, increasing 21.9% from the year-ago quarter. Software revenues increased 6.6% from the year-ago quarter to $39.2 million.
Geographically, international revenues increased 4.5% from the year-ago-quarter to $200.8 million. Revenues from the U.S. & Canada increased 20.5% from the year-ago period to $148.2 million..
Operating Results
Adjusted gross margin was 52.1%, down 47 basis points (bps) from the year-ago quarter, primarily due to unfavorable business mix.
Adjusted operating expenses increased 11.0% on a year-over-year basis to $116.4 million due to increases in both selling, general and administrative expenses and research and development expenses. Moreover, as a percentage of revenues, operating expenses increased 8 basis points from the year-ago quarter to 33.4%. This in turn impacted MICROS’ operating performance.
Adjusted operating income increased 7.6% from the year-ago quarter to $65.2 million while margins contracted 55 bps to 18.7%.
Adjusted net income (excluding the effect of amortization of Torex intangibles but including stock-based compensation expenses) came in at $51.1 million or 67 cents versus adjusted net income of $46.5 million or 58 cents in the year-ago quarter.
Balance Sheet and Cash Flow
MICROS ended the quarter with cash and cash equivalents and short-term investments of $658.4 million versus $627.3 million at the end of the previous quarter. Accounts receivable were $265.1 million. The company did not have any long-term debt on its balance sheet.
The company reported cash flow from operations of $176.7 million for the nine months ended Mar 31, 2014. Free cash flow came in at $141.7 million.
MICROS repurchased 337.4 million shares for $170.6 million during the quarter.
Guidance
The company expects its fiscal 2014 revenues to be in the range of $1.360 billion to $1.385 (previous guidance of $1.320 billion to $1.345), while non-GAAP earnings per share are expected to be in the range of $2.53 to $2.57 (previous guidance $2.46 billion to $2.51). The Zacks Consensus Estimate for revenues and earnings is pegged at $1.339 billion and $2.30 per share, respectively.
Our Take
MICROS reported better-than-expected third-quarter fiscal 2014 results. Both revenues and earnings increased on a year-over-year basis. Revenues were positively impacted by growth across all its business segments. The company is expected to take care of its margins and control expenses. MICROS also provided an encouraging fiscal 2014 guidance.
Moreover, recent collaborations with companies like Microsoft, Dell and Intel (INTC) are expected to boost MICROS’ hardware business, going forward. Also, rapid adoption of MICROS’ solutions will increase its top line. Expansion of the company’s SaaS capabilities and an increase in licensed software sales should also support revenues.
On the flip side, the company is facing competition from the likes of Square, Revel, Groupon Inc. (GRPN) and NCR Corp., which provide mobile and tablet-based offerings for the hospitality sector and cannibalize the legacy POS workstations.
Moreover, the company’s European exposure and a sluggish macro-economic environment are the other headwinds, going forward.
Currently, MICROS has a Zacks Rank #2 (Buy).
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