Those of you who are specialty food aficionados may have heard of Stonewall Kitchen, a Maine-based purveyor of tasty jams and sauces. It seems the company is everywhere these days, even in the financial press. On May 13, 2009, it was part of a press release announcing Micros Systems (Nasdaq:MCRS) as its e-commerce platform provider, electing to go with the eOne Web Commerce product suite, which allows almost any enterprise to mix-and-match operating systems, software and hardware. It's easy to see why owners Jonathan King and James Scott went with Micros. The question is whether they should also buy its stock. (Read more in our Industry Handbook: The Internet Industry.)
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A Familiar Client List
Micros operates in three main industries: hospitality, restaurants and specialty retail. Its client list is a who's who of companies. Well-known names include Marriott International (NYSE:MAR), Yum Brands (NYSE:YUM) and Ralph Lauren (NYSE:RL). Started in 1977 in Maryland, it's come a long way. Today, revenues are just shy of $1 billion with net margins upwards of 10%. No longer just an American company, international sales represent almost 57% of its total business, growing 27.5% in 2008, compared to 14.4% domestically. This trend should continue unabated until the U.S. drags itself out of its economic malaise. Until then, sales outside the U.S. will drive its business. Not to worry though, it has a great business model with three streams of revenue: hardware, software and service. Service revenue accounts for 55.5% of its overall business generating a gross margin of 53.2%. This is recurring revenue, and it won't go away easily. They'd have to really mess up to lose this wonderful margin of safety. Like the cherry on top of a sundae, 16.6% of its business is software that generates 79% gross margins. The remaining 27.9% of its revenues come from hardware, delivering 35.4% gross margins. Mix it all together and you get an overall gross profit of 52.5%. High gross margins are the key to any successful business. Micros have them aplenty. (For more, see our article Technology Sector Funds.)
Getting customers to spend money on new equipment right now must be like pulling teeth. As a prospective business, you might need new equipment, but cash flow concerns trump any desire to improve your technology. As such, Micros is fighting a losing battle on the revenue front and its most recent quarter clearly demonstrates management is more than aware of this fact of life. Despite a strong headwind, it delivered almost identical third quarter income from operations year-over-year ($32.3 million vs. $34.8 million) on $205.7 million in revenue. That's a 15% drop in sales. In its conference call, CEO Tom Giannopoulos laid out its five-point plan for handling the economy. It included keeping revenues at respectable levels, operating margins above 15%, increasing its cash position, continuing to spend on product development and leveraging its financial strength to gain market share. Revenues should be around $900 million in 2009, which is down but still respectable. Earnings per share should come in flat compared to last year, so that's a win. In terms of cash, it should end the year above $440 million, which is the amount on hand at the end of Q3. Product development expenses will likely be between $33-$40 million (what it spent in 2007 and 2008) and gross margins are as high as they've been in a decade.
With easy navigation and ecommerce options, the owners of Stonewall Kitchen just may have the perfect answer to digital shopping.