Despite posting fiscal first-quarter profits that exceeded Wall Street's predictions, MRO Software Inc.'s revenues in the period were slightly below expectations due in part to several software license deals that didn't close in time to be recorded in the quarter.
Nonetheless, MRO officials told financial analysts they were pleased with the results, adding that the Bedford, MA company's strong pipeline should yield enough business this quarter to overcome the revenue shortfall experienced in the first quarter. They also reiterated guidance for fiscal 2006 provided in November and pledged to put the company's strong balance sheet to good use, but noted that acquisitions wouldn't be made for the sole purpose of improving cash utilization.
For the quarter ended December 31, total revenues of the enterprise asset software vendor reached $49.1 million, up 4% from the like period last year. However, the figure was 11% lower than the record revenues posted in the company's fourth quarter. MRO's support and services business grew 12% in the fiscal first quarter to $36.3 million, but couldn't help the company overcome a 14% decline in software license revenues to $12.8 million in the period.
"Our performance in software was largely driven by the natural timing of many opportunities that appear to be well positioned to close in the March quarter," MRO CEO Chip Drapeau said during a conference call with financial analysts to discuss the first quarter's results. Drapeau didn't disagree with one analyst who wondered if the company's more aggressive fiscal 2005 sales compensation plan shifted some deals to last year's fiscal fourth quarter. MRO, he added, did not try to counter this by attempting to accelerate business destined to close during the second fiscal quarter.
"We were not inclined to go on a fishing expedition and drag in business that reduces our ability to capitalize on what we think is fair value for the software," he said.
Due to a concerted effort to control expenses and increase operational efficiencies, the company reported net profits on a GAAP (Generally Approved Accounting Principles) basis of $4.2 million, up 33% from the like period of fiscal 2005. Earnings per share grew 25% to 16 cents, the company said.
Wall Street analysts estimated that MRO's quarterly earnings would come in at 14 cents a share on revenues of $50.5 million, according to a Thomson Financial poll.
The focus on internal efficiencies helped MRO achieve operating margins of 12%, a figure higher than what the company posted throughout fiscal 2005. Key to the improvement was MRO's support and services business, where, according to CFO Peter Rice, the company benefited from better use of its human resources amid growing adoption of its newly released Maximo Enterprise Software (MXES), which added IT service management to the company's core asset management software suite.
In fact, of the 28 MXES deals signed in the quarter, 10 included the IT service management component of the suite, Drapeau noted. MRO's ability to offer one-stop asset management services that track everything from the performance of factory-floor equipment to IT assets is paying off, he noted, particularly among companies seeking to consolidate the number of software vendors with which they do business.
"It's a major differentiator in a customer base that wants to do more with a select group of vendors, but does not want to bet everything on one behemoth," he emphasized.
The move into IT services management puts MRO into competition with a host of vendors, such as Computer Associates, BMC's Remedy, and Peregrine, which was recently acquired by Hewlett-Packard Co. Asked if the Peregrine deal has created more opportunities for MRO with HP rival IBM, Drapeau said while he wasn't aware of IBM's strategy he has received indications that Big Blue is paying closer attention to his company's products and is making sure its personnel are well versed on them.
It will take some time for MRO to benefit from this opportunity, he said, but "a major door has been opened; it's now our job to walk through it."
MRO's end-to-end asset management approach is also helping the company appeal to factory system integrators that want to expand beyond their industrial roots into the business process side of information technology, Drapeau added.
The company's "100% Internet architecture" is another differentiator, he said, and has helped MRO retain an edge in its key vertical markets of utilities (its largest business sector), oil & gas, pharmaceuticals, life sciences, and federal government. Being fully Internet driven has also bolstered the company's claims of cost of ownership, usability, and configurability advantages over asset management software delivered by ERP vendors such as SAP, which have moved aggressively into the space.
ERP vendors, Drapeau said, are delivering asset management functionally that is "thin in vertical areas" and is built primarily for back office use, which makes the software costly to deploy for enterprises with distributed operations.
MRO, he said, has increased its advantage over ERP competitors with new software quietly introduced last month that allows customers to remotely access Maximo asset management functionality from a variety of mobile devices and connection models. "This is another significant step in our strategy to help customers achieve better efficiencies in the field where the action is, instead of in the back office where the accountants live."
One analyst expressed concern that the company might be keeping too much cash on its balance sheet. With $123 million in the bank, the company added $3 million in cash and equivalents since the four quarter (it has no long-term debt).
Drapeau declined to comment on how much cash was too much, but he did say having liquid assets gave the company the flexibility to move quickly and proactively on initiatives that could have a significant impact on its business. He said the company has actively entertained a variety of avenues to increase shareholder value, from stock repurchases to acquisitions, but has moved cautiously, awaiting the most appropriate market conditions (for the former) and synergistic targets (for the latter).
"We are always looking at acquisitions that we think can help our competitive advantage and help our operating characteristics," he said. "We're relatively judicious in how we think about such things; we remember how hard it is to earn it so are not anxious to just go out there and do a deal because people might worry that we have too much cash on the balance sheet."
A company spokesman declined comment when asked if MRO had made a bid for Datastream Systems Inc., an asset management software competitor the company previously tried to acquire and which recently agreed to be purchased by Infor Global Solutions.
Meanwhile, MRO expects business to continue to grow steadily in fiscal 2006, after surging in the second half of fiscal 2005 following a second-quarter set back.
For fiscal year 2006, the company projects overall revenue growth of between 5% and 10% over fiscal 2005 results. Software revenues are expected to grow in the range of 10% to 20%, company officials said. Even though it only posted software revenues of $12.8 million, the company still expects first-half software revenues to reach between of $28 million and $32 million.
As a result, MRO expects fiscal 2006 earnings to increase between 15% and 25% over fiscal 2005 results, with second quarter GAAP earnings per share in the range of 16 cents to 18 cents.