Affirms Full-Year Revenue Guidance of $433-$437 Million; Increases Full-Year Non-GAAP EPS Guidance to $0.88-$0.89
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Total second quarter revenues reached an all-time quarterly high of $105.7 million, increasing more than 6% when compared to total revenues of $99.5 million in the 2006 second quarter. Total second quarter revenues benefited slightly by incremental revenue of approximately $1.3 million from a mid-May 2007 acquisition by Epicor of the Epicor Division of an Australian reseller, Professional Advantage(1). Second quarter GAAP net income was $6.3 million, or $0.11 per diluted share, compared to $7.1 million, or $0.12 per diluted share in the 2006 second quarter. The reseller acquisition was slightly dilutive to GAAP net income. The 2007 second quarter tax rate was 37.2%. The Company's actual cash tax rate for the second quarter was approximately 11%.
2007 second quarter non-GAAP net income was $12 million, or $0.21 per diluted share, compared to non-GAAP net income of $11.2 million, or $0.20 per diluted share, in the 2006 second quarter. The reseller acquisition was slightly dilutive to non-GAAP net income. In addition to excluding amortization and stock-based compensation expense, non-GAAP earnings for the 2007 second quarter also excludes a write-off of capitalized debt issuance costs that resulted from the Company's pay-off of an outstanding term loan with proceeds from the convertible financing in May 2007, all net of tax.
Epicor chairman and CEO George Klaus commented, "We had a solid second quarter with the highest total quarterly revenues in the Company's history and our third consecutive $100 million+ revenue quarter. Total revenue and GAAP and non-GAAP EPS were in-line with the guidance provided in April. We also had very strong cash flow from operations of more than $14 million during the quarter. These results benefited from solid year-over-year maintenance revenue growth of nearly 6% and strong consulting revenue year-over-year growth of 25%, but were tempered by NLR year-over-year growth of approximately 5%, as well as lower than expected hardware revenues.
"As you saw last quarter when the Company's top line benefited from approximately $3 million in additional hardware revenue above our expectations, and as demonstrated in our quarterly results for 2006, the hardware business that accompanies our retail solutions can be unpredictable," Klaus said. "This unpredictability led to 2007 second quarter hardware revenue coming in approximately $2.5 million under our expectations. It is important to note that when hardware and other revenue is excluded from our 2007 and 2006 second quarter revenues, total revenue for the 2007 second quarter increased by more than 11% year-over-year. Hardware represents lower margin business and the impact to the bottom line of any quarterly variance is generally minimal, however, it is an important part of our retail business strategy as it goes hand-in-hand with many of our retail solutions.
"Robust sales of Vantage 8 drove domestic NLR growth in excess of 12%, despite a year-over-year decline in sales in the retail vertical of approximately 3.5%," Klaus continued. "Strong Vantage contribution is a very important metric as the Vantage product already leverages some key elements of the go-forward technology platform for our converged product, Epicor 9. The decline in the retail vertical sales was due to a couple of large contracts that were expected to close in the second quarter, but were delayed into the third quarter. The retail contracts that slipped are expected to close later this week and we are expecting a solid second half of the year from this vertical.
"Additionally," he said, "we experienced lower than anticipated contribution from international NLR -- specifically from new name sales in our United Kingdom region. We had a large pipeline for this region going into the quarter, but our close rates were not what we expected on new name deals. It is important to note that NLR sales into our existing UK customer base, as well as consulting and maintenance revenues met or exceeded our expectations for the quarter.
"Pipelines remain strong in all geographies," Klaus said, "however, based on the lower than expected contribution from our UK new business sales, our current outlook is for international NLR to grow at approximately 9% to 10% for the full-year, causing us to slightly adjust our 2007 full-year total NLR growth expectations to 10% to 12% (from 13% to 15%). In light of our new NLR growth projections, we have taken what we believe are prudent steps to reduce operating costs across the Company to align our operating structure with our revenue expectations.
"Importantly, and as evidenced this quarter in our solid EPS performance," Klaus said, "we are beginning to experience leverage in our operating model, with adjusted EBITDA margins improving sequentially by nearly 300 basis points to 15.7% in the second quarter. This operating leverage and the reduction in operating expenses we have implemented, combined with our expectations over the course of the second half of 2007 for double digit NLR growth, second half improvement in our consulting margins and very solid growth in maintenance revenues, is expected to drive a 400 to 500 basis points improvement in our adjusted EBITDA margin during the second half of the 2007 year, when compared to the first half of 2007. We also believe we will continue to experience excellent leverage into 2008 with adjusted EBITDA margins improving an additional 150 to 200 basis points over the course of the 2008 year."
Revenue by Segment
NLR grew just under 5% to $25.1 million, when compared to NLR of $24.0 million in the year earlier period. The 2007 second quarter's NLR revenue growth was led by a strong year-over-year increase domestically, but was slowed by retail deal slippage and lower than anticipated international contribution. 2007 second quarter NLR did benefit by approximately $0.3 million from the reseller acquisition.
Consulting revenue was up significantly in the second quarter to a record $34.1 million, an increase of 25% when compared to consulting revenues of $27.3 million in the 2006 second quarter. 2007 second quarter consulting revenue was bolstered by undertaking larger engagements, which are being driven by strong new Vantage sales, as well as by the Company's efforts in building a larger professional services team and an uptake in the Company's strategic objective to provide higher margin professional services, such as managed services and hosting. 2007 second quarter consulting revenue benefited from approximately $0.8 million as a result of the reseller acquisition.
Maintenance revenue for the second quarter also experienced solid growth, with 95% customer retention driving record maintenance revenues of $39.7 million, a nearly 6% increase compared to maintenance revenues of $37.5 million in the 2006 second quarter. 2007 second quarter maintenance revenue includes approximately $0.1 million as a result of the reseller acquisition. Maintenance contribution from the acquisition is lower in the first year post-acquisition due to the application of purchase accounting rules, which generally result in reductions in deferred maintenance revenue.
Hardware and other revenue for the second quarter was $6.8 million, down from $10.7 million in the prior year's second quarter.
Excluding hardware and other revenue for the 2007 second quarter of $6.8 million, second quarter total revenue increased more than 11% to $98.9 million when compared to 2006 second quarter total revenue of $88.8 million, excluding $10.7 million in hardware and other revenue.
Balance Sheet Summary
The Company's balance sheet at June 30, 2007 included cash and cash equivalents and short-term investments of $196.5 million, which benefited from excellent cash flow from operations of more than $14 million during the quarter and approximately $222 million in net cash from the Company's convertible note offering in May 2007. The Company's total long-term debt balance as of June 30, 2007 was $230.1 million, consisting primarily of the $230 million obligation to holders of the Company's convertible bonds. The Company paid $16.3 million in cash, including transaction costs, for the reseller acquisition in May 2007.
