After a gloomy year of cash-flow problems and a costly product recall that left the company with a 78 percent increase in debt and an $867,000 loss in fiscal 1982, Beltsville-based Micros Systems Inc. has staged a near-miraculous financial turnaround.
Not only that, but the computerized cash register supplier also is gearing up to penetrate the rapidly growing telephone call-accounting sector of the telecommunications market.
While unprofitability continued to dog Micros into the first quarter of its '83 fiscal year, second-quarter revenue rose 15 percent and profits soared 226 percent, due primarily to retrenching efforts and steadily increasing sales of Micros' products--electronic retail-control systems based on point-of-sale equipment for the hospitality and food-service industries.
Company President Jeffrey Rice says incoming orders are up 25 percent and Micros is struggling to meet the increased demand from a growing list of corporate customers that includes the Madison and Hilton hotels, Baltimore Washington International Airport, Ramada Inn, Beefsteak Charlie's and Amelia's in Crystal City's underground.
Most of Micros' troubles last year stemmed from its efforts to reach growth projection targets through expansion, even in the face of a recession.
Riding the crest of substantial sales gains in each of the four years following its inception in 1977, peaking at $9 million in fiscal '81, Micros was looking to boost revenue still further into the $14 million to $16 million range last year.
The sale of 2 million shares of its common stock in December 1981 fueled growth expectations, adding $2.5 million to the company's coffers and opening the door to expansion. Although a portion of the stock sale's proceeds was used to retire debt and to finance the tooling of a plastic enclosure for Micros' basic terminal product, the bulk of the funds was added to working capital.
Micros opened five new district offices in as many months. Selling and general administrative expenses began to climb as the company beefed up its field and support staff in the new offices in anticipation of sales gains.
But cracking five new markets--New York, Atlanta, Cincinnati, Dallas and Denver--proved more difficult than Micros expected.
Higher-than-anticipated start-up costs and over-optimistic sales penetration projections put a squeeze on cash flow and liquidity, the first puncture in the company's fiscal balloon.
"With $200,000 tied up in inventory in each of the new offices," says Rice, "we were looking for revenue of $60,000 or $70,000 a month from each office to break even. But we were the new kids on the block selling a new product and had no existing customers in those markets."
That, coupled with the fact that cash register users nationwide were cutting capital expenditures to offset the effects of an economic downturn just as Micros was unveiling a spate of new products, further strained the company's precarious cash-flow position.
Things got even worse when a technical problem surfaced in Micros' 400 series terminals. A faulty random access memory component caused intermittent memory loss, and the glitch cost the company $200,000 in replacement parts and another $100,000 to reimburse its district dealers.
Although Micros managed to secure a $1.25 million loan from a Baltimore bank in December 1981 and a $500,000 line of credit to ease mounting cash-flow problems, lower than expected revenue from the new district operations continued to eat away at capital. The company soon found itself in violation of certain covenants of its loan agreement as its net worth slipped to $3 million, below the stipulated $3.7 million.
Undaunted, Micros pressed on, broadening its product base with a series of point-of-sale and electronic cash register products aimed at the lower end of the hospitality and food-service markets. The new line was a marriage of a product made by a Japanese manufacturer featuring two integral printers and an alpha numeric display, and Micros' own software tailored to the hospitality, fast-food and retail industries.
The company also expanded the capabilities of its own basic computerized cash register to allow it to be converted into a point-of-sale device for use in food service and hotel energy management. It priced the new product from $3,300 to $6,000.
Asked if he thought the company had undertaken too much too soon in the way of expansion and new product development, Rice said that, although he doesn't discount the possibility altogether, he doesn't think so.
"It's a lot easier to Monday morning quarterback than to plan for Sunday's game," he says, adding that, even with the benefit of hindsight, he isn't sure he would have done things differently. "It's really too early to say for sure, but we felt establishing district offices was important at the time. They contribute to dealer confidence and it's comforting for our major accounts to know that a Micros representative is nearby, not somewhere in Maryland."
Ironically, the expansion and product development expenses that strained last year's profit margins have played a major role in Micros' turnaround.
Even though the company lost money last year, sales were up 39 percent to $12.6 million, Rice said. Sales for the first half of fiscal 1983 were up 20 percent, which Rice attributes to ever-increasing acceptance of Micros' products in its new markets.
"We're not the new kid on the block anymore," he noted. "Although it hasn't come about as fast as we'd hoped, setting up new district offices has had a synergistic effect on sales. The more leads and referrals you get, the more you sell."
Although figures for the third quarter, which ended March 25, are not yet available, Rice says he's expecting results to pretty much parallel those of the second quarter--$3.7 million in sales with a profit of about $220,000.
Rice's goals for the fiscal year are somewhat more ambitious--a profit of about $500,000 on sales of $14.5 million. His goals for fiscal 1984 are even greater, with a sales target of $19 million and pre-tax margins in the neighborhood of 10 or 12 percent.
While Rice admits that those are lofty goals for a company just emerging from the red, he says Micros' entry into the telephone "call-accounting market"--a call made from a hotel room, for example--coupled with new financing and other retrenching efforts should put the company back on its growth track.
Although Rice concedes that garnering a share of the call-accounting market--already dominated by firms like Telesphere, Bitek and National Cash Register Corp.--won't be easy, Rice says Micros' products will be tailored to interface with the control terminal at the hotel's front desk, an advantage its competitors don't have.
"Everything will be stored in the control terminal at the front desk," he says. "Most of our competitors are offering first-generation systems without that feature. Even if a call-accounting system works to the letter, it isn't much good unless you make sure that all charges get to the front desk. . . before the guest checks out."
The company recently completed the evaluation phase for its call accounting system and initial deliveries have been shipped to the company's district offices in Houston, Philadelphia, Cincinnati, Atlanta and Chicago. Although Micros has not yet launched its marketing campaign for the new product, it has received installation orders from the Mariner Corp. in Houston, a Holiday Inn franchise in Atlanta and a Roadway Inn franchise in Chicago.
Rice expects to make substantial sales gains with Micros' new lower-priced series aimed at the lower end of the hospitality, food service and specialty retail markets.
Payless Drugs North, an $800 million West Coast drug chain patterned after K mart, is currently using several hundred of Micros' lower-priced terminals in conjunction with IBM computers.
Aside from increased revenue generated by Micros' new district offices and last year's new product introductions, Rice's expectation of a healthier balance sheet this year is predicated on a number of belt-tightening moves the company made following last year's brush with unprofitability.
Micros shaved more than $1 million off its annual payroll expenses by reducing staff from 255 to 200 and skimming 10 percent off the salaries of officers and supervisory level managers. Credit to dealers was also tightened, and inventory pared 23 percent.
"A lot of our problems had to do with the fact that we were moved through events rather than by strategic planning," says Rice. "A careful look at the 20 or 25 major markets told us that there was a lot of organizational redundancy for a company our size."
In an effort to combat that problem, management has been restructured into three regional divisions, the heads of which answer directly to Rice.
"When you have a clearer picture of where to go, it's a lot easier to get there," he says. "We're a lot leaner and more efficient now."
Scott Buyers, former manager of the management advisory service division of Price Waterhouse's Richmond office, was recently brought on board as Micros' senior vice president of operations to free Rice to devote himself exclusively to new product development and marketing.
Although Rice says the components are now in place for Micros' resumed growth, a recent infusion of capital will help tide the company over the short term: Micros raised $1 million in a private placement of its restricted stock to an individual investor and boosted its line of credit with the National Bank of Washington by $750,000.
Those funds, Rice says, combined with a leaner, more efficient organizational structure, continued retrenching and rising revenues should keep Micros afloat for the next 12 to 18 months. After that, says Rice, Micros will be running on its own steam.