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| RADS > SEC Filings for RADS > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Introduction
Management's Discussion and Analysis ("MD&A") is intended to facilitate an understanding of Radiant's business and results of operations. This MD&A should be read in conjunction with the MD&A included in our Form 10-K for the year ended December 31, 2008 as well as Radiant's Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. MD&A consists of the following sections:
• Overview: A summary of Radiant's business and opportunities
• Results of Operations: A discussion of operating results
• Liquidity and Capital Resources: An analysis of cash flows, sources and uses of cash, contractual obligations and financial position
• Critical Accounting Policies and Procedures: A discussion of critical accounting policies that require the exercise of judgments and estimates
• Recent Accounting Pronouncements: A summary of recent accounting pronouncements and the effects on the Company
Overview
We are a leading provider of technology focused on the development, installation and delivery of solutions for managing site operations of hospitality and retail businesses. Our point-of-sale and back-office technology is designed to enable businesses to deliver exceptional customer service while improving profitability. We offer a full range of products and services that are tailored to specific hospitality and retail market needs including hardware, software, professional services and electronic payment processing. The Company offers best-of-breed solutions designed for ease of integration in managing site operations, thus enabling operators to improve customer service while reducing costs. We believe our approach to site operations is unique in that our product solutions provide enterprise visibility and control at the site, field, and headquarters levels.
The Company manages its business in two reportable segments: (i) Hospitality
(which includes our Entertainment business and the recently acquired businesses
of Orderman GmbH, Jadeon, Hospitality EPoS and Quest Retail Technology), and
(ii) Retail (which is comprised of our Petroleum and Convenience Retail and
Specialty Retail businesses). Each segment focuses on delivering site management
systems, including point-of-sale, self-service kiosk, and back-office systems,
designed specifically for each of the core vertical markets.
Acquisition of Orderman
On July 1, 2008, the Company acquired Orderman GmbH ("Orderman"), one of the leading manufacturers of wireless handheld ordering and payment devices for the hospitality industry. Headquartered in Salzburg, Austria, Orderman has provided innovative mobile solutions since 1994. Orderman distributes its solutions through a reseller network of more than 600 partners that have deployed approximately 50,000 handheld devices, predominately in Europe. The acquisition enables Radiant to accelerate the adoption of mobile devices in the global hospitality sector. The total purchase price was approximately $33.0 million. The operations of the Orderman business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Jadeon
On May 1, 2008, Radiant acquired substantially all of the assets of Jadeon, Inc. ("Jadeon"), a wholly-owned subsidiary of Innuity, Inc. and one of the Company's resellers in California. Headquartered in Irvine, just outside Los Angeles, Jadeon has been delivering and supporting Radiant's hospitality point-of-sale solutions since 2001. Jadeon offers a full range of technology systems and implementation and support services throughout the West coast. The acquisition enables Radiant to strengthen its service capabilities and relationships with key accounts. Jadeon also serves as a platform for Radiant to strengthen its West coast market presence, specifically in the Los Angeles and San Francisco markets, allowing better penetration in the largest market in North America. The total purchase price was approximately $7.3 million. The operations of the Jadeon business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Hospitality EPoS Systems
On April 4, 2008, the Company acquired Hospitality EPoS Systems Ltd. ("Hospitality EPoS"), a leading technology supplier to the U.K. hospitality market since 1992. Headquartered in Kent, England, just outside London, Hospitality EPoS provided substantial capabilities for sales, implementation and support services and represented Radiant's suite of hospitality products, including Aloha point-of-sale software, Enterprise.com above-store reporting, gift card and loyalty programs, back-office and Radiant hardware. The total purchase price was approximately $6.3 million. The operations of the Hospitality EPoS business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Quest Retail Technology
On January 1, 2008, the Company acquired Quest Retail Technology Pty Ltd ("Quest"), a privately held company based in Adelaide, Australia. Quest is a global provider of point-of-sale and back-office solutions to stadiums, arenas, convention centers, race courses, theme parks and various other industries. The total purchase price was approximately $53.4 million. The operations of the Quest business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Launch of Radiant Payment Services
Radiant expanded its business services in 2008 with the launch of Radiant Payment Services ("RPS"), a business aimed at selling and servicing electronic payment processing. RPS enhances Radiant's current solutions by providing an integrated, turnkey payment processing solution for a wide variety of payment methods including credit, debit, and gift card payments. The objective of RPS is to raise the level of customer service that is provided to our business owners and operators by providing competitive and transparent pricing, increased accountability from a single vendor, and the highest level of security for customer data and credit card transactions.
To the extent that we believe acquisitions, joint ventures or new businesses can position us to better to serve our current segments, we will continue to pursue such opportunities in the future.
Results of Operations
Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008 and December 31, 2008
Systems - The Company normally derives the majority of its revenues from sales and licensing fees for its point-of-sale hardware and software, site management software solutions and peripherals. System sales during the first quarter of 2009 were approximately $27.0 million. This is a decrease of $11.7 million, or 30%, from the same period in 2008, and a decrease of $8.3 million, or 23%, from the fourth quarter of 2008.
The year over year decrease was expected and occurred across all of our businesses and is attributable to the global economic downturn which has slowed new site openings and reduced capital spending from existing customers. The decrease was partially offset by additional revenues resulting from the Orderman acquisition. The decrease from the fourth quarter of 2008 is due in part to the cyclical nature of capital expenditures throughout the retail marketplace, but primarily due to the economic downturn previously mentioned. We expect systems revenues to remain less than 2008 results until economic conditions improve.
Maintenance, subscription and transaction services - The Company derives revenues from maintenance, subscription and transaction services, including hardware maintenance, software support and maintenance, hosting services and credit card transaction services. The majority of these revenues are derived from support and maintenance, which is structured on a renewable basis and is directly attributable to the base of installed sites. Close to 100% of all subscription, maintenance and support contracts are renewed annually.
Revenues from maintenance, subscription and transaction services during the first quarter of 2009 were approximately $31.2 million. This is an increase of $7.9 million, or 34%, from the same period in 2008, and an increase of $0.5 million, or 1%, from the fourth quarter of 2008. The year over year increase is primarily due to the additional revenues resulting from our acquisitions in 2008, the additional revenues generated in both software and hardware support and maintenance resulting from increased systems sales in 2008 which added to our site base for recurring revenue, and the additional revenues resulting from our electronic payment processing business.
Professional services - The Company also derives revenues from professional services such as consulting, training, custom software development and system installations. Revenues from professional services during the first quarter of 2009 were approximately $9.3 million. This is an increase of $1.2 million, or 15%, from the same period in 2008, and an increase of $0.2 million, or 2%, from the fourth quarter of 2008. The year over year increase is primarily due to increases in consulting and custom development projects. These increases were partially offset by a decrease in installations revenues, which have declined in direct correlation with the decrease in systems sales previously mentioned.
Systems gross profit - Cost of systems consists primarily of hardware and peripherals for site-based systems and amortization of capitalized labor costs for internally developed software. All costs, other than capitalized software development costs, are expensed as products are shipped, while capitalized software development costs are amortized on a straight-line basis over the estimated useful life of the software.
In the first quarter of 2009, systems gross profit decreased by $5.6 million, or 30%, as compared to the same period in 2008, and decreased by $2.5 million, or 16%, as compared to the fourth quarter of 2008. In the first quarter of 2009, the gross profit percentage remained constant at 48% as compared to the same period in 2008 and increased by four points as compared to the fourth quarter of 2008. The increase in the gross profit percentage from the fourth quarter of 2008 is explained by a change in product mix between hardware and software sales.
Maintenance, subscription and transaction services gross profit - Cost of maintenance, subscription and transaction services consists primarily of personnel and other costs to provide support and maintenance services, hosting services and credit card transaction services.
In the first quarter of 2009, the gross profit on maintenance, subscription and transaction services increased by approximately $5.6 million, or 55%, as compared to the same period in 2008, and increased by $2.4 million, or 18%, as compared to the fourth quarter of 2008. The gross profit percentage increased by seven points to 50% in the first quarter of 2009 as compared to 43% for the same period in 2008 and the fourth quarter of 2008. The increases in the gross profit percentage are primarily due to normal fluctuations between product development projects and maintenance projects that occur throughout the year and the removal of capacity in the Company through headcount reductions made in the first quarter of 2009 and the fourth quarter of 2008. We also incurred lower repair and material costs within our hardware maintenance business during the first quarter of 2009.
Professional services gross profit - Cost of professional services consists primarily of personnel costs for consulting, training, custom software development and installation services. The gross profit on professional services revenue for the first quarter of 2009 increased by approximately $1.4 million, or 74%, as compared to the same period in 2008, and by $0.7 million, or 27%, as compared to the fourth quarter of 2008. The gross profit percentage increased by twelve points to 34% in the first quarter of 2009 as compared to the same period in 2008 and increased by seven points as compared to the fourth quarter of 2008. The increases in the gross profit percentage are the result of the removal of capacity in the Company through headcount reductions previously mentioned, and a continued focus on improving margins within our professional services through better utilization of personnel, including temporary and contract employees.
Segment revenues - During the first quarter of 2009, total revenues in the Hospitality business segment decreased by approximately $0.4 million, or 1%, as compared to the same period in 2008, and decreased by $3.8 million, or 7%, as compared to the fourth quarter of 2008. These decreases are primarily due to the economic downturn, which has negatively impacted systems revenues. The year over year decrease was partially offset by additional revenues resulting from the acquisitions of Orderman, Hospitality EPoS and Jadeon, which occurred subsequent to the first quarter of 2008.
During the first quarter of 2009, total revenues in the Retail business segment decreased by approximately $2.1 million, or 12%, as compared to the same period in 2008, and decreased by approximately $3.5 million, or 18%, as compared to the fourth quarter of 2008. The decreases are primarily attributable to economic factors that have resulted in a decrease in demand by convenience store operators. In addition, the decrease from the fourth quarter of 2008 is partially attributable to normal seasonality of capital expenditures throughout the industry.
Segment net income before allocation of central costs - The Company measures segment profit based on net income before the allocation of certain central costs. During the first quarter of 2009, total net income before allocation of central costs in the Hospitality business segment decreased by approximately $1.6 million, or 15%, as compared to the same period in 2008, and increased by $0.1 million, or 1%, as compared to the fourth quarter of 2008. The year over year decrease is primarily due to the overall decline in revenues due to the economic downturn, which is exacerbated by the additional cost structure assumed from the acquisitions we made in 2008. The slight increase from the fourth quarter of 2008 is primarily the result of cost-cutting efforts made during the fourth quarter of 2008 and the first quarter of 2009.
During the first quarter of 2009, total net income before allocation of central costs in the Retail business segment increased by approximately $1.3 million, or 64%, as compared to the same period in 2008, and decreased by $0.6 million, or 15%, as compared to the fourth quarter of 2008. The year over year increase is due primarily to a more efficient cost structure resulting from the layoffs that took place in the first quarter of 2009 and the fourth quarter of 2008. The decrease from the fourth quarter of 2008 is primarily the result of a reduction in revenue from the Retail business segment (specifically our petroleum and convenience store operating unit which was expected due to normal seasonality and the economic conditions we are operating under) and a decrease in gross profit due to changes in sales mix.
Total operating expenses - The Company's total operating expenses increased by approximately $5.7 million, or 24%, during the first quarter of 2009 as compared to the same period in 2008, and increased by approximately $3.0 million, or 11%, as compared to the fourth quarter of 2008 due to the following:
• Product development expenses - Product development expenses consist primarily of wages and materials expended on product development efforts, excluding any development expenses related to associated revenues, which are included in costs of maintenance, subscription and transaction services. Product development expenses decreased during the first quarter of 2009 by approximately $0.4 million, or 8%, as compared to the same period in 2008, and decreased by $1.4 million, or 21%, as compared to the fourth quarter of 2008. These decreases are primarily the result of headcount reductions that occurred in the first quarter of 2009 and the fourth quarter of 2008 to adjust our cost structure during the economic downturn. Product development expenses as a percentage of revenues were 8% for both the first quarter of 2009 and the same period in 2008, and 9% for the fourth quarter of 2008.
• Sales and marketing expenses - Sales and marketing expenses increased during the first quarter of 2009 by approximately $2.4 million, or 30%, as compared to the same period in 2008, and increased by $1.3 million, or 14%, as compared to the fourth quarter of 2008. The year over year increase is primarily related to incremental sales and marketing expenses resulting from our acquisitions during 2008 and additional bad debt expense that was included in our first quarter 2009 results. The increase from the fourth quarter of 2008 is a result of additional bad debt expense included in our first quarter 2009 results as well as the reintroduction of bonuses for 2009 which were suspended and reversed in the fourth quarter of 2008 due to the Company's 2008 financial results. Sales and marketing expenses as a percentage of revenues were 16% for the first quarter of 2009 as compared to 12% for the same period in 2008 and 12% for the fourth quarter of 2008.
• Depreciation and amortization expenses - Depreciation and amortization expenses increased during the first quarter of 2009 by approximately $0.9 million, or 33%, as compared to the same period of 2008, and decreased by $0.2 million, or 5%, as compared to the fourth quarter of 2008. The year over year increase is directly related to the amortization of certain intangible assets related to the acquisitions of Orderman, Hospitality EPoS and Jadeon, as well as additional depreciation expense resulting from the growth in our fixed assets. The slight decrease from the fourth quarter of 2008 is the result of currency fluctuations that impacted the intangible asset balances related to the acquisitions we made during 2008. Depreciation and amortization expenses as a percentage of revenues were 5% for the first quarter of 2009 as compared to 4% for the same period in 2008 and 5% for the fourth quarter of 2008.
• General and administrative expenses - General and administrative expenses increased during the first quarter of 2009 by approximately $1.7 million, or 22%, as compared to the same period in 2008, and increased by $2.1 million, or 29%, as compared to the fourth quarter of 2008. The year over year increase is primarily due to additional overhead expenses resulting from our acquisitions during 2008 and foreign currency losses recorded in the first quarter of 2009. The increase from the fourth quarter of 2008 is due to foreign currency losses recorded in the first quarter of 2009 (the fourth quarter of 2008 results included foreign currency gains), additional stock-based compensation expense resulting in the change in the terms of previously issued options and the reintroduction of bonuses for 2009 which were suspended and reversed in the fourth quarter of 2008 due to the company's 2008 financial results. General and administrative expenses as a percentage of revenues were 14% for the first quarter of 2009 as compared to 11% for the same period in 2008 and 10% for the fourth quarter of 2008.
During the first quarter of 2009, the Company recorded a charge of $0.7 million related to severance payments and restructuring of the organization and a charge of $0.5 million related to the write-off of third-party software licenses. These charges were partially offset by a gain of $0.1 million on the sale of a building.
During the fourth quarter of 2008, the Company recorded an impairment charge of $1.0 million related to the write down of a capitalized software product and a charge of $0.4 million related to severance payments and the restructuring of the organization. These charges were offset by a gain of $1.4 million on the sale of land near its corporate headquarters.
During the first quarter of 2008, the Company recorded a gain of approximately $0.3 million as a result of entering into a forward exchange contract in preparation for the acquisition of Quest. This gain was offset by approximately $0.4 million in debt cost write-offs and penalties associated with early termination of the WFF Credit Agreement as described in Note 7 to the condensed consolidated financial statements.
Interest expense, net - The Company's interest expense includes interest expense incurred on its long-term debt, revolving line of credit and capital lease obligations. Interest expense decreased by approximately $0.6 million, or 47%, in the first quarter of 2009 as compared to the same period in 2008, and decreased by $0.5 million, or 42%, as compared to the fourth quarter of 2008. These decreases are due to continued paydown of the Company's outstanding principal and revolver and a reduction in interest rates. See Note 7 to the condensed consolidated financial statements for additional discussion of the Company's debt structure.
Income tax provision - The Company's effective tax rates for the quarters ended March 31, 2009 and 2008 were equal to 32%, inclusive of discrete events.
Liquidity and Capital Resources
Prior to January 2008, the Company had a senior secured credit facility with Wells Fargo Foothill, Inc. (the "WFF Credit Agreement"). The WFF Credit Agreement provided for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $31 million. The revolving loan amount available to the Company was derived from a monthly borrowing base calculation using the Company's various accounts receivable balances. The amount derived from this borrowing base calculation was further reduced by the total amount of letters of credit outstanding. Loans under the WFF Credit Agreement bore interest, at Radiant's option, at either the London Interbank Offering Rate ("LIBOR") plus two and one half percent or at the prime rate of Wells Fargo Bank, N.A.
The WFF Credit Agreement was scheduled to expire on March 31, 2010. However, it was refinanced on January 2, 2008 upon the execution of the credit agreement with JPMorgan Chase Bank, N.A., as arranger, and JPMorgan Chase Bank, N.A, SunTrust Bank, Bank of America, Guaranty Bank and Wachovia Bank, N.A., as lenders (the "JPM Credit Agreement"). The JPM Credit Agreement provides for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $80 million and a term loan facility in an aggregate principal amount of up to $30 million. An amendment to the JPM Credit Agreement was signed in July 2008, whereby the Company has the right to increase its revolving credit commitment by up to $25 million, subject to the terms and conditions set forth in the JPM Credit Agreement. As of March 31, 2009, aggregate borrowings under this facility totaled $87.5 million, comprised of $63.0 million in revolving loans and $24.5 million in term loan facility borrowings. As of March 31, 2009, revolving loan borrowings available to the Company were equal to $17.0 million.
The JPM Credit Agreement is guaranteed by the Company and its subsidiaries and
is secured by the assets of the Company and its subsidiaries. The maturity date
of the JPM Credit Agreement is January 2, 2013. Interest accrues on amounts
outstanding under the loan facility, at the Company's option, of either
(1) LIBOR plus a margin ranging between 1.25% and 2.00% based upon the Company's
consolidated leverage ratio, as defined, or (2) the higher of the administrative
agent's prime rate or one-half of one percent over the federal funds effective
rate plus a margin ranging between 0.25% and 1.00% based on the Company's
consolidated leverage ratio, as defined. The JPM Credit Agreement contains
certain customary representations and warranties from the Company. In addition,
the JPM Credit Agreement contains certain financial and non-financial covenants,
with which the Company was in compliance as of March 31, 2009. Further
explanation of this agreement is presented in Note 7 to the condensed
consolidated financial statements.
The Company's working capital decreased by approximately $7.4 million, or 18%, to $34.2 million at March 31, 2009 as compared to $41.6 million at December 31, 2008. This decrease was primarily attributable to the fact that working capital was utilized to reduce the outstanding balance on the Company's revolving loan facility during the first quarter of 2009. The Company has historically funded its business through cash generated by operations. Cash provided by operating activities during the three months ended March 31, 2009 was approximately $11.6 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash charges, including depreciation, amortization, stock-based compensation and other charges. Changes in assets and liabilities increased operating cash flows during the first quarter of 2009, principally due to a reduction in accounts receivable and an increase in client deposits and unearned revenue. The decrease in the Company's accounts receivable balance during the first quarter of 2009 was largely the result of the year over year revenue decrease, while the increase in client deposits and unearned revenue was attributable to significant amounts of cash received for calendar year support and maintenance, which has been deferred and is being recognized as revenue over the course of 2009. These increases in operating cash flows were offset by decreases in accounts payable and accrued expenses, due to normal quarterly fluctuations and annual bonuses and commissions being paid during the first quarter of 2009. If near-term demand for the Company's products weakens, or if significant anticipated sales in any quarter do not close when expected, the availability of funds from operations may be adversely affected.
Cash provided by operations during the three months ended March 31, 2008 was approximately $0.9 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash charges, including depreciation, amortization, stock-based compensation and other charges. In addition, the Company received a significant amount of cash for calendar year support and maintenance which was deferred and recognized as revenue over the course of 2008. The cash received from support and maintenance was offset by the fact that the Company did not purchase the related receivables of Quest in conjunction with the acquisition completed during the first quarter of 2008 (see Note 3). As a result, a majority of the revenue generated by Quest had not been collected. Decreases in accounts payable and accrued expenses were . . .
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