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| RADS > SEC Filings for RADS > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-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 Annual Report on 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 serve our current segments, we will continue to pursue such opportunities in the future.
Results of Operations
Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008 and March 31, 2009, and the Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008
Systems - The Company has historically derived 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 second quarter of 2009 were approximately $29.8 million. This is a decrease of $9.1 million, or 23%, from the same period in 2008, and an increase of $2.8 million, or 10%, from the first quarter of 2009. System sales during the six-month period ended June 30, 2009 were $56.9 million compared to $77.7 million for the same period in 2008, a decrease of 27%. The decreases from 2008 are primarily attributable to the global economic downturn which has slowed new site openings and reduced capital spending from existing customers. The decreases were partially offset by additional revenues resulting from the Orderman acquisition. The increase from the first quarter of 2009 is primarily due to increased sales within our hospitality and retail channel businesses in addition to the cyclical nature of our hospitality international business, which historically has a strong second quarter. We expect systems revenues to remain lower 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. A significant majority of all subscription, maintenance and support contracts are renewed annually.
Revenues from maintenance, subscription and transaction services during the second quarter of 2009 were approximately $32.1 million. This is an increase of $6.7 million, or 26%, from the same period in 2008, and an increase of $0.9 million, or 3%, from the first quarter of 2009. Revenues from maintenance, subscription and transaction services during the six-month period ended June 30, 2009 were $63.3 million compared to $48.7 million for the same period in 2008, an increase of 30%. These increases are 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), continued penetration of our hosted solution products within our current site base, 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 second quarter of 2009 were approximately $9.2 million. This is a decrease of $0.2 million, or 2%, from the same period in 2008, primarily attributable to a decrease in installations revenues, which have declined in direct correlation with the decrease in systems sales previously mentioned. The revenues for the second quarter of 2009 were consistent as compared to the first quarter of 2009. Revenues from professional services during the six-month period ended June 30, 2009 were $18.6 million compared to $17.5 million for the same period in 2008, an increase of 7%. This increase is primarily due to an increase in consulting and custom development projects, which was partially offset by a decrease in installations revenues for the reason noted above.
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 second quarter of 2009, systems gross profit decreased by $4.1 million, or 22%, as compared to the same period in 2008, and increased by $1.6 million, or 12%, as compared to the first quarter of 2009. In the second quarter of 2009, the gross profit percentage increased by one point to 49% as compared to 48% for the same period in 2008 and the first quarter of 2009. For the six-month period ended June 30, 2009 as compared to the same period in 2008, systems gross profit decreased by approximately $9.7 million, or 26%, while the gross profit percentage increased by one point to 49% as compared to 48% for the same period in 2008. The increase in the gross profit percentage during the three and six-month periods ended June 30, 2009 is primarily due to hardware product mix.
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 second quarter of 2009, the gross profit on maintenance, subscription and transaction services increased by approximately $5.8 million, or 55%, as compared to the same period in 2008, and increased by $0.8 million, or 5%, as compared to the first quarter of 2009. The gross profit percentage increased by nine points to 51% in the second quarter of 2009 as compared to 42% for the same period in 2008 and increased by one point as compared to the first quarter of 2009. For the six-month period ended June 30, 2009, the gross profit on maintenance, subscription and transaction services increased by approximately $11.4 million, or 55%, as compared to the same period in 2008, while the gross profit percentage increased by eight points to 51%. 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, the launch of our payment services business (described earlier), and the removal of capacity in the Company through headcount reductions made in the first quarter of 2009 and the fourth quarter of 2008.
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 second quarter of 2009 increased by approximately $0.5 million, or 20%, as compared to the same period in 2008, and by $0.2 million, or 5%, as compared to the first quarter of 2009. The gross profit percentage increased by six points to 36% in the second quarter of 2009 as compared to the same period in 2008 and increased by two points as compared to the first quarter of 2009. For the six-month period ended June 30, 2009, the gross profit on professional services increased by approximately $1.9 million, or 41%, as compared to the same period in 2008, while the gross profit percentage increased by nine points to 35%. 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 second quarter of 2009, total revenues in the Hospitality business segment were $54.3 million. These revenues are consistent with the same period in 2008 and represent an increase of $2.9 million, or 6%, as compared to the first quarter of 2009. The increase from the first quarter of 2009 was primarily attributable to increased systems revenues within the European marketplace and our indirect sales channel. For the six months ended June 30, 2009, total revenues in the Hospitality business segment decreased by approximately $0.4 million, or less than 1%, as compared to the same period in 2008. This decrease was primarily due to the economic downturn, which has negatively impacted systems revenues. However, the 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 second quarter of 2009, total revenues in the Retail business segment decreased by approximately $2.4 million, or 13%, as compared to the same period in 2008, and increased by approximately $0.7 million, or 5%, as compared to the first quarter of 2009. For the six months ended June 30, 2009, total revenues in the Retail business segment decreased by approximately $4.5 million, or 13%, as compared to the same period in 2008. The year over year decreases are primarily attributable to economic factors that have resulted in a decrease in demand by convenience store operators. The increase over the first quarter of 2009 is mainly attributable to normal seasonality of capital expenditures throughout the industry and an increase in our channel business.
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 second quarter of 2009, total net income before allocation of central costs in the Hospitality business segment was consistent with the same period in 2008, and increased by $1.5 million, or 17%, as compared to the first quarter of 2009. For the six months ended June 30, 2009, total net income before the allocation of central costs in the Hospitality business segment decreased by approximately $1.7 million, or 8%, as compared to the same period in 2008. The six-month 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 increase from the first quarter of 2009 is primarily due to strong operating results from our European business.
During the second quarter of 2009, total net income before allocation of central costs in the Retail business segment increased by approximately $1.3 million, or 56%, as compared to the same period in 2008, and increased by $0.3 million, or 9%, as compared to the first quarter of 2009. For the six months ended June 30, 2009, total net income before the allocation of central costs in the Retail business segment increased by approximately $2.7 million, or 60%, as compared to the same period in 2008. The year over year increases are 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 and an increase in sales in the second quarter through our channel partners.
Total operating expenses - The Company's total operating expenses increased by approximately $4.2 million, or 17%, during the second quarter of 2009 as compared to the same period in 2008, and by approximately $9.9 million, or 20%, for the six months ended June 30, 2009 as compared to the same period in 2008, and decreased by approximately $1.0 million, or 3%, as compared to the first quarter of 2009, 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 second quarter of 2009 by approximately $0.6 million, or 10%, as compared to the same period in 2008, and by $1.0 million, or 9%, during the six months ended June 30, 2009 as compared to the same period in 2008, and increased by $0.3 million, or 7%, as compared to the first quarter of 2009. The year over year 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. The 77% increase that occurred from the first quarter is due to normal fluctuations between maintenance, custom development, capitalized software projects and product development. Product development expenses as a percentage of revenues remained constant at 8% for the three and six-month periods ended June 30, 2009 and 2008 and the first quarter of 2009.
• Sales and marketing expenses - Sales and marketing expenses increased during the second quarter of 2009 by approximately $1.9 million, or 22%, as compared to the same period in 2008, and increased by $4.3 million, or 26%, during the six months ended June 30, 2009 as compared to the same period in 2008, and were consistent with the first quarter of 2009. The year over year increases are primarily related to incremental sales and marketing expenses resulting from our acquisitions during 2008. Sales and marketing expenses as a percentage of revenues were 15% for the second quarter of 2009 as compared to 12% for the same period in 2008, 15% for the six months ended June 30, 2009 as compared to 12% for the same period in 2008, and 16% for the first quarter of 2009.
• Depreciation and amortization expenses - Depreciation and amortization expenses increased during the second quarter of 2009 by approximately $0.9 million, or 36%, as compared to the same period of 2008, and by approximately $1.8 million, or 34%, during the six months ended June 30, 2009 as compared to the same period in 2008, and increased by $0.1 million, or 2%, compared to the first quarter of 2009. The year over year increases are 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. Depreciation and amortization expenses as a percentage of revenues were 5% for the second quarter of 2009 as compared to 4% for the same period in 2008, 5% for the six-month period ended June 30, 2009 as compared to 4% for the same period in 2008, and 5% for the first quarter of 2009.
• General and administrative expenses - General and administrative expenses increased during the second quarter of 2009 by approximately $1.5 million, or 20%, as compared to the same period in 2008, and by $3.2 million, or 21%, during the six months ended June 30, 2009 as compared to the same period in 2008, and decreased by $0.2 million, or 3%, as compared to the first quarter of 2009. The year over year increases are primarily due to additional overhead expenses resulting from our acquisitions during 2008. The decrease from the first quarter of 2009 is primarily due to a full quarter of savings resulting from headcount reductions made during the first quarter of 2009. General and administrative expenses as a percentage of revenues were 13% for the second quarter of 2009 as compared to 10% for the same period in 2008, 13% for the six months ended June 30, 2009 compared to 11% for the same period in 2008, and 14% for the first quarter of 2009.
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 second quarter of 2008, the Company recorded a gain of approximately $0.5 million as a result of entering into a forward exchange contract in preparation for the acquisition of Orderman, as discussed in Note 8 to the condensed consolidated financial statements.
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 the 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 $0.4 million, or 40%, in the second quarter of 2009 as compared to the same period in 2008, and by $1.1 million, or 45%, during the six months ended June 30, 2009 as compared to the same period in 2008, and decreased by $0.1 million, or 8%, as compared to the first quarter of 2009. These decreases are due to continued paydown of the Company's outstanding indebtedness and a reduction in interest rates. See Note 7 to the condensed consolidated financial statements for additional discussion of the Company's credit facility.
Income tax provision - The Company's effective tax rates for the quarters ended June 30, 2009 and June 30, 2008 were equal to 38.5% and 35.9% respectively, inclusive of discrete events. For the six-month period ended June 30, 2009 as compared to the same period in 2008, the Company's effective tax rates were 37.0% and 34.2% respectively, inclusive of discrete events. The year over year increases are primarily attributable to a valuation allowance recorded against state attributes.
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 the Company'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 June 30, 2009, aggregate borrowings under this facility totaled $80.0 million, comprised of $57.0 million in revolving loans and $23.0 million in term loan facility borrowings. As of June 30, 2009, revolving loan borrowings available to the Company were equal to $23.0 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, at 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 June 30, 2009. Further
explanation of this agreement is presented in Note 7 to the condensed
consolidated financial statements.
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