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| RADS > SEC Filings for RADS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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, 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 had been delivering and supporting Radiant's hospitality point-of-sale solutions since 2001. The acquisition enables Radiant to strengthen its service capabilities and relationships with key accounts and 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 September 30, 2009 Compared to the Three Months Ended September 30, 2008 and June 30, 2009 and the Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 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 third quarter of 2009 were approximately $29.6 million. This is a decrease of $13.0 million, or 31%, from the same period in 2008 and a decrease of $0.2 million, or 1%, from the second quarter of 2009. System sales during the nine-month period ended September 30, 2009 were $86.5 million compared to $120.3 million for the same period in 2008, a decrease of 28%. 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. 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 third quarter of 2009 were approximately $33.5 million. This is an increase of $4.0 million, or 14%, from the same period in 2008 and an increase of $1.4 million, or 4%, from the second quarter of 2009. Revenues from maintenance, subscription and transaction services during the nine-month period ended September 30, 2009 were $96.8 million compared to $78.2 million for the same period in 2008, an increase of 24%. These increases are primarily due to the additional revenues resulting from our electronic payment processing business but are also attributable 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 continued penetration of our hosted solution products. These revenues are recurring in nature and we expect to see continued growth in this revenue stream despite the economic conditions that currently exist.
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 third quarter of 2009 were approximately $7.8 million. This is a decrease of $2.4 million, or 24%, from the same period in 2008 and a decrease of $1.4 million, or 15%, from the second quarter of 2009. Revenues from professional services during the nine-month period ended September 30, 2009 were $26.4 million compared to $27.8 million for the same period in 2008, a decrease of 5%. The year-over-year decreases are primarily attributable to a decrease in installations revenues, which have declined in direct correlation with the decrease in systems sales previously discussed. The decrease from the second quarter of 2009 is primarily due to one-time consulting arrangements which were not repeated in the third quarter.
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 third quarter of 2009, systems gross profit decreased by $6.2 million, or 31%, as compared to the same period in 2008, and decreased by $1.1 million, or 7%, as compared to the second quarter of 2009. In the third quarter of 2009, the gross profit percentage of 46% was consistent as compared to the same period in 2008 but decreased from the second quarter of 2009 by three percentage points. The decrease in the gross profit percentage from the second quarter is primarily due to hardware product mix. For the nine-month period ended September 30, 2009 as compared to the same period in 2008, systems gross profit decreased by approximately $15.9 million, or 28%, while the gross profit percentage of 48% was consistent as compared to the same period in 2008.
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 third quarter of 2009, the gross profit on maintenance, subscription and transaction services increased by approximately $5.0 million, or 41%, as compared to the same period in 2008 and increased by $0.7 million, or 4%, as compared to the second quarter of 2009. The gross profit percentage increased by ten percentage points to 51% in the third quarter of 2009 as compared to the same period in 2008, and was consistent as compared to the second quarter of 2009. For the nine-month period ended September 30, 2009, the gross profit on maintenance, subscription and transaction services increased by approximately $16.4 million, or 50%, as compared to the same period in 2008, while the gross profit percentage increased by nine percentage points to 51%. The year-over-year increases in the gross profit percentage are primarily due to 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 for the third quarter of 2009 decreased by approximately $0.5 million, or 17%, as compared to the same period in 2008, and by $0.9 million, or 26%, as compared to the second quarter of 2009. The gross profit percentage increased by three percentage points to 32% in the third quarter of 2009 as compared to the same period in 2008, and decreased by five percentage points as compared to the second quarter of 2009. For the nine-month period ended September 30, 2009, the gross profit on professional services increased by approximately $1.4 million, or 18%, as compared to the same period in 2008, while the gross profit percentage increased by seven percentage points to 34%. The year-over-year 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. The decrease in the gross profit percentage from the second quarter of 2009 is primarily due to a reduction in consulting revenues where the associated costs are essentially fixed.
Segment revenues - During the third quarter of 2009, total revenues in the Hospitality business segment were $53.5 million. This is a decrease of $10.2 million, or 16%, compared to the same period in 2008 and a decrease of $0.8 million, or 2%, as compared to the second quarter of 2009. For the nine months ended September 30, 2009, total revenues in the Hospitality business segment decreased by approximately $10.6 million, or 6%, as compared to the same period in 2008. The year-over-year decreases are primarily due to the economic downturn, which has negatively impacted systems revenues. The nine month 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. The decrease from the second quarter of 2009 was primarily attributable to a reduction in systems sales due to seasonality within the European market. This decrease was partially offset by increased systems sales within our channel business.
During the third quarter of 2009, total revenues in the Retail business segment were $16.7 million. This is a decrease of $0.9 million, or 5%, as compared to the same period in 2008 and an increase of $0.4 million, or 3%, as compared to the second quarter of 2009. For the nine months ended September 30, 2009, total revenues in the Retail business segment decreased by approximately $5.3 million, or 10%, 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 second quarter of 2009 is mainly attributable to 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 third quarter of 2009, total net income before allocation of central costs in the Hospitality business segment decreased by $3.0 million, or 27%, compared to the same period in 2008 and decreased by $2.3 million, or 22%, as compared to the second quarter of 2009. For the nine months ended September 30, 2009, total net income before the allocation of central costs in the Hospitality business segment decreased by approximately $4.6 million, or 14%, as compared to the same period in 2008. The year-over-year decreases are 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 decrease from the second quarter of 2009 is primarily due to a reduction in one-time consulting profits within our direct customer business that were not repeated in the third quarter and a decrease in systems profits resulting from reduced systems sales due to seasonality within the European market.
During the third quarter of 2009, total net income before allocation of central costs in the Retail business segment increased by approximately $1.7 million, or 86%, as compared to the same period in 2008 and was flat compared to the second quarter of 2009. For the nine months ended September 30, 2009, total net income before the allocation of central costs in the Retail business segment increased by approximately $4.4 million, or 68%, 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 headcount reductions which took place in the first quarter of 2009 and the fourth quarter of 2008 and an increase in sales in the second and third quarters through our channel partners.
Total operating expenses - The Company's total operating expenses decreased by approximately $4.0 million, or 13%, during the third quarter of 2009 as compared to the same period in 2008, decreased by approximately $1.3 million, or 4%, as compared to the second quarter of 2009, and increased by approximately $5.9 million, or 7%, for the nine months ended September 30, 2009 as compared to the same period in 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 third quarter of 2009 by approximately $0.6 million, or 9%, as compared to the same period in 2008, increased by $0.4 million, or 7%, as compared to the second quarter of 2009, and decreased by $1.6 million, or 9%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The year-over-year decreases are primarily the result of headcount reductions which occurred in the first quarter of 2009 and the fourth quarter of 2008 to adjust our cost structure during the economic downturn. The increase from the second quarter is due to normal fluctuations among 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 nine-month periods ended September 30, 2009 and 2008 and the second quarter of 2009.
• Sales and marketing expenses - Sales and marketing expenses during the third quarter of 2009 were consistent as compared to the same period in 2008, decreased by $0.2 million, or 2%, as compared to the second quarter of 2009, and increased by $4.3 million, or 16%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The nine month year-over-year increase is primarily related to incremental sales and marketing expenses resulting from our acquisitions during 2008. The slight decrease from the second quarter is primarily due to a reduction in trade show expense and advertising costs. Sales and marketing expenses as a percentage of revenues were 15% for the third quarter of 2009 as compared to 13% for the same period in 2008, 15% for the second quarter of 2009, and 15% for the nine months ended September 30, 2009 as compared to 12% for the same period in 2008.
• Depreciation and amortization expenses - Depreciation and amortization expenses decreased during the third quarter of 2009 by approximately $0.1 million, or 3%, as compared to the same period of 2008, were flat as compared to the second quarter of 2009, and increased by approximately $1.7 million, or 19%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The three month year-over-year decrease is due to lower depreciation expense resulting from reduced capital spending during the economic downturn. The nine month year-over-year increase is directly related to the amortization of certain intangible assets related to the acquisitions of Orderman, Hospitality EPoS and Jadeon. Depreciation and amortization expenses as a percentage of revenues were 5% for the third quarter of 2009 as compared to 4% for the same period in 2008, 5% for the second quarter of 2009, and 5% for the nine-month period ended September 30, 2009 as compared to 4% for the same period in 2008.
• General and administrative expenses - General and administrative expenses decreased during the third quarter of 2009 by approximately $1.2 million, or 14%, as compared to the same period in 2008, decreased by $1.4 million, or 15%, as compared to the second quarter of 2009, and increased by $2.0 million, or 8%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The three month year-over-year decrease is 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 decrease from the second quarter of 2009 is primarily due to the timing of our bonus expenditures for 2009 and the increase in our health insurance accruals that occurred in the second quarter and were not repeated in the third quarter. The nine month year-over-year increase is primarily due to additional overhead expenses resulting from our acquisitions during 2008. General and administrative expenses as a percentage of revenues were 11% for the third quarter of 2009 and the same period in 2008, 13% for the second quarter of 2009, and 12% for the nine months ended September 30, 2009 compared to 11% for the same period in 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 third quarter of 2008, the Company recorded a restructuring charge of $2.1 million related to amending a sublease agreement on a facility in Alpharetta, Georgia, as discussed in Note 8 to the condensed consolidated financial statements.
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 conjunction with 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 conjunction with 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 $0.7 million, or 58%, in the third quarter of 2009 as compared to the same period in 2008, decreased by $0.1 million, or 16%, as compared to the second quarter of 2009, and decreased by $1.8 million, or 49%, during the nine months ended September 30, 2009 as compared to the same period in 2008. 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 September 30, 2009 and 2008 were equal to 35.1% and 27.5%, respectively, inclusive of discrete events. For the nine-month period ended September 30, 2009 as compared to the same period in 2008, the Company's effective tax rates were 36.2% and 33.0%, 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 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 and subsequent amendments thereto provide 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 September 30, 2009, aggregate borrowings under this facility totaled $67.0 million, comprised of $45.5 million in revolving loans and $21.5 million in term loan facility borrowings. As of September 30, 2009, revolving loan borrowings available to the Company were equal to $34.5 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 . . .
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