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Executives

John Heyman - Chief Executive Officer

Mark Haidet - Chief Financial Officer

Andy Heyman - Chief Operating Officer and President, Retail Division

Analysts

Terry Tillman - Raymond James

Unidentified Analyst for Chad Bennet - Northland Securities

Unidentified analyst for Gil Luria - Wedbush Morgan Securities

Radiant Systems, Inc. (RADS) Q3 2009 Earnings Call October 29, 2009 4:30 PM ET

Operator

Good day and welcome to the Radiant Systems, Inc. third quarter 2009 earnings release. At this time I would like to turn over the call to your host Mr. John Heyman. Please go ahead sir.

John Heyman

Thanks you and thank you to everyone for joining us this afternoon. We know it is a busy earnings season and we certainly appreciate your interest in Radiant. With me here today are Mark Haidet, our Chief Financial Officer; Andy Heyman, our Chief Operating Officer; and Alon Goren, our Chairman and Chief Technology Officer. Before I get started I’m going to let Mark run through the forward-looking caveats.

Mark Haidet

Thanks, John. As always, certain statements contained in this conference call are forward-looking statements within the meaning of the Securities Act of 1995, such statements relating to financial results and plans for future business development activities, and are thus perspective. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company’s control. These risks are detailed in our most recent 10-K filed with the Securities and Exchange Commission.

During this call, we will also discuss certain non-GAAP financial measures. Reconciliations of these financial measures to comparable GAAP financial measures can be found in our earnings release and on our website at www.radiantsystems.com under Investor Relations. John?

John Heyman

Thanks Mark. We are obviously very pleased with the business performance and it continues to be ahead of our expectations that we laid out at the beginning of the year. From a financial perspective, revenues and earnings are above our expectations. Recurring revenues and our hosted solutions business continue to demonstrate very strong growth. Our operating margins are expanding again and our exceptional cash flow is helping us improve our balance sheet.

Underlying this strength is our ability to separate ourselves from our competitors, in terms of the value we are adding to our customers, the reach we have into our markets, and a team of people who are intensely committed to helping our customers provide exceptional service to their customers while driving superior operational performance inside their site.

ESP environment continues to remain tough for all the reasons that you are aware of. However, our current success is being driven by a combination of what I believe to be five factors.

Number one, our brand the Radiant brand, is trusted by the industries we served and accordingly operators continue to seek value from us that allows us to drive sales of add-on products.

Two, gross initiatives we started over the past few years, we have entered a number of new market and launched a number of new products that are Greenfield opportunities for the Company and given our historical share has been either non-existent or very low has allowed us to grow even in this environment.

Three, our innovation on our business model, many of our products delivering exceptionally quick payback and are often sold and delivered to its subscription model that allows our customer base to match cash expenditures with even higher cash benefits. In other words, we are putting more pockets, putting more money in each of our customers’ pockets starting day one.

Fourth factor is our customer base, many of them are medium- to large-size chains who are focusing on existing site operations in this current environment and investing in our technology is helping them better compete.

And fifth and finally our industries are diverse and include sectors that happened to be more resilient to the economy.

A considerable note in this environment is that our pipeline in backlog is significant and allows us to see visible growth next year. Big wins we have secured earlier this year are turning in to roll-outs and new prospects have emerged that are highly interested on our solutions giving the demonstrable impact they have had on tens of thousands of sites. I attribute this again to the intense satisfaction of our customer base and the efforts of our people delivering innovations and results to our customer.

Our channel business which serves our small and independent businesses had stabilized. In fact many of our channel partners are sharing with us an optimistic turn right now. I believe that is representative of their entrepreneurial spirit that they bring to the market, day in and day out. What the challenge is right now is we have a solution which improves profit performance for each of our customers and the competition has pulled back or simply not surviving.

It is too early to say that the tough times are over so we are going to continue to be conservative in our forecast as well as with our cost structure. I will say that unless the economy recovers in the short term or not, we believe we can grow our business to share gains and add on solutions across the market. Inevitably our mass wide Radiant is performing so well in this climate and how we can be confident in growth in the year ahead.

Competitors cited a number of factors for their declines. We have seen decline in certain areas of our business as well, but the continued growth and recurring revenues and large wins we have secured this year, demonstrates the continued adoption of our innovation in the market and the high return on investment our solutions deliver every day.

That is why our business is growing again. At the end of the day it is our ability to innovate, deliver that innovation and serve our customers with very high standards that motivates them to invest in Radiant Solutions.

That will conclude my opening comments, I am going to let Mark run through the financials and provide the fourth quarter guidance.

Mark Haidet

As John described we are pleased with the quarter and several years ago, we set out to create an economic model that was more predictable and with sustained profit growth. Each quarter our financial results demonstrate the progress we have made towards this model and the potential we have ahead. To summarize some of those results for the quarter, our revenue was $70.9 million, which exceeded the high end of our guidance by nearly a million dollars. Recurring services contributed 47% of revenue compared to 36% during the same period last year. This represents 14% growth rate from the prior year and 4% over the second quarter.

As expected this growth was offset by year-over-year declines in our one-time revenue streams. Our systems revenue was down compared to a high comparable in 2008 and was a flat compared to the second quarter of this year. Professional services revenue was down as several projects were in transition during the quarter from planning to rollout.

Overall revenue was down 14% over the prior period, however gross profit was only down 5% and adjusted operating income was flat. Our operating margin was 13% in the quarter, an improvement of 170-basis points over the same period last year.

The resulting adjusted net income for the quarter was $6.2 million or $0.18 for diluted share which is a penny over the high end of our guidance. Clearly the quality of our revenue is much stronger than a year ago and the profit we are driving on incremental sales dollars continues to improve.

This translate to our balance sheet were the strong cash flow in the business during the quarter allowed us to reduced our net debt position by $10.9 million from the second quarter to $54.6 million. Year-to-date our net debt position has improved by nearly $30 million.

From a working capital and cash flow standpoint, our Day Sales Outstanding was 54 days. Our inventory balance decreased by $1.4 million during the quarter and the resulting cash from operations was $12.4 million for the quarter and $36.4 million year-to-date. This generated free cash flow of $9.7 million for the quarter and $29.1 million for the year.

So now I will talk about our guidance for the fourth quarter. Based on our year-to-date results and our visibility into the fourth quarter, we are raising our guidance to a range of $281 million to $283 million of revenue with adjusted earnings of $0.69 to $0.70 per diluted share. This implies fourth quarter guidance of $71 million to $73 million of revenue and adjusted earnings of $0.18 to $0.19 per share.

We believe that we are meeting our goal of becoming a stronger Company during this downturn and feel that we are well-positioned for the year 2010. We anticipate continued high growth in our recurring revenue services that should result in overall moderate growth for the Company next year. Our assumptions are based on conditions similar to what we see today; understanding the changes in the end-mark good economics could likely create upside in our model.

From a cross-standpoint we will absorb increased depreciation of approximately $1 million next year as we deploy our updated technology systems and we will expect our tax rate to move up to a range of 30% to 33% over the current 28% rate. Taking all this into account we still anticipate solid growth in our operating margin and income for 2010.

While we are in our final stages of our planning and we do expect to get specific guidance for the next year in our fourth quarter earnings call in February. One final note, it is important to remember that all of our earnings guidance is on an adjusted basis which excludes amortization of acquisition related to intangible assets, employees stock comp expense, and non-recurring charges and is on a cash tax basis. John?

John Heyman

Thanks Mark and before we take questions, I would just like to reflect on the year in the middle of the Radiant, it is obviously been a tumultuous year for the global economy and we laid out some expectations at the beginning of the year. From a revenue perspective we felt likely we would do $275 million, $280 million. As Mark just spoke to we believe we will, not just come in stronger than that but we have done so well we are making their operating model much more visible with almost 50% of our revenues at this point coming from recurring sources.

In other words, revenues are fired than we forecast on the quality of these revenues has improved. So that is one point that I would reflect on, the second is our cash flow from operations, we originally projected we drive $20 million to $25 million during the year and through the first nine months we have already driven $37 million. So I think we are very pleased with that and as a result of that and managing our other expenditures, our net debt position has declined this year by roughly $30 million as what we projected at the beginning of the year, $10 million to $15 million.

So Mark said it but I just want to say it again, a year ago everybody running any company across the world was concerned, our goal with what we have felt like was a very large opportunity in front of us was just to get stronger in every way during this year and we have done just that.

Our markets are measured in billions of dollars. We have been gaining share, we are going to continue to gain share across our markets. Our reach is strong and it has been strengthening. Our products are adding even more values to our customer sites, and our people are the best in the industry and continue to do just a great job on behalf of our Company and our customers and channel partners.

I just wanted to reflect on that and now Megan we will take questions.

Question-and-Answer Session

Operator

(Operator instructions)

Our first question will come from Terry Tillman from Raymond James. Your line is now open.

Terry Tillman – Raymond James

First question, I do not know if it is for John or Andy. Maybe it is just an update on actual pool of restaurant sites that have the Radiant and/or Aloha technology and then maybe the attached rate, how many of these sites actually have at least one of these hosted offerings and maybe how many of these sites you have actually fully penetrated, where they pretty much uptake everything?

John Heyman

Basically you are asking about the install-based, Terry, in the restaurant business and then the attached rate of one or more of our hosted solutions offerings and then a separate question around where we fully penetrated the site [Inaudible]?

Terry Tillman – Raymond James

That is right.

John Heyman

Okay. Andy? We may not have all that at our disposal, Andy?

Andy Heyman

Yes, roughly on a global basis we have about 75,000 restaurants using some Radiant products and that could be anything from Orderman to Aloha to a variety of other products. In terms of how of them has some kind of a hosted solution products, it is a little bit more than 15,000, probably closer to about 16,000 at this point that have one or more hosted solutions products. What was the third question John? How many have all of them?

John Heyman

Yes.

Andy Heyman

It is a very small number. You are probably talking about 1,000 to 1,500 that might have everything.

Terry Tillman – Raymond James

Okay.

Andy Heyman

And remember our whole methodology is that we are always bringing new products to market. So our intention is that there is always going to be a slight gap in terms of who has everything.

Terry Tillman – Raymond James

What, as we get into next…

Andy Heyman

Terry, it is a very small number of that. That is a tremendous piece of upside force as we are looking at driving full penetration.

John Heyman

And let me just add to that, not each one of the products is suitable for each restaurant offering.

Terry Tillman – Raymond James

Okay. As we get into next year and you guys have at least highlighted some visibility and feeling like there is going to be some, at least, reasonable growth next year. Considering how many sites you have, is next year in growth in the restaurant business running hosted offerings more about just getting attached rate of the plethora of products that you have now or is it going to be contingent on some of this new e-services or new hosted products coming into the market next year?

Andy Heyman

Right, right, this is Andy, Terry. Right now the growth that we see is fairly comprehensive. Number one, we are assuming the environment out there remains very tough. If that variable changes, we will see upside to what I am about to say, but whether we are looking at systems, recurring services or whether we are looking at different types of channels that we have. Right now we are very encouraged by what the pipeline will reflect, and none of that assumes any new product that does not already exist today would generate any effect revenue before us.

John Heyman

Yes, that is well said. I think generally speaking the recurring revenue growth next year is all about driving higher attached rates in site or existing install-based.

Terry Tillman – Raymond James

Okay, thank guys. And then I guess just, Mark one question on when I look at the gross margin for systems sales, I know that could move around a lot depending on the mix of products, could you help us with maybe what cost is to be down sequentially in Q3 and then how do we think about it for Q4? Thank guys.

Andy Heyman

Yes Terry, the biggest variable in that mix, in the third quarter was really the seasonal decline of Orderman, as you know, it is typically high in sales in the first and second quarter which you saw and bumped up in our systems margin, that volume is lower typically in the third and fourth quarter. So I would expect fourth quarter margins to, barring other variables, would be similar based on the Orderman mix for the fourth as the third quarter.

Operator

Our next question will come from Chad Bennet from Northland Securities. Your line is now open

Unidentified Analyst for Chad Bennet - Northland Securities

This is Ian sitting in for Chad. Just wanted to see if we can get an update on Orderman, both on how it performed abroad and as well as other developments coming for the US market?

Andy Heyman

Yes this is Andy. On Orderman for this year, we are pleased with the performance that we have had. Just taking people back to the initial strategy that, obviously the core business of distributing mobile devices in Europe was the primary business there and as we look at how we are going to build the best distribution channels in all of Europe for solutions, we felt that a partnership or marriage with Orderman was the best way and that was the driver of the acquisition.

Based on that, there is a variety of technologies that are on the roadmap that we are building. Pieces of that actually comes to market this year, the bulk of it comes to market at the end of next year. So we believe there will be substantial growth, we will be in the European business for 2011 and beyond. We hope that we will see some of that upside next year. So that was the primary driver of the acquisition.

The other opportunity that we all remain very hopeful on is the idea that in the United States there would be upside associated with adoption of mobile ordering devices. We are working with a variety of companies right now; trying to get things really understands the value proposition, the sales model and so forth. We are making very hopeful that over the long haul there will be wide amount of adoptions. But we also do not think, we think that there is a tremendous amount of adoptions and strengths associated with the way American restaurants run.

So we think that in any one given year, we do not see, I call it a breakout, but we are working with about a hundred of companies in the United States now. I think that will grow next year, but I would not expect it to be material over the next year or two.

Unidentified Analyst for Chad Bennet - Northland Securities

Okay, so you are looking, still we are not pushing back after all in terms of, releases; we are still looking for the ball to be coming toward the back end of next year.

Andy Heyman

In terms of the European strategy, we will see some upside next year off of this year’s base. The year 2011 is when we issue the all-systems-go, because all of the R&D will be complete by then.

Chad Bennet - Northland Securities

Okay and we have not heard too much about that specialty retail site lately. Just wondering how badly it looked during the quarter and if you see that improving along with the rest of the businesses here, going forward?

Andy Heyman

Yes, this is Andy. In general, if you look at this year versus last year that is probably our best performing channel business. It is our largest market in terms of the number of sites that we can be serving. And in terms of shares you are talking about, a bunch of companies out there that have less than 2% share; we are one of those companies. So the upside associated with that business is huge for us and the performance this year has actually been very well and has driven growth for us this year versus last year. It is our best performing channel business that we have right now and we do not see an end to a solid growth story for many years to come.

Unidentified Analyst for Chad Bennet - Northland Securities

Okay and then last one, obviously not a good operating quarter from the operating standpoint. I was just wondering, 13% in operating margin, as we expect similar performance or as revenues grow should we expect some expenses getting added back to the business?

Mark Haidet

This is Mark, I would say as we look to the fourth quarter, our guidance contemplates similar operating margin in the fourth quarter. As we look out in the next year, we are still going to our planning process; there will be some expenses that come in with growth. I mentioned the depreciation item, there will be a few others but we would expect to be able to maintain the trajectory of operating margins on the path that we are on. This year our guided range, for the total year is 12%, we are tracking down now towards the 13% range and we ought to be able to sustain that into next year.

Operator

(Operator Instruction)

Our next question will come from Gil Luria from Wedbush Morgan Securities

Unidentified analyst for Gil Luria - Wedbush Morgan Securities

This is actually [Inaudible] for Gil. Last quarter you spoke of transaction processing and checking ahead of the minimum 8-figure number you had as a goal for the year. Would you please give us an update on that business end to the extent possible perhaps to talk a bit about the trajectory or magnitude?

John Heyman

This is John. That business shared again, nice growth and in the third quarter one of the faster-growing components of our hosted solutions business and on a run rate basis continues to be ahead of where we had thought it would be.

Unidentified analyst for Gil Luria - Wedbush Morgan Securities

You mentioned that you expect continued margin growth next year as well. Does that assume continued growth in higher margin revenues as part of overall mix or do you expect a rebound in system sales might move the mix back a bit towards the lower margin hardware sales?

John Heyman

Well from our standpoint right now, our recurring business which again year-over-year grew 14% in the quarter, and given the products we have and a still fairly low penetration we have in the install-base versus the potential, that growth for us is exceptionally visible and it is easy for customers to subscribe to those services and get cash savings, cash benefits literally [mark] once. So that part of our business is very visible.

We have also had a log of big wins in the business and anticipate some more and those are things that would drive system revenues significantly higher than the growth rates we would otherwise forecast. The other thing would be that the economic climate improves significantly. If those two things happen, then we would expect the systems margin, the system revenue lines continue to accelerate. But in this current economy, despite the activity, we are going to stay prudent with our forecast and assume much lower growth in the system side than we would on the recurring side of the business. And then if the system side does happen, what you would foresee is overall gross margins would probably decline a bit because of mix. But absolute gross margins and earnings would expand at a faster clip because we will be leveraging products we had already built and sales channel we already have. Does that make sense?

Unidentified analyst for Gil Luria - Wedbush Morgan Securities

Absolutely.

Operator

(Operator Instruction)

And it appears that we have no further questions at this time.

John Heyman

Alright well thanks again to everyone for joining us and most importantly thanks for all the Radiant associates who are making all this happen on behalf of the Company and our customers. We are looking forward to speaking with you in February.

Operator

This just concludes today’s teleconference you may disconnect at any time, thank you for your participation and have a great evening.

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Source: Radiant Systems, Inc. Q3 2009 Earnings Call Transcript

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