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Executives

John Heyman - CEO

Mark Haidet - CFO

Andy Heyman - COO

Analysts

Eric Lemus - Raymond James

Nick Setyan - Wedbush Securities

Ross MacMillan - Jefferies & Company

Andrew Jeffrey - SunTrust

Vincent Colicchio - Noble Financial

Chad Bennett - Northland Capital Markets

Brian Murphy - Sidoti & Company

Radiant Systems, Inc. (RADS) Q3 2010 Earnings Call November 2, 2010 4:30 PM ET

Operator

Thanks very much for holding everyone. Welcome to the Radiant Systems third quarter 2010 earnings release call. At this time, I would like to turn the call over to your host, John Heyman. John?

John Heyman

Thank you very much and thanks to everybody for joining us this afternoon or if you are in Europe like I am this evening. With me here today is Mark Haidet, our Chief Financial Officer as well as Andy Heyman, our Chief Operating Officer. I do want to let everybody know that I am actually in Prague today and Mark and Andy are in Atlanta. We do not anticipate any technical difficulties and for some reason we encounter them Mark and Andy are prepared to conduct the call without me and regardless to ensure we are not talking over each other you may hear a little bit lengthier pause because we are going to navigate the questions amongst ourselves.

Before I get started, Mark is going to 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 as 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 measures can be found in our earnings release and on our website at radiantsystems.com under Investor Relations.

John Heyman

Mark thank you very much, and again, thanks to everyone. Obviously we are very pleased with another exceptional quarter that came in ahead of our expectations, our track record of delivering value to customers around the globe, continues to allow us to gain share across the industries that we serve. Specific highlights include; one, our revenue growth was in excess of 25% significantly ahead of our guidance, operating income growth was over 35% with operating margins ahead of our guidance at 14% on a adjusted basis, our recurring revenue growth was over 10% and when adjusted for the impact of the restructuring of our payments business that we announced last quarter, real growth was actually in excess of 15%, continued progress in our SaaS business with new site additions fueling 30 plus percent growth compared to last year and finally the completion of a very successful secondary offering which has allowed the company to raise over $50 million broadened our shareholder base and create a significant and more flexible capital base to support to the growth of our business.

Just a few things as we look into the future before I turn it over to Mark, increasingly our product strategy is allowing our customers to build stronger relationships with their consumers through a variety of tools, most recently we have launched our customer connect solution which has delivered in a hosted manner that let's us customers build very specific email marketing campaigns to consumers based on detailed customer buying behavior linked with available food and inventory offerings. Already over a hundred customers are seeing significant sales lift from this tool as we ready the product to release later this year.

Let me give an example of what I am talking about, so it just hits home for everyone. Let's say I know someone who likes to drink wine. She loves to buy mid-priced California cabernets and French burgundies. Our point of sale data and our loyalty tools allow us to track repurchases. Now assume that I am a wine store owner. I have some brands that fit her style or maybe in a tough economy I have been able to buy a large amount of normally limited quantity brands.

In the old world I would just flip these bottles out for sale and I would wait for consumers to come to my door. In the new world I can identify customers who may like this brand, I can alert them to its availability with an email, I can attach tasty notes and I can even permit them to order in advance and make the purchase with some online tools we have. In other words, we are increasingly enabling our customers to bring their stores and sites to their customers, allowing them to increase sales and turn their inventory more quickly. This can be accomplished because our system already knows the customer, their buying patterns and the store inventory or food offerings. This is one of many examples of how our tools are helping our customers today.

As to our global efforts right now we are nearing some key inflection points that we have been talking about for sometime now, as we look to replicate our domestic success to other parts of the world. I'm just now completing a six-week tour of Europe, I have been visiting with our customers, with our people and of course with our partners our global growth prospects here are very clear. One, we have got developing relationships with some very large companies growing inside and outside the continent.

Two, we have a very strong position inside key growth markets such as Turkey and we have a low share in more mature geographies that can increase despite the lack of overall market growth. Three, this past week we launched our Columbus point of sale product, we continue to see excitement around the offering from our partners and orders have started to come in. We expect volumes to become significant towards the second or third quarter of 2011.

Four, we completed the formation of a partnership with a Brazilian partner to penetrate that market. We began shipping in the third quarter and we will ship a significant number of units by yearend. This venture was not even in our plans earlier in the year and we have to credit some very entrepreneurial thinking by some of our people as well as some of our partners for the creation of this exciting opportunity.

And finally frequently on these calls we've been asked about how our handheld technology is doing which was developed in Europe, inside the United States. After the results of a 30 store pilot, one of the most prominent brands in the food service industry in the US is moving forward with an implementation of our handheld ordering solution and they are busiest 250 sites in 2011. We continue to see this as an important trend globally as further evidenced by the 300 plus restaurants inside the US that have adopted the Orderman handheld technology this year which effectively doubled the site base in the US using the products; so, we are again very excited about this trend.

Looking ahead to the fourth quarter Mark will give some specific guidance, but we expect another good quarter on the heels of another record third quarter, our pipeline is strong, our backlog is strong, new products are maturing and we are expanding our global efforts and the efforts of our domestic sales force. Of course we must all temper our collective enthusiasm with continued conservatism around the economy and many parts of the globe, but our business continues to fire on all cylinders and with that I will let Mark run through the financials and the guidance and then we will take some questions.

Mark Haidet

All right as John mentioned we are pleased with the results from the quarter with revenue at $89.2 million which exceeded the high end of our guidance of $87 million. Overall revenue grew 26% over the same period in the 2009 driven by systems revenue which grew 42% and contributed 47% of total revenue in the quarter. As John touched on recurring revenue grew 10% from the prior year, 15% on a normalized growth accounting basis and contributed 41% of total revenue in the quarter. And professional services grew 29% from the prior year and contributed 11% of revenue in the quarter.

From a segment standpoint, hospitality contributed $54.6 million growing 32% over the same period last year. The retail sports and entertainment segment contributed $23.9 million growing at 20% and the international segment delivered $9.6 million for a 9% growth in the quarter. Our adjusted operating income for the quarter was $12.5 million resulting in an operating margin of 14% bringing the year-to-date margin to 13%.

This represents approximately $500,000 over the high end of our guidance. The resulting adjusted net income for the quarter was $10.7 million or $0.29 per diluted share which is $0.05 over the high end of our guided range. On a comparative basis to our guidance, our EPS would have been $0.25 per diluted share or a penny over the high end.

The dilution from the equity offering in the quarter reduced this number to $0.24 while the adjustment of our tax rate from 27% to 22% for the year added $0.05 to the earnings. From a cash flow standpoint, we had cash from operations of $9.8 million generating free cash flow of $7.5 million for the quarter and $14.5 million year-to-date. This cash flow coupled with the impact of our equity offering moved us from a net debt position of $34.7 million to a net cash position of $40.6 million during the quarter. We now have a total available capital of approximately $138 million between our cash and credit facility capacity to invest in potential organic and inorganic growth opportunities.

So now I'll talk briefly about our guidance for the rest of the year based on the results in the third quarter and our visibility into the fourth quarter. We are raising our revenue guidance to a range of 344 to $345 million with adjusted earnings of 94 to $0.95 per share. That represents revenue growth of 20% over 2009. Our fourth quarter guidance is 88 to $89 million of revenue resulting in 15% growth in the quarter with adjusted operating income of 11.5 to $12 million which exceeds previous guidance by approximately $500,000 and results in adjusted earnings of 22 to $0.23 per diluted share which equates to a penny raised over our previous range. The EPS calculation is based on an assumed cash tax rate of 22% for the year with 40.5 million average diluted shares for the quarter.

One final note, it’s important to remember that all of our earnings guidance is on an adjusted basis, which excludes amortization of acquisition-related intangibles, employee stock compensation expense, and non-recurring charges, and includes the ongoing cash benefit of the utilization of net operating losses and tax credits. John?

John Heyman

Mark, thank you very much and with that we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). First up, we have a question from Eric Lemus from Raymond James.

Eric Lemus - Raymond James

My first question is regarding the system sales line. You won a lot of new business throughout 2009 and through the first half of 2010. Is most of all that coming online now in a material way or is some of that still more of a future looking saying in terms of materially impacting the system sales line such as into 2011?

John Heyman

This is John, Andy you want to talk about the business and how that translates into rollouts both this year and into the future?

Andy Heyman

Sure we've had a really good last few years in terms of direct wins and that's certainly showing up on the system sales line. The first thing to point out there is of course that's our best leading indicator for the recurring revenue growth will go in future years, so that's very encouraging for us given the importance of that metric.

Second of all, this year we've realized a lot of the revenues of deals we have signed as you have referenced Derrick. As we're more encouraging is we look at contracted backlog dollars and those dollars over the last 12 months of business that remains in front of us actually continues to grow. So you might expect that number might have shrunk given all of what we have recognized this year by its actually not true. That number continues to grow for us, so while we recognized a lot this year over the next few year’s rollouts continue and then with some of those recognized brands we have a lot of upside when it comes to the franchisees of those same companies.

Eric Lemus - Raymond James

Okay and then…

John Heyman

And the only thing I would add to that would be besides the backlog being strong is the pipeline is also strong and so that is for deals that we have not yet won but that we are working hard everyday to close and create additional rollouts.

Eric Lemus - Raymond James

Okay. And could you guys update us on the specialty retail business? You said this part of the business actually feels like your restaurant business, how it was several years ago. Where are you guys in terms of your partner side and instill the recurring mode or not more monetizing mode after focusing on the channel enablement and at what rate is that business growing either in the quarter or year-to-date basis?

Mark Haidet

Well retail in total is growing at 20% we don't breakout this specialty retail component in our segment but in total retail is growing at 20%, specialty retail is growing at a clip faster then that.

Eric Lemus - Raymond James

Okay, hopefully and then just my last question, I'll jump off, but in terms of your SaaS base sales force, do you guys hire the additional 10 to 15 reps that you were contemplating previously and any thought into the sales capacity going into 2011?

Mark Haidet

Yes Andy you probably want to comment just to backtrack a little both on the specialty retail sales channel which was the other part of the previous question as well as the hostage solutions sales force build out.

Andy Heyman

Yes, on specialty retail I just want to point out because its, we remind ourselves that often which is we're talking about a market that's bigger than the restaurant industry and one where we only have about a 2% share. So the opportunity in front of us is enormous. As Mark alluded to, our fastest growing part of the retail fortune entertainment division is a specialty retail business and so we're very confident about what it looks like in the future. A key driver for us, there is two key drivers. One is the partners and this history they were adding to the sales force capacity. We'd done that modestly this year. I would actually like to see that more accelerating and we're working on programs work with ourselves and our partners to do just that. So we just got to keep working hard at that one. I want to see us get to a 100 sales people as fast as we can and we're not there right now but we are growing that sales force this year if I grow about 20% in headcount.

The other key driver is on the product side is ensuring that our products are distinguished in the eyes of our customers and on John's opening, he alluded to the type of functionality that we're offering to people like wine stores. We've already got a 100 plus customers that have adopted that in just a few months. So we are really encouraged by what the market's telling us about our ability to differentiate on the solutions side. So those are the key and specialty retail for us.

In terms of the capacity of the SaaS sales force, if you go back to the beginning of this year, we only had I'd say roughly five to seven sales people that were Radiant employees going after the install base and up-selling them on premium offerings. One more than triple that by the end of this year. We've got north of 20 today and we'll probably exit the year just a little bit more than that. So we're well encouraged by what the early indications are of their success and that certainly will contribute we think to ongoing great growth rates well into the future.

So just too kind of quickly answer the question I think we are frankly ahead of our goals in terms of trying to hire the sales force we were trying to hire. We had a year-end goal and we have been able to accomplish that.

Operator

Next up we have a question from Gil Luria at Wedbush Securities.

Nick Setyan - Wedbush Securities

It's actually Nick Setyan for Gil. Just a quick question the Q4 guidance, traditionally Q4 is your strongest quarter with respect to the top line and the bottom line. Given the momentum you are seeing across the board, is there anything that you can point to that kind of accounts for the sequential decline that the guidance implies or does that just share traditional or customer conservatism there?

John Heyman

Mark, you may want to add to that. I think the way I would first start up is generally the fourth quarter is our strongest quarter because our larger customers are often at times frankly flushing budgets and that's something that we don't typically have visibility into until the very end of the year. We make sure we have enough inventory on hand to serve that if that happens but we don't count on it happening and we typically don't have visibility into it, until the very end of the quarter. Mark, did you want to add anything to that?

Mark Haidet

We've said throughout the year we expected the fourth quarter to be lower than the third quarter that was our original guidance. We've actually upped our view of the fourth quarter already in this round of guidance and I think this year more than many we have companies that were anxious to get their roll out started earlier in the year. So we saw very strong second quarter, a very strong third quarter. Our fourth quarter by all measures is very strong but sequentially looks a little weaker than the third and second but I think its very ahead of where we expect it to be last year, well ahead of where we were guiding to on our last call and as John pointed out, there may be upside as it relates to budget flushing but we sure aren't going to bank on that.

Nick Setyan - Wedbush Securities

Then just on the use of cash, strategically how are you thinking about acquisitions, share repurchases, invest in the business, just gives us some color on that.

John Heyman

I think we have been looking at a number of ways to grow our business inorganically and you can never count on any of those things happening but we are having some really good discussions with companies that could be additive to our long term growth model and our margin expansion and our recurring revenue expansion and let us add more value to our customers. The products that would fit very nicely in our solution stable, valuations are always concerning so we have to make sure we can do those in a way that can deliver the right return on capital to our shareholders and the other thing I would say about them is we don't expect to do any type of blockbuster deals. I think the types of deals we would expect to do are businesses that have 5 million to 20 million in revenues that we can plug into our client base and distribution capabilities and grow their businesses faster than can grow their businesses. And of course realize some cost energies as well. So, that's what we're looking at. We feel like we've done a really good job of that through 2008. We're ready to do more of it but we got to say valuations be right, the culture's got to fit, the products got up dead. I would expect us to certainly do an acquisition in 2011 at some point, if not a couple of acquisitions but predicting anything else in terms of timing would be premature

John Heyman

Mark you want to add anything? I don't think you will expect because we see those opportunities by the way, I do not think you will see us engaging in share buybacks.

Operator

Next question we have comes from Ross MacMillan of Jefferies & Company.

Ross MacMillan - Jefferies & Company

A lot of the metrics are good but I did notice John that I think I got the number right that you did nine spot million in international revenue which you think was down a little sequentially. I know you just launched the Columbus POS so I don't know if there was any issue there in terms of training or some of the channel focusing on that launch ahead of time, but could you just help us understand how we should think about the POS terminal for Europe and I think you mentioned Q2 or Q3 of next year, may be you could just frame how big or material a contributor this product could be over the next year or two? Thanks.

John Heyman

Yes so Q2 is seasonally our biggest quarter internationally because of the traditionally the Orderman business and which is specifically the handheld technology in Europe, you know its getting nicer in Europe in the spring time and that product is a very big market for that product is outdoor cafés and so forth that are so prevalent in Europe. So Q2 is always a spike in that business and similarly Q3 is always a low point because there are so much vacation time taken in Europe.

We did not launch and that's particular to the Orderman technology. So, the Columbus terminal has been formally launched this week so we are already into the fourth quarter and just as we did when we introduced a similar product into the Aloha channel five, six years ago what we do is start in a very controlled manner because more importantly then seeing lots of volume in the initial months and quarters of the launch is to make sure that the product is working exceptionally well and that it is what we call effectively channel ready and properly tested with all the other solutions that can run with it. So we believe that takes two or three quarters. We have second product in the Columbus family that's being added in the spring time that will help that as well and broaden the Columbus family of products and I think by the time we exit next year that should be a product that's doing on a run rate basis in the high single millions of dollars on an annual basis and we see it as a product that over the next two or three years should be contributing eight figures to our company's revenues.

Andy would you like to add anything to that?

Andy Heyman

The one thing I think worth adding is that the Orderman channel is touching more restaurants today then the Aloha channel is in the United States. Order of magnitude, they are serving about 100,000 restaurants on a yearly basis and the Aloha channel is serving probably closer to 50,000. So, what you are talking about, even as you are talking in terms of the revenue size, the long-term prospects here we're looking at something that we believe is a nine figure opportunity, not an eight figure opportunity.

Ross MacMillan - Jefferies & Company

And then just one follow-up if I could. You mentioned Orderman in the US the handheld when you had as a major chain. Are we getting closer to a tipping point? Do you think where we're going to see broader adoption of handheld devices within North American restaurants? It seems to be Europe has been ahead of the US in that regard. I am just curious as to where you think we are going to hit a tipping point? Thanks.

John Heyman

We probably each have our own opinions Andy and I. But I don't think we're at a tipping point yet, I'd love it if we were. But I think that, what we're seeing now is some decent population of the handheld technologies and a couple of specific regions in the country. We're also starting to see it with a couple of specific brands and I think as we can build kind of the case studies around that over the next 12 to 18 months I think then we can start talking about hopefully and show it why it can be a tipping point and it's becoming something kind of more of a normal way for restaurants to operate. But I don't think we're there today. Andy?

Andy Heyman

One more thing I think is important to add here is our R&D teams are looking at this. The Orderman type of product, the handheld ordering and payment is one of several new developments in the space of ordering and payment and we're looking and exploring a variety of these methods and so as John said we hope that this one takes off and I don't think there is just one answer in the future I think its going to be a variety of traditional methods, handheld methods and then also smartphone type of methods out there in the future and its important that we look at all of those as we put our R&D dollars to test.

Andy Heyman

And Ross I'll just conclude it one last comment, I was with an operator here in Europe, another big brand last week and they are ready to go in terms of getting it implemented in their side. So the more leaders we get using this technology I think the closer we can get to a tipping point but one thing I'll say that's different about the US market versus Europe is, in Europe you really see it used on a table service basis and the US the interest isn't just on the table service side, its in the fast, casual and quick service side as something that can bust lines and that can make the drive through operate more efficiently. So little bit of broader appeal in the US if we can get there.

Operator

From SunTrust this is Andrew Jeffrey.

Andrew Jeffrey - SunTrust

Mark a couple of points of clarification, I just want to make sure I understand. I think in the press release you said that the tax rate adjustment was $0.03 beneficial to the quarter and I thought in your prepared remarks you said it was $0.05, is there a point of reconciliation that I need to think about there?

Mark Haidet

The cash tax rate in the press release was a reduction in the quarter by $0.03 per share. There is a cumulative effect of that in the quarter for the previous two quarters as well. So it was $0.05 for the total year that hit this quarter.

Andrew Jeffrey - SunTrust

So in the quarter forgetting about the dilution from the secondary for a moment, it's $0.03 or is the $0.05 the year-to-date number?

Mark Haidet

Yes, so let me clarify, apologize for that being completely…

Andrew Jeffrey - SunTrust

I am little slow on the uptake here.

Mark Haidet

No problem. The $0.03 was for the first and second quarter's adjustment and there is an additional $0.02 impact just related to the third quarter, so the total is $0.05 year-to-date. It all hits in the quarter, this is just a break down of the timing between the previous quarters and the current.

Andrew Jeffrey - SunTrust

I understand, hence the $0.01 versus guidance when you are factor in the dilution from the deal. Okay.

Mark Haidet

Right.

Andrew Jeffrey - SunTrust

And then you said, again I just want to make sure that I caught it. You said 40.5 million weighted average shares in the fourth quarter, right?

Mark Haidet

That's correct, that's what we had.

Andrew Jeffrey - SunTrust

When I look at third quarter which file accounts is really strong quarter, the one thing that kind of jumps out is the gross margin which took a little bit of a dip on system sales. Could we get a little color, is that mixed or should we expect that gross margin to be little bit lower in the fourth quarter and beyond?

Mark Haidet

Yes, and when we gave our guidance last year we stated that we thought our gross profit margins would be between 46 to 46.5, they came in I believe at 46.4 so we were pretty close in our guidance and that was because we did anticipate a different mix part of that is John mentioned earlier though the difference in the order man seasonality that’s the higher in our systems margin, a higher margin item and then just within our overall mix more of a waiting towards some of the lower margin hardware items in the quarter. As we look at the fourth quarter and our guidance for the fourth quarter I have contemplated about a 46% gross profit margin in my guidance just based on the typical standpoint that the fourth quarter has more hardware items than it does software items as people are finishing up roll out so that is the current estimate would be about 46%

Andrew Jeffrey - SunTrust

Okay and so the implications and looking at the consolidated P&Ls you are going to have a step up in adjusting EBIT margin back close to kind of the second quarter levels after dipping down a little bit this quarter.

Mark Haidet

I am sorry you said for operating margin?

Andrew Jeffrey - SunTrust

Yes just EBIT margin

Mark Haidet

I don’t expect it to step back up, we did a 15% operating margin in the second quarter, we did 14 in the third I don’t expect it to step back up in 15 in the fourth quarter I believe it’ll stay in that 14% little over 14% it’ll step up some, but now only up to 15.

Andrew Jeffrey - SunTrust

Okay and then you have obviously had strong system sales and it seems like the pipeline also remains pretty strong, should we expect as we look out maybe not in the fourth quarter, but certainly as we look out for example into ‘11 to see acceleration in the services growth line as you start to sell into all the new systems you have installed?

John Heyman

Andrew this is John are you talking specifically on the recurring service line?

Andrew Jeffrey - SunTrust

Yes, specifically I mean both side I assume you’ll get the software license maintenance revenue doubtless yeah that but I guess on the cross sell of the occurring the SaaS solutions?

John Heyman

I think Andy mentioned earlier a leading indicator for us on the recurring line is the system sales, so the system sales have been exceptionally strong this year, meaning just frankly a lot more sites are getting installed with our products and whether its through maintenance revenues or also often times whether it’s a channel sale or whether it’s a large direct sale frequently for a large direct sale kind of a phase II implementation is on some of the hosted solutions front and then of course we have our hosted sales force now its on into the installed base. So we very much believe that recurring revenue growth could follow system sales growth. And why you want to add anything to that?

Andy Heyman

No, what I would say is well I think in addition to that some of the mix of recurring may change next year I would expect more what I will call premium recurring services, I would expect that to grow its going to continue to outpace the general recurring growth rate so when you asses our products we certainly see a 30% plus type of growth rate continuing that will outpace the general occurring growth rates that we have seen traditionally

[Multiple Speakers]

Andrew Jeffrey - SunTrust

And then really that’s an ‘11 phenomena more than it would be fourth quarter phenomena?

Andy Heyman

Yes, that it wouldn’t be a big need on movement in the fourth quarter. And the recurring factors that are the installed base and the first three factors that are the installed base growing, the sales force growing and the products table growing.

Mark Haidet

Andrew this is Mark Haidet. I just want to clarify on your earlier question around operating margin. So, just based on the guidance that we put out with a 46% gross profit and the revenue range of 88 to 89 million that implies the operating income that I'd laid out of 11.5 to 12 million which is in operating margin of 13.2 to 13.5%. So I don’t want there to be any confusion of where we are guiding operating margin to be in the quarter.

Operator

The question now from Vincent Colicchio on (inaudible) at Noble Financial.

Vincent Colicchio - Noble Financial

John this one for you, your restaurant channel market was very strong for the first-half of the year. I think above plan, do we continue to see very good strength there and what does it look like going forward?

John Heyman

Andy why don’t you speak to the channel?

Andy Heyman

I think that right now that’s the place we had some really, it depends where your comparison base this was in and we look at 2009 certainly as a comparison year and we continue to be very healthy relative to 2009 across all of our channels. 2008 was the high watermark for our channel businesses and we continue to be soft versus that benchmark. So our forecast and our plans over the kind of short and near term continue to be fairly conservative given the headwinds that we are facing the small business community. So, if we had an economic surge we believe we would see upside there, while also trying to do some very creative things on the bundling side to make it more attractive for small business that be able to get into our system faster and higher numbers. But for now we were being very conservative as we see the outlook in channel businesses.

John Heyman

Vince the only think I would add to that this is John, is that as I track what our competitors say about their businesses and what independent surveys tell us about market share gains is that I feel like we are continuing to gain share out there on the street and seeing it in the growth of our channel in a different and better way than others in the industry.

Vincent Colicchio - Noble Financial

And one other for you John. Can you revive more color on the Brazil comment you made in your prepared remarks, is that a customer you are showing to, is that a reseller?

John Heyman

Yes, it’s a good question and it’s the Brazil markets one that has interested us for a long time we got a number of channel partners in Latin America. Brazil has created opportunities for us around specific brands that we do business there, but it’s also a market that’s been difficult in terms of being able to bring a high quality solution in a cost efficient manner because of some of the barriers to the Brazilian market and in terms of [Paris] etcetera and so what we have been able to do is structure effectively a partnership with an existing partner down there as well as another company with capabilities down there, and we basically are now able deliver a qualified effectively Brazilian build solution to the market which brings the Radiant quality to the market and in a much more affordable cost but one that allows us to hand our channel partners to be very profitable. So that business started in Q3, it’s exceeding our expectation and its one of those market as I think about the global market place. It’s a growing market obviously it’s a big market we have got anchor customers there, we have got healthy channel partners there.

So, it’s got all the elements from a framework standpoint of being a very successful global market for us, and so we are looking for bigger things obviously in the years ahead.

Operator

Moving on to Chad Bennett, Northland Capital Markets.

Chad Bennett – Northland Capital Markets

John or Andy for that matter, can you talk about what impact the various kind of milestones or dates on PCI this year. I think there was one kind of August, September and I think there is one coming up here in December, in terms of compliance and restaurant operators getting up to date with that standard, how that’s driven the business this year and if there is anything like that going on next year, that might help things?

John Heyman

I am going to let Andy take that question

Andy Heyman

The general situation with security in the industry I’d say its been a moving target for a number of years that the target probably growth has increased pressure from one year to the next, but the challenges we’ve had the last several years are the same types of challenges we see for the next several years. So we had that several milestones this year where we are leading the keep up with securities standards issued by groups that we have then matched the card companies have created. That’s an ongoing thing I think the bigger question for us right now is how do we protect consumers and customers so that they have the best safety and reputations in their market if possible. And we have invested quite a bit of money this year we are coming to market and pilots now and working with our customers and new prospects on helping them protect their data and their consumers next year the milestones will continue to increase for us the investments will continue and perhaps we see this type of change and increase in security as a good thing, a good call to action for the industry is one we feel confident that we can continue to provide a leadership stance in and most importantly bring affordable technology with the small business community to (inaudible) really struggle with the things that really don’t even relate to a point of sale company that relates to the network, it relates to how they have managed passwords therefore and we think we can add a lot of values in those areas that are traditionally outside of the normal point of sale type of responsibilities inherent in the PCI standards.

Chad Bennett – Northland Capital Markets

Got it, go it okay let me…

John Heyman

Hey, Chad, this is John let me just jump in for a second, I don’t think we've seen it as a big driver for us at all this year and I do think what the factors Andy is talking about could be important drivers for us though in the future as we are very specifically the small business community has to keep with the, they've realized to find etcetera that they have to get compliant, number one and number two and this is something that I think is becoming more important in the market overall, a lot of the companies we compete with are very small companies and they have not been able to keep their solutions PCI compliant and that creates a problem for the businesses and there is more and more of these types of things that the smaller companies we competed with historically that had trouble keeping up with and small businesses as well as of course large businesses are very skeptical now of doing business with those small companies for that very reason.

Chad Bennett – Northland Securities

It just seem like an area just general security which SaaS offering would make sense at some point?

John Heyman

Yeah, we think that if you are looking for a kind of Y2K kind of an opportunity where there is grand full of investment I would say we don’t see that, I think what we do see is what you just said is we believe there is offerings outside of the point of sales that can add value and provide risks safety to our customer base and that’s what we are focused on.

Chad Bennett – Northland Securities

Okay. And then any, at the [annual] stage you talked about new SaaS products coming out this year and you talked about customer, (inaudible) customer connect earlier in the call, do we have any products expected for the fourth quarter from a SaaS standpoint?

John Heyman

The only other one at this very moment is which is continuing to mature is the online ordering product and other than that I don’t think we want to talk about specific products in the pipeline.

Chad Bennett – Northland Securities

This probably for Mark, last question for me. Can you give us a sense on hospitality side of the business? How the business had shifted if it has from direct to indirect over the last two, three, four quarters? And then maybe I know you have not given ’11 stuff, but maybe what you see that mix being 12 months out from today?

Mark Haidet

In general we’ve had, as Andy pointed out. We’ve had a better year in the indirect channel than we did last year, but as it relates to the direct business it's been significantly stronger. So, we’ve typically run at about 50-50 mix, when you look at system sales between the distribution channel and our direct sales. This year that shifted a bit more to about 60-40 mix favoring the direct business. I’ll let Andy comment on whether he sees that trend changing in the future again, we are not giving any specific details on next year, but as it relates to a trend of the direct business being up significantly, the channel being up, how that relates to the go forward.

John Heyman

Andy answer the question but the one thing I want you to do is when you are talking about the channel is also talk about the brand component, the franchisee base as you talked about.

Andy Heyman

Yes, I think directionally what Mark said, there is not a ton to add. I think when we're in the 60-40 kind of 50-50 split or even 40-60 split that tends to be the range for us when you look at all of the components of the products and the different types of channels that we got out there. So I think that’s going to continue into the future. I would see next year for what we see right now being a little bit less worth it to the direct side and a little bit more weighted to the small business community and what may happen there you never know it happened this year and it could happen well into the future where we get significant direct winds and those are the kind of things you don’t want to plan too much on, but when they happen there are very nice for the short and long term health of the business. And so it remains, but I think more of the 50-50 type of split is the long term model.

Operator

(Operator Instructions). You have another question this is from Brian Murphy, Sidoti & Company.

Brian Murphy - Sidoti & Company

John or Andy I am just wondering how you guys feel about your sales capacity in the channel at this point based on some of John’s earlier comments, it sounds like you guys are taking share in it some of the smaller competitors on the street side of the business might be creating an opportunity there. So, I am just wondering how you guys feel you are set in terms of sales capacity there?

Andy Jeffrey

Yes, Brain this is Andy. Let me take that one. First of all on the competitive landscape its hard to get market data but from the best we can tell the total spending occurring in the industry when you add up all the revenues of competitors its significantly down relative to over the last couple of years its called 2008 being the peak period and yet all revenues are significantly up. So when John talks about taking more share from competitors, that’s really what he is talking about amidst evidence by looking at market dollar spent. So we feel really good about that and our partners out there are doing an exceptional job, really what I would call holding serve on there sales force. It probably shrunk a little bit last year when the economy hit the bottom, its back up and actually most of that today so we have more sales people today than we have ever had, we are, there is always what I would call a healthy tension worth showing, we always want to see more sales people, but they are trying to run profitable, resourceful, entrepreneurial businesses and they have done a really good job fighting through this economy and continuing to add capacity.

So, over the coming years we are going to continue to try to push the needle higher in sales capacity and just as importantly is the productivity measure which is a number of sites each sales person is selling. We believe through the marketing programs of ours, bundling programs and just better training and recruiting, we think we can move the needle higher and that’s a big area of focus for us.

If you can get 200 people selling 2 more sites a year that could be a 10% lifting revenues just like that. So those are really important programs on productivity.

John Heyman

This is John I think we would like to see certainly more capacity added in the specialty retail channel which Andy has already alluded to and I think as we begin to launch Columbus and so forth here. We’ll start to assess our sales capacity here and kind of the same analytical way and be talking to you about that next year.

Andy Heyman

As for our channel partners that are listening on the call we encourage you to hire more and more sales people. Other questions?

Operator

(Operator Instructions). John at this point there are no other questions holding.

John Heyman

Alright thank you every much just again I know it’s a busy season for everybody. Thank you everybody for your time today, I know the call was a bit awkward at times because the Radiant Group are in two different places in the world but thanks for putting up with us and specifically I had a number of hosts during my trip through Europe and I would like to thanks all our people and customers and partners for very educational and (inaudible) experience. So speak to you next quarter. Thank you.

Operator

Thanks again for joining us everyone that will conclude today’s call. Again have a good day.

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