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Executives

John Heyman – CEO

Mark Haidet – CFO

Andy Heyman – COO

Analysts

Gil Luria – Wedbush

Brian Murphy – Sidoti & Company

Vincent Colicchio – Noble Financial

Radiant Systems, Inc. (RADS) Q2 2008 Earnings Call Transcript July 31, 2008 4:30 PM ET

Operator

Good afternoon and thank you for standing by. All lines will be in listen-only until the question-and-answer portion of the call. (Operator instructions) Mr. Heyman, you may begin.

John Heyman

All right. Thank you, Valerie. And good afternoon to everyone and thanks for joining us this afternoon. With me here today is Mark Haidet, our Chief Financial Officer, and dialed in remotely are our Chief Operating Officer, Andy Heyman, and our Chairman and Chief Technology Officer, Alon Goren.

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 prospective. 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 ability to 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. Reconciliation of these financial measures to comparable GAAP financial measures can be found in our earnings release and on our website at radiantsystems.com under Investor Relations.

John Heyman

Mark, thanks a lot. The second quarter was a successful one by many measures for our company. In a difficult economic environment, we continued to deliver stronger results. Furthermore, we made significant strides against some key strategic objectives we have been pursuing. These results and investments provide our team with confidence we can continue growing the business in a slowing economic environment while positioning the company for even stronger growth when the macro environment improves.

Our quarterly financial results continue to strengthen. Clearly, activity in some sectors is lower today than a year ago, but the strength of our operating model, the diversification of our industries and geographies, and the power of our products and people are permitting us to deliver better results. Revenue growth exceeded 17% for the quarter. And while some parts of the businesses were obviously impacted by the economy, our businesses in retail, hospitality, and sports and entertainment continue to grow and gain share.

Additionally, our operating model continues to progress, with adjusted operating margins for the quarter growing to 13.7% versus 12.4% a year ago. Strategically, we have continued to grow our business on two important pillars. One, we endeavor to add more value to each of our customers with new products and services. And two, we continue to look to expand into new markets with our existing offerings. Both organically and inorganically, we have made great strides against our growth strategy during the first half of 2008 and the second quarter specifically.

Organically, we have had a number of new products under development that are receiving great response and further differentiating our offerings in the marketplace. And the acquisitions we have completed this year have accelerated our progress. Our most recent acquisition, Orderman, is a great example of this acceleration. Clearly, Orderman will enable Radiant to bring more value to each of our customers.

Already we are in pilot with one of the largest restaurant chains in the United States with our mobile ordering and payment device. The value proposition of mobile ordering and payment is clear and compelling for both table service and for quick-service restaurants. Of course, for those of you who have been following Radiant for some time, you understand the aspirations we have had to become more global.

In our hospitality business today, only 6% of our revenues are currently coming from outside the United States. This number should be closer to 50% over time. A key component to this strategy has been to build an infrastructure, management team, and channel to serve key markets. The past few months have seen significant progress in that regard.

Our acquisition of Orderman can be a game-changer for us in Europe, in much the same way our 2004 acquisition of Aloha was in the United States. Orderman brings to Radiant a powerful European brand, a strong management team, and a network of hundreds of channel partners serving tens of thousands of restaurants in Europe. Overnight, we believe we have increased our bandwidth in Europe significantly and we believe we will start to see sizable returns from these investments in the second half of 2009.

Overall, our business has performed well during what are obviously tough times. We have some areas of weakness that will continue, but other parts of the business are making up for this weakness. And that strength, together with our predictable operating model, is allowing us to deliver strong earnings growth while making significant investments across the business. Specifically, gas prices have taken their toll on our convenience store business. Less people are driving, and those pulling into convenience stores have less money to spend, and retailer margins are being squeezed. The industry has felt this pinch, and it has clearly impacted spending.

This quarter, the business was down roughly 16%. And we continue to forecast a tough year in this segment, with our revenues being as much as $10 million to $15 million behind plan. Hospitality grew over 20% in the quarter. Though the economy is certainly impacting this sector, we continue to see fairly robust spending in this market and a strong pipeline.

New products focusing on kitchen productivity, delivery and takeout, and managing the guest experience are helping us to gain share in the United States. And the Orderman channel will help us accelerate into the European market next year. So we continue to believe we can grow through these times in this group and are committed to investing our products and channels so that when the market improves, our growth will be even stronger.

The sports and entertainment business is having great success. During the quarter, we won the largest deal in that business's history in what was obviously a very competitive process with a company that operates over 150 venues around the world. This was the largest win, but we continue to gain share in the stadium market with other key operators and venues. The pipeline in this part of the business continues to be very strong. The Quest product was also integral and an important joint win with our retail group with a large operator of small footprint restaurant and retail sites. Of course, this was another very competitive process.

While our retail group only grew 3% in the quarter, the core channel business in our retail group actually grew much faster. In 2007, we closed a significant direct deal inflating last year's quarterly results. Though the pipeline of business for direct deals is strong right now, we have not yet closed significant direct business this year. Almost all of our revenues in this unit are coming from the channel, and the growth in the channel this past quarter exceeded 20%.

As I have said, we believe we can continue to grow through this climate, though not in all our segments. Simply stated, our growth businesses can still achieve share gains, which can allow us to grow, even if spending in the industries we serve moderates or declines. In certain markets, for instance, Europe, Asia, or the domestic retail business, our share is so small that we believe we can make great strides. But we do not forecast the PCS business – the petroleum and convenience store business, excuse me – turning around this year.

Given this, let me give some comments on our view for the rest of the year and provide you with some color on how we're running the business. First, despite the economic climate, we are delivering significant revenue growth in many areas of the business and for the company as a whole. This is very impressive to me, given the negative impact we have seen specifically in the convenience store market. Second, it would only be prudent of us at this time to forecast some increased costs in this environment, specifically around freight and around bad debts. And then third, we are a drastically different company midway into 2008 than we were just six months ago.

We have a stronger European footprint, we have a new mobile ordering and payment device that can change the way restaurants serve their customers, and we have new opportunities in areas such as stadiums. We are integrating four acquisitions into our company, we are launching new products, and we are investing in our infrastructure to support our future growth.

Our strong bias has always been to build for the long-term health and growth of the business. And we view these times as ideal to get stronger, both through organic and inorganic investments. Fortunately, our operating model provides a strong foundation for improving profits and continued investment in this regard. Specific to Orderman, we have significant investments in process around integration, research and development, and channel development for our other products, all of which we believe will drive growth over the medium term, but are a drain on our profits in the third quarter, especially given Orderman's seasonality.

In summary, our hospitality, sports and entertainment, and retail businesses are enjoying nice growth that will continue even in this environment. Our PCS unit is struggling right now. And while this segment typically has done well in tough economies, oil prices are a new variable that the industry and therefore Radiant are contending with. The good news is our growth businesses now represent 75% of our revenues and are becoming a much bigger portion of our mix and present large growth opportunities for us for years to come.

In the short-term, in terms of our operating margins, investments and integration costs will depress margins slightly, but we should return to the mid-teens in 2009. Mark is going to run through what all this means in the numbers and the guidance for the rest of this year, but we continue to expect great growth throughout this year and are beginning plans for a strong 2009 as well. Mark?

Mark Haidet

Thanks, John. Covering the highlights of the income statement, our revenue in the quarter increased 17% over 2007. Specifically, our restaurant business continued to see strong growth, exceeding 20% in the quarter, driven by new client wins, growth in our subscription software sales, and continued growth in the small business channel. We had systems revenue growth of 7% and service revenue growth of 31% compared to the second quarter of 2007. Our service revenue growth was led by increased recurring revenue and several consulting projects on the front end of large customer relationships that we've entered into.

Our gross profit margin remained flat from the first quarter. And our adjusted operating income grew 28% compared to the second quarter of 2007, which resulted in adjusted operating margin of 13.5%, an increase of 110 basis points from the same quarter last year. Our adjusted net income from the quarter was $6.7 million or $0.20 per diluted share for the quarter. This represents an improvement of $0.02 over the same quarter last year.

From a balance sheet standpoint and a cash standpoint, our cash from operations was $8.5 million for the quarter and $9.4 million year-to-date. The resulting free cash flow was $3.2 million for the quarter. In conjunction with the acquisition of Orderman, we exercised the $20 million expansion option in our credit facility. We currently have a facility with a $30 million term loan and an $80 million revolver. As of June 30, the balances were $28 million on the term loan and $41.5 million on the revolver. Due to the acquisition, we drew an additional $24 million on the revolver in July to fund the Orderman acquisition, with the remainder of the purchase price coming from operating cash flow.

Now I'll turn the focus to the future and talk about our guidance. Based on the acquisition of Orderman and our current visibility and market assumptions, we are providing the following guidance. For the third quarter of 2008, we expect revenue in the range of $79 million to $80 million, a growth rate of approximately 27% over last year. We expect this to result in adjusted earnings in the range of $0.17 to $0.18 per share.

For the year, we are updating our revenue estimate to a range of $306 million to $312 million and our adjusted earnings estimate to a range of $0.76 to $0.80 per diluted share. This guidance reflects a significant reduction in our convenience store business that John referred to for the second half of the year, as well as the dilutive impact of the Orderman acquisition, which is expected to be $0.03 to $0.05 per share in the third quarter.

In addition, we estimate that our cash tax rate will move from 23% to 26% for the remainder of the year, having an approximate $0.015 impact on earnings per share for the year. Based on this guidance, we expect adjusted operating margin to be approximately 12% in the third quarter and 13% on average for the year. On 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 comp expense, non-recurring charges, and includes the ongoing cash benefit of the utilization of net operating losses and tax credits. John?

John Heyman

Mark, thanks. And Valerie, we'll go ahead and open it up for questions right now.

Question-and-Answer Session

Operator

(Operator instructions) Gil Luria from Wedbush, you may ask your question.

Gil Luria – Wedbush

Thank you. Would you mind breaking out the growth for some of the segments? I think I heard you say that hospitality grew 20%, but I also think you said that restaurants grew 20%. How much did the food service business grow?

Mark Haidet

Gil, this is Mark. For the quarter, the restaurant business was up roughly 20%. And I think sometimes we make the mistake of interchangeably using hospitality and restaurant, but we were referring to the restaurant-specific portion of the business.

Gil Luria – Wedbush

And then the entertainment and specialty retail?

Mark Haidet

Yes. Specialty retail was up 3%, and the petroleum and convenience store business and the entertainment business were both down approximately 15% to 16% each.

John Heyman

Well, the sports and entertainment, you got it –

Mark Haidet

Yes, I'm referring just to the entertainment portion of the business. The Quest portion, or the sports portion of our sports and entertainment, was up, but that's a new part to the business for the year.

Gil Luria – Wedbush

Got it. So it looks like all of the change to guidance is from petroleum/convenience, entertainment, and the change of tax. You really haven't seen a change in the rest of the business?

John Heyman

I think that's accurate. I mean, I think without that change in PCS, we would have felt – we probably would have been increasing our numbers.

Gil Luria – Wedbush

Now, as you finish the acquisition of Orderman, as complete that and start integrating it, what is the latest breakdown for this quarter between US and international?

John Heyman

For this quarter?

Gil Luria – Wedbush

Yes.

Mark Haidet

I'm sorry, Gil. For the second quarter we just finished or the third quarter going forward?

Gil Luria – Wedbush

The second quarter.

Mark Haidet

Yes. The second quarter, our international revenue was roughly –

John Heyman

12% of total company revenue.

Mark Haidet

Right.

Gil Luria – Wedbush

Yes. Go ahead.

John Heyman

It was 6% in the restaurant, and remember, Orderman is not included in those results. We closed that deal literally on the first business day of the third quarter.

Gil Luria – Wedbush

And you still expect that to contribute $9 million for the balance of the year?

Mark Haidet

Yes, approximately. That's – one of our assumptions in our guidance is that it's going to be roughly $9 million for the year.

Gil Luria – Wedbush

Thank you very much.

Mark Haidet

I should say for the second half of the year, yes.

Gil Luria – Wedbush

Thank you.

Mark Haidet

Yes.

Operator

Chad Bennett from Northland Securities, you may ask your question.

Unidentified Analyst

Hi. Actually, I'm an associate of Chad's. I didn't quite catch it, but what is the company's total debt level following the Orderman transaction?

Mark Haidet

The debt level after the transaction would be, we have a $28 million balance on the term loan and a $41.5 million on the revolver. As of the end of the quarter, we added another $24 million to the revolver. So, that would be 65 – approximately $65.5 million in the month of July is where we were on the revolver. Obviously, that's all subject to changes throughout the quarter, but that's the general magnitude of where we are at this point.

Unidentified Analyst

How about $93 million total, is that right?

Mark Haidet

I believe that's right.

Unidentified Analyst

Okay. And last question, can you indicate how your Quest acquisition performed in the quarter?

John Heyman

It's going exceptionally well. They're winning a lot of business. Their results grew significantly over the first quarter of this year. When I say significantly, roughly 20% on the top line. And just in terms of market momentum, one of the largest deals that’s been bid in the industry was done so in the second quarter. We went head-to-head with all the names you might recognize in the industry and we were selected, and we've been selected for a number of other stadiums during the quarter that will roll out later this year as well.

Unidentified Analyst

Great. Sounds good. Thank you.

Operator

Brian Murphy from Sidoti and Company, you may ask your question.

Brian Murphy – Sidoti & Company

Hi, thanks for taking my questions. Mark, I just want to get some clarification on the guidance. I thought on July 7 you guys issued some updated guidance that was sort of in line or in the sort of $0.84 range. And now you're updating your guidance below that. I guess in the interim here, we had some updated assumptions. Could you just give us some clarification on what has changed in the past three weeks? I know you're saying that the Orderman acquisition is going to be $0.03 to $0.05 dilutive in Q3. Is there additional dilution in Q4, or is this just the tax rate moving up? Anything would be helpful.

John Heyman

Brian, let me start and Mark might want to piggyback. Obviously, the tax rate is probably costing us – we assess it to be about $0.015. The Orderman dilution was baked in to the July 7 comments. The big change for us has been the petroleum and convenience store business. And over the past few weeks, being able to assess that against the fairly – unlike our other businesses that are, much of which the business that goes through the channel, the petroleum and convenience store is basically all direct business. And typically, while that business can be lumpy, customers typically always spend the budgets they had at the beginning of the year. And also typically, this industry does very well in tough times. And what's happening at the pump is really hurting the industry. People are driving less, the people who are coming into the stores aren't spending money inside the store. And the store makes their money on in-store sales, not on gasoline sales. That's all going to the – going upstream to the oil companies. And we believe – we know a few things. One is they are spending less. Two is sales opportunities are getting delayed. And three, where we usually see a very large fourth quarter with people because they are making sure they spend their budgets, we just think it's imprudent at this point to count on that. And so I would say, you know, 30 days ago, we felt like that business would be able to recover, as they have for the 15 years we've been serving the industry, customers would spend their budgets. And now we're looking at the business and we're saying it's going to have a really tough time meeting its revenue numbers. And there is going to be obviously a drag on profits. And that is – that accounts for virtually any change between early July and where we are today. We could get that – that business could come back, but I think at this point in the year, it would be, again, imprudent for us to be counting on that.

Brian Murphy – Sidoti & Company

I got it. And just to be clear, this is not sort of a macro call here, because it would seem that incrementally in the past three weeks sort of the oil picture has improved. I'm assuming that this is specific information that you have from customers or your sales force.

John Heyman

Yes.

Brian Murphy – Sidoti & Company

Okay. And –

John Heyman

And I would also say we are not losing any deals or any customers, just to be clear on that.

Brian Murphy – Sidoti & Company

Okay. And Mark, I think you said that specialty retail was up 3%. Obviously, that's a segment that's been growing much faster. And I think we have been expecting growth more along the lines of 25%, 30%, 35%. Could you give us an indication of how fast is the channel growing there? I think you alluded to – I mean, maybe not base share [ph], but what accounts for that deficit?

Mark Haidet

Yes, Brian, and John mentioned it briefly in his earlier remarks that the channel in the retail sector is growing over 20% for us in the quarter, which we're very pleased with. The real impact year-over-year was around the third quarter of last year we did have a fairly sizable one-time deal.

John Heyman

Second quarter of last year.

Mark Haidet

I'm sorry, the second quarter. I apologize. The second quarter of last year, we had a one-time direct deal that was in the numbers for a comparable standpoint. We did anticipate, when we were planning for this year, we'd have some of that. At some point in the year, as John mentioned, there is quite a bit of it in the pipeline, but those did not occur in the second quarter, but the channel business itself was very strong in the second quarter.

Brian Murphy – Sidoti & Company

I see. So that's mostly just a tough comp there. And your outlook for that segment for the rest of the year, I mean, has that changed from sort of the growth rate that we've been expecting?

John Heyman

No.

Brian Murphy – Sidoti & Company

Okay. I'll hop back in the queue.

Mark Haidet

Okay. Thanks, Brian.

Operator

(Operator instructions) Vincent Colicchio from Noble Financial, you may ask your question.

Vincent Colicchio – Noble Financial

In your prepared remarks, did I hear you say, John, that your quick service restaurant and table service segments of the restaurant market were strong?

John Heyman

Andy, why don't you comment on the two segments specifically?

Andy Heyman

Sounds good. Both segments performed very well in the second quarter, and our outlook for the remainder of the year continues to be very strong. We've got a variety of reasons for that. And if you've got any follow-up questions, I'm happy to answer them. But for new product introductions, channel capacity, and new deals that have come to the table, it's a very healthy business for us.

Vincent Colicchio – Noble Financial

And any change on the pricing front?

Andy Heyman

We really haven't had any changing on the pricing front. There’s definitely pressures out there, I would say, that are – I commented on three months ago in the first quarter conference call, where we had seen smaller competitors, were tracked from the industry. And we've seen some larger competitors try to, I'd say, cover up some of their own holes with pricing schemes, but our customers see through that. The industry is too smart for that. And we're winning the vast majority of deals that we are entered in, even though there are some pricing pressures out there.

Vincent Colicchio – Noble Financial

Where do we stand with the kitchen product and the takeout product? I know you've been talking about that in recent calls. Is that now in the hands of several customers? Where do we stand?

Andy Heyman

Yes. Yes, we're piloting those products. In fact, we're releasing those products now. GuestManager and the TakeOut and Delivery products, as well as another product that we have not commented on a whole lot called Command Center, all three of those products are released in the field. Depending on the product, some of them have 50 to 100 sites of pilots, some of them have thousands of sites that are rolled out. And we're already seeing a nice impact this year. Much of that is in the recurring revenue side of the business. So the backlog on our subscription business and the growth of our subscription business has been substantial. We're going to beat our plan on the recurring revenue significantly this year. And the really interesting thing is what that means for the follow-on years, because we are only getting, in some cases, a quarter or a half-year credit for those. And as we continue to sign up those sites, we're going to start to see some even better growth in what had historically been a very solid growth business.

Vincent Colicchio – Noble Financial

Okay, thanks. And Mark, one question for you. What was capital spending?

Mark Haidet

Capital spending was around $5 million, including internally developed software capitalization and building and the internal projects I mentioned before on a previous call, where we're doing a systems implementation internally around our infrastructure.

Vincent Colicchio – Noble Financial

And what's the outlook for the year?

Mark Haidet

I would expect the number to be roughly – call it roughly $3.5 million to $4.5 million a quarter for the next couple of quarters as we move through those projects.

Vincent Colicchio – Noble Financial

Okay. Thanks, guys.

John Heyman

Thank you.

Operator

There are no further questions.

John Heyman

All right. Well, we would again like to thank everybody for joining us this afternoon. And as always, I have to thank the 1,300 or so employees of Radiant who turned in another great quarter, and they are doing great things out there on behalf of our company and our customers. Thank you. And we'll talk to you guys at the end of the third quarter.

Operator

This concludes your conference call. You may now disconnect. Thank you.

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Source: Radiant Systems, Inc. Q2 2008 Earnings Call Transcript
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