NCR Voyix Corp (VYX) 2003 Q2 法說會逐字稿

Good morning. My name is Latoya [ph] and I will be your conference facilitator today. At this time I would like to welcome everyone to the Retalix second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Coulson, you may begin your conference.

Thanks, Latoya. Welcome, everyone, to Retalix's second quarter 2003 conference call. With us today are Retalix Chairman and CEO Barry Shaked, Chief Financial Officer Danny Moshaioff and the CEO of Retalix USA, Jeff Yelton.

But before I turn the call over to them, I'd like to remind our listeners that in this call management's prepared remarks do contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. These forward-looking statements include comments regarding anticipated demand for Retalix's enterprise software products, successful implementation rollout of existing license agreements and management's expectations as to the company's future financial performance.

Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and, therefore, we'd like to refer you to a more detailed discussion of these risks and uncertainties that is contained in the company's filings with the SEC.

For those of you unable to listen to the entire call at this time, a recording will be available for 90 days and you can find that at www.retalix.com.

With those formalities out of the way, it's my pleasure to turn the call over to Retalix CEO Barry Shaked. Barry?

Thanks, Crocker , and good afternoon and good morning for those in the U.S. Welcome to the Q2 2003 Retalix conference call.

I'm pleased again to announce another strong quarter for Retalix. Net revenues for the quarter ended June 30th, 2003, were $21.5m, an increase of 24.8% from $17.3m in the second quarter of 2002. Net income for the quarter was $1.42m or 11 cents per diluted share. Net revenues for six months ended June 30th, were $42.2m, an increase of 26% from $33.5m for the comparable period in 2002.

This quarter has seen us make significant gains on an international scale across all our market-leading software solutions. Increasingly, global retail chains are becoming aware of the proven cost and operational benefits that Retalix solutions can deliver. We are continuing to win major accounts across all tiers and against all competition. Our growing penetration is reflected in the strength of our pipeline and is providing us with great confidence that we are on target to meet our stated finances and goals for 2003.

In terms of some highlights for this quarter, we have mentioned our successful rollout in Sainsbury. We have started our rollout of our Linux solution in Hannaford Brothers in the United States. We've signed a contract for 200 stores with Hy-Vee.

Casey's General Stores we've rolled out 178 stores. Husky Oil we've completed 255 rollouts. Partner Orange in Israel we've gone live and we've started rollout with our ``thin store'' and proven POS solutions. And we've even installed our first StoreLines in the Palestine supermarket chain here in our territory.

We've also won a RAD award from Microsoft for the Retalix Pocket Office solution.

We are continuing to make steady gains in the U.S. market penetration and the territory continues to expand its contributions to our bottom line. North America now accounts for almost 70% of our revenue and we continue to grow our market share in both grocery and convenience and fuel sectors.

Now I would like to pass the call to Jeff, our CEO in the U.S., to discuss business progress in the U.S.

Thanks, Barry. We've had another strong quarter in the U.S. across both the convenience store and our grocery segments. The number of deals that we've been involved in has increased and it appears, at least to us, that the technology spending in these two sectors is starting to slowly turn around.

But because of the number of vendors that are still in this space, every deal is still extremely competitive and hard-fought. That being said, we do continue to win the majority of the deals that we're engaged in.

Starting in the convenience store side of our house, we had two large wins in the second quarter. The first was Irving Oil. Irving is a 600-store Canadian-based chain with stores in both Canada and the U.S. They'll be using our StorePoint application with our new XML interface to PDI's [ph] application. This is one of the first installations in the country where a vendor has used the National Association of Convenience Stores, or NACS, new XML standard to pass information between two different applications from two different companies.

Retalix actually showed this XML interface at NACS last year, the NACS convenience store show last year, and we were one of the first vendors to show that. It's actually called NAXML, which is a standard developed by the convenience store industry to pass information between vendors. We were the first to show it and we're also the first in the U.S. to implement it.

Retalix is very proud to lead the convenience store industry by adopting and implementing standards. A lot of companies say that they will support the standard, but a lot of them don't actually start implementing them, so we're very excited about this engagement.

Our second win is with Cumberland Farms. Cumberland Farms is an 800-store chain located in the Boston area and is one that we've been working on for quite some time. They're a very aggressive operator and one that we're looking forward to work with. Cumberland is one of the first chains to use our RFS product chain-wide.

RFS is our software interface that directly controls the pumps, the gas pumps. This software allows a customer-- or allows us to remove a third-party piece of hardware out of the solution, which reduces a failure point for our customers and our customers have been very excited about this new software that we're bringing to the market.

On the grocery side of the house, we had three wins, three big wins. The first, as Barry said earlier, was Hy-Vee. Hy-Vee is a 240-store chain located in Des Moines, Iowa. And the second is Fresh Brands, which is located in Sheboygan, Wisconsin, and has 102 stores.

Both of these chains were currently using IBM and NCR hardware and software and they'll be moving to our StoreLine product to include our fuel module for their gas stations. Both Hy-Vee and Fresh Brands have used an older piece of back office software from Retalix called RBX, so we've had a relationship with them in the past and we look forward to working with them in the future.

The third win was in our StoreNext joint venture. And if you'll remember, the StoreNext joint venture was a company that was started by Retalix and Fujitsu. Retalix brought the software to the joint venture and Fujitsu brought a very mature channel to that joint venture, a dealer network.

The focus of StoreNext has always been on the tier three and tier four grocery market space. And the vision was to have-- not only bring them point of sale software, which we've done for many years in that market space -- in fact, we own about 85% of that market share there -- but to bring the back office and host applications and some of the more sophisticated applications that chains of this size might not be able to implement on their own because they might not be able to afford the cost or they might not have the actual resources to do that. We're bringing these applications to this customer set in a connected services type environment or an ASP-type model and then also, once we have them connected, the vision is to connect back in to the supply chain to the manufacturer.

This is a business model that we put in place in Israel about 18 months to 24 months ago and we've been very successful with it in Israel and we're now implementing it here in the U.S.

C&K Groceries -- C&K is a 55-store chain that's located in Oregon -- and they have chosen both StoreLine and Retalix's new RBO back office product for all of their stores. But the piece that's most significant about the C&K win is that we believe that it validates our vision for StoreNext. C&K has bought into the vision of having not only their store systems, but also having those store systems interface back to the connected services for delivery of applications and then also that interface to that system back into the supply chain so that the manufacturers can communicate with them and have visibility down to the stores. So we're very excited about that win and are looking forward to working with C&K.

Also in StoreNext, it has not only been validated by C&K, but we also have a few hundred other stores that have already committed to the connected services or connect to our server farms and we have a few hundred more that are in the pipeline that will be connected by the end of the year. So we're very excited about the success that we've had with this joint venture and we look forward to continuing to build the connected community, just as we've done in the Israeli market.

From a services point of view, our services continue to remain on-time and on-target, which is a strong testament to the dedication of our people. We've been running pretty hard this year with the new customers that we've had here in the U.S. and everyone at Retalix has stepped up to the plate to contribute to make sure that we continue to deliver to our customers what we have committed to them.

From a pipeline point of view, fortunately, as has been the case all year, our pipeline remains full and we feel very confident that the U.S. has adequate opportunities to fulfill the commitments that we've made to the business for the remainder of 2003 and are looking excited about finishing out 2003 in a very strong position.

Barry, that's it for the U.S. I'll turn it back to you.

Thanks, Jeff.

On the international front, we have continued to explore opportunities to foster and cooperate with leading hardware vendors in a number of territories, particularly in the Asia-Pacific region. Our growing list of alliances, including those with distributors, hardware providers and system integrators, is an important part of our overall strategy as these relationships enable us to focus on enhancing and broadening our core products and solutions while leveraging our partner's strength in the particular global market sectors.

In the second quarter we completed the successful rollout of Sainsbury with our StoreLine solution across the U.K. as part of their front-end replacement program. Sainsbury is the second-largest retailer in Britain and with Tesco, the largest retailer, who has just finished a rollout of their NT-version of StoreLine, we are currently serving about 35% of the grocery market in the U.K. and about 25% of the fuel market, including a customer of ours called [inaudible].

During the quarter, we continued to add functionality to our ReMA platform, which provides food retailers with browser-based architecture that supports e-business processes from the point of sale to advanced head office applications and collaborative supply chain management.

StoreNext Israel is continuing to add new independent retailers to its ASP-based loyalty system. Currently 24 independent retailers have joined StoreNext's loyalty service, with over 200,000 members signed up. In addition, StoreNext is in the process of launching its ASP-based promotion by ReMA promotion monitors to the independent retailers.

The company continues to experience strong interest from a number of major tier-one retailers in its Retalix Pocket Office or what we call RPO, advanced handheld office mobile applications. This technology is designed to help clients boost their back office operation productivity through easy-to-use workflow-based mobile applications. Retalix Pocket Office was the winner of a Microsoft RAD award.

During this quarter, we launched with the retail stores of Orange Partner, a leading mobile operator in Israel, the first installation of our new next-generation ``thin-store'' solution. This solution includes a thin POS and thin office where all application logic runs on the central server, requiring minimum hardware at the store level. This solution is significant to the company as it would decrease the cost of ownership of the hardware for retailers in the future.

At this moment, I would like to pass the call to Danny to give us an update on financials.

Thanks, Barry.

Net revenue for the second quarter amounted to $21.5m compared to $17.3m in Q2 of 2002, an increase of 24.8%. For the first six months, revenue was $42.2m, an increase of about 26% over last year.

Gross margins were 66.3%, lower than our average margin, because of higher hardware sales in StoreNext USA and a shift in license revenue towards the second half of the year.

Operating profits for the second quarter amounted to $1.9m compared to a profit of $1.8m in second quarter of 2002. And operating profits for the first half were $3.3m compared to operating profit of $3m the last year.

Net profits for the quarter were $1.4m compared to $1.37m last year. Net profits for the first half of the year were $2.5m compared to a profit of $2.2m in the first six months of 2002.

Earnings per share for the quarter were 11 cents per share and 20 cents per share for the first six months, fully diluted.

Total operational expenses for the quarter were $12.4m compared to $11m last year. These expenses include StoreNext USA expenses, which was incorporated in July of 2002. Cash and marketable securities amounted to $36.6m on June 30th, compared to $34m on December 31st of last year. Long-term financial liabilities include the current maturity for $10.9m compared to about $15.8m on December 31st, 2002.

Our cash flow position remains strong with positive operating cash flow of about $1.8m for the quarter and $4.4m for the first six months. Our DSO for June 30th was 62 days, down from 63 last quarter. Shareholders' equity amounted to $61.5m out of $95.3m total balance sheet.

That completes the financial review. Now back to Barry.

Thanks, Danny. We expect to continue growing by over 20% for this year, both in the top line and bottom line and we reconfirm our previous guidance. With $1.8m generated this quarter or $4.3m for the first six months, we will continue to be cash positive in 2003.

Our business successes in the U.S., Europe and Asia-Pacific prove that Retalix is maintaining its position as the number one software supplier to the grocery, C-store and petroleum retail industry in the world.

At this moment, I would like to turn it back to the operator for questions and some answers.

At this time I would like to remind everyone in order to ask a question please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Stephen Levey, USB.

Hi. It's UBS. Another really excellent quarter and it's difficult to find fault in the numbers, guys. But if I was to be extra critical, I would say that maybe there were less tier-one wins this quarter than in previous quarters and I'm just wondering if you could give us some more color on the pipeline in terms of tier-one wins and what we should expect in the next couple of quarters?

Thanks, Stephen. You know, tier-one wins have got their own agendas, including when you can actually announce them. I can just tell you that we've got tier one customers in our pipeline. They are continuing to look for next-generation solutions, as I've told you in the past. Many of them are running old proprietary systems, either from IBM or from Fujitsu or even from Wincor Nixdorf and they will be changing and I'm confident that you'll be hearing soon on more tier-one wins.

Thanks very much.

Your next question comes from Arnon Rubinstein [ph], Shore Capital.

Hi, good afternoon. I've got a few questions. The first one I feel that we have some information, maybe you could expand a little bit on something that was mentioned in the past, the 2000-store health and beauty chain. Can you say anything about that?

Yeah, that was a win which includes what we call part of our international win, which is Europe and Asia-Pacific. We have progressed in starting the first installations and it's going on track. Giving more information on names is more due to internal reasons rather than indicative of any problems with the contract.

OK. Then following the good news that you were talking about in StoreNext, do you still foresee annual sales this year of about $16m?

Yes. StoreNext is continuing to prove that our investment or our joint venture with Fujitsu was the correct move. The more important thing of annual sales to exceed $16m this year is what Jeff has mentioned, the number of stores that are willing to connect up to our connected services, because eventually the connected services is the great opportunity for Retalix to increase its margin in the total pie that we are getting from this tier-three and tier-four market place.

OK. And then two small kind of items. First of all, what was the number of shares that you used, the diluted number of shares that you used for this quarter?

13 million.

13 million?

Yeah, 1-3.

OK and then you've had something to do with trade receivables versus deferred revenues. You reduced the two items for 2002. Should we know more about that?

It's just a reclassification, wiping up from those receivables and deferred revenues actually invoices of deferred revenues that were not paid. So that's the reclassification.

Thank you very much.

It's not very significant.

If you are dialing in from the U.S. or Israel and you would like to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your next question comes from Alan Doff [ph], Doff and Company [ph].

Good morning. Congratulations, gentlemen. Excellent quarter. Just a balance sheet question for you. Could you describe to us the profile of your investment in marketable securities? What kind of investments are you making with these funds?

It's mainly corporate bonds. The long-term marketable securities you are talking about?

Yes. Well, on the cash flow statement it says investment in marketable securities for this quarter, $3.277.

Yeah.

What's the average maturity on that paper and the rating on it?

About three to four years.

I see. And the ratings?

About A and upwards.

I see. Terrific. And what kind of approximate rate of return are you getting on that paper?

Well, we have some old ones with better rates of return and right now the average is about 4.5%.

I see. And are these primarily U.S., European, Israeli or a mixture of all paper?

A mixture.

I see. Thank you very much.

You're welcome.

If you're dialing in from the U.S. or Israel and you would like to ask a question, please press star, then the number one on your telephone keypad. Please hold while we compile the Q&A roster.

Your next question comes from Denise Steele, Greenville Capital Management.

Hi, guys. Congratulations on a good quarter. I'm just wondering if you could provide some clarity on where you think the gross margin will be heading in the back half with licensing revenue improving?

Somewhere between 69% and 69-1/2%.

Is that on the product revenue or total?

Total.

Total. Wow, great. Thank you.

Please hold while we compile the Q&A roster. Your next question comes from Ofshalong Shamik Alfalek [ph].

It's from [inaudible] Securities [ph]. I just wanted to ask a question regarding the gross margin, also. You just mentioned that the connectivity on StoreNext will increase the gross margin contribution on the StoreNext side. Can you elaborate when we are supposed to see this one kicking in and whether we're going to see the gross deteriorating if this one [inaudible] 2003?

That should-- we should start seeing effects of it somewhere next year.

So--

Of the connected services.

I see. So for this year, we shouldn't expect any improvement from the gross contribution of the StoreNext?

Marginal.

OK, thanks.

Please hold while we compile the Q&A roster. At this time, there are no further questions. Mr. Coulson , are there any closing remarks?

Yeah. We'd just like to thank everyone for joining us today and we're going to be traveling to the West Coast later this month, so feel free to give us a call if you'd like us to come visit you at that point and look forward to bringing you more news on the company's progress and Q3 results. Thanks.

Thank you.