NCR Voyix Corp (VYX) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Retalix fourth-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. (OPERATOR INSTRUCTIONS) Mr. Coulson, you may begin your conference.

Thank you. Welcome, everybody, to Retalix fourth-quarter earnings call. With us today are Retalix's Chairman and CEO Barry Shaked; the company's Chief Financial Officer, Danny Moshaioff; and the CEO of Retalix USA, Jeff Yelton.

Before I turn the over to them I would like to take a moment to remind our listeners that in this call management's prepared remarks do contain forward-looking statements; and these statements are subject to risks and uncertainties. Management may also 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 and rollout of existing license agreements, the integration of OMI International with Retalix's existing software products, and management's expectations as to the company's future financial performance.

Therefore Retalix claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1985. Actual results may differ from those discussed today, and therefore we would like to refer you to a more detailed discussion of these risks and uncertainties that is contained in the company's filings with the Securities and Exchange Commission.

For those of you who are unable to listen to the entire call at this time, we're going to make a recording available for 90 days via webcast; and you can find that at the Retalix website in the Investor Relations section, at www.Retalix.com. With those formalities out of the way, it is my pleasure to turn the call over to Retalix's CEO, Barry Shaked.

Mr. Coulson, Mr. Shaked disconnected from the conference, but we are dialing out to him now.

My apologies; Barry will be back with us in a moment. (technical difficulty) We completed the Safe Harbor. Over to you.

Good afternoon and good morning to everyone. Sorry about the small technical problem, and welcome to the Q4 and 2003 Retalix conference call.

With our finance highlights, revenues for the fourth quarter of 2003 were $25.6 million, an increase from $22.5 million in the fourth quarter of 2002. Net income was $3.5 million, an increase of 92.7 percent compared to net income of $1.8 million. Earnings for the fourth quarter of 2003 were 26 cents per diluted share, an increase of 73.3 compared to earnings of 15 cents per fully diluted share in 2002.

For the year ended December 31, 2003, revenues were $92.1 million, an increase of 20.4 percent as compared to revenues of $76.5 million in 2002. Net income was $8.2 million, an increase of 45.5 percent in comparison to 5.6 in 2002. Earnings for 2003 were 63 cents per diluted share, an increase of 40 percent as compared to earnings of 45 per fully diluted share in 2002.

The fourth quarter included other income of approximately $1 million from investment of IsraCard in StoreNext Israel. Excluding all onetime events, net of taxes, net income increased from approximately $5 million in 2002 to approximately $7.2 million in 2003. This is an increase of 44 percent.

What does all of this mean? The company is growing, and we have actually met our expectations for 2003, a growth of 20 percent from 76 million to $92 million. Even though there has been an economic softness, we continue to grow. This means we are taking business from our competitors.

Our core business is big enough to fund our aggressive R&D and e-marketplace initiatives. In 2003 we spent $18.3 million in R&D and over $10 million in our StoreNext initiative. With revenues of over $92 million in 2003 and expected revenues to pass 120 million in 2002, we are big enough to support both our core business growth, our investment in initiatives like StoreNext (indiscernible) StoreNext Israel, prepaid, and our aggressive entry into the supply chain arena.

We will continue these investments in 2004 and our R&D budget for this year is close to $29 million, an increase of over $10 million compared to 2003. In this investment we will continue to enhance our R&D platform, our arena platform, our thin-store architecture and technology that are connected to prepay sale time (ph), software for mobile devices, and enhancements to our traditional products like StoreLine and StorePoint. However the majority of our R&D budget, over $7 million, is allocated to build Next Generation technology products for the supply chain arena and integrating them into Retalix enterprise product ReMA.

I would like to take this opportunity to thank all Retalix employees for their efforts, focus, and contribution. We expect to continue growing by over 30 percent in our top line. Although the plans, although with our massive investment in R&D we will continue to be cash positive for 2004, we expect our net income to be $5 million. Once again I am proud of our achievements for 2003. These were the goals we set ourselves and announced last year, and these are the achievements we have demonstrated and achieved.

The growth drivers factors are continuing. We are continuing to take business from our competitors. And the sector that we're selling to is continuing to show strength and continuing to invest in IT. IDC reported IT spending in retail will grow in the next five years by over 5.9 percent a year, with the biggest growth in the grocery sector of 7 percent. Also IDC estimates suggest that retail software spending in North America will grow from $4.7 million in 2003 to over $6 million in 2007. This represents an average annual growth rate of approximately 8 percent, compared to a forecast growth rate of just 2 percent for the retail hardware spending.

I would like to mention a few significant activities in 2003. Publix supermarkets and Hy-Vee selected Retalix to provide Next Generation point-of-sale systems. A.S. Watson selected StoreLine for over 1,850 sites across Europe. Hannaford Brothers continues its rollout with StoreLine on Linux. The Tussauds Group selected StorePoint for its entertainment business. Paz Oil selected StorePoint for its fuel stations across Israel. Partner Orange went live and fully (inaudible) with our Next Generation thin-store solution. In Q4 2003 we launched activity to pilot with a global major oil company; and in 2003 IsraCard invested $2.5 million in StoreNext Israel.

We concluded the acquisition of OMI International in January, 2004. (indiscernible) put Retalix together with OMI, this brings us to the Retalix retail enterprise vision for the grocery and convenience store industry. Retail enterprise solution is all about reducing cost through supply chain efficiency and store automation, and increasing revenue for our customers through customer loyalty and CRM systems. Retalix has them all now.

More so, a typical model of warehouse management to date has been based on movement from warehouse to store that drove replenishment, while we all know that a better way to optimize order is based on optimizing algorithms that are based on point-of-sale data.

With Retalix holding the store information and the front-end activity, and with OMI's new DAX system, a system tuned to optimize orders based on POS data, Retalix is positioned to offer its customers a true retail enterprise system. At this time I would like to pass the call to Jeff, who will talk about our activities in North America.

Thank you, Barry. We had another strong quarter in the U.S. across both our convenience sore and grocery segments. The number of deals we're involved in remain high, and it continues to appear that the technology spending in these two sectors is increasing. We are not only seeing this in the field, but the new consulting surveys from IHL, IDC, and Gartner are starting to come out and support this observation.

In fact one of these studies shows that in the grocery industry in the U.S. over the next 12 months, 35 percent of the companies will be making a point-of-sale decision. In the 12 to 18-month time frame, an additional 18 percent will be making a point-of-sale decision. So over the next 18 months 53 percent of the grocery customers or retail customers in the U.S. will be making a point-of-sale decision.

In the gas and convenience space in the United States, 45 percent of retailers will be making a point-of-sale decision in the next 12 months; and an additional 36 percent will be making a point-of-sale decision in the next 12 to 18 months, for the total of 81 percent over the next 18 months will be making a point-of-sale decision.

These numbers are especially significant in the grocery segment because historically only about 11 percent of grocery retailers make point-of-sale decision in a given year. There is also a large installed base of systems have been installed between 12 and 14 years, and in the past grocery retailers have usually just repaired these systems to keep them running. To have the grocery segment make this many point-of-sale decisions in a single year shows that the new technology point-of-sale vendors like Retalix are proving the ROIs associated with their systems.

Another major trend is the move to the Windows operating system. Approximately 73 percent of the grocery segment and 100 percent of the convenience store segment say that their next point-of-sale system will be on a Windows platform. We feel like these trends uniquely position Retalix to take advantage of these opportunities over the next 12 to 18 months.

2003 was a banner year in the U.S. in both of our core segments. We had three new Tier 1 grocery segments sign with us, grocery accounts sign with us. Three new Tier 1/Tier 2 convenience store accounts signed with us. We had four Tier 1 and Tier 2 accounts commit to and begin the rollouts of our RPO software, which is our new mobile handheld software. We had three accounts commit to ReMA, our new enterprise package that includes both price management and customer loyalty. We had two customers commit to RFS, our new offering that allows software control of the fuel pumps.

Our dual strategies of new account penetration and additional revenue from existing accounts was successful in 2003 and will continue to be at the core of our strategy for 2004.

In StoreNext, our joint venture with Fujitsu, we continue to see acceptance of our connected community vision within both the dealer and customer base. As more and more customers connect, they are realizing that the value of receiving these services in an ASP model; in many cases these are services that these accounts would never be able to afford if they had to pay for them in the usual license and services model. Therefore this is a new segment of customers that were unavailable to us in the past.

This has been validation that they agree with our belief that this is the best way to forge some of the higher-value applications that the Tier 1 accounts have always had access to, but the smaller chains have not been able to afford. Their belief, as is ours, is that this is the best way for them to acquire these tools to be competitive in the future.

Ray Carlin is our new CEO of StoreNext and has been doing a great job since he has joined us. He brings a great deal of industry experience to the job from his time at NCR and dramatically increased the odds of our success in this endeavor in the U.S. We are looking forward to working closely with him and his team in the year to come.

From a sales backlog point of view, our pipeline continues to remain full, and we feel confident that the U.S. has adequate opportunities identified for a successful 2004. And last but not least, I will leave you with one last statistic from the survey that I quoted from earlier. Sixty percent of the grocery customers say that having their point-of-sale systems integrated with their headquarters inventory management operational systems was of extremely high importance to them. This bodes well for our strategic acquisition of OMI; and the integration of their products into Retalix's current systems will be a top priority of ours in 2004. This will further differentiate Retalix and its enterprise solutions offerings from the rest of the industry. Barry?

At this time, I would like to ask Danny to give us highlights on some finance information.

Thanks, Barry. Net revenues for the fourth quarter were $25.6 million compared to $22.5 million in the Q4 2002, an increase of 14 percent. For the year, revenues were 92.1, an increase of 20 percent over last year. As we discussed before, our revenues and profit was tilted in 2003 towards the second half of the year; and gross profit has increased to over 70 percent compared to 66 percent in Q1 and Q2 of this year.

Operating profit for the fourth quarter amounted to $3.2 million, compared to a profit of 2.6 in the fourth quarter of last year. And for the year they were $9.7 million compared to a profit of $7.7 million last year. Net profits for the quarter were $3.5 million compared to $1.8 million last year. They include $1 million of a capital gain due to IsraCard's investment in StoreNext Brazil.

Net profits for the year were $8.2 million compared to a profit of 5.6 in the same period last year. The $8.2 million again includes a $1 million capital gain. Net profits grew in 2003 by 44 percent over 2002 when we disregard one-time gains in both years and the tax effect of those gains.

Earnings per share for the quarter were 26 cents per share, and 63 cents per share for the year fully diluted. Without a capital gain, the earnings per share were 19 cents and 55 cents, respectively. Operating expenses for the quarter were $14.8 million, compared to $12.8 million last year.

Net cash and marketable securities amounted to $40.9 million on December 31, compared to $18.1 million on December 31 of last year. The increase in cash reserves includes about $8.9 million from exercised options by employees and $2.5 million in investment in StoreNext Israel by IsraCard. Our cash flow position remains strong with positive operating cash flows of about $4.2 (ph) million for the quarter and $11.7 million for the year.

Our DSO in December, at December 31, was 62 days, similar to the previous quarter. Shareholders equity amounted to $75.8 million of the $120.9 million total balance sheet, over 60 percent. That completes the financial review; now back to Barry.

In summary, this has been the best year for Retalix. It has been the best year in terms of revenue, and it has been the best year in terms of profit. Also we are well positioned to be a major player in the supply chain execution arena, and Retalix will be focusing 2004 in growing our customer base and developing new technology and Next Generation technology for the supply chain arena.

At this time I conclude our prepared part of this call, and I would like to pass the call to the operator for questions and answers.

(OPERATOR INSTRUCTIONS) Stephen Levey, UBS Warburg.

Good afternoon. Well done again. Quite a few questions from me, so I will get through them quickly if I could. First of all, Danny, can you give us an idea for how many shares we should be using for the fully diluted EPS for 2004? What you think the (indiscernible) number of shares across the year will be?

We know we have another 225 which we issued to OMI shareholders, and given our optimistic view of the year and where the price of the share will go, we think you can add another million to that.

About 14 million?

(multiple speakers) 14.5.

Okay. Can you give us an idea what the impact on gross margin from OMI is going to be?

They should lower it a bit, because their revenues are based mostly on services. And they won't have that many license revenues this year, only after we finish the Next Generation software. So I guess it will be a down trend. I can't give a number right now.

But in '05, if you do all the right things in '04, it '05 it will reverse itself?

In '05 I would say we will come back to where we are now.

When I look at 2004, it was very much a back-end-loaded year. The second half of the year was where you generated most of the net income. I am getting the feeling, just running some numbers here, that that is going to be the case again in 2004. Can you confirm that we should expect really Q1 and Q2 to be weaker quarters, and Q3 and Q4 you come through and make that (multiple speakers) ?

You're right. That will be the same, mirror image of this year in terms of behavior.

In terms of Q1, when you have made acquisitions in the past your first-quarter revenues have gone up over Q4. But when you haven't made acquisitions, Q1 has generally been a slightly down quarter. So taking into account OMI, just so we can take a base for Q1, would you be (indiscernible) a slight increase in revenues against Q4?

I would say about the same.

About the same in Q1.

Right.

Okay. Barry mentioned $29 million of R&D in 2004, which is $11 million over 2003. How much of that increase, if you can tell us, is going towards upgrading the OMI software?

He mentioned about 7.

About 7.

Right.

And in terms of the P&L impact of OMI, you have got $7 million in the R&D lines. Is there going to be any ramp up in sales and marketing, just to get that product launched correctly? Does it have a gross margin impact? Where are the other impacts on the P&L?

We did say, if you remember, when we announced the OMI acquisition that the acquisition will be accretive in the fourth quarter, if that helps you.

So you expect to make most of the amount, $7 million R&D investment, in the first three quarters?

No, we will make it also in the fourth, but in the fourth we will hope to start getting some revenues out of them.

So you only get revenues from OMI from Q4, you say.

On the New Generation products, yes.

So service revenues from ongoing will continue; but new revenues only in Q4.

Right.

Danny, what kind of tax rate do you expect for the year? It was pretty volatile during 2003. What would we use for a full-year '04 tax rate?

Somewhere between 27 and 30.

27 and 30 percent. Okay. The last one for me, you mentioned in the press release and, Barry, you mentioned that you have pilot with an oil major; and you gave us no more details than that. Are you going to be able to tell us what size the pilot is and when you think will be able to make some kind of announcement as to whether that is going to become a more important customer for you?

Stephen, we are waiting. We have to get of course the customer's approvals, and we can't tell you (inaudible).

Okay, last one from me. Could you (technical difficulty) an idea, you said you got the impact of $7 million from OMI into R&D. What do you think your EPS would've been in 2004, from what you now, if you hadn't made the OMI? What would have been the clean EPS number? I was looking at it and coming up with something around 80 or 90 cents. Does that sound like the kind of number you would have expected without the OMI deal?

I think our revenues would have grown by somewhere between 15 and 20 percent. And you expect profits to go higher than that because of the fixed element. Because of the fixed-cost element in your cost structure.

Okay. What are again the guidance (technical difficulty) Thanks very much for your time.

(OPERATOR INSTRUCTIONS) Tad Piper, Piper Jaffray.

Can you give us a little bit of color on what you are seeing competitively? I did notice that you signed a large deal with A.S. Watson. I know that that was also on the customer list for JDA software last quarter. I would like to get some color on who you're running into most. Maybe you can narrow it down to the grocery segment, and then talk a little bit about how that's different obviously in the oil segment for you.

Actually we see different competitors at the store level and at the enterprise level. At the store level in grocery we would see people like IBM, NCR, Triversity. In c-stores people like Radiant, Pinnacle, Wincor. At enterprise people like ReTech, JDA, DCI. These are the types of people.

We're not really seeing many or at least any someone who is providing a full solution in grocery and c-stores, both on the enterprise, warehouse, and store solution.

In terms of (indiscernible) on the pilot that you're doing in the oil, for the large oil company, can you give us any color on -- is that the norm that you expect to be the case as you're looking at other oil company deals? And any indication of all in terms of how long these pilots might run?

Looking now, area in our space, pilots with Tier 1 customers or major companies tend to be around a year.

Are these paid pilots?

I can't give that kind of information. It is competitive information.

Okay, but it would be fair to say that we are probably 12 months away from having what would be considered a more long-standing deal with a large oil company?

Again I can't give you this kind of information. Typically what happens with Tier 1 customers is that towards the end of the pilot you would normally see either enterprise license or large purchase of licenses.

Okay, and one last question about the consensus numbers for this quarter. I'm just looking at the one-time event, it looks like 19 cents. Just to confirm that, is that slightly below what the prevailing estimate was on the company? Or about in line?

It was in line.

That's all I've got; thanks.

Avshalom Shimi, with ASIC (ph).

Congratulations for the results. I came on late, so I didn't hear if you referred to the StoreNext contribution for the year. I know you didn't provide their contribution on a quarterly basis. But can you provide some insight regarding StoreNext for the year?

We told at the beginning of the year that we expect revenues to be 16 million; and we have beaten that. We expect revenues to grow in StoreNext U.S.A. by more than 30 percent in 2004.

Thirty three zero?

30.

Excellent, thanks.

Dan Gallagher (ph) of UBS.

I just had a question regarding operating leverage; trying to understand over the course of time or the next couple to three years what your normalized R&D spend might end up as a percentage of revenues.

Yes, in a steady-state I would say we will get to about 15 percent. But that is at once we finish investing in the Next Generation and stabilizing our systems.

When might that glide begin? Is this a unique year here, 2004? Or do you think that there will be additional investments in 2005?

2004 is a unique year in terms of percentage, R&D percentage of revenues, because of the acceleration of our investments in the Next Generation of supply chain OMI new products. We definitely will see the percentage going down of revenue in 2005.

Do you think that we might get back closer to that 20 percent level in 2005 or below? Is that a reasonable assumption?

Yes.

Can you size the market potential on the grocery and c-store side? Are there other vertical channels that your software is applicable to that are broader then just these markets?

We are currently concentrating on grocery and convenience stores. The total software market for resale is around between 4.7 to 6 billion U.S. dollars; and grocery probably has probably between 15 to 20 percent of that in our estimates. But all of this is public knowledge that you can get from IDC and others.

Thank you.

Tad Piper, Piper Jaffray.

Just a quick follow-up question. I wanted to drill down on the comment that Jeff made about the IDC study and the POS market opportunity. Can you just touch on a little bit what -- obviously this is a market that traditionally you have seen a lot of strength out of IBM. Can you give us some color on, competitively, why you think the opportunity is really large to beat IBM in their installed base?

Why do I think the opportunity is large?

To beat IBM specifically. Obviously you have said a lot of companies are going to upgrade. But obviously most of those are pre-existing customers for IBM. I just want to get some color on what gives you the open-the-door, if you will, to potentially steal some of those customers from IBM on the POS side?

In the IHL study, if you go into the detail it talks specifically about the 4690 OS customers and the number that are looking to move in 2004. And of those, 95 percent of them have said, of those 4690 OS customers, 95 percent have said that they will either go to a Windows or a Linux-based platform. So that is a statement of saying that they're moving off of that 4690 OS base.

And the primary competitor that you expect to see in the POS side of things, is it changing at all? You have reasonable leases on the POS side, and talk of more success from the likes of ReTech and JDA. And then obviously you have got the traditional players in Triversity, Radiant, etc. in different areas. I'm just wondering whether there's any change that you're seeing in the competitive situation on the POS side specifically.

No change in the POS side. As Barry said earlier, it is different depending on whether you're speaking of grocery or gas and convenience. In grocery the two main competitors still are mainly IBM and NCR.

Okay, thanks.

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

I would like to thank everyone for listening to the Retalix 2003 conference call, and we will see you next quarter. Thank you.

This concludes today's Retalix fourth-quarter earnings conference call. You may now disconnect.