NCR Voyix Corp (VYX) 2004 Q2 法說會逐字稿

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

I would like to start off by welcoming everybody to Retalix's second quarter earnings call. As most of you know Retalix's Chairman and CEO, Barry Shaked, normally leads these calls. Barry has had an unforeseen personal issue that resulted in his unable to be on the call with us today. In his place Danny Moshaioff is going to be covering both the operational review and the financial review on the call. And we also have Jeff Yelton, CEO of Retalix USA, who will be giving us more insight as to the dynamics in the U.S. marketplace.

But before I turn the call over to them, I would like to take a moment to remind our listeners that in this call management's remarks do contain forward-looking statements. And these statements are of course subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions on the call, and these forward-looking statements will include comments regarding anticipated demand for Retalix's enterprise software products, successful implementation and roll out 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 1995. Actual results may differ from those discussed today. And 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 SEC, and in particular on the Form 20F.

For those of you who were unable to listen to the entire call at this time, we are going to make a recording available. And it will be up for 90 days at the Retalix website at www.retalix.com , where you can find it in the Investor Relations section. With those formalities out of the way I am going to the call over to Danny Moshaioff.

And good morning to all our U.S. listeners and good afternoon to the European and Israeli listeners. And welcome to the Q2 2004 Retalix conference call.

I want to start with some financial highlights. Once again we're happy to announce record revenues for the quarter of $28.7 million, an increase of 33.5 percent from 21.5 in the second quarter of 2003, and that is 11.2 percent from 25.8 million reported in the first quarter of this year.

Net income was 1.3 million or 8 cents per diluted share compared to a net income of 1.4 million or 11 cents per diluted share in the second quarter of 2003. Net income reflects the intensive investment and development of the Next Generation Supply-Chain Management applications and their integration with the Company's suite of products, a process the Company committed to in the latter part of the OMI acquisition.

I will go now to some operational highlights, and we will start with the international activity. Tesco is to install Retalix's BackOffice across all sites in the UK, Europe and Asia. That is a big win for us, and we were winning this contract -- we were actually competing with Retek on that.

The Tussauds Group selected StorePoint for the Group's international theme park in the UK, Europe, USA and Asia, including the famous Madame Tussauds attraction in London, and roll out in the UK is in progress. Implementation of the A.S. Watson system from the Hutchinson Group is progressing at full speed. Superdrug chain has installed StoreLine in 600 stores in the UK and continue rolling about 30 stores per week, complete with support for Chip & PIN and E-Topups.

Rossman completed the roll up of StoreLine in its 105 stores in Hungary, on schedule with pilot project of StorePoint in both Europe and the USA with a major global petroleum retailer.

StoreNext U.S. has excellent progress with StoreNext. Our joint venture with Fujitsu targeted to the needs of the independent grocery sector. Dealers and operators are increasingly embracing our subscription-based model of delivering sophisticated software functionality and connected services. Significant sign-ups in the quarter included Lowes Food Stores, a 65 store chain in Texas, which has ordered the StoreNext Connected Services hosting applications.

The integration of the OMI acquisition is going as scheduled. We are moving the OMI employees from their Richardson offices to our Retalix Dallas offices. And that is in progress and will be completed in the next few weeks. The development of new generation of OMI's advanced supply chain and warehouse management applications and their integration in our ReMA architecture are progressing on schedule.

Now I would like to pass to Jeff Yelton, CEO of the Retalix USA, for a presentation of our North American activities.

We had another strong and balanced quarter in the U.S. across the complete set of our supply chain offerings. And we're starting to see customers make decisions to acquire our software based on the synergies brought about by our integrated offerings, and the customers' belief that our synchronized retail strategy will provide meaningful business value to their companies.

The value of data synchronization is now well understood by our customers set. Retalix's ability to provide our customers with the foundation for this initiative is generating a solid backlog of opportunities for the Company.

Most customers now understand that they must (technical difficulty) like RF ID, electronic product codes, and the implementation of analytic software. The hype of many of these technologies has far outpaced many of our customers' ability to implement them, and has generated a strong need for the solutions we provide.

Because of this trend the number of deals we're engaged in across the grocery, convenience and fuel segments remains high. The level of engagement with each customer is becoming deeper and more strategic. This trend has manifested itself into a very strong second quarter in the U.S. with a few of the highlights including an account in the Southeast has chosen our ReMA offerings to use as their product information database (technical difficulty).

This offerings is a direct competition with -- in direct competition with products from both IBM and QRS. The customer was a user of our supply chain products, but needed a single item database to populate these applications as well as their other operational systems. They felt that our integration would be far better than the competitors because we offered a full solution, and any other choice they made would require them to absorb the cost of the integration.

We had a customer in the Southwest with -- just implemented our DemandAnalytX offering called DAX. It is a (technical difficulty) product for us. They were able to reduce their out of stocks by approximately 80 percent and reduce their inventory in all of their stores by approximately 3 to 5 percent. This is of tremendous benefit to the customer and creates a very high ROI for the business and from this product.

A Tier 1 and Tier 2 chain purchased our warehouse offering and began implementing it in the second quarter. Here 2 chains purchased our warehouse slotting application. And a Tier 1 and Tier 2 chain purchased our yard management application in the second quarter.

A major oil company has purchased our BackOffice application -- implementation in the U.S. Tier 1 convenience chain implemented our loyalty application in 126 stores. And a Tier 1 convenience store chain has purchased our handheld application called RPO LX Pocket Office for 600 of its stores. These transactions were on top of many of our current customers that purchased additional offerings to complement their current applications they acquired from us.

As you can see Q2 was an excellent quarter for us. The results could not have been achieved without the hard work and dedication of our employees and the work ethic that underpins our Company's culture. We appreciate the efforts they exhibit and believe our workforce is at a major competitive advantage in the marketplace. 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.

Let me now wear my hat as CFO and give the financial review. Net revenues for the second quarter amounted to $28.7 million compared to $21.5 million in Q2 of 2003, a 33.5 percent increase. Gross margin was 65.9, as we -- 65.9 percent. As we previously discussed our revenues and profits for the first 6 months of 2004 will be lower than the second half of the year mainly because of shifting of license revenue to third and fourth quarters of 2004. This influences the gross and operating margins.

Operating income for the second quarter amounted to $1.7 million compared to a profit of $1.9 million in the third half of 2003. Net income for the quarter was 1.3 million compared to 1.4 million last year. These figures all include our onetime R&D expense for the transition of technology from the old OMI technology to new modern technology of their application. We did say that we are going to spend about $7 million in 2004 for those R&D onetime expenditures. It is just under $2 million per quarter. Most of that work is done by outsourcing.

Net income for the -- I'm sorry, earnings per share for the quarter was 8 cents per share and 14 cents per share for the 6 months fully diluted. Total operating expenses for the quarter were $17.2 million compared to $12.4 million last year. And they reflect the increase in those onetime expenses.

Cash and marketable securities amounted to $102.3 million on June 30, from $41 million on March 31. The increase is due of course to our successful follow-on of which we increased our cash by about $58 million.

Long-term financial liabilities were $6.1 million compared to $8.1 million on December 31, of 2003. Our cash flow positions remain strong. Even though the onetime costs and our operating cash flow was about $0.6 million for the quarter and $1 million for the 6 months. Our DSOs, about 68 days compared to 62 days in the last quarter. Shareholders equity amounted to $145.8 million out of $190.1 million, about 77 percent.

Just to come back and talk about our cash balances and what we're going to do with them. We have identified companies, mainly in Europe, that can serve as sales and support infrastructure for our penetrating into countries like France, Italy, Spain and Germany. And we are in progress in finding the suitable company for us. And should announce in the next few weeks or months some completed deals. Those deals can range anywhere between 5 million and 15 or EUR20 million depending on the company and the market share it brings to the table.

Our pipeline of preferred projects, (indiscernible) and prospects is stronger than ever. And we believe it can support our continued growth. We believe some of that pipeline will materialize into orders, including Tier 1 chains and some of them in Europe, still by the end of this year.

Just to sum up our business outlook, we're reaffirming our 2004 guidance, which includes the revenue growth of about 30 percent in 2004, which will bring us to about $120 million in sales. And net income of $5.5 million, which we have to adjust for financial income from our recent offering. Those figures of course you have to remember take into account anticipated expense and (indiscernible) integration of the OMI acquisition and the transfer of technology and integration into ReMA.

That concludes our presentation for the quarter. I will now open the call for Q&A.

(OPERATOR INSTRUCTIONS).

Operator, is it the same procedure for our Israeli listeners?

Yes, sir. (OPERATOR INSTRUCTIONS). Mark Verbeck with Smith Barney.

This is Alan Ticware (ph) reporting for Mark Verbeck. First of all, and can you give us a little idea on the amount of the Tesco deal?

You know we don't do that. I can just say that a deal of a customer -- a Tier 1 customer of that size that generates revenues of something between I would say 3 and $5 million annually, and that is part of that deal. That supposes actually that that kind of revenue that we get from that kind of Tier 1 customer.

Also, can you give us a little bit more clarity on OMI revenues for this quarter? And how that has been progressing for you guys?

Yes, it is just under 2 million. As we said, OMI should come somewhere between 8 and 9 and then (indiscernible).

Tad Piper with Piper Jaffrey.

This is Katrina calling in for Tad Piper. I have some just additional questions on the Tesco deal where you beat Retek. Are you also seeing Retek in other head-to-head competition? And can you give a little bit more color on other competitors you may be seeing where you're winning, where they might be winning?

I will cover Europe. I think the first time we really met Retek on a head-to-head we (indiscernible) operating with the (indiscernible) but we didn't meet them yet on that on a head-to-head transaction. Jeff, can you complete that.

Yes, it depends on the sectors that you're talking about when you're talking about competitors. If you are talking about Retek and more of the supply chain area, we tend not to bump into them very often. The main strength of their offering and the main focus has tended to be in the general retail area, and not grocery. Only 1 or 2 places have we bumped into them from a competitive point of view.

If you're talking about more of the warehousing space in our supply chain offering, EXE is the largest competitor. We occasionally see Manhattan, but very seldom do we see Manhattan in the grocery and convenience sector.

And then can you also build on -- you mentioned QRS and how you're competing with them on some of the master data management. Can you build on that and how you're seeing them?

Yes, we have only in one customer seen QRS as a competitor in the grocery industry. As you know, the majority of their focus is in general retail and apparel in the past, but they are starting to make a move into grocery with their catalog and PIM capabilities, product information management capabilities.

We believe that we compete very aggressively there and have a great product, because our (technical difficulty) fell all the way back through the warehouse (technical difficulty) applications where they have just a single stand-alone application as a catalog and as a PIM.

And then also I may have missed this on the call, Daniel, but did you give the specific revenue contributions from StoreNext broken out by Israel versus the U.S.?

No, we didn't. But it is in line with our -- with the numbers we gave for the year. And it is about 4 million for Israel and about 20 for the U.S.

And then one last question. When I worked for your guidance, the 30 percent growth rate, and take into consideration our assumptions on expenses, I'm just wondering should we be looking at increases in expenses in G&A because of additional acquisition activity? We already are modeling for increases in R&D based on the OMI integration. But are there other areas where we really will see an increase in operating expenses throughout the rest of the year?

I think it is early to say. It depends on the size of the acquisition we will do. And I think once we do it, we don't like to sit down on another discussion on that, but maybe in the next quarter we can really update on that. But right now it is difficult to really give estimates on that.

(OPERATOR INSTRUCTIONS). Anjon Lubinstein (ph) with Shoal Capital (ph).

I am just -- I would like you to repeat your comment towards the end about your pipeline with the Tier 1 chains -- you mentioned that you expect to win before the end of the year.

Yes, I can Barry on previous calls was discussing -- I think he was more specific about French grocery chains we are talking to in various stages of negotiation. And just repeating, we feel stronger now that we think we will be able to announce something before the end of the year.

But you gave a size. You said it it is at least 1 with a 5 to $15 million size, if I understood correctly?

No, no. I said in general a Tier 1 company generates somewhere between 3 to 5 or $6 million annually for us.

And a little bit just for me to understand the Madame Tussauds announcement. They don't have a real food retailing operation, as far as I know. So is it an operation which is outside -- is it external to the food retailing business that you're doing?

Not really. We're still we are selling them the food court services of their operations, which are quite extensive.

So it is not a very large contract?

It is a Tier 2 plus. It is a nice contract. I hope we have some more (indiscernible).

Avshalom Shimi with Investec.

(inaudible) if you can elaborate a little bit. Jeff, you talked about a very strong pipeline in the U.S. And previously in previous calls you talked about different market research that are stating that Tier 1, Tier 2 customers would be making a buy decision in the next two years regarding POS systems, warehouse systems, etc. Can you just elaborate a little bit how this is proceeding in terms of what is from that pipeline you think is an outcome of the trend that is starting, kicking in, or this is something that is yet to be seen?

Yes, I think I understand your question. The studies that I had talked about in the past focused on both point-of-sale and the supply chain warehousing area. The biggest growth opportunity for new systems was more in the store systems area, which includes point-of-sale and back office. And then also growth not quite as large in the warehouse and the supply chain area. The way that we have seen that manifested is the number of deals that are in the pipeline and the number of engagements that we're actively involved in throughout the United States and the world. And that is what gives us so much confidence in our numbers for 2004.

So you are saying basically this thing has already kicked in and to some extent this is the rate that you will witness in the next two years in general, according to those researches? Of course, you cannot provide any outlook 2 years forward now, but this is basically what you're looking for it in terms of the growth of decision-making over Q1 to decline?

Yes, that's correct. And as you stated very correctly, we don't know what is coming in the future, but what we can say is that the number of deals in the pipeline and the number of customers that have engaged with us (technical difficulty) potentially different than what it was 18 months ago when the IT industry in a hole -- as a whole went through a bit of a slump. So we have seen what is actually happening support what the studies are saying.

Lastly, so it won't be far-fetched to assume that if this is continued what you see right now is looking at the fast (ph) rate of Q1 contract wins that you have, this rate should be increasing in general?

If what the studies are saying are true.

Mark Verbeck with Smith Barney.

My questions have already been answered. Thank you.

At this time there are not further questions. Are there any closing remarks?

No, I would just like to thank you again for joining us on this record quarter again. And I hope to see you with similar news next quarter. Thank you very much.

Thank you for participating in today's Retalix conference call. This call will be available for replay beginning at 12:30 PM Eastern standard time today through 11:59 PM Eastern standard time on Wednesday, August 11, 2004.

The conference ID number for the replay is 8973564. (OPERATOR INSTRUCTIONS). The number to dial for the replay is 1-800-642-1687 or 706-645-9291. This concludes today's Retalix conference call. You may now disconnect.