NCR Voyix Corp (VYX) 2004 Q3 法說會逐字稿

Good morning.

At this time, I would like to welcome everyone to the Retalix third quarter 2004 earnings release 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. [Caller Instructions] Thank you.

I will now turn the conference over to Mr. Crocker Coulson.

Please go ahead, sir.

Well, thank you, operator.

I'd like to start off by welcoming everyone to Retalix's third quarter earnings call.

Leading the call today is going to be Retalix Chairman and CEO, Barry Shaked, and Danny Moshaioff the Company's Chief Financial Officer will also be making some comments.

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 and management may be making additional forward-looking statements in response to your questions.

These statements are, of course, subject to risks and uncertainties and these forward-looking statements that are contained in the call will include comments regarding anticipated demand for Retalix's enterprise software products, the successful implementation and rollout of existing license agreements, the integration of OMI International and its supply chain and warehouse management products into Retalix's overall solution, and, of course, 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'd like to refer you back to a more detailed discussion of these risks and uncertainties that's contained in the Company's filings with the SEC and, in particular, on Form 20F.

For those of you who are unable to listen to the entire call at this time we are going to make a recording available and it's going to be up there for 90 days at the Retalix website at www.retalix.com and you can find it in the investor relations section.

Well, with those formalities out of the way, I'm going to turn the call now over to Barry Shaked.

Barry, over to you.

Thank you, Crocker.

Good afternoon and good morning to everyone.

I'm pleased to announce our best quarter ever.

This is true in terms of revenue, project progress with key new customers and existing ones, product development, and pipeline and market -- and market demands.

Revenues for the quarter were $33.9 million, an increase of 40% from $24.3 million in the third quarter of 2003; and up 18% from $28.7 million reported in the second quarter of 2004.

Net income for the quarter was $1.8 million, or 10 cents per diluted share.

Q3 highlights: acquisition of 51% in Italian unit SPA, expanding our presence in Italy;

Casey's convenience store select our PocketOffice suite of mobile applications;

United Western Grocery rollout our TRICEPS warehouse management solution;

Lotus supermarket in China selects StoreLine for installation throughout the chain;

ICI PARIS of AS Watson Group installed the first pilot store with StoreLine in Holland; good progress with two international oil companies running pilots with StorePoint;

Food Giant, Dallo and Pro & Sons signed up for StoreNext Connected Services in the U.S.A.

This quarter was very strong quarter for Retalix, not only from a financial standpoint, but also in making significant progress on a number of key strategic initiatives.

Our growth in -- our growth has been driven by three primary factors.

First, winning new customers in our verticals of grocery, convenience and fuel.

Second, moving deeper into food retailers technology strategy as we realize our vision of Synchronized Retail that ties together all of the retailers' critical data and operations from the point of sale to the supply chain.

And, third, continuing to expand our presence in new regions based on our world-class global retailing capacities.

On the international side, during this quarter we announced a contract with Lotus supermarket in China.

The significance of this account is that we are now, uh -- have a working store in China -- in Chinese supported by a local company.

We all know that the Chinese market will be growing rapidly in the next five years and we will be a significant player in that part of the world.

ICI PARIS, 180 store leader of, um, perfumery retail in Holland, Belgium and Luxembourg, and a subsidiary of AS Watson Group successfully installed its first pilot store with StoreLine in Holland.

This example of AS Watson supports our repeat business model where we are selling not only to new customers but, uh, most of our sales are to existing customers.

Actually, 80% of revenue is coming from existing customers.

And this selling new products to existing customers or, in this case, expanding our penetration with an existing group, strengthens our repeat business model.

We have also made good progress with two international oil companies running pilots with our StoreLine product.

One of these companies is a major oil company with presence in multiple countries, including the U.S.A.

And the other is an Indian -- is in India, a country that is waking up to new ways of doing business as the government has privatized the selling of fuel.

In general, I believe that countries like India represent the next wave of growth for Retalix.

We are very focused on extending our sales and marketing reach into new global markets through a combination of selective acquisitions, strong local penetration, and expansion of our international sales organization.

We announced acquisition of a major interest in Unit, an Italian retail company, which brings us an excellent customer list of leading Italian retailers and a high-professional local sales and support team that will provide for support -- strong presence in, uh, the Italian market.

This is an example of our growth strategy via acquisitions of companies, mainly in Europe, with retail customers and domain knowledge.

Companies that have ran out of steam with their own internal product in a way that we can reduce their R & D costs, some SG&A, and these acquisitions are pretty much accretive very soon after we acquire them.

Normally, these companies will be selling Retalix products once we acquire them.

We have staffed up our senior sales team to address the substantial market opportunities in South America.

As food retailing becomes increasingly global, Retalix offers the technology platforms required to manage international and global retail enterprises across multiple regions, languages, currencies, and fiscal regulations.

South America is one of these regions that some large European retailers have a presence.

In the U.S., we continue to grow our presence with existing customers as they come to appreciate the contribution of our Synchronized Retail suite of solutions can make to their critical operation objectives.

We have received an order for our new Country of Origin Location, or what's known as COOL, and Bioterrorism application from a major grocery chain.

This application, the first of its kind in our industry, enables our customer to accurately track products back through the supply chain so as to ensure the safety of these items and comply with proposed new federal legislation.

We continue to have a very robust pipeline of tier 1 grocery chains that are evaluating Retalix as their selected -- as they select their next-generation PO solutions.

As we move into 2005, we expect to begin to realize the benefits of the substantial investment in re-engineering OMI supply chain and warehouse applications which will position us as the only truly integrated end-to-end solution in the food retailing industry.

One of the most exciting products that we are offering today to the market is our CAO, Computer Assisted Ordering, or CGO, Computer Generated Ordering, products; a product that we picked up in the OMI acquisition and we have re-engineered it to work better with Retalix platforms, to take advantage of the data collected at the point of sale in the form that Retalix is collecting this data.

This product is gaining momentum in the marketplace.

We have committed -- we have commitments to three additional pilots, one of them in a major tier 1 existing Retalix customer.

And if we will manage to continue to prove the savings that this product has proven to generate in our first fully rolled-out chain, Market Basket, this -- this line of product will be a great revenue potential for Retalix in 2005 and the years to come.

Just to remind you, CAO can reduce the amount of inventory a store needs to hold by up to 15% while reducing the amount of out of stock by over 50%.

This represents savings to a chain of 10s and hundreds of millions of dollars.

We are also continuing to grow our share of the total installation system based in the convenience and fuel industries.

We received contracts for full chain rollouts of Retalix PocketOffice suite of mobile applications from several of our existing C-store customers, including Casey's.

Casey's continues its aggressive StorePoint rollout marking its 750th site installation and Cumberland Farm reached the 400 site milestone with StorePoint during this quarter.

This proves that our products are robust and providing value to our customers.

We are in active discussions with half a dozen sizeable food convenience chains as the industry enters a major upgrade cycle comparable to what is occurring in the grocery segments.

StoreNext USA, our joint venture with Fujitsu, that focuses exclusively on needs of independent grocery sectors, what we call tier 3 and tier 4, is showing good momentum as dealers and operators embrace our subscription-based model of delivering sophisticated software functionality through connected services on an ASP base.

Significant sign-ups of StoreNext Connected Services in the quarter include 90 store Food Giant in Alabama, as well as Dallo and Pro & Sons, both based in California.

Having chains this size connect up to StoreNext embraces our strategy of creating a community of online small chains and individual stores all connected to StoreNext data centers.

To date, we have over 600 stores connected, or in the process of being connected, and I believe that we are on track so that by the end of 2005 we should have over 2,000 stores connected, a number that is large enough to bring in the suppliers.

Something similar that we've done in StoreNext in Israel.

Talking about StoreNext Israel, uh, StoreNext launched its retail school, another service aimed at the small retailer helping them to improve their retail skills by taking advantage of StoreNext ASP retail applications.

CellTime, another StoreNext Connected Services allowing customers to top up their cellphones with prepaid dollars at the point of sale without the need of the traditional physical cards, is continuing to show growth month after month proving this concept.

And now we'd like to pass the call to Danny, who will give us more light on the financial information.

Thanks, Barry.

Uh, net revenues for the first quarter amounted to $33.9 million compared to $24.3 million in the same quarter last year, an increase of 40%.

For the nine months revenue were $88.5 million, an increase of about 33% over same period in 2003.

Gross margins were 66.1% compared to 50 -- 59% in the first six months of the year, over, uh, our revenues are tilted towards the second half of the year and our profits are high on the second part of the year as they were last year and as we planned.

Operating expenses for the quarter were $20.1 million compared to $13.9 million last year.

These expenses include costs of new technology rewrite of the supply chain management system, estimated for the year to be about $7 million.

Operating profit for the third quarter amounted to $2.3 million compared to a profit of $3.1 million in third quarter of 2003.

Operating profit for the nine months were $5 million compared to a profit of $6.5 million last year.

The decline, again, is due to our announced investment in the new generation of OMI products.

Net profit for the quarter were $1.8 million compared to 2.1 last year and 1.3 in the last quarter.

Net profit for the nine months were $3.9 million compared to $4.7 million last year.

Earnings per share for the quarter were 10 cents per share and 24 cents per share for the nine months fully diluted.

The number of shares for the quarter, the basic number of shares, was 16,954,000 and the fully diluted was 17,876,000 shares.

Cash and cash equivalents were $103.8 million on September 30th compared to 54.6 on December 31, 2003.

Financial liabilities, including long-term liabilities, were $10.6 million compared to about $13.7 million on December 31, 2003.

Operating cash flow was about $2.9 million for the quarter and $4 million for the nine months.

Our DSO for September 30th was 67 days, similar to the previous quarter.

Shareholders' equity amounted to $149 million out of $199 million total balance sheet.

That completes the financial review.

Now back to Barry.

Thanks, Danny.

Um, looking at 2005, we see the Company continuing to grow in double-digit rates, and at this stage I can give you revenue ranges between $135 million and $145 million.

Our R & D spending will return to the 20, 21% rates in 2005 while we will continue to invest in building the next-generation of supply-chain products and warehouse products, together with enhancing and building new store applications and enterprise applications.

We are on track to finish 2004 with revenues of over $120 million and profits of over $5.5 million, according to guidance we have given in the past.

Now we'd like to pass the call back to the operator for questions.

[Caller Instructions] Michael Clar with Remco.

Michael Clar with UBS.

I have one question with your guidance for, um, for '04, 30% sales growth and now $5.5 million on the bottom line, isn't that somewhat conservative?

Barry said over.

Danny, um, couldn't hear very well the question.

Maybe if you -- it was in your region you can answer and hear better.

Yeah.

First of all, Barry said over and, uh, we are not changing our guidance right now.

All right.

And, uh -- but Barry stated that it would be over 120 and over 5.5.

Tad Piper, Piper Jaffray.

Um, a couple of questions about the -- specifically on the expense side of things, I have some product questions.

The -- if you look at R & D this quarter it obviously leapt up quite a bit and I know you're expecting to spend a lot.

Are you on track with the OMI rewrites, or are you finding that you're needing to contract more third-party contractors here at end of the year in order to get -- to get that done?

And -- and do we expect that, uh, next year that it's only $7 million that you think is -- is the transitional cost or does it actually run a little bit higher than that?

It's will run this year about $7 million, uh, that doesn't mean we won't spend on supply chain next year, but it'll still be within the 20, 21% of R & D expenditures that we'll have for next year.

In terms of the OMI transition, do we expect to have that largely completed by the end of next -- or the end of really this quarter?

Yeah.

A great part of it will be completed, but, again, as Barry said, that we will continue to have costs involved certainly in the first and second quarter, but all that will be within the 20, 21%.

Okay.

Can you talk a little bit about the roll of the pilot programs in your sales process?

You obviously have a number of them going on.

How do you usually think about the timing of those, how long do they usually run, um, you know, and at what point do you sort of squeeze them a little bit to make more of a definitive decision?

Um, first of all, when we are allotted a pilot, it's after we've been selected, um, so in some cases the pilot is -- the stage before rollout.

Some of these pilots will be finished, um, this year in terms of store solutions with major oil companies and the rollouts will start next year.

Around the CAO products, the pilots that we are gaining to -- I see these pilots lasting about three to four months, giving the retailers enough time to realize the tremendous savings that these products are bringing to them and about three -- after three to four months we will know if we will continue or not.

Okay.

Specifically on the -- on the oil company pilots, do you -- do you bake in those rollouts into your -- your guidance, or do you -- or do you not?

Because obviously when you do those, it gives you quite a bit of visibility into the -- you know, into the next several years in terms of revenue.

We do take that into account and we know our position with the pilots.

Okay.

And then on the -- on the -- on the rollout of POS across, um, you know, obviously there's been a lot of talk of the upgrade cycle in POS across many different areas.

I think it would be fair to say that the pace of an upgrade cycle has probably been a little bit slower than most industry observers, uh, would have hoped for.

What do you think is the cause of that and what do you think ultimately gets the upgrade cycle to -- to accelerate as has often been talked about?

Yeah, I agree with you that, uh, retailers are slow to adopt technology or implement technology.

Um, rollouts of POS is -- is a hot operation for retailers.

It's something very delicate, but they have to do.

I think one of the biggest causes that's causing the retailers to actually make the decision and go for it is the Wal-Mart effect.

They are looking for new ways to compete with Wal-Mart, and one of the ways is to create customer loyalty and, uh, rolling out a new POS with -- with our capabilities of customer loyalty connected to the front end is the way to compete with Wal-Mart.

So I'm seeing more and more quick decisions by major chains and definitely tier 2 chains.

Let's just go, install a new system, because we have to do something to compete in the marketplace.

Okay.

And then my last question.

On the -- on the StoreNext, um, business.

At what point would you expect that business to turn profitable?

It is -- it is in the black.

As of?

As of this year, it will be in the black.

For the -- for the full year?

Yes.

So you're obviously expecting it to be fairly profitable in the December quarter?

Uh, yes.

Ronny Baron (ph), Oscar Groove.

I have a couple questions.

First, how do you see the mixture between tier 1 and pier 2 projects and ASP services, in 2005 and whether it's going to affect your gross margin?

Ronny, we can't -- can you speak a bit louder?

We couldn't hear you.

Okay.

I'm saying how do you -- how do you see the mixture between tier 1 and tier 2 projects and ASP services in 2005 and whether it's going to impact your gross margin in any way?

Uh, I -- I still -- I still -- what do you mean, Q1 and Q2?

Q1 and Q2 projects.

Tier 1 -- tier1 and tier 2 projects.

Tier 1 and tier 2 projects.

Yeah.

Yeah.

Uh, you know, it -- our -- our margin -- we don't see -- we don't think there will be a deterioration in our -- in our margins and we think, uh, they'll stay about the same -- at the same -- at the level of between 66 and 68% for next year also.

Uh, and, uh, while the ASP services, once they kick in in the U.S., and Barry just talked about that, will increase the margins.

But that will be a bit offset by the hardware that'll be sold to their customers.

So we still think the 66 to 68% is a good figure for the next couple of years.

My second question is in regard to your backlog.

If you could a little bit elaborate on your backlog today compared to the way it was entering 2004?

Yeah.

We -- we don't give backlog figures, but if you listen to Barry, he did say that the pipeline looked stronger than ever.

Okay.

And, finally, what -- what tax rate -- effect effective tax rate should we assume looking forward.

27%, 28%.

Mark Verbeck, Smith Barney.

Um, Barry, I'd like to understand a little bit better, um, kind of where you're at with -- with OMI.

And, um, your investment in that, um, kind of some-- you know, are there some milestone projects you're going to release?

And, also, you know, I saw that you noted that United Western Grocers is rolling out TRICEPS Solution.

Just kind of surprised that given kind of how you guys positioned where that -- where that product was and the investment you needed to make that we'd have, you know, a major rollout of the product that I'm assuming is kind of in the state that you acquired.

Just give us some comments there.

You know, um, in terms of re-engineering the OMI products, we've -- we are doing it with about four phases with different products that we are releasing.

We already have released one product that is out there in -- with a customer in better site.

We will be releasing in Q1 2005, uh, the buying system and, um -- and another version of the computer assisted ordering system.

And, uh, towards the end of 2005, we will come out with the new warehouse management system.

The development is on track in terms of the platforms, the applications, the re-engineering of -- or documenting the functionality, and now it's all a matter of just coding and bringing it out to the market.

So in general, I'm very happy with the progress around that area.

The rollout of, um -- this -- your second question was around the rollout of the -- the TRICEPS Warehouse system.

Um , we see continuous interest in our warehouse system, as this warehouse system is the best in the marketplace.

Even though it's running old technology, still can run on the UNIX platform and it gives the customers the return on investment needed for them once they roll it out in the warehouse.

You know, a warehouse you can have a lot of savings, there's a lot of moving parts in a warehouse; and OMI products have been proven to be the best in the marketplace and that's why we see continuous interest, even though it's old technology.

The new technology will just be, um, an upgrade which will probably do the same feature functions as this product is completely rich with feature functions.

Okay.

What -- what are you seeing next -- given that you're kind of still selling that product, what are you seeing on the competitive front with that product?

Can you just speak a bit up, I couldn't hear you.

Yeah.

What are you seeing competitively with the OMI product?

We still have seen the traditional EXE and home-grown solutions with a bit of, um, Manhattan starting to come into our space.

We don't see them very strongly, still got a lot -- a lot of, uh, way to go, taking their supplier warehouse product, moving it to a retailer warehouse product.

Okay.

Curious, Danny, a couple of -- kind of housekeeping questions.

Can you give us some sense of what kind of contribution you're getting from Unit this quarter and next year?

Yeah, this year we didn't recognize any contribution and, uh, and, uh, next year we do think it will be accretive to our -- to our results.

Okay.

And then what kind of distribution of revenues did you have by geography that -- in this quarter?

Uh, about the same, about 60, 65% U.S., 25 Europe and about 10% Israel.

Okay.

And then one last thing.

Um, accounts payable spiked up quite a bit.

Can you tell me what's going on there?

It's just some of the outsourcing that we are -- we are using for the project.

Tad Piper, Piper Jaffray.

This is Trina Fallon (ph) for Tad Piper.

He already asked a lot of the questions that I had, but, um, just looking at the guidance for Q4, um, and the fact that you're maintaining, you know, slight upside to the 120.

Um, looking back, you haven't actually had a sequentially down quarter in revenue since 2000.

So I'm just taking this as a positive, um, you know, this quarter we had 33.9 in -- in total revenue, um, that puts me well above -- or, well, it puts me above the 120 guidance, I'm just --

And Barry said over.

Uh-huh, uh-huh.

So you can -- you can assume we won't be under.

Right.

Um, can you give me a little bit more color as to some of the -- um, you know, the larger deals that tend to have services revenue, um, and how many of those deals you closed in this quarter?

We really don't give out that information in terms of number of deals, but as you know, every project has -- that we are involved with, has service revenue and license revenue with the ratio of about 40% service revenue and 60% license revenue.

Okay.

And then on the StoreNext business, I know you said that it's -- it's now profitable.

Is -- is there some kind of guidance as to the number of, um, additional customers you expect to add in that area or the number of new stores that we can expect to see in 2005?

Yeah.

Barry mentioned that we hope to close with about 1,000 stores this year and, uh, reach the 2,000 mark by the end of next year.

Tad Piper Jaffray.

Just a quick question.

You guys gave expense guidance for next year of 20 to 21% of revenue on the R & D side.

Can you give us any other color on some of the other line items in terms of sales and marketing, etc., and do you expect that services gross margins will stabilize at current levels or continue to rise a little bit as we've seen in the last couple of quarters.

We'll give maybe a bit more guidance once we finish our planning phase.

We won't, uh, at this stage we won't give any numbers.

In terms of margins, as I said before, we think they'll stay about the same.

That margins will stay about the same?

Yeah.

Didn't margins expand -- you mean on the gross margin side.

Yeah, gross margin.

Okay.

And on -- just -- just to be clear.

I mean, as a -- as a general rule of thumb, would you expect sales and marketing to be up as a percentage of revenue next year?

Tad, that's really something we are really trying to summarize now.

We think that the fixed costs effect should keep it about the same but we'll -- I'll have to give you a final answer next quarter.

Okay.

Well, we'll do our best to estimate, then, I guess.

[Caller Instructions] Arnon Rubinstein, Shore Capital.

I just want to know, what's the number of the diluted shares you are using?

I gave it and I'll give it to you again.

It's 17, 876 -- 17,876,000.

Any specific reason for the growth between this quarter --

Because we calculate average.

And since the secondary or the follow on was in the middle of the second quarter, so this is the quarter that takes the full effect of our secondary.

Mark Verbeck, Smith Barney.

Um, just on R & D. You've talked about -- that you're spending 7 million, uh, extra for the OMI kind of add-on work, but you're tracking at a pretty hefty growth rate even -- even without that, above and beyond the $7 million.

Can you kind of tell me, um, kind of a little bit better, is it reasonable to expect that Q4 is -- is sequentially flat with what you spent here in Q3 and -- and give me a little bit of more information in terms of what you are investing on the R & D front?

In terms of projects we're working on?

Yes.

Yeah, you know, we have numerous projects, like next-generation POS, what we call future POS is a huge project we are working on and other projects that'll complement our products in the next years.

So is it -- is it reasonable to assume that R & D will be similar next quarter to this quarter?

Yes.

At this time, there are no further questions.

Mr. Shaked, do you have any closing remarks?

Thank you everyone for joining the Q3 conference call and we'll hear -- you'll see us all in Q4 and the 2004 summary.

Thanks a lot.

This concludes today's Retalix third-quarter 2004 earnings release conference call.

You may now disconnect.