NCR Voyix Corp (VYX) 2004 Q4 法說會逐字稿

Good morning.

My name is Jamie and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Retalix fourth quarter fiscal year 2004 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Mr. Coulson, you may begin your conference.

I'd like to start off by welcoming everyone to Retalix's fourth quarter and fiscal year earnings call.

Leading the call is going to be Retalix's Chairman and CEO, Barry Shaked and joining him is also going to be Danny Moshaioff, the Company's Chief Financial Officer.

Before I turn the call over to them, I would like to remind our listeners that in this call management's prepared remarks do contain forward-looking statements.

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

These statements include comments regarding anticipated demand for Retalix's enterprise software products.

Expectations with regards to implementation and rollout of existing license agreements.

The integration of Retalix's supply chain management applications into Retalix's overall solution.

And management's expectations as to the Company's future financial performance.

Such forward-looking statements are subject to risks and uncertainties and, therefore, Retalix claims the protection for such statements 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 to a more detailed discussion of all of these risks and uncertainties that is 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 is going to be there for 90 days at the Retalix website at www.Retalix.com in the investor relations section.

Well with those formalities out of the way, it's my pleasure now to turn the call over to Barry Shaked.

Thank you, Crocker.

Good morning and to those in Israel good afternoon. 2004 was a year of explosive growth and enormous operation achievement for Retalix.

We significantly exceeded our goals and footprints.

Entering important new markets and expanding our position as the key technology partner for many of the largest and most successful food retailers around the world, we won major customers in France, China, Japan and India for the first time.

We acquired a subsidiary that gives us a presence in Italy.

And we are directing new sales efforts towards Latin America.

The food retail industry is undergoing rapid consolidations and globalization.

Retalix is the only company that provides a truly end to end software platform for global operators.

We are aligning ourselves to grow our share in all of these high-growth markets around the world.

We also made tremendous progress in realizing our vision of a fully synchronized set of Enterprise Solutions from warehouse to checkout. 2004 was a year of heavy investments in our next generation of Enterprise Applications.

I am pleased to report that this development work has been very productive.

We are experiencing excellent customer acceptance of our next generation solution and we believe that our technology leadership continues to grow over our competitors.

These accomplishments position Retalix to become the global leader in providing integrated software solutions for the food and fuel retail industries around the world.

I would like to take a look at a few highlights of the fourth quarter and the full year results.

Revenue for the fourth quarter grew by 40 percent to $35.9 million.

This is the 37th straight quarter-over-quarter growth.

I do believe not many companies can report such an achievement.

Net income for the quarter was $2.1 million or 11 cents per share.

This is down from $3.6 million last year when R&D spend was much lower and we had a onetime gain of $1 million pretax.

But it is an increase of 10 percent from the prior quarter and illustrates that we are able to produce consistent profitability, even while making a massive investment in our future growth.

For the full year, revenues grew by 35.1 percent to $124 million.

Net income was $6 million or 36 cents per diluted share.

We generated $6.2 million in cash from operations; and we ended the year with a strong balance sheet and actually the strongest in the history of the Company with $112 million in cash and securities, and $157 million in shareholders equity.

Once again, we exceeded the goals we set forth for ourselves at the beginning of the year at both the top and bottom line.

As pleased as we are with our excellent growth during 2004, we believe that we are only beginning to realize the full market opportunity available to Retalix.

Synchronized retail.

A year ago, we told you that following the acquisition of OMI, we saw a clear opportunity to extend our market leadership for Insource (ph) Solutions to become the only player with a fully integrated set of Enterprise Applications.

As I said then the food retail industry is in the midst of a generational shift in its installed technology.

The market is demanding a solution that no other establishment vendor can supply.

The traditional hardware vendors are not investing in software any longer.

Retailers realize that home-grown applications are not an option and there are billions of annual spend at stake.

During 2004, Retalix increased our spending on R&D by 86 percent to $34.1 million.

Where was this investment focused?

Over the past 12 months, we have completely rearchitected the supply chain and warehouse management solutions we acquired with OMI.

We also continued to develop a number of new solutions for loyalty, demand forecasting, and COOL and BIO.

We now are close to having a suite of mature Enterprise Applications spanning all the strategic businesses processes of food retailing chains.

This includes merchandising, customer relationship management, and loyalty and supply chain management.

The real power comes when you can combine these applications with our market-leading in-store solution.

As many of you know, the only way to capture the full benefit of supply chain management is to drive replenishment algorithms off a real-time base generated at point-of-sale.

No other software company has been able to realize this vision.

Food retailers understand the benefits of the Retalix approach (indiscernible) is the beating heart of the business.

It is where all revenues are generated and the prime point of customer contact.

Once you have a system that is architected off that data, you get better business decisions.

You are able to reduce stockouts.

You can actually forecast demand.

You can increase your inventory turns.

You can optimize your assortments.

You can design and measure customer promotions, maximum customer loyalty, and collaboration with your suppliers.

All that adds up to increased revenue, lower operational costs, more efficient use of capital.

This is technology that directly drives bottom-line results.

And Retalix is the only company with an end-to-end Enterprise Solution that meets that need of the industry.

We believe we have a substantial lead on our competitors and that lead is widening.

International expansion.

Our technology leadership and commitment to high-quality service results in numerous customer (indiscernible) around the world during 2004.

Over the course of the year, we expanded our growth horizon and positioned ourselves in every major growth market around the globe.

We continue to make strategic inroads in Europe which we see as a very attractive market for Retalix and an important launch pad in two regions such as Latin America and Asia, given that many of the beating global retailers are headquartered in Europe.

We recently announced StoreLine had been selected as the in-store solution for the French-based Intermarche Group with 3,000 French (indiscernible) including supermarkets, discounts, do-it-yourself stores, and auto centers and textile stores across France, Spain, Portugal, Belgium and Poland.

Pilots are expected to start in mid 2005 while a full rollout is to follow.

Our solution -- which is capable of working across Intermarche's many formats, concepts, and geographies -- was a clear differentiator winning this business.

We are also working closely with another major French retail chain and expect to have a contract to announce sometime in the first half of 2005.

Tesco's selected Retalix back office solution for inventory management to be rolled out in full integration with Retalix front office and POS is already installed in 1300 Tesco stores worldwide.

We continue to make good progress with pilots of StorePoint installed at a major global petroleum retailer.

We now have new country pilots in addition to our initial European and U.S. pilots with this customer.

In January, we acquired the remaining 49 percent of UNIT S.p.A. from Getronics.

This company has been relaunched as Retalix Italia and provides us with an Italian client base and the local expertise of sales deployment and support of Retalix retail solutions to the Italian food and fuel retail markets.

More so, Retalix Italian is a base to support some major customers in Europe.

And in Israel, we are going to supply our IREX B2B exchange system to Supersol, Israeli's largest supermarket chain.

Supersol will use IREX to manage a B2B exchange between their stores and major suppliers.

Suppliers who have already signed up include (indiscernible) Israel, Auto LLC (ph) and Coca-Cola Israel.

We think this is a great trading solution for retailers around the world and its early success in Israel is already attracting interest from other countries.

We are also experiencing excellent success entering new markets and winning our first major customer in Asia, whose retail sector is positioned for tremendous growth, modernization, and consolidation in the years coming.

In China, Losi (ph) Supermarket with 124 stores planned by 2006 has selected Retalix StoreLine, the in-store solution throughout the chain.

We also entered the Japanese retail market by signing a contract with Drug 11, a leading Japanese health and beauty chain to install StoreLine and Retalix chain management and Losi solution across their 169 stores.

We went live with our first customer in India in the fourth quarter.

This customer, by the way, is installing about 20 new sites a week.

North America.

As more companies in the U.S. realize operational benefits of Retalix synchronized retail suite of solutions, the pipeline of Tier 1 grocery chains that are evaluating our product remain very strong.

Cash and carry roll out StoreLine as it converts its 103 supermarkets to the new suite-based format.

Being part of the Dellhaze (ph) group this illustrates our ability to meet the needs of global food retailers and drive efficiencies across multiple formats and brands.

United Western grocers who already have high concepts warehouse solution agreed to market our StoreNext Pure S system to their members.

That is about 2005 independent groceries across the western U.S.

Following a successful rollout at Market Basket, we had another one for our demand analytic what we call DAX application with Redner's warehouse markets and have seen very dynamic improvement in both the reduction of stockouts and increased returns of inventory investments from customers that have deployed our demand forecasting and all the optimization solutions.

I do believe that DAX will be an engine of growth for the years to come for our Company.

A new country (ph) of a region and bioterrorism what we call COOL and BIO applications have been approved for delivery with a major grocery chain.

Retalix was the first to market with a solution that allows grocery stores to comply with this new legislation and track fresh product down to the global supply chain to protect the food supply.

In the convenience store segment along USA the largest 7-11 licensee in North America rolls out StorePoint to its 168 locations and will make it available to another 1200 FINA branded fuel outlets it supplies.

The rollout of a StorePoint with KC general stores continues and the chain has now decided to license Retalix pocket office to deliver key operational efficiencies to its in-store managers on wireless PDAs.

StoreNext used a joint venture with Fujitsu that focuses on the independent grocery sector, it's showing good momentum as dealers and operators embrace our subscription-based model of delivering in-store solutions and connected services.

In fact, we had a significant number of signups for connected services during 2004.

These include the 90 year store Food Giant and 65 store Lows Food Stores Group as well as promotional agreement with United Western Grocers that I have already mentioned.

Finally, I'd like to say a few words about our market opportunity in North America.

In addition to the names involved we are in later evaluation with several Tier 1 grocery chains.

The pipeline of customers evaluating Retalix as the next generation enterprise software solution remains very strong across the grocery, convenience, and fuel segments.

What is driving our growth?

We are in a growing marketplace.

We have significantly broadened our offerings to catch an even greater share of our customers' total software spend.

And we continue to expand into new geography regions.

But if you really want to know what is fueling our growth, it is simple.

We help our customers survive and thrive in a brutal competitive marketplace.

Not only is the retailer able to increase efficiencies of his supply chain, but he is actually in a different competitive game.

He can add new merchandise, become Retalix -- because Retalix system can handle everything from foods to hardware to gasoline.

He can add new formats because we can provide solutions for any format from the warehouse store to the small format convenience store.

He can handle a whole range of promotional activity, based on customer flow and buying pattern enabling him to hold on to and grow his share of the consumer spending.

He can expand into different geographies.

These advantages make the Retalix offering very compelling.

These are some of the reasons why I see only growth in Retalix marketplace.

The drivers for our business are so clear and so strong that they are providing the momentum for our business today and will do so in the future.

For 2005, I see continuing growth with revenue exceeding $115 million -- that's over 20 percent growth again -- and net profits of over $13 million.

I do want to remind you that, traditionally, our revenues are weighted towards the second half of the year and this will continue.

At this point, I am finishing an excellent year of 2005;

I would like to thank all of Retalix employees for their efforts in 2004 and of course I'd like to thank our customers and shareholders.

At this point I would like to pass the call to Danny Moshaioff, who will give us a small light on the financial results.

Thank you Barry.

Less revenues for the fourth quarter amounted to $35.9 million compared to $25.6 million in Q4 of 2 '03, an increase of 40 percent.

For the year revenues were 124.4 million, an increase of 35 percent over last year.

Gross margins for the quarter were 66.5 percent and 66.1 percent for the year, compared to 68.5 percent in 2003.

The decline is attributed to increased activity in our StoreNext operation with hardware content.

Of course that hardware content has a much lower margin than our (indiscernible) increase.

Operating profit for the fourth quarter amounted to 2.4 million compared to a profit of 3.2 million in the fourth quarter of 2 '03, and operating profit for 2004 was 7.4 million compared to 9.7 million last year.

Our operating profit and net profits of course were influenced by the increased R&D costs regarding the rewrite of the OMI product and integrating them into the Retalix system.

Those costs accumulated to about 7.6 million in 2004.

Net profits for the quarter were 2.1 million, compared to 3.6 million last year.

And net profits for the whole year were 6 million compared to a profit of 8.3 million last year.

Again, the decline is explained by the additional R&D expense.

Earnings per share for the quarter were 11 cents per share, 36 cents per share for the whole year fully diluted.

There were 17 million 936 (ph) fully diluted shares in the last quarter and 16,552,000 shares for the year.

These are average numbers for the respective periods, which were mainly influenced by the offering of 3.45 million shares in May of this year.

In May of 2004.

Net cash and marketable securities amounted to $98 million on December 31st compared to $45 million on December 31st of 2003.

The increase is mainly due again to that offering of about $59 million, about $10 million from exercise of options by employees, less the cash portion paid for acquisition of about $15 million.

Our cash flow position remains strong with positive operating cash flows of about $2.2 million for the quarter and $6.2 million for the year.

Our DSO as of the last quarter was 70 days.

Shareholders' equity amounted to $157 million out of $211 million, total balance sheet about 75 percent.

This concludes the financial review.

Now back to Barry.

Thank you, Danny.

At this stage, I would like to pass back to the operator for questions.

(OPERATOR INSTRUCTIONS) Joseph Wolf of UBS.

Two questions.

One is on the income statement.

The tax rate was a little bit lower than we expected.

So as you look forward to 2005, should we still the modeling using a 28 percent tax rate?

Or should we be adjusting that going forward?

Then for Barry, I think, I thought the forecasting tool was purchased by Redner's warehouse earlier in the quarter is an interesting strategic development.

And I'm wondering if you could spend a little bit more detail or time going into some of the opportunities that you see for products like that to gain traction and those can lead sales of your other products or whether that was an add-on sale for an existing product?

I would leave the 27, 28 percent for modeling purposes.

We had some breaks because we elected Rule 338 in our acquisition but still we are using in our budget 27 percent.

Around the demand Analytix this is definitely a product that we somewhat inherited from -- bearing my position actually it's a product that was developed in Israel by a group of people that have all joined Retalix.

We have strengthened a lot that team and we are putting a lot of R&D dollars enhancing their product.

The reason for that is, actually, this is where we capitalized on the fact that we have got three anchors at the retailers operation.

The warehouse, the store and the enterprise, the headquarters.

Having these three anchors we are sitting on the data in all of these areas.

Once you can take the data at the store level, looking at scanned information at historical sales, that what's happening now, what has been -- what is going to go on promotions all planned at the headquarters and what's in stock at the warehouse and what is the best optimum month order.

You can come with a new demand forecasting engine that, actually, we have seen fantastic results with it.

We have proven that, in some cases, we -- or in most cases we've reduced amounts of stock by over 10 percent that the store has to hold while decreasing the alpha stocks by over 50 percent and sometimes even 80 percent.

Which of course makes more availability of product to consumers, which generates higher satisfaction and higher revenue.

So this product is probably the hottest product in terms of low-hanging fruit of dollars that are being wasted out there by retailers; and they are trying to save money and increase revenues through this type of tool.

We have got tremendous amounts of interest in this product.

We are involved with a major Tier 1 retailer and in his words, he says, well, if everything you say works and we've done a simulation on historical data of what would have happened if we would have run this tool for the last year, we had brought savings of $400 and $500 million to this retailer.

So, definitely, we see a lot of interest in this product and I believe that 2005 and 2006 will be a great year for DAX.

Mark Verbeck of Citigroup.

Barry, I was wondering if you could comment on looking forward to '05 and compare it to what you thought Retalix's position was going into '04?

And compare it and contrast the progress that you think you have made?

2005, I see the biggest growth is in our international markets.

European and Far East retailers are very hungry for new technology.

There is kind of a rush for who can grow the fastest out there and they're not shy on spending.

That is one area.

Looking at North America, I've mentioned this many times before.

I think retailers are very worried about Wal-Mart and are looking for ways to compete with Wal-Mart.

That is driving them to look for solutions like Demand Analytix -- DAX that I mentioned.

A lot of tools around the store loyalty.

I see customer loyalty is becoming a big selling point in the coming years.

Something that was a bit low in the last few years is coming back again.

So all in all, I see it took the retailers in detail and its growing at the store but at the warehouse, at the enterprise.

It's every place has got a little contribution and a little growth which combined all in all is one big growth for another continuous growth for Retalix.

That's a good tie-in with the expanding revenue coming from international market.

Many times, there's more credit problems and revenue recognition issues with sometimes Asia Pac and Latin America.

What kind of steps are you taking to make sure that you can keep things in control there?

We are following the revenue recognition rules and, in some cases, we will just recognize revenue as we install the systems.

Right, but do you have any -- sometimes the Asian countries we've seen problems with side letters and that kind of things.

Or, there's just historically been more problems there.

Are you taking any more specific steps to verify that the revenue is as reported?

Yes; and don't forget we have been in those countries, are really tier 1 countries.

Their credit standings are excellent.

We checked them of course.

We were considering looking at insurance but the insurers told us, it is not necessary.

And we really do not -- the list of customers we have right now we don't -- we really don't have any issues.

Can you comment, specifically, in your 2005 outlook on what you expect R&D investment to be?

And give us an update in terms of the specific R&D investment in the OMI solutions?

It is not where we are blending it in but it will increase our standard R&D to, I guess, over 22 percent.

It's just a jump, a staged jump and this is the number we have used.

That's helpful.

Finally one last question for Barry.

Can you comment on Microsoft Win POS (ph) initiative and what your view is of how that impacts your marketplace?

The Win POS initiative shows that Microsoft is starting to understand the needs of retailers and is putting a lot of thought behind what they can provide to this marketplace. (indiscernible) is actually some of the things between embedded XP and the full XP, were far more user-friendly than XP.

From a financial point of view, it gives everything that XP gives.

But from a pricing and licensed point of view, it is far more aggressive which will make the decision of moving into new peer systems easier for retailers.

Does the standardization coming from WE (ph) POS changed anything in terms of how easy it is for you or competitors dynamics supporting additional platforms?

I think that the world will continue to have people that will want to go on the Microsoft platform and people who want to go on the Linux platform and Retalix as a company is committed to its customers, not to operating system, will provide applications on all platforms.

Thanks a lot.

Nice quarter.

Roni Biron with Oscar Gruss.

Congratulations on another good quarter.

Danny, can you provide us with a geographical breakdown for the quarter and the full year?

Yes.

In terms of percentages, 57 percent USA and 36 percent what we call international, and 7 percent Israel.

That is for the fourth quarter?

That's for the fourth quarter.

Barry, do you recognize any more proactive approach towards initiating organization projects?

And I know that for some, for a few years we thought change were a little bit more reluctant to initiate comprehensive projects?

Sorry, could you just summarize that question again?

The line was bad.

Whether or not you recognized any more proactive approach taking by large retail chains towards a (indiscernible) modernization project?

Absolutely.

The threat of Wal-Mart is putting a lot of pressures of CEOs on their CIOs and say, we need to compete with Wal-Mart and technology is one area.

So they are shortening the time that they are spending valuating if they should or shouldn't do it and they come into far quicker decision.

Finally, what specific countries do you see when you look at your pipeline, you think they stand out in terms of imminent opportunities in the coming year or two?

Roni, we talk in terms of continents.

I think we covered this.

Ron Kabeen (ph) with (indiscernible).

It seems that you have a superb technology over most of your competitors.

When you do lose a new project or vendor from one of your competitors what are the reasons for this to happen?

Another question, if you can talk a little bit about the Japanese market.

How significant do you think this would be in the next coming years?

The first question if I heard correctly was why do we sometimes lose to our competitors?

First of all, this issue of relationships, we don't cover all the territories with all the customers.

Secondly, the biggest loss that we have is no decision.

Meaning they are thinking about changing their (indiscernible) system and they decide to remain with the current solution which is of course bad for us.

It is a loss but I would hope it's a postponement.

In terms of the Japanese market, at least the way we understand it, once we will be successful with Drug 11 we believe that many Japanese chains will follow.

They are definitely looking at adopting technology from the U.S. and from Europe.

It is not so much because the technology in terms of the J2E and architecture but it's more because of the retail business processes that we've embedded into our software.

We actually teach them how, through our systems, how to change the way they do retail and they adopt Western retailing methods through our systems; and I believe that Japan is a country that tends if one thing works many of them take it in one go.

Devang Kothari of Unterberg, Towbin.

Couple of questions.

One around the longer-term operating model.

I wonder if you could give us some color on that?

Especially as we start looking at 2006 estimates.

What type of revenue growth do you anticipate beyond 2005 and, again, if you could comment on a longer-term operating model?

We don't give guidance beyond 2005.

The only thing we do say is there are enough opportunities out there to support similar growth rates.

We showed in the past.

But we cannot give a specific growth rate.

Danny, could you comment on the share count that you are assuming in your '05 guidance, the diluted share?

I would just assume about exercising about 100,000 per quarter right now.

If there will be any other events we will report them, of course.

Neil Amicham (ph) with Bank Copaline (ph).

Congratulations for a good quarter.

I was wondering what was the organic growth in 2004?

Do you have that number?

Yes, it was just over 20 percent.

Can you give us a breakdown on the (indiscernible) Enterprises, the profitability, expectations, forecast, something like that?

They enjoyed the same growth that Retalix, that our total internal growth and all we can say in terms of profitability that both in the black.

And what about the acquisition strategy for the future because I guess (indiscernible) if you have about $100 million in the bank, you are looking for something else, something of (MULTIPLE SPEAKERS) technology or marketing and leverage of (MULTIPLE SPEAKERS)?

Yes we announced, we talked about it in previous quarter.

I can repeat that.

That two kinds of acquisitions; we will do one of them is really technology that somebody else, a group of products that can enrich our offering to our customers.

So that is one thing.

Similar to the OMI acquisition so that is one kind of acquisition that we will be looking for and the other one is an acquisition similar to the Italian acquisition that we did.

If there is a new territory that we want to get in and we can find a local company that can give us local (indiscernible) and support and to allow our products through it, that's the second kind of acquisition and in both cases there are quite a few opportunities we are looking at.

(OPERATOR INSTRUCTIONS) Arnon Rubinstein of Shore Capital.

The remaining question is to do with North America.

Just can I assume -- did I hear that the sales cycles in the U.S. are longer than you expected because of some company postponing more than far longer than you thought?

The question was when we lose, what do we lose?

And of course you can't win everything.

The answer was, one of the reasons to lose is no decision.

On the other hand, there's a big drive to make decisions because of the pressure of Wal-Mart that they have to react.

Correct but the Tier 1 story has been basically -- has been expected to be strong for quite a while.

And I was wondering whether 2005, because you did not mention the U.S. as (inaudible).

Of course it is most of your sales out there; but you mentioned the growth is going to come from international.

Yes.

The U.S. market will continue its strong contribution to our revenue and it's a solid market.

I just see the international as being far more strong in terms of growth.

And of course the numbers in the U.S. are much bigger.

So it is harder to grow from these numbers.

You have to first of all follow the whole amount that you did last year and then grow.

Just a small question about store mix.

I consider following it through the minority, however, there were positives this quarter in growing and I was wondering, again, if it is a small technical issue but if there is any specific reason for that?

As I said we are going into the black in them.

At this time, there are no further questions.

Gentlemen, are there any closing remarks?

Well Barry, unless you have something, I think we would like to thank everybody for their participation today and look forward to offering you further reports as the year unfolds for Retalix.

Thank you very much.

Bye-bye.

Thank you.

This concludes today's conference.

You may now disconnect.