NCR Voyix Corp (VYX) 2005 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the second quarter fiscal year 2005 results conference call.

(Operator Instructions)

Mr. Coulson, you may begin your conference.

Well thank you, Crystal.

Welcome everyone to Retalix second quarter 2005 earnings call.

Leading the call today is going to be Retalix Chairman and CEO, Barry Shaked and joining him on the call are the Company's Chief Financial Officer, Danny Moshaioff and also Retalix's -- Retalix USA's CEO, Victor Hamilton.

Barry is going to cover the highlights for the second quarter and discuss some of the important drivers in the enterprise software market for food and fuel retailing.

And after that, Vic is going to review the activity in the US in more detail and then Danny will discuss the financial results in more detail.

And at that point, we're going to open up the call to your questions.

But 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 some forward-looking statements and management may make additional forward-looking statements in response to your questions today.

Such statements include comments regarding the anticipated demand for Retalix's enterprise software products, the integration of the Company's recent acquisitions, successful implementation and rollout of existing licensing agreements, the success of the Company's product development and integration projects, the Company's competitive positioning, and in particular, management's expectations regarding the Company's future financial performance.

Such forward-looking statements are subject to risks and uncertainties and therefore, Retalix claims the protection of the Safe Harbor for forward-looking statements as 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 those risks and uncertainties that's contained in the Company's filings with the SEC and, in particular, their Annual Report on Form 20-F.

For those of you who are unable to listen to the entire call today, we're going to make a recording available, and you can access that at the "Investor Relations" section of the Retalix website.

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

Thank you, Crocker.

Good morning to our listeners in the US.

Good evening to those who are joining us from Israel.

And welcome to you all.

The first half of 2005 has been has been very successful for Retalix.

We continue to broaden the platform of enterprise software solutions that we can deliver to our customers and extended our position as the technology leader in the food and fuel retailing and distributing sectors.

The acquisitions of TCI and IDS in April have been tremendous additions to the range of solutions that we provide to our customers all over the world.

Integration of these acquisitions is proceeding rapidly.

And I am pleased to say that we have been able to balance the need to support the existing applications with development of long-term product roadmap that will take the concept of synchronized retail and synchronized distribution to the next phase of evolution.

The food and fuel retail and distribution industries have been looking for leadership.

We are convinced that we have the right strategy and the right mix of market-leading applications to fulfill that mission.

The success of our strategy is reflected in the strongest results that we have ever produced as a public company.

I am pleased to report that the revenues, net income, and earnings per share all came in significantly ahead of our internal plans and analyst consensus.

Second-quarter revenues were up by 77%, to $50.7 million.

Net income tripled to $4 million.

Earnings per diluted share grew to $0.20 from $0.06 just a year ago.

We generated over $4.2 million in operating cash flow during this quarter.

And our balance sheet remains very strong with $64.4 million in cash and shareholders' equity of $190 million as of June the 30th 2005.

Our second-quarter results provide an early indication of the synergies we expected from the joined forces between Retalix, IDS and TCI.

For those of you, who are now -- who are new to the Retalix story, I should make it clear that we have traditionally generated the majority of our growth through organic means.

However, in the past few years, Retalix recognized that our customers were looking for broader solutions that will enable them to integrate the critical data and operations from the point of sale to the sophisticated headquarters and supply chain applications.

Retalix HQ and Retalix Store, the market-leading merchandizing and inventory management systems that were developed by TCI Solutions strengthen our product offerings for the grocery chains and consolidate our leadership position in this market.

The acquisition of Integrated Distribution Solutions, IDS, extended our footprint to now cover the enterprise system used by many of their leading distributors servicing the grocery, convenience and foodservice segments in North America.

The Power Enterprise software suite, which was developed by IDS, provides its distributors with a single-synchronized solution for their enterprise resource planning, customer relationship management, wealth management, and business intelligence.

I am pleased to say that both these acquisitions have not only started to contribute to Retalix success but have also strengthened our human capital and management bench in North America.

During the second quarter, we announced the appointment of Vic Hamilton, formerly the CEO of IDS as CEO and President of Retalix USA; and Lance Jacob, former Chairman of TCI Solutions as Executive Vice President of Product and & Strategy for Retalix.

Vic, Lance and the rest of the US team have been working very hard to make sure that the merger of our companies is a success.

We've already seen great synergies between the sales, support, and development organizations and I believe that the results of the second quarter indicate that we are in the right direction.

Before Vic reviews the North American operations, I would like to say a few words on our growing international activity which accounted for 27% of our revenues in the second quarter and is probably our biggest growing sector organically currently.

Global retailers are looking for technology partners who can combine prudent solutions and industry specific expertise with the ability to support an integrated enterprise wide approach to IT investments.

I'm very pleased that Tesco which chose Retalix as the preferred IT partner in 1995 has recently began a worldwide upgrade of the store systems to Retalix StoreLine V8 with Front Office, Back Office and our Mobile PocketOffice applications.

This is the next phase of multi-year relationship and partnership that has been very successful for both parties.

We are committed to working closely with Tesco to develop software solutions that support the global -- supports the goals of standardizing across their global retailing organization.

With regards to the Intermarche Group, the French group, which is a tier-1 European retailer, we are now getting ready for installations in a number of pilot stores to be followed by rollout of our StoreLine solution to 3000 stores.

As we announced on our last call, we're working on a large project with another tier-1 customer in Europe.

This project involves challenging requirements from the customer, innovation solutions from our team, and all of this under a tight schedule.

I'm pleased and proud to say that we are doing very well on this project.

Our wins of a major international fuel retailer is in -- is progressing properly as we completed the preparation work for rollouts.

We view this as a very strategic account given the number of other global fuel retailers that are currently evaluating the next generation POS and install systems.

Like Tesco, all these are world-class retailers with strong global reach and provide us with the opportunity to build bridge, multi-year IT partnerships.

In Asia, we are in active negotiation to expand our customer base in China, Japan, and Hong Kong following our initial wins there in 2004.

Our reputation for technology leadership and our successes implementing our solutions in multilingual retail organization, including Asian languages, provide us with a strategic advantage over local and foreign software vendors.

During the second quarter, we formed a new alliance with Fujitsu Korea to provide sales and support to Korean retailers.

Together with Fujitsu Korea we have a great opportunity to capture a significant share of the grocery and convenient store market in this large retail economy.

In other regions, we are concentrating efforts in Australia with a local team of over 40 development and support people, as well as Spain, Portugal, Russia, and several Central and Eastern European countries.

These markets are very exciting in terms of opportunities for Retalix, and you can expect to hear more about our progress later during this year.

Now I'd like to ask Vic to review our activities in North America.

America during this quarter produced about 67% of our overall sales.

Vic?

Thanks Barry and hello to all of our listeners.

First of all it's an honor for me to be able to join you on this call for the first time as the CEO of Retalix USA.

The past few months have been very exciting and rewarding and it has proven to me what a great company Retalix is and how big the potential is for our combined product offerings and this industry expertise.

While we still see considerable interest in upgrading installed point of sale solutions at Tier 1 and Tier 2 chains, decision cycles have been pushed back towards 2006 in many instances.

North American retailers are looking for IT solutions that provide short-term return on investment.

This is caused mainly by the Wal-Mart effect, which pressurizes retailers to find quick ways to improve their operational performance and sustain margins in the face of the intense pricing pressure.

Fortunately Retalix is able to offer a variety of solutions that speak directly to these challenges, be it demand driven ordering, multidimensional pricing, inventory management, or warehouse management solutions.

During the second quarter, several grocery chains have chosen our HQ and Store products.

And two of the Tier 2 retailers have licensed our warehouse and supply chain management products.

Our DAX demand forecasting and computer generated ordering application is drawing much attention from the retailers and is being evaluated by many several grocery and convenience chains.

In June, DAX was selected by Kum & Go, a large US convenience store chain, which was very impressed by the significant improvements in stockouts and inventory management that was achieved by the DAX products.

In the distribution segment, we announced that IJ Company, one of the top 10 food service distributors in the US has selected our power enterprise software suite for company-wide implementation.

Our strong sales force has completed its reorganization following the merger of IDS and TCI into Retalix and our combined customer base is showing great interest in our synchronized retail vision and in our broad product offerings.

I also believe we will have more great news to announce the next time we talk.

Thank you, Barry.

Thanks Vic.

Following the acquisition of IDS and TCI, we are planning our first ever Retalix International customer conference on September the 18 through 21.

The conference will provide our extended family of customers with hands-on experience to our full set of offerings and a clear understanding of our road map for the future.

We also want to encourage our analysts and members of the trade media to attend the special Analyst and Media Day that is being held in conjunction with the conference on September 19th to 20th.

This is going to be a great opportunity to get better acquainted with our software solution, find out how our customers are using Retalix technology, and learn about our long-term products development and integration plans.

Regarding product development, I am pleased to say that our R&D efforts bore fruit in April with the release of our first version of our next generation enterprise and supply chain platform.

With this new platform in place, we are currently installing solutions that were developed on our new platform in two major customers in the US.

At the same time, we're moving forward with our efforts to complete the new purchasing solution as planned in October.

And our new warehouse management solution by the end of this year.

These new enterprise applications are creating tremendous customer interest due to their high return on investment and alignment with the retailers' state -- stated IT priorities.

With that I will turn it over to Danny to discuss our Q2 financials in more detail.

Thanks, Barry.

Net revenue for the second quarter amounted to $50.7 million compared to $28.7 million in Q2 of '04, an increase of 77%.

And for the first six months, $84.6 million, an increase of about 55% over first half of last year.

In the quarter, we consolidated our recent acquisitions of IDS and TCI for the first time.

TCI is also fully consolidated, though the merger has not been fully completed yet and is expected to be completed in the third quarter.

Gross margins for the second quarter were 64.9% compared to 67.3 last quarter and about 66 in the second quarter of last year.

As we previously discussed, our gross margins will be lower due to the higher service and maintenance revenue percentages in IDS and TCI.

Total operating expenses for the quarter were $27.3 million compared to 17.2 last year and for the six months, $46.9 million compared to 33.3 last year.

Therefore, operating profits for the quarter were $5.6 million compared to 1.7 in second quarter of 2004.

And 8.8 million for the six months compared to 2.7 million for the first half of last year.

These figures include one time expenses related -- the 2004 figures, we have to remember, include one time expenses related to the rewrite of the OMI product last year.

Net profits for the quarter were about $4 million compared to 1.3 last year.

And for the first six months, $6.4 million compared to a profit of 2.1 million in the first six months of 2004.

Earnings per share for the quarter was $0.20 per share and $0.33 per share for the first six months, fully diluted.

The weighted average number of shares for the quarter were 19,756,000 and 19,210,000 for the first six months.

Cash and marketable securities amounted to $64.4 million on June 30th compared to 111.9 on December 31st, the decrease due to the cash content of our recent acquisition in the amount of about $60 million.

Our cash flow position remains strong with positive operating cash flows of about $4.2 million for the quarter and $7.4 million for the first six months.

Our goodwill has increased because of the recent acquisitions to $100.7 million, and other intangible assets, which are amortized over time, to $28 million.

This quarter we have recorded an expense of $1.1 million as amortization of these assets.

Shareholders' equity amounted to $190.4 million out of $254 million total balance sheet, a 75% ratio.

This completes the financial review, and now back to Barry.

Thanks, Danny.

Today Retalix reported our strongest quarter ever as a public company.

Combined with the significant improvements in operating margins, these results confirm that our business model is successful and that we are recognizing the synergies of our recent acquisitions.

Based on the positive trends we are seeing, we feel very confident about reaching our stated financial goals for 2005 of over 185 million in revenues and 15 million in net income.

We see room for continued rapid growth in 2006 and beyond.

We expect some very sizable rollouts to begin in the second half of 2005.

Beyond this, we are very -- we have a very strong pipeline of tier 1 and tier 2 retailers that are currently evaluating Retalix as a next generation solutions.

I think that these retailers come to better understand the full scope of our end-to-end solutions, while each of our products is considered as a best of breed product.

Therefore, our competitive position is growing stronger and stronger.

With that, I'd like to open the call to questions.

Operator?

(Operator Instructions)

Your first question comes from the line of David Rudow with Piper Jaffray.

Next job in the quarter.

On the acquisition front, what did IDS and TCI contribute to revenues during the quarter?

We don't give numbers of subsidiaries.

I can tell you that their annual revenues right now run about between $45 million and $50 million.

For those companies combined?

Right.

Okay.

And then the impact on gross margin how far down should we assume they drive it?

Is it 100 basis points, 200 basis points?

I am sorry; again?

Yes, what's the impact on the gross margins?

Yes.

You said it's going to be lower?

Last year, since same period about 3 percentage points.

About 3%, so we ended up, what, at 58%.

So those should go down to 55% then for the next quarter?

No from 67% to about 64.

Okay.

Got it.

Okay.

And then any changes on the competitive environment during the quarter?

Danny.

Nothing specific.

Okay.

And then, what about numbers of subscribers on the StoreNext in the US?

We are continuing to be strong on that end of the market and we believe that by the end of 2005, we will be starting to bring in suppliers into the equation.

Okay.

Yes, because I think that your stated goal by yearend is 2000.

I think last year quarter, I think you had around 1100?

I think a bit higher than that, but that's about right.

Okay.

Great.

All right.

Thanks much.

Your next question comes from the line of Joseph Wolf with UBS.

Hello.

Hi.

Thanks just as a quick follow-up, and I know you don't like to talk about subsidiaries but as it's the first quarter of the contribution, should we have seen the -- I mean, you mentioned it going down three points from 67 to 64.

Should we have seen the entire impact in the second quarter, or is there little bit more to come in the third quarter?

And then as this is the first quarter that you've broken it up into the products sales and services, project sales, could you tell us what the -- how the underlying or the pre acquisition Retalix businesses grew in the second quarter?

You know, if you'll just use the guideline that I gave you in terms of the annual revenue and I would just divide that by four.

That will give you an indication.

But does that --it that split evenly between products and services?

I would say, yes.

Okay.

As far as percentage, this is not rocket science.

This quarter was 64.9 but I'd say as a guideline for a model 64% number would be a good number.

Okay.

And then I just want to follow up a little bit.

There was a mention, I think by Vic, about push-outs or slowing decisions.

And I just wanted to get a better framework on what types of projects exactly are you seeing companies slow down the decision making process and perhaps areas where they're not slowing down the decision making process?

This mainly was Store solutions and point-of-sale.

We see that there has been some slow up in decisions, which actually gives us more potential for 2006 and beyond.

Okay.

Thank you, guys.

Our next question comes from the line of Roni Biron with Oscar Gruss.

Hi, Barry and Danny.

Congratulations on the quarter and --

Thanks.

First question is your annual guidance leaves very limited room for growth in the second half of the year -- and you mentioned a few major rollouts, can you elaborate on that?

Roni, our review of the guidance again in the first quarter.

We didn't want to change it at this stage.

And in terms of synergies, during the second half do you see any additional synergies that you can realize?

Synergies resulted from the acquisition?

Yes.

Yes.

We will continue to realize them in the third and fourth quarter.

Okay.

And a final question.

Do you have a breakdown between your enterprise solutions and your in-store solutions roughly?

I'd say Store solutions are about 60%, and Headquarter solutions about 40%.

Okay.

Thank you.

You're welcome.

Your next question comes from the line of Mark Verbeck, Citigroup.

Thank you.

Congratulations on the quarter.

Thanks.

Guys, on the operating margin, could you help me understand a little bit better, I would have -- when I saw the topline numbers, I thought, maybe the license margins might have picked up a little bit more.

What's going on, on the cost side, there?

In terms of what, Mark?

Just the license margins contribution.

It's kind of stuck there at 70%.

Yes.

Don't forget that our, what we call, product revenue also includes some hardware there.

Okay.

So that really explains those margins.

Okay.

When you acquired those international subsidiaries or partners, where does the benefit of that show up?

In G&A and sales and marketing, mainly.

Okay.

All right.

The one line you mentioned there, I guess, R&D -- can you tell me -- I assume a lot of the increase there is due to the acquisition.

Is this a steady run rate here that we're at?

No.

I think that will be (inaudible) as you know, we have to do some alignments in the next few quarters.

And as we've said, we will come down to about somewhere between 21, 22%.

Okay.

On the Store solutions, IBM earlier said that they had seen people pushing out purchases of the In-Store solutions.

I'm wondering do you think that there's something specifically going on in the industry?

Is there anything that you can point to that as what might be causing people to delay some?

Yes.

This is Barry.

What we've seen seeing is that retailers are reacting to the Wal-Mart -- to Wal-Mart, and they are looking for quick wins in terms of reduction of cost and increasing revenue and currently their higher profile products like our DAX product and our merchandising products that are giving the retailers higher return.

And they are delaying the execution side (ph) on point-of-sale to 2006.

Do those products have the same rollout profile as the point of sale does, where it is very staggered and more -- it almost looks like an annuity as they go through geographies or what have you?

These are all fast products to rollout.

You don't have to many times upgrade 20,000, 30,000, 50,000 point-of-sales terminals in terms of hardware.

The total cost is much, much lower, whereas the hardware -- sorry -- the point of sale includes hardware where 80% is hardware could be $200 million and up.

Our share of that may be 20% or 10%.

Okay.

That's all.

Thanks a lot.

Your next question comes from Eran Yaakobi with Klal Finance.

(Inaudible) As a result --

We can't hear you.

Can you raise your voice?

Yes, I'll try.

First of all, congrats for the good result.

Can you give us some update regarding the Japanese and Chinese market?

Can you talk about that a little bit?

And secondly, Danny, what are your operating margin targets for the long run, if you give us some guidance?

Thanks.

Regarding the Chinese market, we've successfully rolled out one chain, which is called Lotus, and we're in negotiations with other chains out today (ph).

Not only that Lotus can grow in China, but it's a good reference for other customers that modern solution is running out today (ph).

In Japan, we've signed our first contract with -- as we released in the past with Drug Eleven.

And in the pipeline we've got some more coming up.

Both of these markets are looking for new technology, something different to what they've been doing in the past.

Definitely China is an up and coming economy, while Japan is an economy that is looking for new solutions.

Regarding your second question, we really didn't give any guidance for operating margins.

I can only tell you that because of the fixed costs element within our cost structure, those margins will increase.

Also our headquarters and supply chain management solutions are usually sold to our current customers.

And that enables us to perform the sale without really increasing that much our sales and marketing effort.

So both G&A and sales and marketing will increase much less than revenue increases, and that will increase our margins.

Thanks.

Your next question comes from the line Devang Kothari with CEUT.

Good quarter, gentlemen.

Thanks.

On the services revenue, you had increase sequentially.

I think most of that must have been driven by the acquisitions.

Do you have the run rate that you would kind of anticipate going forward?

In terms of services and (ph) from total revenue, yes.

From services and projects revenue, right?

Yes.

And the mix between license and services and projects is what you would see going forward as well?

And that's the mix that's implied in your guidance?

Yes.

We do think that growth rate of those acquisitions will be in line with the Retalix growth rate.

Okay.

And on the operating expenses, everything is up sequentially again due to the acquisitions.

Anything extraordinary this quarter or is this the run rate that you would expect going forward, barring some cost synergies that you may have from the acquisition?

No, we're still carrying some costs that will be reduced due to the synergies of the acquisition.

It will take us, as I said, another two quarters to straighten those out.

Okay.

All of my other questions have been asked.

Thank you.

Okay.

Your next question comes from the line of Raghavan Sarathy with Ferris Baker Watts.

Congratulations.

Danny, you said there's 1.1 million amortization expenses included in the operating expenses in the quarter.

Is that correct?

Yes.

Okay.

That is amortization of other (ph) assets.

Right.

I'm sorry.

What?

That's for amortization of other (ph) assets.

Okay.

Yes.

And so, going forward, we should expect that expense (inaudible) one time?

No.

No, you should expect it for the next three or four years.

Okay.

All right.

On the R&D expenses, it increased sequentially by 3.5 million, and that seemed like -- it's high even after you include the quarterly run rate of TCI and IDS R&D expenses combined, which I believe is about 1.6 million, looking at the last year's run rates.

Could you give us some color on why there was a sharp increase in R&D expenses?

Are you still -- you've guided over 22% for this year.

Do you still think it's doable?

Yes.

We think we will reach it somewhere in the fourth quarter.

So all in all, we may be a bit higher for the year, but that is our target.

Okay.

All right.

Thanks.

Okay.

(Operator Instructions)

At this time, there are no further questions.

Thank you very much.

We'd like to thank everyone for joining us on the call today and look forward to coming back to you with further good news later during the year 2005.

Thank you.

Thank you.

This concludes today's second-quarter fiscal year 2005 results.

You may now disconnect.