NCR Voyix Corp (VYX) 2005 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Retalix Third quarter 2005 Earnings Conference Call.

[Operator Instructions].

Ms. Barnes (ph), you may begin the conference.

Thank you, Nikki.

Welcome everyone to the Retalix Third Quarter 2005 Earnings Conference Call.

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

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

After that, Victor will review the activity in the US, Danny will discuss the financial results in more detail, and then we will open the call up to your questions.

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 make additional forward-looking statements in response to your questions.

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

Such forward-looking statements are subject to risks and uncertainties.

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 would like to refer you back to a more detailed discussion of those risks and uncertainties that is contained in the Company's filings with the SEC and in particular, on Form 20-F.

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

With those formalities out of the way, I would like to now hand the call over to Retalix's CEO, Barry Shaked.

Thank you, Eileen.

Good morning to our listeners in the US, good evening to those of you joining us from Israel, and welcome to all of you.

During the third quarter of 2005, Retalix continued to experience very strong demand for our software applications for retailers and distributors in the food, fuel, c-stores and food operator industries.

I am pleased to report that net income and earnings per share exceeded the analyst consensus estimates.

Third quarter revenues were up by 55% to a record of $52.5 million, net income grew by 163% to $4.7 million, earnings per diluted share grew to $0.24 from $0.10 a year ago.

We generated $10.2 million in operating cash flow during the first nine months of 2005, and our balance sheet remains very strong with $65.2 million in cash and shareholders' equity of $200 million as of September the 30th, 2005.

Our third quarter results provided a future indication of the synergies we expect from acquisitions of IDS and TCI.

We are positioned as a leading enterprise software company, providing a proven end-to-end solution that addresses the needs of food retailers and distributors from the point of sale all the way to the warehouse and to the distributor.

Our unique position in the industry was underscored at our recent first International Customer Conference in Dallas here in September.

This event was attended by hundreds of customers and business partners from 22 countries.

As many of you know, we used this occasion to launch our integrated next-generation enterprise and supply chain platform, Retalix InSync.

This web-based platform will eventually include all of our enterprise applications using a common data architecture, and a full integration with existing Retalix applications.

The vision that we presented at the conference was extremely well received.

I would like to share with you some of the takeaways that we heard from our customers at the conference.

First, as retailers and distributors think about investing in next-generation technology, they're looking for fully integrated enterprise and supply chain applications.

CIO's confirmed that they're less interested in single point solutions.

They realize that their internal development is not an option, and one stage transition from legacy and homegrown applications.

These CIOs are focused on the total cost of ownership.

They are concerned about financial health and visibility of their software partners, and they want to see solutions that incorporate deep domain expertise.

For these reasons, we found customers were very well supportive and interested in the Retalix InSync value proposition.

Second, IT investment is being driven by increasing detailed ROI calculations.

Therefore, we are seeing tremendous interest in applications such as our demand-driven replenishment solution, DAX and our advanced low fee applications.

The fact that we are able to demonstrate meaningful improvement in metrics, like our out of stock, spoilage and inventory [turns] make these applications very strategic.

Third, following the acquisitions of OMI and IDS and TCI, the breadth and maturity of our applications that Retalix is now able to offer is unmatched in the food retail markets, if not in the entire industry.

The customers who joined us following these acquisitions came to understand that the full extent of what we can provide them and they are now seeing us as strategic partners.

Finally, we continue to hear that major POS upgrades in the grocery segment cannot be delayed forever.

As most of you know, we have seen very strong demand for in-store solutions in Europe and Asia in the last 12 months.

While decisions in North America for new POS software have been delayed due to a huge investment in self checkout hardware, many of the existing solutions are clearly reaching end of life and Retalix is very strongly positioned to participate in this business, when these decisions are made.

My belief is that we will see this starting at the beginning of 2006.

During the conference, we made very clear to our customers that while we are dedicating great efforts to our next generation platform, we will continue to enhance and support our existing products.

We believe in evolution, rather than revolution.

We have designed the next Retalix InSync platform to integrate with our classic applications and deliver incremental advantages.

This message was very well received across our customer base.

Now I'd like to ask Vic to review our activities in North America during the quarter, which accounted for 59% of our overall sales during the third quarter.

Thanks Barry, and hello to all of our listeners.

The third quarter has been very good for Retalix USA.

During the quarter, we completed the organization of our US teams, following the acquisitions of IDS and TCI in April.

We now have consolidated sales, marketing, and professional services teams, which are equipped with the best of breed products and deep domain expertise.

Adding to Barry's comments about Retalix InSync, I am pleased to say that two customers have already signed up for our next-generation application suite, and will be the early adopters of our newest supply chain applications.

Both these customers are US retailers, operating more than 200 stores each.

One of them, a mid-sized grocery retailer, will deploy our new purchasing, warehouse management, order management and billing, reconciliation, and yard management applications, all part of the Retalix InSync platform.

The other one, a large discount retailer, will deploy the Retalix InSync master data management, purchasing, DAX, HQ, and the Retalix analyzer applications.

In addition, modules that are part of the Retalix InSync platform are already functional in two beta installations.

Retalix InSync offers cool and bio-compliance to a major US grocery retailer.

And another pilot based on the Retalix InSync platform offers connectivity to UCCnet to a US co-op distributor.

I believe these early implementations of Retalix InSync are an indication of good things to come, as we launch additional Retalix InSync modules in the coming quarters.

In the fuel and convenience segment, we have won a deal to provide our Retalix fuel solution to an operator of over 800 fuel sites at one of the nation's premier discount chains.

This is a fast growing fuel retailer, which plans to add hundreds of high volume sites in the next few years.

During the quarter, Pilot Travel Centers went live with our web-based store audit and analysis and reporting applications, supporting over 530 locations.

Our web-based platform is now the centralized data warehouse for all data uploaded from the Retalix StorePoint POS, and then fed to Pilot's other third-party corporate applications.

Our demand-driven replenishment solution is drawing much attention from the retailers, as well as distributors.

One of our existing Power Enterprise customers, a self-distributing convenience store operator, has selected the Retalix DemandAnalytX or DAX applications for a companywide implementation.

This is another derivative of the acquisition of IDS by Retalix.

We are very excited with the opportunity to provide an integrated end-to-end solution combining the customer's existing Power Enterprise suite with DAX.

In the distribution segment, we announced that Affiliated Foods Southwest and Berner Food Service have selected the Retalix Power Enterprise suite to streamline and standardize their distribution operations.

And we had a number of additional new wins or upgrades among distributors in the convenience and foodservice markets as well.

Our pipeline of customers remains very strong across our market segments, and we feel very confident about the coming months and year.

I expect to bring you more good news the next time we report.

Thank you.

Thanks, Vic.

On the international front, Retalix continues expansion in Europe, Asia and Australia, all of which offers excellent prospects for growth and market share expansion.

International activity accounted for 33% of our revenues in the third quarter.

In Europe we have gone live with Pilot at three major retailers.

These customers include both in-store and enterprise level solutions.

The top convenience store operates in Finland's Rautakirja began rolling out Retalix StorePoint and Head Office solutions to support their R-Kioski stores.

In the fuel segment a multi-country rollout for a major global petroleum chain is progressing very well, and we have made good progress with an Eastern European fuel chain looking to conclude agreements in the first quarter.

In India, Retalix solutions have already been installed in almost 500 convenience and fuel sites for one of the largest chains in this continent, and the rollout is in progress at a pace of 20 stations per week.

We offer support through a local employee in our recently established office in Mumbai, India.

In Australia, we are running Pilots in another tier-1 supermarket chain and a general merchandise chain.

These projects are supported through a local team of development and support people, based in our new Software Competence Center in Sydney, Australia.

During the third quarter, we announced that AS Watson Retail Group is expanding the deployment of Retalix StoreLine to 1500 stores across Asia.

This expansion marks another step in our growing presence in Asia.

In Japan, we are -- have won a second major retailer which operates nearly 1,000 grocery stores, and we expect to finalize the contract early next year.

In summary, the international market continues to offer tremendous growth potential for Retalix.

Our ability to quickly adopt to multiple geographies and regions, our scale and maturity of our solutions, all position Retalix to make full advantage of the consolidation, growth and globalization of retailing.

With that, I will turn it over to Danny to discuss our Q3 financials in more details.

Thanks, Barry.

Net revenues for the third quarter amounted to $52.5 million, compared to $33.9 million in Q3 of 2004, an increase of 55%.

For the nine months, revenues were $137.1 million, an increase of 55% over the same period in 2004.

Gross margins were 65.7%, as planned, compared to 66.1% in 2004.

Operating expenses for the quarter were $27.8 million, compared to $20.1 million last year.

Operating expense as percentages of sales is decreasing as revenues increased, because of the fixed cost element within our operating costs, and the integration of IDS and TCI.

Sales and marketing expenses and G&A expenses continued to decline as a percentage of sales, while R&D expenses will be at the level of about 22%, 23% while we complete our new platform offering.

Operating profits for the third quarter amounted to $6.7 million, compared to a profit of $2.3 million in the third quarter of '04.

Operating profits for the nine months were [$15.5] million, compared to $5 million last year.

Net profits for the quarter were $4.7 million, compared to 1.8 million last year, and $4 million in the last quarter.

Net profits for the nine months were $11.1 million, compared to a profit of 3.9 in the same period last year.

Earnings per share for the quarter were $0.24 per share fully diluted.

Excluding the cost of amortization of intangible assets, which started last quarter as a result of the TCI and IDS acquisitions, the non-GAAP earnings per share was $0.29 per share fully diluted.

Number of shares for the quarter were 19,893,000.

Cash and cash equivalents were 68.8 on September 30th, compared to 111.9 on December 31st, a decrease due to the cash portion of the consideration of the recent acquisitions.

Operating cash flow was about $2.8 million for the quarter and $10.2 million for the nine months.

Our DSO for September 30th was 68 days, an increase due to some Tier-1 deals with longer payment terms.

Shareholders equity amounted to $200 million, out of $262 million total balance sheet.

That completes the financial review.

Now back to Barry.

Thank you, Danny.

Today Retalix reported our strongest quarter ever.

Combined with a significant improvement in operating margins, these results confirm that our business model is successful and that we are recognizing the synergies of our recent acquisitions, both on the revenue side and the cost side.

In light of these results, we felt confident in raising our guidance for total revenue for fiscal year 2005 to exceed $190 million, and annual net income to exceed $15.5 million.

We see room for continuing growth in 2006 and beyond.

Our vision of synchronized retail and distribution has reached a new level of maturity with the launch of our Retalix InSync platform.

Our customers have fully embraced this vision, and we have already had initial wins for the Retalix InSync platform.

We plan to continue making considerable investment in R&D to support this vision, but have now reached a scale in our business where we can support this investment while achieving improvements in our operating margin.

In summary, our position today is stronger than at any time in our company history.

We have the right vision for our customers, we have a comprehensive suite of applications, we are ahead of the curve in our technology approach, and we have the domain expertise, management strength, financial results required to execute this vision successfully.

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

Back to you, Nikki.

[Operator Instructions].

Your first question comes from Joseph Wolf of UBS.

Thank you.

Good afternoon.

Couple of questions for Danny.

You mentioned operating expenses -- I want to jump to the gross margin line.

I know the guidance after the acquisitions was for about 3 percentage (inaudible-background noise) margins.

It looks like that has recovered to about 1% off last year's number.

So, I'm wondering if there is room for more gross margin improvement or, you've squeezed out all you can get for the short term?

And then also, what kind of tax rate should we be looking at going forward?

Yes, in terms of gross margin, it can vary by a percent or two from quarter-to-quarter, but we can still find ourselves with 1% or 2% lower than the average of last year.

So that -- to answer your question, I would stick to our guidance from before.

As far as taxes, somewhere between 28% and 30%, let's say 29% is a good number to use.

Just a quick follow up, you mentioned that the -- operating expenses have some room for scale.

Should we be thinking about them in absolute dollar terms right now or as a percentage of sales?

No.

Still as a percentage.

As sales grow, we still will have to increase our sales and marketing and some of the G&A, but they won't grow as fast as sales growth.

Your next question comes from the line Devang Kothari of CE Unterberg Towbin.

If you're on a speakerphone, could you please pick up the handset?

Oh, I'm sorry.

I was on mute.

Good morning, gentlemen.

Nice quarter.

Barry, my first question is around the POS upgrade cycle.

It's something that you've spoken about as a catalyst.

I don't recall you setting a timeframe on it before.

I think you said early 2006 is when you would expect -- you should expect that to initiate.

Just wondering what you were seeing out there in the marketplace that gives you the confidence to put a timeframe on the POS upgrade cycle?

Yes.

If you have been following all the analyst reports, everyone has been talking about the upgrade cycle that should have started in 2004 and then they were talking about 2005.

I'm talking about the US, not international.

And the facts are that there hasn't been a big upgrade cycle.

What I mentioned on the call is, that what we've seen is lot of the budget for the in-store solutions have moved to self check out, where it's a quite expensive element, mainly because Wal-Mart came out with the self check out devices, and most of the budget was spent on that element.

We see after a huge investment in the industry in self check out, that they got no option and in 2006, we believe, and other analysts, industry analysts, believe that the cycle will start again, in the US, I'm talking about Tier-1 and Tier-2.

Also from our history, we've seen that big cycles in the US start after the cycle in Europe.

That is true for the beginning of the '90s, and I believe it will happen also now in the US.

Okay.

My second question surrounded deferred revenues.

It seems like they were down sequentially.

Is that just seasonality or is there anything else going on there?

No.

Just seasonality.

Okay.

And as we start looking at kind of longer-term 2006, and maybe and beyond, could you give us a feel for what kind of operating margin improvements you can achieve?

And clearly you had good improvement this quarter.

How should we look at that kind of on a longer-term basis?

We are not giving a guidance, but as I said before to Joe, I think we can expect that as we grow in revenue you can apply a smaller percent growth to certainly to G&A, and to some extent to sales and marketing, too.

So, you will have to do some modeling about that.

And we do think in the next few quarters, you will see the same trend you saw in the last three quarters.

Okay.

Great.

Good quarter.

Thanks guys.

Thank you.

Thanks.

Your next question comes from Raghavan Sarathy of Ferris, Baker Watts.

Good morning.

A couple of questions.

You indicated that you won two deals at mid-sized North American grocers for InSync product suite.

I was wondering if these two customers are existing customers, meaning either POS customers or OMI customers or new customers.

And also given your presence in Tier-1 grocers with (ph) that expected initial uptake, probably among Tier-1 grocers, I was wondering how we should think about it, and the nature of the pipelines are InSync platform?

Regarding the first question, one of them was an existing customer and one of them was a new customer.

So, we felt pretty happy on both occasions.

Can you just repeat the language there about the second question?

Yes.

Given historically, you had very strong presence among Tier-1 grocers for your point of sale applications.

Given the nature the InSync platform more of enterprise I would've expected initial uptake from larger Tier-1 grocers.

It seems like you're having some success with the mid-size.

And I was wondering what's the dynamics here and what's the nature of the pipeline for those platforms?

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

Just one moment.

Operator, we're still on the previous question.

Rag, if you mean that, the new platform is more suitable to Tier-2 customers, we do find a lot of interest on Tier-1 customers, on certain aspects and certain parts of the new platform, too.

So, it will fit both kinds of customers.

Fine.

I was just wondering what the driving that the demand from Tier-2 versus Tier-1?

The one we have now is -- we also have a Tier-1 customers there.

And if I could ask a follow-up.

You talk about three major vendors French retailers, and you indicated that you were moving ahead with these projects.

I presume you already started to recognize revenue from these projects.

My question is, is the majority of the revenue from these projects still ahead of us or behind us, meaning 2005?

The majority of revenue is planned in the next year.

Thanks.

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

Hi, Barry and Danny.

Congratulations on the good quarter.

A couple of questions.

First, In regard to your wins in Europe and France, have you begun to recognize revenues from these projects, and if not, when do you see these revenues kicking in?

Yes.

We just answered that.

We recognize relatively low numbers of revenues up until now.

We expect higher revenues in 2006 and 2007.

Sorry, I didn't get your answer.

And the other question regarding -- if you can comment on the competitive landscape that you're seeing in the enterprise and supply chain market, now that you launched the InSync platform, who are the main competitors, and what are their competitive factors meanwhile?

Just going back to your previous question, the majority of revenues from the French market are still to come in 2006 and 2007.

And regarding the landscape and the competitive landscape in the enterprise, the biggest competition is the internal development and the movement away from legacy systems, and of course, we're seeing SAP, Oracle, JDA in the enterprise people.

In what way do you differentiate yourself from these incumbents?

We are the only company that has got a full end-to-end solution from the point of sale to the warehouse, where if we look at Oracle Retail which used to be Retex, they've just got elements of the merchandising side, and maybe a bit in the warehouse, nothing proven in the US.

And JDA has got some elements of retailing, but no one is a full end-to-end solution.

We know that point of sale is a key element in the grocery retail chain.

That is the only place that a -- the customer actually has got an interaction with the chain.

And all the retail's know-how has to be transmitted to that one and a half minutes that the customer is standing in front of the checkout lane.

If it is through the supply chain, if it is through loyalty, promotions, and the end-to-end is very important and that's our advantage over our competitors.

Okay.

And finally, regarding StoreNext USA, if you can update us to the number of bank subscribers and current run rate?

Yes.

We still believe we'll reach about 2000 stores by the end of the year or beginning of next year, and we are on plan with that.

Okay.

Thank you.

Your next question comes from Mark Verbeck of Citigroup.

Thank you.

First, can you guys comment -- the services cost contributed to margin was a little bit less than I was expecting.

Is that seasonality or are you projecting that you're working more with partners for the services component?

That is seasonality.

We still think we'll maintain a 55, 45%.

Okay.

Barry can you comment on, kind of, watching the competitive landscape, we've seen IBM and NCR had real difficult years on the retail side of the business.

Can you comment on what you're seeing competitively there?

Yes.

I think IBM and NCR, who have been focusing on their store solution, for them, just providing a store solution leaves them out of the game.

As I mentioned before, most of the investment was on the enterprise side and some in self checkout.

So, people are looking more for end-to-end solutions, if we are looking the whole software game that we have.

And they're losing market share and we are gaining, it's simple.

Okay.

So the investment in these new areas are what's really branching (ph) you from those guys then.

Is that what I'm hearing?

Absolutely.

The investments on the enterprise gives us streams (ph) at the store.

Okay.

And one more thing, and just help me understand the POS cycle and how the self-checkout -- is that because self-checkout was taking dollars away from that or is it going to spur it?

Yes, it's because they're taking dollars away.

So, it's just a matter of deferring or when they're going to put in a new POS system.

Fortunately, for the legacy systems, they all interfaced to self-checkout.

Okay.

Thanks for the help.

We do have one follow-up question from Raghavan Sarathy of Ferris, Baker Watts.

Thanks.

Just my back of the envelope calculation shows that the enterprise -- Power Enterprise software suite from IDS is probably tracking double-digit growth this year.

I was wondering if you could comment on what the driving growth was at in the IT 9ph) products, and whether this level of growth is sustainable, if you look ahead?

And then, I had a couple of follow-ups.

Vic?

We've got very strong exposure out here.

There is a lot of people in the pipeline, the enterprise applications are doing extremely well.

And I mean this -- it's very -- it's somewhat simple as well, doing very well in that segment.

Are you selling additional modules to existing customers or, the new customers?

Can you give some --?

Yes, we are doing upgrades.

We are doing new installations.

We're also cross-selling now with the combination of the acquisitions.

We are able to cross-sell a lot applications to our existing customers.

And of course, we've got a lot of new customers that have been buying applications, as well.

And is this -- should they except a similar level of growth next year?

Absolutely.

Okay.

And just a follow-up on the point of sale upgrades.

Barry, you mentioned that you expect activities to pick up in early 2006, and you gave couple of reasons.

I was wondering do you see this in your pipeline now or -- what gives you the confidence beyond some of the qualitative things you've said?

First of all, I said 2006 and not early 2006.

What we've seen is RFPs and RFIs.

And we know the cycle it takes between 6 months to 12 months, before they make a decision.

And you are seeing increased RFPs now?

Yes.

If I may ask another follow-up here on sort of -- what was the reason for the higher tax rate, 30%?

Again, on a quarterly figure, it's just an adjusted quarterly figure, and you will have to look for another January 1.

We still believe that the 29% is a good number.

Okay.

And are you starting to generate profits from the third StoreNext USA operation?

Yes, it's not -- it's a breakeven more or less.

Okay.

So what would explain the change in the minority interest?

Now I see gains in the minority interest.

Is that because of StoreNext or --?

Yes, mainly StoreNext in Israel and US, but these are still small numbers.

Okay.

All right.

Thanks.

[Operator Instructions].

Okay, thank you very much for joining the Q3 Retalix call.

See you next call.

Thank you.

This concludes today's conference.

You may now disconnect.