NCR Voyix Corp (VYX) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Retalix Ltd. first-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for this conference, Mr. Allan Jordan. Thank you. Mr. Jordan, you may begin.

Thank you. Welcome to Retalix's first-quarter 2006 earnings call. Leading the call is Retalix's Chairman and CEO, Barry Shaked. Joining him are Danny Moshaioff, the Company's Chief Financial Officer; Reuben Halevi, Executive Vice President of Product Development; and Victor Hamilton, President and CEO of Retalix USA.

Before I turn the call over to them, I would like to remind our listeners that management's remarks may contain forward-looking statements. These statements include comments regarding anticipated demand for Retalix's enterprise software products, expectations with regard 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 would like to refer you to a more detailed discussion of all of these risks and uncertainties 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 call at this time, we're going to make a recording available, and it will be available on Retalix's website at www.retalix.com in the Investor Relations section.

With those formalities out of the way, it is my pleasure to turn the call over to Barry Shaked.

Thank you, Allan. Good morning to our listeners in the U.S., good evening to those of you joining us in Israel, and welcome to you all. Retalix have a good first quarter of 2006. Our business is moving forward, building on the momentum achieved last year, and we continue to invest in our future. We continue to broaden the platform and enterprise software solutions that we can deliver to our customers and extend our position as technology leaders in the food retailing and distribution sectors.

Revenues grew more than 50% in this quarter. Our non-GAAP results were in line with our traditional results, with gross margins of 64%, operation margins of 9% and net income of 7%. In a moment, we will review our operations, but first I would like to ask Danny to provide the financial review of the first quarter.

Thank you, Barry. I would like to remind you that during 2006, we report our net income and earnings per share on both GAAP basis and on pro forma non-GAAP basis. That excludes the amortization of intangibles related to acquisitions and stock-based payment charges. This pro forma presentation of net income and earnings per share will enhance our understanding of our historical financial performance and will facilitate an analysis of our business and meaningful period-to-period comparisons.

Revenues for the first quarter were $50.7 million, an increase of 50% compared to a year ago. We just need to remember that last year first quarter, we didn't have IDS and TCI; we only acquired them on May 31 of last year.

Our non-GAAP gross margins for the quarter were 64.2%, compared to 67.6% in 2005. The decline, again, as I previously said, was the lower margins of IDS and TCI. Net income for the first quarter was $1.5 million on GAAP basis and $3.6 million on non-GAAP basis, which excludes equity-based compensation expenses of $660,000 and acquisition-related charges of $1.38 million. Earnings per fully diluted share for the first quarter were $0.08 on GAAP basis and $0.18 on non-GAAP basis.

The exceptional effective tax rate mentioned in our press release was partly caused by the devaluation of Israeli currency against foreign currencies during the first quarter. The result was an excess quarterly tax expense which caused the tax rate to reach 50% versus our regular 28 to 30% tax rate. However, in view of the devaluation of the U.S. dollar in Israel during the recent weeks, we do expect our tax expense rate to decrease so that our annual average tax rate will be closer to our traditional rate.

The results this quarter also reflect an increase in R&D expenses as we continue to invest in our product and strategy of synchronized solutions from warehouse to checkout. R&D expenses as a percent of sales were 27% this quarter. We are anticipating maintaining the investment in R&D going forward, but as a percent of sales, it will decline as our revenues increase during the course of 2006. Based on our revenue focus, we expect R&D will decline to a percent of sales around the level of 23% during 2006.

Our balance sheet remains very strong. At the end of the quarter, our net cash and marketable securities amounted to $65.4 million and we generated $1.9 million of operating cash flow for the quarter. Retalix has over $1 million of long-term debt and our DSO was about 70 days.

This completes the financial review. Now back to Barry.

Thank you, Danny. As part of our discussion today, we wanted to take the opportunity to give you some more insight into our strategy for the Retalix InSync, our supply chain and enterprise software suite, and why we are so excited by the opportunity it creates for us.

A few years ago, we recognized that our customers were looking for a broader solution that would enable them to synchronize their data and operations from point-of-sale to headquarters, warehouse and supply chain applications. We embarked on a strategy to fulfill this vision of synchronized retail and distribution.

One step was our acquisition of OMI, IDS and TCI, which expanded the breadth of our applications that Retalix offers. Our strategy also included rearchitecting the supply chain and warehouse management solutions that we acquired with OMI, creating a new platform, Retalix InSync, and enhancing it with the functionality found in the enterprise applications that we developed and acquired from IDS and TCI.

We launched Retalix InSync in September last year and have received a strong response from the market, even real adopters of the product. I have asked Reuben Halevi, our Executive Vice President of Product Development, to join us for this call and to provide you with more details on our enterprise software strategy.

Thank you, Barry. I assume that our listeners are not as interested in the technological aspects of the development of Retalix InSync, so I will try to focus on one simple question -- why are retailers and distributors so interested in Retalix InSync?

I would say that the answer lies in these main points. First, because we have the deepest understanding of the food industry in the enterprise software market. Retailers and distributors appreciate the experience and expertise that we have accumulated in over 20 years working with them.

Second, Retalix InSync was built for customization and facilitization. We realize that our customers are running their business in different ways and that we need to be able to tailor the behavior of the product to their needs. We [save] them in effort, cost and time. Therefore, we designed the product with dynamic data model, meta data layers of [gavins] application behavior, rules and workflows to allow more configuration with less [quoting].

Third, Retalix InSync is developed using state-of-the-art technology. For those of you who are familiar with the jargon, I will just mention that we're building Retalix InSync using service-oriented architecture, Web services and Java J2EE. We built Retalix InSync as a platform of services with applications on top to increase corporate use and for rapid development and testing.

CIOs also appreciate the fact that Retalix InSync is database-independent, which means that they can choose between IBM DB2, Oracle or Microsoft SQL. We also offer operating system and hardware interoperability, supporting UNIX, Windows, Linux, IBM iSeries and mainframe computers, thus removing barriers [point] limitations and leveraging our customers' existing IT investment.

This brings me to the fourth reason retailers and distributors are interested in Retalix InSync. They want a staged transition from legacy applications to modern solutions, and they appreciate our ability to collect to and synchronize with homegrown and third-party applications. Retalix InSync is multilayered, meaning that applications can be integrated over time. We do not require a big bend implementation, meaning that we reduce the risk to success.

We provide the unique and clear roadmap for migration from legacy systems, and customers tell us that this is the first migration strategy that they have seen that does not scare them.

Last but not least, ROI -- Retalix InSync can save money for our customers and can help them make more money. Customers today are placing increasing demands on their IT systems, seeking more complex capabilities. Since the internal IT department cannot keep up with this demand, CIOs are looking for off-the-shelf solutions, but the enterprise solutions that are available in this market lack the flexibility to incorporate the unique strategies of the individual customers.

In contrast, the flexibility of Retalix InSync enables our customers to quickly configure the solution to their needs, reducing internal IT costs for building applications. And there are yet two more ways that Retalix InSync can make them money -- advanced science and management by exception.

Using sophisticated algorithms and modeling, Retalix InSync does not only automate many processes, but also optimizes them and enables the user to utilize their resources better and increase productivity. We provide business intelligence solutions and key performance indicators, or KPIs, on top of our applications to ensure visibility and enable our customers to act on critical issues first.

We feel that we are on the right track with Retalix InSync. Just eight months has passed since we launched it, and our new platform has attracted a great deal of interest from both retailers and distributors. Some of the specific applications that have been installed, including master data management, or MDM, purchasing, order management and billing, and [on-demand] focusing in computer-assisted ordering solutions [baps].

A major U.S. grocery retailer is using Retalix InSync for country-of-origin labeling and bioterrorism compliance, while a U.S. crop distributor is piloting the system for connectivity to the global data synchronization network. Two Tier 2 retailers are installing different Retalix InSync solutions this year.

In addition, other retailers and distributors are evaluating Retalix InSync as their next-generation enterprise solution. I hope that this brief review has helped you understand the opportunities we see for this exciting new platform and solution portfolio. Thank you.

Thank you, Reuben. As you can see, it's real. Retalix is becoming a significant player in the enterprise software field. This is becoming evident to retailers, distributors and to the industry analysts who cover our industry.

AMR Research recently commented, and I quote, as early adopters mature into reference accounts, meaning they are adopting to Retalix InSync platforms, Retalix will be well-positioned to make the most of the shift of retail IT strategy and dollars from homegrown to packaged applications in the enterprise retail suite. We believe the combination of our long experience and deep domain knowledge with flexible technology and the unique capabilities incorporated into Retalix InSync make for a very compelling offering.

As more retailers learn about Retalix InSync, its flexibility and its ability to reduce internal IT budgets while speeding applications to market, I believe you will hear more about our success in this area, as much as you have been hearing about our successes in the store and point-of-sale software.

Now we would like to ask Vic Hamilton, CEO of Retalix USA, to review our activity in North America during the first quarter.

Thanks, Barry, and hello to all of our listeners. The first quarter has been very good for Retalix USA. We continued the implementation of Retalix InSync at our five early adopters. We launched a pilot self-service kiosk for bakery and deli at one of our largest grocery retailers in the U.S. Another major grocery retailer decided to start a Retalix StoreLine point-of-sale pilot in one of its regional divisions.

Our demand forecasting and computer-generated ordering solution, Retalix DemandAnalytX, has won two more customers -- one of them is a midsize grocery retailer and the other is a convenience store chain.

And in the distribution segment, we have inked a significant number of new contracts for the Retalix Power product line and the Retalix Supply Chain classic product.

The first quarter was also filled with operational achievements, including the successful implementation of the Retalix PowerSuite at Affiliated Foods Midwest and at Avalon; the rollout of Retalix StoreLine at Publix supermarkets, which links 200 stores; and a chain-wide upgrade of back-office and head-office solutions for one of our StorePoint customers.

We have a good pipeline of prospect customers that are evaluating our solutions and we're confident that we are on track to achieve our goals for 2006. Thank you.

Thanks, Vic. Finally, a few words about our international activity. During the first quarter, we completed the successful implementation project with a major grocery retailer in Europe. We also launched the first pilot store with Retalix StoreLine point-of-sale in Italy. We are moving forward with our rollout of Retalix StoreLine for the [Telhais] stores in Greece, which is a new territory for us.

In China, we installed our solutions in more than 100 health and beauty stores owned by AS Watson Group. Our global rollout with AS Watson also reached more than 180 additional stores in Holland, Belgium and Slovenia during the quarter. These projects demonstrate once again our superiority in addressing the needs of global, multinational, multilanguage retailers.

Also during the quarter, we won another project to install Retalix StoreLine in a medium-size grocery convenience store in Europe. Furthermore, one of our largest grocery chains in Europe agreed to roll out Retalix StoreLine in the general convenience store in addition to the supermarkets that already have been installed with that solution.

As you can sense, exciting things are happening in our markets. That concludes our business review for this third quarter.

Before I close, I would like to reconfirm our guidance for 2006. And I would like to thank all the Retalix employees for their efforts in the first quarter and to thank our customers and shareholders for their trust and support.

Now we would like to turn the call back to the operator, and we would be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Joseph Wolf, UBS.

Just a question on the progression of profitability during the year. Danny, you mentioned some of the -- how to consider R&D for the year after the first-quarter results. If I just take the middle of the guidance range, I get to a net income of about 10 to 11%. In the press release, you talked about 7 being the historical range.

I am wondering if we should think about the progress from 7 to 10 as linear or if there was something specific in the first quarter, and how we should think about modeling the rest of the year?

Yes, I referred to it in my presentation. We did have a problem with the tax issue, which influenced our net percentage, of course. And that will not occur. And as I said, our tax rate for the year should be somewhere between 28 and 30%.

And as Barry indicated in his last paragraph, we are reiterating our guidance. So you can go back and use the guidance figures.

Raghavan Sarathy, Ferris, Baker Watts.

A couple of questions. I've got a few questions for Danny. Danny, accounts receivable increased by about 8.4 million sequentially. And according to my calculation, DSO was 80, different from what you said. Why -- could you comment on the increase on the DSO?

Yes, we had -- in first quarter, traditionally we have a higher rate of annual maintenance charges, and that will level out as we go along. And you can also see an increase in prepaid revenues, too.

Yes, but that -- when I look at last year, it didn't increase that much. So I'm just trying to understand --

We didn't have IDS and TCI yet. So that portion in those companies is much higher. It will come back to the level as we go along during the year. And we do take in our formula of DSOs, we do take the prepaid revenue -- deferred revenue, I'm sorry.

On acquisition-related charges, will that reoccur rest of the year, or it's just really in the first quarter?

Which charges? I did not hear you.

The acquisition-related charges --

Yes, that will occur every quarter. So will the FAS 123.

Okay, so it will occur every quarter -- and then what about next year? It will continue?

Yes.

And then on the expense side, G&A expenses increased sequentially about $2 million, a lot higher than I had expected. Could you comment on that and what you expect?

G&A? No, maybe you're talking -- what -- we don't see an increase in that kind of interest in G&A.

Sequential -- what, it was 6.3 million.

You're talking about the third quarter of last year? [multiple speakers] quarter to this quarter.

This quarter -- wasn't it 6.3 million?

Yes.

I am looking at about, roughly 2 million increase.

From Q1 '05.

No, from Q1. But that is without IDS and TCI.

But going forward, what should we expect?

You should -- you know, the annual figure should be just a bit higher than the annual figure of '05, but not by much. But if you look at the numbers that we have by quarter, they are about an average of 6.3, $6.4 million.

Roni Biron, Oscar Gruss.

Regarding your R&D, it went up by 1.4 million sequentially. Could you elaborate a bit on where this incremental investment -- where it was allocated? And just to be clear, you mentioned that for the full year, it should be around 23% of revenues?

That is what I said. We may have shift within quarters because we use quite a bit of outsourcing in helping our R&D, and that may cause shifts between quarters. And that is why I gave the number, the estimated number for the year -- should be around 23%.

And in regard to the incremental investment, where it was allocated, to what product lines, or was it spread across the board?

Well, it also declines, and as I said, that's because the increase from special activity and outsourcing, and that may shift by $1 million between quarters.

So it is safe to assume that it will be a little bit lower in the coming quarters?

And don't forget that we will have higher revenues toward the end of the year. So we are talking percent-wise, it should be around 23%.

Just to add on that point, as we had early adopters, a higher amount of adopters than we anticipated, we accelerated the development.

Regarding your interest income, it was a little bit higher than usual. What was the reason, and is it sustainable?

Part of it, as I said, was of course our higher income tax. It was because of higher devaluation of the Israeli shekel vis a vis the dollars, and that comes from finance income. That will reverse itself in the next quarter. And that will cause our income tax to come down. So that is the exception that we had.

And finally regarding gross margins, do you expect this level to be sustained in the coming quarters, or--?

Yes, somewhere between 63 and 64%.

(OPERATOR INSTRUCTIONS). Brad Whitt, RBC Capital Markets.

Maybe, Barry, you can address this, or possibly Vic. Just curious as to when you looked at the architecture for the InSync product line whether you gave any consideration to an on-demand or softwares and service business model for a true multitenant architecture, and whether or not you're seeing any potential interest from your customers, or any demand -- any customers pulling in that direction in this particular vertical?

We definitely took those aspects of technology in line when we decided to develop our multitier product, not only that we took it into account, but if you understand our StoreNext business model, it is a complete on-demand central server format providing retailers and distributors and suppliers centralized applications. And InSync is running not only as a licensed software, but also a hosted software by StoreNext.

And Danny, it looks like someone had mentioned AR. It looked like that impacted your cash flow quite a bit this quarter. Do you expect cash flow to improve going forward throughout the year?

Yes, cash flow more or less coincides with our net profits. I am talking operation now, so those are the figures you should expect as far as cash flow is concerned.

And I am curious -- anything, any changes on the competitive front? I know it seems like Oracle is making a bigger push in retail, and both Oracle and SAP have made some acquisitions on the point-of-sale side, although they don't seem to have near the expertise that you have in some of your key markets like grocery and convenience. But any new changes on the competitive front?

No, I wouldn't say changes in comparison to last quarter, but we see more and more consolidation in this market kind of showing us as a stronger player in the vertical that we're focused on because the focus of the big guys is more on the general merchandise, apparel. And grocery, because of its complexity, they are kind of leaving for the next stage, allowing us to penetrate more and more with our InSync product and be a global enterprise player, as well as a sole solution player.

Raghavan Sarathy, Ferris, Baker Watts.

Could you guys give us some color on the U.S. point-of-sale upgrade -- do you see any change in the conditions?

Vic?

Yes, I truly believe that in 2006 and 2007, we are going to be a lot stronger. The marketplace is increasing right now. We've got a lot of activity with prospects. We have pilots that are initiated. Point-of-sale is going to be very strong within the next two years, plus there is a lot of research and analysts that are indicating this as well.

So can you the talk about -- is in the Tier 1 or the Tier 2?

I think you are going to see it in all sections, Tier 1, Tier 2, even some of the Tier 3 and Tier 4 players as well. I think that this is going to be -- we're definitely seeing a lot of interest now again in point-of-sale.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions at this time. Mr. Shaked, do you have any closing comments?

Thank you. The first quarter was a solid opening for 2006. We are pleased with our progress and look forward to speaking to you again next quarter.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.