NCR Voyix Corp (VYX) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the Retalix second quarter conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Allan Jordan. Thank you Mr. Jordan, you may begin.

Thank you. Welcome to Retalix second quarter 2006 earnings call. Leading the call is Retalix Chairman and CEO, Barry Shaked; joining him are Danny Moshaioff, the Company's Chief Financial Officer; 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 my 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'd 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's 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 all of you. While our business is strong, the results of the second quarter were disappointing for Retalix. We experienced delays in execution of several projects which resulted in our inability to recognize all the revenues that we expected to recognize during this quarter. The delays are not specific to a single geography, territory or to a single product.

After track records of six years of continuous profitability, we take our performance in the second quarter very seriously. We recognize our obligation to deliver results, not only to our customers but to our shareholders. It is important to note that during this period, our customers continue to support all of the projects and remain committed to work with us. Following the many contract wins and the acquisitions that we reported in the last two years, Retalix today is handling a record number of 167 active customer projects, more than ever before in the history. While this is basically a very good thing for the Company, it is also -- it also creates a lot of hard work for us and demands a lot of resources. The nature of the projects is often more complex, requiring more steps and time to achieve the milestones established in the customer contracts and sometimes contracts by the companies we acquired.

We are well aware of our challenges and we are taking action to address our procedures and structure in order to ensure that we continue to meet the needs of our customers while quickly returning to profitability. One key step is to adjust our human resources to handle the increased number of projects. In the first and second quarters, our global head count grew by 73 people and we have also adjusted the mix of employees to meet our current and future needs. At the end of the second quarter, our staff includes a total of 1,415 people worldwide. Since the beginning of the third quarter, we have hired more people and we are currently looking to hire for approximately 100 positions primary in development, professional services, and project management. Since it is difficult to hire experienced employees in Israel and in the U.S., especially while seeking to maintain cost and control wages, we have accelerated our use of outsourcing both in Israel and in India. All of these people are included in the annual budget plan and in the estimates we have given for this year.

These additions and change of mix of human resources will help us overcome the difficulties and the deliverables that we have to perform in the coming quarters. We are working hard on completing the job on the delayed projects and we know that the burden of proof is on us. Most important, our business remains strong as we continue to sell, continue so sign new contracts, and continue to negotiate with new prospects. The second half of 2006 will be strong, stronger than the past two quarters and more heavily tilted toward the fourth quarter. We still feel that we can meet the goals that we have set forth for the full-year of 2006. We continue to target revenues of more than $215 million, with non-GAAP net income of more than $21.7 million for 2006. In a moment, I will elaborate on our progress in our markets, but first I would ask Danny to provide financial highlights of the second quarter.

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

Revenue for the second quarter were $45.9 million, a decrease of 4.8 when compared to the year-ago quarter. Project and service revenue remains strong and reached more than $30 million. However, the delays in delivery of several project milestones have prevented us from recognizing license revenues associated with these milestones. As a result, our product revenue in the second quarter are only $15 million. We believe that we will be able to recognize these revenues in third and especially in the fourth quarter.

As Barry mentioned, we have increased our head count since the beginning of the year in order to support the many projects that we are handling. Despite the quarter, we are continuing to maintain our planned level of spending, and we are proceeding with our plan in investing and development of our systems. Increases in the project and services cost and in R&D expenses in the second quarter were the result of hiring new employees and wage increases as well as one-time expenses due to adjustments to employee rights upon retirement and bonus payments. In terms of percentages, we believe as we will see the R&D percentage at an annual level of around 24%. G&A expenses increased in the second quarter due to professional services related to the accelerated Sarbanes-Oxley compliance process and increased bad debt. The number of total outstanding shares for the quarter was 20.2 million fully diluted.

During the third quarter, we granted additional incentive stock options to a range of employees. These options will have the impact of increasing our non-cash equity-based compensation charge in accordance with FAS 123R. In addition, we have increased expenses due to our of multization of intangibles associated with relatively small acquisitions we concluded this year. These items increase our non-cash expense and will reduce our GAAP net income by approximately $2 million for the full year, without having any effect on our non-GAAP results for the year. Our balance sheet remains very strong, at the end of the quarter, our net cash and marketable securities amounted to $60.2 million and we generated $2 million in cash flow from operations for the quarter. Retalix has just over $1.1 million in long-term debt outstanding. Receivables remained at about the same level of the previous quarter, we are experiencing some slower payments and are acting to bring our DSO back to about 70 days. That completes our financial review. Now back to Barry.

Thank you, Danny. Now I would like a ask Vic Hamilton, CEO of Retalix USA to review our facilities in North America during the second quarter.

Thanks, Barry, and hello to all of our listeners. We continue to receive strong offerings from the North American market during the quarter. Among the most significant new developments this quarter were the following. A U.S. Tier 1 grocery retailer committed to Retalix InSync as its next generation enterprise and supply chain solution. And the implementation of Retalix InSync continues at five other early adopter customers in the U.S. A leading grocery wholesaler started deploying the classic Retalix supply chain management solutions, while another large grocery wholesaler and three food service distributors went live with Retalix power suite solutions.

Two Tier 2 grocery retailers selected Retalix DemandAnalytX for demand forecasting and order optimization and the deployment of Retalix DemandAnalytX started at two convenience store chains as well. A large petroleum operator started a pilot of Retalix StorePoint and Retalix Four quarter server in one of its sites. A regional convenience store chain contracted a comprehensive solution from Retalix, including point of sale, fuel, back office, headquarters management, and demand forecasting applications, and a Tier 2 grocery retailer went live with the first store using Retalix store line point point of sale. We have good prospects in the pipeline that we hope to see come in during the next few months and the overall interest remains strong in our products as we continue to develop opportunities in the region. Thank you.

Thanks, Vic. Finally a few words on our international activity. A Tier 1 retailer in Europe went live with Retalix loyalty and promotion solution, another European chain started the roll up of Retalix line in its hypermarkets. The roll up of Retalix store line with Woolworth's stores in Australia is progressing very well with hundreds of stores already installed and running. We also completed successful rollouts of Retalix store line to the Delhaize and our stores in Greece, this is the first major deployment in this country. Retalix store line selected by Asian grocery retailer.

We have created a new partnership with the local distribution and integrator in Russia, the commonwealth of independent states and in China. These partnerships already have brought us good prospects, customers, and we are working together with our partners to win those contracts. In Israel, we completed the porting of 70 supermarkets acquired by Supersoft from Club Markets to the Retalix point of sale.

That concludes our business review for the second quarter. As you can see from the long list of contracts and installations, demand remains strong. Before we take your questions, I want to remind you of our analyst day, which will be held during our global customer conference in Anaheim, California, on September 11. It will be a great opportunity for us to meet face to face and for you to get a closer look at our vision, our strategy, and our products. You can find details about the event on our website at www.retalix.com. We hope to see you all there. Now I would like to turn the call back to the operator and we would be happy to answer your questions. Thank you, gentleman.

[OPERATOR INSTRUCTIONS] Our first question is from Mr. Joseph Wolf with UBS.

Thanks. Question about -- I guess two questions, really. One, on the operational challenges related to hiring of people, is it possible to tell us whether some of these were U.S. or Israel-based, or whether that's actually a question that's meaningless at this point of the integration of the acquisitions that were made, and the second question I have is more financial in nature, which is--As you increase the level of stock options granted to employees, is there a program in place by the Company to put options in order to prevent further dilution going forward?

Regarding your first question, the main hiring is around development and professional services, which is actually -- the hiring will be done in Israel and outsourced in some cases to India. So we feel comfortable that we can hire these people and also we've got contracts in place with outsourcing in India and we've also been piloting for the last six months, working with India and seeing the effectiveness of the outsourcing through India. The second question, you can just repeat it?

I'm just wondering, as you increase the level of stock options that you're going to be granting to employees, whether there's a program in place by the company to right put options to prevent dilution, or to spend cash to buy back stock to prevent dilution?

In general, some of the options or at least 50% of the options are out of the money and options that we just granted, which will provide key employees with incentives still leaves the total number of options relatively low in comparison to other companies. In general, we feel strong that what we do to our employees is in line with what other companies are doing and there's no intention of buying back any options of our -- if our performance or when our performance improves, the stock will grow and the options will be in the money, but there's a win-win for everyone.

Okay, thank you.

Our next question is from Roni Biron with Oscar Gruss.

In regard to your full-year guidance, do you now look at the lower end of the guidance as more realistic or do you still look at the same range as before in terms of revenue and net income? And then also, if you can -- following the stock options you have granted, what share count should we assume in the coming quarters?

In regards to the range, I wouldn't pinpoint any specific number, we can see every possibility happening, we've got figures on the top end, we've got figures on the low end. A company spending over $200 million is always -- new contracts that you have to close. We have to execute on projects, the complexity is higher and the visibility that we had in the previous years is more difficult to forecast at these numbers and the sizes that we offer. Regarding the share count, the share count would be about the same running. It depends on the price of the stock to some extent, because when you calculate the effect of the options, but for our modeling purposes, it will be around 20 million.

Okay. Regarding your financial income, it dropped this quarter, any reasons for what we should expect.

We had some effect of exchange rate between shekel and dollars and that affected -- but that's a one-time cost.

Okay, finally, regarding your gross margin and tax expenses, on a non-GAAP basis. What kind of rate should we expect in the second half. We are still talking for the year somewhere between 27 and 30%. That's for the tax, right?

Right.

Gross margin went down this quarter, should we expect--?

Yes, gross margin went down because of the lack of the license revenue and we are still thinking about 62, 63% for the year.

On a non-GAAP basis?

Yes.

Okay, thank you.

Our next question is from Rag Sarathy with Ferris, Baker Watts.

A few questions for Danny. How much revenue slipped from the second quarter and what are some mix between license and services in that revenue? Do you anticipate recognizing more sales as revenue in the third quarter or do you expect them to come in in the fourth quarter? Some color around, it's going to be back-end loaded, actually, fourth quarter, it's going to be, but can you give us some indication?

Yes, it is difficult to see how much slip, but I guess if you take the first quarter as an indication, so that's where we should have been. You remember our first and second quarter originally looked about the same. Most of that revenue is licensed and as Barry said, we are very heavily tilted towards the fourth quarter.

So would it be reasonable to assume that the third quarter licensed revenue would be flat, or would be up slightly?

it would be up from this number, but still substantially lower than the fourth quarter.

Okay, all right. In terms of the projects during the third quarter, could you comment on the progress you're making in terms of meeting the product milestones and getting written approval from customers? In other words, have you made the process adjustment in terms of revenue recognition so there's no further risk of third quarter revenue slipping into fourth quarter. I know you are hiring lot of people but rom a process perspective, can you comment on that?

It's still early in the quarter, we're only one-third down the line. We made quite a few changes in terms of resources and management and it's still early to say, but from our checking and we check it constantly, it looks like we will -- as I said, we will be able to come up with the numbers, and again I'm stressing that it will be tilted to the fourth quarter.

Okay, then in the press release, you indicated that you made some small acquisitions recently, if I read that right. Could you comment on the nature of those acquisitions?

Yes, one of them was that we actually acquired most of our holdings in StoreMax USA and we now own 95% of StoreMax USA where Fujitsu is only 35%. And we also acquired the small distributor of the director to Tier 3, Tier 4 to strengthen our position in the Tier 3, Tier 4 market in the U.S.

Okay, and then, with it cash, you said it was small, can you talk about the transaction details?

Most of it cash, yes.

All of it.

Okay. How much was it, total? I didn't see a big change in it.

You can see it on the 20F note 16, since we filed relatively late, so all those transactions appeared there.

Okay. And in terms of cash flow, DSOs has been increasing and you said some slower payments, why is this a slower payment this year than last year? Occasionally, with big customers, it can happen. We are acting to correct that and it's just something that may happen, it happened to us before and we're act to correct it. You still expect it to come down to 70 days in the back half?

Yes.

On the R&D expenses, Barry mentioned you're going to hire additional 100 head count, where is that going to go? Is it going to go mostly R&D, or can you give me some color on this?

Most will be operations.

Operations.

That means cost of goods.

Okay. And then, in terms of R&D expense, is it right to assume the current level of $15 million and change for the next two quarters, and even if I were to take the high end of your revenue guidance, I'm looking at 27% as a percent of revenue.

Rag, if you listen--.

24%.

Yes, I did say that that's a one-time charges in this quarter because we add our wage increases traditionally, our wage increases in April and because we had our wage increases, we have reserved for severance pay by law in Israel and that increases dramatically the location for a severance payment reserve, and that's a one-time cost increase, plus we had one-time bonuses that we also traditionally give every April, so 15 is not a good number for that respect.

How much is the one-time expense?

Over 1 million.

Okay. So then would it be reasonable to assume this should decline as we go through the next two quarters, even though you're going to hire some people?

But, as I said, most of them for operations.

Okay, and then on the G&A side, are there any one-time costs in there? What should we expect?

Yes, also, there's also an element of wages there so there's also element of one time bonuses over there, plus we had some-one time bad debt relatively higher number and again, it's a one-time.

So it should decline for the next couple of quarters?

Yes.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Our next question is from Amil Avizy with Poalim Sahar.

Hi, by the way, my name is Amil Avizy, but it's okay. I wanted to ask about the project rejections. It seems like in this quarter, the project rejection was pretty -- a bit severe. Is there any specific reason for this phenomenon? Maybe something with clients or kind of delays or kind of things like that?

No. The product sales include the licenses and that's what Barry and myself mentioned, we could not recognize significant amounts because of not being able to abide by certain milestones. And those revenues will be deferred as we said to the second half of the year.

Okay, thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] Gentleman, there are no further questions at this time. I would like to turn it back over to management for any closing comments.

Thank you. We appreciate your time. I would like to thank all the Retalix employees for their efforts and dedication. We expect to make a solid progress in the second half of 2006 and we are looking forward to seeing all of you at analyst day at the Retalix conference. Thank you.

Thank you, gentleman. This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.