NCR Voyix Corp (VYX) 2006 Q3 法說會逐字稿

Welcome to the Retalix's third quarter 2006 conference 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 the listeners that managements remarks contain forward-looking statements. These statements include comments regarding the guidance about revenues and net income. Anticipated demand for the Company's software products, expectations with regard to implementation on rollouts of existing license agreements. The completion of projects and continued support. Analysis of market conditions, perspective customers, anticipated rate of growth 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-S. I will now return the call to the CEO of Retalix, Barry Shaked.

Thank you. Welcome to all of you and thank you for joining us on this call. We reported results for the third quarter this morning that was in line with the guidance we gave the market a few weeks ago. We discussed with you on our last call and we continue to be confident about our results. Financially, the third quarter is a improvement over the second quarter, and we strongly believe that the fourth quarter will mark our return to our previous growth trends. Operationally, we continue to win new opportunities and we are progressing with our customer projects. I would like to highlight a few of the operational achievements we have had in the last few months. Carrefour, the French mega retailer went Live with Retalix loyalty and promotion in 200 Hypermarkets in France.

During the customer conference we held in California, we announced a general availability of Retalix InSync master data management, during the third quarter we won an additional contract to install a point of sale and chain solution to over 1,000 convenience stores in Europe. The rollout in Woolworths in Australia is progressing well and we have completed much of -- half of the installations of this chain. We launched the successful pilot in Italy with a major fuel retailer and our professional services center in India grew to 60 employees, while a few dozen more are being trained in Israel these days. Before we continue on our outlook for 2006 and 2007 and beyond, I would like to ask Vic Hamilton, CEO of Retalix USA, to review our achievements in North America during the third quarter.

Thanks, Barry, and hello to all of our listeners. In the past few months we made progress and had significant achievements in our U.S. operations. CNS wholesale grocers, which is the second largest grocery wholesaler in the U.S. started a deployment of the classic Retalix purchasing solution, and plans to also implement our new Retalix InSync master data management. Another step forward with our new master data management solution was taken when a major grocery retailer which started a pilot of Retalix InSync MDM. An important implementation was executed by Retalix USA in Australia where Metcash Trading started using Retalix Power Enterprise. Also during the quarter Maines Paper and Foodservices implemented Retalix power warehouse in their distribution centers. While a significant part of our business in North America comes now from enterprise and supply chain solutions, we had some important achievements also in store solutions. Of most interest to you will be two pilots that were launched with two mid-tier grocery retailers that are evaluating Retalix store line for a point of sale upgrade. We are continuing to work hard on the many projects that we have to execute and we have our mindset on constant improvement. Thank you.

Thank you, Vic. In a moment, I will discuss our outlet, but first I will ask Danny to provide financial review of the third 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 non-GAAP basis that excludes amortization of intangibles related to acquisitions and stock-based payment charges. This presentation of net income and earnings per share was an understanding of our historical financial performance and will facilitate analysis of the business and meaningful period to period comparisons.

Today's press release includes a reconciliation of non-GAAP information and the most directly comparable GAAP information, and is closer to investor section in our website at www.retalix.com. As we discussed with your previous call -- in previous calls, the results of the third quarter still reflect the effect of the delays in execution that prevented us from completing as planned a few project milestones during the second quarter. We are continuing to maintain our planned level of spending, our R&D expenses remain at the same dollar turn as the previous quarter, and decreased as a percentage of revenues.

For 2006, we estimate the R&D percentage at an annual level of around 28%. We expect to continue these efforts in 2007, but on a percentage basis, this may drop to approximately 26%-- between 25 and 26% in 2007 as our revenues return to the previous growth rate. G&A expenses returned to the normal level in the third quarter after the second quarter. We saw additional expenses for professional services, related to the soft compliance process and increased bad debt. The number of total outstanding shares for the quarter was 19.5 million fully diluted.

During the third quarter, we granted additional incentive stock options to a range of employees. These options increased our non-cash equity based compensation charge in accordance with FAS 123R. In addition, we have increased expenses due to amortization of intangibles associated with relatively small acquisitions we concluded this year. The balance sheet remains strong with very little debt and over $58.5 million in cash and marketable securities. This completes the financial review, now back to Barry.

Thank you, Danny. Now let me address our outlook for 2007 and beyond. We continue to believe that strong opportunities lie ahead in the food, fuel, and convenience sectors. Nothing has changed in the key factors that we have discussed with you in the past, which are driving our business. Retailers and distributors are continuing to look for ways to improve the efficiencies and enhance their customer experience. Many of them are using legacy systems both internally, that are outdated and limit -- and have limited capabilities.

These retailers and distributors are looking for software vendors that offer field-proven solutions, the main knowledge in their retailing and distribution, and then end to end application platform that allows cost effective integration of existing and used software applications. As a result of the product development, and the strategic acquisitions that we have done in the past two years, we are no longer focused only on store solutions, but have significant share of business -- about 30% of our revenues -- of our revenues currently, and expect it to reach 50% in the future, coming from enterprise solutions.

Since the last time we spoke, some of you asked us to explain in greater detail how this change has effected our operations, our financials, and our visibility. I would like to take this opportunity to make sure that all of you understand the differences -- or the difference as we have moved from being focused only on store solutions to be an end to end solution provider with significant activity in enterprise and supply chain solutions.

In store solutions, we have over 20 years of experience, a strong track record, and proven experience. With this amount of experience and installed base, the accounting rules of software companies enable us relatively high visibility. As soon as the pilot is completed in a few [Inaudible] -- we can recognize the license fees for hundreds and thousands of stores in the case of a ELA that follow. Until last year, most of our revenues came from these license fees and from recurring maintenance fees. In 2003, for example, license and maintenance revenues, consists of 60% of our total revenues. This is why our visibility was relatively high when we were focused on store solutions only.

As newcomers in this field of enterprise solutions, the accounting rules for a software company dictate when and how we recognize revenue. This is especially true when introducing new products with installations like Retalix InSync, Retalix Loyalty, Retalix DemandAnalytX. When we sell an enterprise system, we have to execute a lot of project worth to integrate our solution and the interface to other enterprise systems that the customer is using. This kind of project is often very complex and requires more steps and time to complete. As our new products mature into the marketplace and gain a significant installed base, we will be able to recognize license revenues from these products at an early stage of the project life cycle. As we explained, experience in executing enterprise projects, the revenue stream from these projects will be more visible to us than -- in the -- than has been in the past few quarters.

Three years ago, we generated minimum revenues from enterprise solutions, and today this is growing part of our business. This is reflected also in our gross margins, which is expected to be around 62 to 63% in 2007, compared to 65 or 66% in previous years. As you have seen in today's earnings release, we have already improved our execution and are making progress in all our projects. This is reflected in our results, which has improved from the second to the third and are expected to improve more in the fourth quarter. I believe that the fourth quarter will be -- will mark our return to our previous trend, and that we are now back on track in terms of revenue growth and profitability.

We are taking into account that we still need to improve even more our execution especially around our enterprise solutions, during the third quarter we also made a few changes in management. We appointed Reuben Halevi as Chief Operating Officer of Retalix USA reporting to Vic Hamilton, Retalix USA CEO. In addition to his responsibility as EVP of product development. In this dual position role, Reuben is not only in charge of the product development, but is also responsible to successfully deliver our commitment to customers. I believe this is the correct combination when introducing such an important new line of product to the markets. We also appointed Ray Carlin of EVP of Sales and Marketing of Retalix USA in addition to his responsibility as CEO of StoreNext USA. This again, will allow us to combine sales efforts across all markets here.

We will finish 2006 better equipped to meet the challenges that we face -- that face us, both in terms of human resources, management team, product and integration, and experience to better produce solutions to the markets. In addition, I reconfirm that revenues for the fourth quarter will be over $54 million and net income, non-GAAP, of more than $3.8 million. Looking forward, we believe market conditions remain favorable for Retalix. We are confident that Retalix will continue to grow, but we are also maintaining our current conservative outlook for 2007, with revenues ranging from 220 to $230 million. We expect about 80 to 85% of these revenues to be generated from existing customers, and we estimated that about 15 to 20% of revenues depend on signing of new contracts of new customers.

Winning these new contracts is not an easy -- is not -- not any easier today than it was in the past. Competing in our industry is growing stronger, and customers want to be convinced that they are making the best choice. We are confident that our solutions and our industry expertise offer distinct advantage to our customers, not only that we are the best in point solutions, but we are offering an end to end integrated warehouse to checkout solution. It will take a lot of hard work and a lot of focus. We will be keeping a close watch on our business units, sales directors, and project managers to make sure that we achieve our goals and execution as planned. While we cannot promise that we will beat the outlook for 2007, we will certainly aim to do just that. And now, I know that the burden of proof is on us. We appreciate the support of our shareholders during this period. Before we close I would like to thank all Retalix employees all over the world for their dedication and efforts. Now we will be happy to answer your questions. I would like to return the call to the operator.

Thank you, sir. [OPERATOR INSTRUCTIONS] The first question is from Joseph Wolf of UBS. Please go ahead.

Thanks, good afternoon. Just a question on one of the points you touched on, Barry, which was on the visibility of the business and the amount of business which is currently in backlog. I'm just wondering if you can give us -- we used to think about Tier 1 customers providing visibility in certain ranges of revenues, and I'm wondering as we look at new contract wins that you are continuing to pile up, if there's some sort of metric we can start to think about in terms of what the size of these rollouts or the timing of revenue recognition means with the new mix of business that we've got that you have moved towards?

Joe, it's Danny. We're running backlog system, and we have our estimations, and we don't publish the backlog yet. We may in the future. But I can tell you that our backlog is very strong, and the point of the visibility is that those projects as Barry mentioned are much more complex, and that's where the visibility really gets a bit less clear than it was in store solutions than we had. Right now we are -- we are running -- implementing those symptoms and running them. And when we will be ready in the future we may publish them like other fellow comps do.

I guess just a follow-up, that is helpful, in terms of just industry growth, just some flavor on whether -- or color on whether the pent up demand at some of the larger customers, how that relates to this change in mix? Meaning, are the underlying drivers the same, or do you find the customers because of the complexity of the new products that are being rolled out that the decision making process is even longer, and the transitions are going to take longer than expected, so that effects the 2007 growth rate?

If we compare where we were in the past, in the past we were mainly on the store solutions, and then we were active, let's say for specific retailers once every 7 to 10 years. Now that we have got the full range of product that any retailer needs in terms of execution, business intelligence, enterprise warehouse, store, et cetera, whatever he is buying, we are out there trying to sell to him. Meaning that in any particular year, we are engaged with the customer. So that, of course, increases the pipeline and possibilities for us, taking into account that visibility on enterprise piece is less than store solutions, but overall, the growth engine is much stronger than where we were in the past.

Okay. Thank you.

Thank you. The next question is from Roni Biron of Klal Finance, please go ahead.

Yes. Hi, Barry, and Danny. A few questions, first, you are now two-thirds into the quarter, have you already met some of the project milestones that should trigger license contracts or is it shaping up to be more of a back-end loaded quarter?

Yes, it always is in our business, but we are still confident that we can meet those numbers.

Okay. And looking at your outlook for 2007, should we still expect the same seasonality as in previous years, with the first half of the year slower than the second, or did the acquisitions and impact of project delays change this pattern?

No. It's still -- the seasonality is there, especially on the -- on the new customers that Barry mentioned. So we will see the same seasonality.

Okay. And last one for me, can you talk on your working capital and cash flow performance this quarter and specifically on your accounts receivable, which increased -- what was the reason for that? And what should we expect going forward?

In terms of accounts receivable, we did have an increase, and that's mainly because of some of the big projects, we have long payment terms, which -- which we have to concede in some cases, and that's what caused the increased AR in this case. We do not expect that to increase, and we put as a target, actually to decrease that and hopefully in 2007, at least that's our target.

Okay. Thank you.

And in terms of just the cash flow, it's closely related for a profit we usually generate what our profits are because our capital expenditures are similar to what we depreciate, so in that respect, on a yearly basis cash flow or profits will be associated with our cash flow.

Okay. Thank you.

The next question is from Nir Amikam of Hapoalim. Please go ahead.

Thank you, and good evening. First question is just technical. What happened to the [Inaudible] shares this quarter?

The -- I gave the number, it's 19.5 million.

19.5.

Yes.

Yes, but it went down from last quarter about 1 million, I think. Was it because shares were -- the options were finished?

Yes, don't forget because of the formula that the calculate the effect of the options and they look at formula, when the price of the share goes down it affects the formula.

But it affected it--?

The share price went down quite--.

Yes. Okay. So -- so that's -- and mostly that's [Inaudible], still, yes?

Yes.

And another thing about a bit of the strategy, can you give us a little bit of a picture about your strategy for mergers and acquisitions looking forward. After all the talk we heard about this quarter? What is your take?

Retalix is definitely focused to be the leading solution provider for the retail and distribution through the grocery convenience sector. We are focused to continue to be that leader, and in that aspect, we will continue to look at acquisitions, and to grow the Company. While it's my responsibility as Chairman of the Board and CEO to look at all of the possibilities, I definitely -- if applicable -- if I will receive any offers that will increase the shareholder's value far and beyond than what we can achieve by ourselves, we will look at it on a serious basis. We will take it to the Board. We will take it to the shareholders. As such, we have not received anything like that and definitely we do not comment about rumors in the market.

Okay. Thank you. One other question. Can you give us an update about -- you talked a little bit about it -- in the statement about the employees. How many did you manage to get? How much still is a problem in the -- market -- and in the [Inaudible] market?

We have about 1470 employees. In Q3 we hired about 60, and we still have about 60 positions open.

In Israel?

All over the world.

All over the world. Talking about India, and can you maybe tell us a little bit what you can say about the development in the Indian retail market? A lot of things talked about there, and how it can effect you, as well as your customers that came over?

Yes. The Indian market from a retail point of view is an interesting market. Definitely the rate of growth in India is the most impressive around the world even more impressive than China. We have got an installed base with a large Indian retailer or company in the convenience side. We are progressing with him very well on grocery. We definitely are planning and will be a significant player in the Indian market. Not only that we on the sales side we are progressing well, but we also progress very well in terms of building an offshore development in India. We currently I mentioned got 60 employees working for us, that's growing rapidly, so to your previous question about how many employees we have hired, we have built a platform or the infrastructure to hire as much as we can absorb in India to produce results for the entire company.

Okay. And can you see any -- anything happening -- I heard something about [Inaudible] going into India or even [Inaudible] things like that, [Inaudible], I think Woolworths, Australia was supposed to have some plans to enter the Indian market. Maybe you can tell us something that you can see from your side.

I can't tell you more than what the market knows, but I can just definitely confirm that if any of them enter into these emerging markets, we will follow them.

Yes. Okay. My last question about the StoreNext, you say, can you give us a picture on what is happening there in -- I know that you took a [Inaudible] more than 50% that you had before, what is the reasons? And where is it going from your point of view? Is it going -- as it was planned or you can see something different going there?

StoreNext USA actually has improved by probably more than 20% in 2006 in comparison to 2005. In terms of sales, we have got over 1,000 stores connected to us, and we had business opportunity to take more than 50%. If you remember we had a joint venture producer for its own reasons, nothing to do with StoreNext needed cash in a certain quarter, was willing to sell off some of its assets. We acquired another 45% of these assets, and -- and we definitely believe that StoreNext is one of the growth engines for Retalix. Like we have got strong growth engines in Tier 1, Tier 2. StoreNext represents our growth engines in Tier 3, Tier 4 and we definitely are on track in terms of what we see for StoreNext.

So it's not disappointing you -- the results?

Definitely not.

Okay. Thank you very much.

Thank you. The next question is from Raghavan Sarathy of Ferris, Baker Watts.

Thanks and good evening. I have a few questions from my end. Looking at the product margin -- product margin declined about 700 basis points sequentially, and a lot lower than what I had expected. Are you selling more ERP systems than pure software licenses? So what might explain the steep sequential decline? And then what should we expect as we look ahead?

The pieces of revenues that we missed in the second and third quarter, as you know, are mainly license revenues, and the decline in the margins is basically as a result of the shortfall of license revenue, so that explains results.

You had the finish this the second quarter as well. So what explains the sequential decline? Your product revenues sales is higher.

I know, but we are still missing compared to what we planned, and we have higher hardware -- that includes also hardware.

Right. But are you saying that in this quarter compared to second quarter you had more hardware system sales?

That's right.

Are these related to the ERP systems that you are selling?

We are -- we think in the fourth quarter we pick up quite a bit of the shortfall and the margins will increase in the fourth quarter.

Okay. And so when you say margins will increase, what level are you looking at for fourth quarter, for gross -- gross-- gross margin?

Will be about 55%.

65%? Okay. And then this is on a nitpick, but -- so you reported 690 K of non-GAAP net income, or $0.035 per share which is lower than what you had expected when you reported permanent results. What would explain the delta between reported results and previous expectations? Is it a function of lower than expected revenue or higher expenses? How should we think about it?

It's a small amount, it's a combination of both.

Okay. And then with regard to the new contract that you talked about -- point of sale installation, store line installation in Europe, does your guidance for 2007 include potential revenue from this new C-store deal that you signed in Europe.

It's a customer we didn't announce yet, and it will affect 2007.

Right, but you have given guidance or in a broad, maybe midpoint of your growth is 11% -- does your guidance include the revenue from this deal that you signed? Meaning that you are expecting this to go into production?

Yes, it does.

Okay. All right. Great. And just a question for Barry, Barry, you talked about revenue mix shifting towards enterprise in -- looking ahead to 2007, so in terms of the revenue mix between a license and services, what should we expect there?

For what? For next year?

Yes, '07.

It should be somewhere between 40 to 45% product and 50 to -- 55 to 60 professional services and maintenance.

This is the overall figure for the company, including store and enterprise.

Right. So we should -- basically, we should expect 10 basis point -- 10% influence from the current levels?

Right.

5 to 10% in terms of license revenue.

Right, because, yes, right.

Okay. And then -- and in terms of the -- Danny, you talked about R&D expenses. You gave us a sense for what to expect for 2007. Can you give us some sense for G&A and sales and marketing as a percentages of revenue? Because I'm trying to figure out where you are picking up the gross margin slot essentially?

G&A should stay flat -- the [Inaudible] the last two quarters, about $6.5 million, and so should our sales and marketing.

What did you say. I'm sorry, I didn't hear--?

The G&A should be about $6.5 million.

Yes.

And sales and marketing, somewhere between 8 and $9 million it will increase as we increase our operations next year.

Okay. And then I think you talked -- you commented on the cash flow I'm -- I'm looking at the cash flow still bouncing around a bit this year. DSO the same at 80 days, and so Barry talked about the mix shift towards enterprise. Is this something that we should expect next year as well in terms of cash flow? Or could you give us some sense for what -- what is your cash flow target for '07?

Yes, it's similar to what we think our net profits will be, but we will make an effort to decrease our accounts receivable, and that may affect us, but right now, I would say net profits is what we look at.

The non-GAAP, again, that should be equal to the cash flow from operations?

Net.

Okay. Great. Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] The next question from [Jasri Abraham], of Bank of Holland]. Please go ahead.

Hi. Thank you. Just one follow-up question, how come you are expecting the R&D will stay on the same level in dollar terms if you still don't have all of the people working for you right now? You said you are expecting to add 55, 60 more people?

Yes, most of these people are going into operations to execute on new products and bigger business.

Oh, okay. And you -- and maybe you can relate to which tax rate you are expecting in 2007.

Sorry, didn't hear, which what?

Tax rate.

About 30%.

30%. Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] There are no further questions at this time. Before I ask Mr. Shaked to go ahead with his closing statement I would like to remind participants that a replay of this call is scheduled to begin three hours after the conference. In the U.S. please call 1-877-332-1104. In Israel please call 03-925-5925. For a toll free number in Israel, please call 1-800-286-285. Mr. Shaked.

Thank you, we appreciate your time today. We anticipate continued improvement and a strong 2007. We look forward to speaking with you again next quarter. Thank you.

Thank you. This concludes Retalix third quarter 2006, conference call. Thank you for your participation. You may go ahead and disconnect.