NCR Voyix Corp (VYX) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Retalix fourth-quarter and full-year 2006 results conference call. Leading the call today is Retalix Chairman and CEO, Barry Shaked. Joining him is Danny Moshaioff, the Company's Chief Financial Officer.

Before I turn the call over to them, I would like to remind our listeners that management's 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 and rollout of existing license agreements, the completion of projects and continued support, analysis of market conditions, pipeline with respective customers and anticipated rates of growth and management expectations as to the Company's future financial performance.

Such forward-looking statements are subject to risks and uncertainties and therefore Retalix claims (indiscernible) 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 these risks and uncertainties contained in the Company's filings with the SEC and in particular on Form 20-F.

Also I would like to remind you that Retalix reports its net income and earnings per share on both a GAAP basis and on an adjusted non-GAAP basis, but excludes the amortization of intangibles related to acquisitions and stock-based payment charges. This presentation of net income and earnings per share will enhance your understanding of the Company's historical financial performance and will facilitate analysis into business and meaningful period-to-period comparisons.

Today's press release includes a reconciliation of non-GAAP information to the most directly comparable GAAP information and is posted in the investors section of our website at www.Retalix.com. I will now turn the call over to the CEO of Retalix, Barry Shaked. Please go ahead.

Thank you, Julie. Welcome to all of you and thank you for joining us on this call. This morning, we reported our results for the fourth quarter of 2006, that was a record quarter in terms of revenue and our second-best quarter in terms of adjusted income, net income. We view this as an encouraging sign that we are back on track after two tough quarters. I promised you this last time we spoke and we delivered.

During the fourth quarter, we continued our leadership in point of sale installed solutions, winning new contracts and progressing with some of the biggest names, in food retailing and distribution.

A Tier 1 petroleum and convenience store chain in the U.S.A. selected Retalix point of sale. A Tier 1 supermarket chain in the U.S. completed the rollout of Retalix StoreLine point-of-sale to its 900 stores. Successful pilot of Retalix StoreLine progress with two Tier 2 grocery retailers in the U.S. and (indiscernible), Reliance Industries selected Retalix StoreLine and Retalix Loyalty for their newly established grocery stores. This is over and beyond -- over 1000 convenience stores that Reliance are operating using Retalix StorePoint. No doubt this is an up-and-coming economy.

In China, another retailer chain selected Retalix solutions for their point-of-sale, headquarters and loyalty. This is another interesting geography that we are putting a lot of efforts to succeed in as the potential is infinite.

A Ukraine retailer group selected Retalix point-of-sale, headquarters, management and old optimization solutions. Woolworths Australia completed the rollout of the Retalix point-of-sale software to BW stores and progressed in the rollout to Woolworths supermarkets.

In Israel, Supersol successfully piloted our [ThinLine] point-of-sale solution, Retalix StoreLine.net and then start a rollout of over 10 stores have gone live and store next to Israel expanded its market coverage to include also sales data from large chains and is now covering 70% of the Israeli food and fast food in consumer goods markets or over $5 billion annual sales.

As you will recall, enterprise and supply chain solutions have become a large part of our business in the past two years and growth in these areas is demonstrated by new wins and significant progress was achieved during the fourth quarter, including C&S Wholesalers Grocery went live with Retalix BICEPS, our purchasing solution.

Four more distributors in North America went live with Retalix Power Enterprise and Retalix Power Warehouse with development and implementation of the Retalix InSync products progress. A large U.S. petroleum retailer that has been using our point-of-sale for several years signed up for our new headquarters solution called [for convenience chains]. Three privately held grocery chains in the U.S. have licenses with Retalix software applications for store and headquarters management.

Our new business intelligence solution, Retalix InSync Analyzer, was sold to customers who are using Retalix powered by Retalix DemandAnalytx. We released a new solution for centralized fuel management and it will be installed in a large petroleum customer in North America.

As you see, we had a very busy fourth quarter both in terms of new wins, as well as in completing projects and going live with customers.

In a moment, I will discuss our outlook for 2007, but first I would ask Danny to provide the financial review for the fourth quarter.

Thanks, Barry. Retalix achieved record revenue and second-best ever adjusted net income in the fourth quarter. As you read in our press release, product revenues in the fourth quarter were 36% of total revenue compared to 48% of total revenues in the fourth quarter of 2005. This mix between product revenue versus service revenue represents the change in mix of enterprise solutions with store solutions mainly in the U.S.

As we explained in our previous call, enterprise projects involve much more professional services revenue. As a result of this change in the mix of revenues, the adjusted gross margin for the quarter was 64.4% compared to gross margins of 65.7% in the fourth quarter of 2005.

Our R&D expenses remained at the level of about $15 million and I expect it to stay at this level in 2007. This reflects the investments we have discussed with you in the enterprise and store solutions. For 2007, we will be continuing these investments. We estimate the R&D percentage at an annual level of around 26% in 2007.

Sales and marketing expenses were slightly lower in the fourth quarter in comparison to fourth quarter of 2005 because of the completion of integration process of our 2005 acquisitions. We recorded tax income this quarter mainly due to a tax income in a subsidiary in Israel. We are in the process of tax planning, which should reduce our effective tax rate already in the year 2007.

The number of total outstanding shares for the quarter was 19.980 million fully diluted. In terms of geography, 62% of our revenues in 2006 originated from North America and 38% came from our international operations. The balance sheet remains strong with very little debt and about $60 million in cash and marketable securities. That completes the financial review and now back to Barry.

Thank you, Danny. As you see, we believe 2006 is equipped to meet the challenges that face us both in terms of human resources, management teams, products and integration and the experience to better predict the execution and revenue recognition of various projects.

Looking forward, we believe market conditions remain favorable for Retalix. Market activity continued to be strong across all of the geographies we serve.

As I am sure you already know, Vic Hamilton, President and CEO of Retalix USA retired last week. I would like to take this opportunity to thank Vic. Vic joined at Retalix two years ago following the acquisition of IDS, the company that he had founded and headed as Chairman and CEO. At this time of the acquisition, Vic agreed to stay with Retalix USA for two years to help with the integration of IDS, TCI and Retalix.

During the past two years, we have successfully completed the integration of these companies. Vic was instrumental in introducing the distribution market to our business and in successfully integrating the people and the culture of the three companies together. Thanks again, Vic.

As you will recall, last summer, we named Reuben Halevi to the position of Chief Operating Officer of Retalix USA. Reuben will now be reporting directly to me on the Company's operations in North America. Retalix has a strong position in the U.S. and we look forward to building on our strength in the years ahead.

Now let me address our outlook for 2007 and beyond. We believe that the strong opportunity lies ahead in the grocery, food service, petroleum and convenience segment. Retailers and distributors are continuing to look for ways to improve their efficiencies and enhance their customer experience.

In the last few years, we have been laying the foundations for continued long-term growth. We are investing in product development more than the industry norm in terms of percentage of our revenue. We believe that while there is market potential for end-to-end solutions like Retalix is [holding], and while we can grow Retalix substantially every year, we should do it. These are one-time opportunities in the marketplace today to become a significant leader through a warehouse to checkout solution that can save retailers and distributors millions of dollars, something that the market needs.

We have today the main knowledge and the technology to execute on this. I believe that we should continue to invest while the opportunity is so great. This strategy has served us well in the past and has made us the point-of-sale leader in our industry against huge players like IBM, NCR and Wincor Nixdorf. We strongly believe that our investments in the development of enterprise solutions will bear more fruit in the future.

We are making progress with Retalix InSync customers and we plan to release the Retalix InSync purchasing for the management and building ThinStore applications in the first half of 2007 and a warehouse management system later this year.

At the same time, we continue to have strong business of in-store solutions and a strong business of [fuel]-proven headquarters and supply chain solutions. These immature products provide us with the resources and the confidence to invest in the future as much as we do and still make a profit for our shareholders.

As in the past, we expect our revenues and income to weigh more on the second half of the year. We expect around 45% of our total revenues to be in the first half of 2007 and around 55% of our total revenue in the last two quarters of the year. We are maintaining our outlook for 2007 with revenues ranging from $220 million to $230 million and adjusted net income ranging from $15 million to $22 million.

We will be keeping a close watch on our business unit sales directors and project management to make sure that we achieve our goals and execute and exceed them. While we cannot promise that we will beat the outlook for 2007, we will certainly aim to do so. We believe the opportunities are strong and that Retalix is continuing to grow its position to meet future opportunities.

We appreciate the continued support of our shareholders and in closing, I would also like to thank all Retalix employees all over the world for their efforts and dedication in the past 25 years. By the way, this is the year that Retalix celebrates its 25th year and my 25th year in the Company. Thank you for your attention and now we would be happy to answer questions. I would like to turn the call back to the operator.

(OPERATOR INSTRUCTIONS). David Kaplan, UBS.

Danny, you mentioned going forward in 2007 lower effective tax rate. Can you give us a range or just something to work off of because in the last two quarters of '06, the tax rate if I'm not mistaken was around 16%?

Yes, somewhere between -- we are shooting for somewhere between 20% and 24%.

Okay. Fine. For all of '07? In other words, the quarters could be a little bit lumpy here.

Right.

Raghavan Sarathy, Ferris Baker Watts.

I have a few questions for Barry and then some for Danny. Barry, could you give us an update on the policy and the (indiscernible) [optimism] first in the U.S. and then Europe and Asia?

What we have seen is that after about two, three years of relatively quiet in the cycle of upgrades, we are starting to see a lot of activity. The way we see it is by the amount of RFPs and RFIs we have seen. I believe that 2007 and 2008 will be the year that -- 70% of the market that is still using proprietary solutions will start to move to open solutions.

In Europe, the cycle started earlier. We also saw that around '94, Europe moved to [PT-based] solutions before the U.S. and of course, Asia we are seeing just tremendous growth, new chains that are looking for solutions and have got nothing to do with upgrade cycles.

Okay. And then in terms of your guidance, it seems like your guidance, kind of back-end loaded (indiscernible). So do you have the fixed opportunity expectations for customer (indiscernible) last year? How would you characterize this (indiscernible) last year?

The back-end is very typical in the industry. We have seen this in the 25 years that we are active that that is the way that it happens, but actually what happens is retailers budget what they budget and negotiate for the first half of the year and start the projects in the second half of the year. That is typical and that is why you can see the cycle.

Right. You said the same thing last year, but your second and fourth quarter you have been below expectation. So what I am trying to understand how you dividend improved this year, [which] is last year.

Yes, but you will still see if you compare 2006, you will see about a balance 47/53 balance.

And then in terms of the earnings you are earning, you were indicating that you will be heading more toward the back half of the year as well. So in terms of the revenue mix between products and from services, are we looking at more (indiscernible) product sales as a percentage of revenue during first half of '07? What would drive your earnings in the back half of the year? (indiscernible).

It is the recognition process. We will be able to recognize most of the license revenue in Q3 and Q4 and that is what actually causes the shift in revenues and in earnings.

Right. So would we assume that product sales would be from the most of these in the first two quarters and then about 40% in the back half of the year?

The product revenues will be 20 in the first half and then somewhere between 27-32 in the second half.

Okay. And then a couple more questions and I will jump back into queue. It looks like accounts receivable -- the total accounts receivable increased 34% year-over-year this year while the revenue grew only by 9%. So it's a backwards number (indiscernible). So I was wondering if there was any change in your (indiscernible) terms that is open accounts receivable.

Can you repeat again?

The total AR reached 34% year-over-year this year while revenues were only 9%. Was there any change in the payment terms or what led to this buildup of AR year-over-year?

Yes, we do have an increase and if you will see on the balance sheet, we also have some long-term receivables. Some of our bigger accounts do demand and we do give them extended payment terms and that is the reason for an increase in our receivables.

The long term didn't increase that much. The year-over-year, that is (multiple speakers).

It increased about over $2 million from last quarter.

Yes, but you have taken an improved outlook (indiscernible) end of last year to end of this year. That is quite a big chunk.

But we also had an increase in revenues.

So are you paying those low payment terms?

We are not -- it is just a mixture of customers. If it is bigger customers, we give longer terms than smaller customers.

I have some bookkeeping questions, but I will come back. Thank you.

(OPERATOR INSTRUCTIONS). Ehud Eisenstein, Oscar Gruss.

Congrats on the nice numbers. Can we look at the long-term model behind '07? What kind of revenue (indiscernible) are you expecting? What kind of gross margin and obviously operating margin and then again, I am looking behind '07? Thank you.

You know we don't give guidance; we only give guidance for '07.

That is not guidance. That is your long-term model.

Long-term model is -- we do believe we will continue growing and hopefully that would be just numbers and assuming our percentages in terms of profitability will stay the same and the mix will be the same, of course that will result in increased earnings because of the fixed-cost element within our cost structure.

Right. And then you expect operating margin to be at the high teens, mid-teens or the 20s. Just give us some color on that. Thank you.

Long term should be between mid-teens, about mid-teens.

Thank you so much.

Amir Aviv, Poalim Sahar.

Hi and congrats for the good [file]. I wanted to ask about all the manpower issues. Are you planning to bring some more manpower this year and how about a little bit of a follow-up about the cost of the new low-cost [acid] rings with the [flex] on and the second one is a question that you already have been asked about the position with Danny in the [year-ago] position.

Currently, we have got the manpower to execute on 2007. We actually, if you look, we have increased in the top quarter of 2006 our manpower to be sufficient for what we believe we should execute in 2007 in terms of R&D and in terms of projects that are in the pipeline and in the budget for 2007. We have also budgeted the fact that the dollar is weak and the conditions in the Israeli high-tech market take into account the competitive situation. So in general, this is in place. Does that answer your first question?

Yes, thank you.

The second question was -- could you just repeat that?

Yes, about acquisitions. The market and the papers, something about this company, a bigger company, (indiscernible), interested to purchase or to acquire Retalix.

Our policy is not to comment on any rumors and I just will repeat what I said on the last call that while we foresee a way for Retalix to grow in this marketplace, if it's organically or if it is through mergers and acquisitions, and the returns to our shareholders are beyond any offer that would be made or has been made to Retalix, we of course will not accommodate such an offer. That is my responsibility as Chairman of the Board and we will act accordingly.

Okay. Thank you very much and last question for the next year, will you give any forecast for the products and the service percentage?

Products will be about 44% and services about 56%.

And the same margin as we saw in 2006 or even better?

Gross margins will be average for the year around 63%.

(OPERATOR INSTRUCTIONS). Raghavan Sarathy, Ferris Baker Watts.

A couple of good pieces left. What was the mix between sales solution and headquarters last year?

About 35% headquarters and 65% sales solution.

And then what is the mix and [mine] gross [receipts] we saw on distributors (indiscernible)?

I didn't hear that. Speak louder.

What about the mix of billed receipts and distributors in '06?

I don't have those figures in front of me.

And how many new customers have you added in '06?

I don't have that either.

Okay. Thank you.

There are no further questions at this time. Before I ask Mr. Shaked to go ahead with his closing statements, 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 1-888-295-2634. I repeat, 1-888-295-2634. In Israel, please call 03-9255-925. The telephone number in Israel is 1-800-286-285. Mr. Shaked, you may go ahead.

Thank you. We appreciate your time today. We anticipate continuous improvement and a strong 2007. Thank you very much.

Thank you. This concludes Retalix fourth-quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.