NCR Voyix Corp (VYX) 2007 Q1 法說會逐字稿

Welcome to the Retalix third quarter 2007 conference call. Leading the call 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'd like to remind our listeners that management's remarks contain forward-looking statements. These statements include: Comments that regarding the guidance of our revenues and net income; anticipated demand for the Company's software products; expectations with regard to implementation and rollouts of existing license agreements; the completion of projects and continued support; analysis of market conditions; investment in R&D; pipeline of prospective customers; anticipated rates 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 from such statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and I 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'd 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 that excludes the amortization of intangibles related to acquisitions and stock-based payment charges. This presentation on net income and earnings per share will enhance your understanding of the Company's 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 to the most directly comparable GAAP information and is posted in the investor section of our website at www.retalix.com.

I will now turn the call to CEO of Retalix, Barry Shaked.

Thank you, (inaudible). Welcome to all of you and thank you for joining on this call. This morning we reported our results for the first quarter of 2007. These results were in-line with the outlook that we discussed with you last quarter. We continued to make progress according to our outlook and business goals. During the first quarter, we won new contracts and the progress with the execution of several significant projects. In the U.S., we saw a tier 1 grocery retailer expand the use of our system with additional of voice-operated warehouse management. Another grocery retailer chose a combination of DAX Power Enterprise and HQ Solution. It is worth noting that these are three software products, which the retailer would have bought from three different vendors until two years ago, but now they can come to Retalix to get all of them and the integration from the same source.

We also enjoyed a few deals of Retalix StoreLine (inaudible) with mid-tier grocery retailers. Alex Lee (inaudible) food relative to the division selected Retalix Demand Analytics, At the same time another division of Alex Lee went went to (inaudible) with Retalix Power Enterprise. CNS wholesaler grocery began the rollout of Supply Chain Management Solutions for perishables. (inaudible) began the deployment of our Warehouse Management System and three food distribution -- distributors went live with Retalix Power Enterprise and Power Warehouse. I am very encouraged by the emerging trends of customer Loyalty in the U.S. As you know, we went live with Retalix Loyalty in 200 (inaudible) markets in France serving almost ten million consumers. Our success there and the quality of our solution are attracting lots of interest of grocery and convenience retailers in the U.S. During the first quarter, we started our first project of Retalix Loyalty with a convenience retailer that has been using our point-of-sale software and we expect more Loyalty projects to start later this year.

I would also like to highlight for you a few of the international projects and achievements of the first quarter. (inaudible), a growing grocery chain in China selected Retalix point-of-sale headquarters and Loyalty solution. BP started rollout of Retalix software to its fuel and retailer (inaudible) worldwide. Australian Woolworth's completed rollout from Retalix point-of-sale software to its 900 supermarkets and general merchandise stores. The Scandinavian retailer group, (inaudible), extended the rollout of Retalix software to its 7-Eleven convenience stores across Norway and Sweden. And Israeli leading grocery chain, Supersol, started rollout of RetalixStoreLine.net POS and StoreLine Management Solution. As you see, we had quite a busy first quarter, both in terms of new wins as well as in completing projects and going live with our customers.

In R&D efforts, we progressing with the development of Retalix in-sync applications. We expect first installation of Purchasing and Ordering Management and Billing in the next few months. We have also made significant advances -- advancements in the development of our new Warehouse Management System and we are planning to start implementation with customers in Q4.

Now I would like to ask Danny to provide financial review for the first quarter.

Thank you, Barry. As you read in our press release, product revenue in the first quarter was 33% of total revenues compared to 43% of total revenues in the first quarter of 2007. This mix between product revenue versus service revenue represents a change in mix of enterprise solutions versus store solutions mainly in the U.S. The adjusted gross margin for the quarter was 60% compared to gross margin of 64% in first quarter of 2007. This is large -- this is due to a larger hardware component in our product sales this quarter and to lower service margins achievable when penetrating new markets such as China and Japan and Eastern Europe, and we see it necessary to support future sales in this region. Our U.S. operations generate 58% of our total revenues during the first quarter. 42% were generated from our international operations. Our R&D expenses for the first quarter remained at the level of about $15 million and I expect it to stay the same quarterly level throughout 2007. This reflects the investments we have discussed with you in enterprise and store solutions. For the remainder of 2007, we'll be continuing these investments. We estimate R&D percentage on an annual basis to be around 26% in 2007.

The high effective tax rate reported for the first quarter was a result of two causes. First, the FAS 123 compensation expenses of $1.3 million not being a deductible expense for tax purposes. And second, the relatively high effective tax in some of our foreign subsidiaries. We expect, as our consolidated income grows during 2007, our effective tax rate to be below 30% for the year. I would like to remind you that our revenues and income are traditionally tilted toward the second half of the year with about 53% to 55% of the revenue expected in the third and fourth quarters of this year.

In the first quarter, we reported an increase in trade receivables. This was caused by a temporary delay in issue of tax resident certificates by Israeli tax authorities, which caused the delay in the collection of some of our receivables. The necessary certificates were issued in the second quarter. Also, we decided to gradually decrease the use of factoring of our long-term receivables versus results in an increase of our customer balance due to the nature of the long-term payments (inaudible) certain large tier 1 customers. This also translates to a deficit in the cash flow from operating activities. Deferred revenues increased primarily because we now have more maintenance agreements that are closed and paid in advance at the beginning of the calendar year and are recognized throughout the year.

The devaluation of the U.S. dollar versus the Israeli shekel since the beginning of the year did not have a significant affect on our results in the first quarter, mainly because we had revenues in British pounds and euros that offset the dollar affect. However, we believe the continued devaluation of the U.S. currency will have an effect on our second quarter results, mainly because of the impact of our wages in Israel, which are paid in shekels, but we did take this affect into account when we reaffirmed our guidance for the year. The total number of outstanding shares for the quarter fully diluted was $20.2 million.

That completes the financial review. Now back to Barry.

Thank you, Danny. We believe that strong opportunities lie ahead in grocery, food service, petroleum and convenience segment. Due com -- due to competitive pressures in the market, retailers and distributors are continuing to look for ways to improve their efficiencies and enhance the customer service. We have been following this trend and investing in development of products and solutions that help retailers and distributors address these challenges. Our recent wins and achievements prove that we are on the right track. Our field-proven products provide us with the resources and the confidence to invest in the future and still make a profit for our shareholders. The first quarter was a good start to the year and we continue to expect good growth coming over the course of 2007. We are maintaining our outlook for 2007, with revenues ranging from $220 million to $230 million with an adjusted net income ranging from $15 million to $22 million. We appreciate the continuous support of our shareholders and in closing I would like to thank all Retalix employees all over the world for their efforts and dedication in the past 25 years.

Thank you for attending and now we will be happy to answer your questions. I'll turn the call back to the operator.

Thank you, sir. (OPERATOR INSTRUCTIONS) The first question is from Raghavan Sarathy of Ferris, Baker Watts. Please go ahead.

Good morning. Thanks for taking my questions. Danny, you talked about the services revenue in [the sense of services being mixed in enterprise and the store solutions] in the U.S. Could you give us some sense on what we should expect for the full year in terms of the mix between products and services?

Yes, I think we'll come back to the numbers we mentioned in the beginning and we'll come back to those margins of somewhere bet -- you're talking about the mix or the margins?

The mix.

The mix will be 40% product and 60% service -- professional services and maintenance.

So it's going to be higher than what we saw last year, so you expect do more product sales in the back half of the year?

Yes, certainly. Last year you remember we had issues with recognition and this year we'll have much more license revenue.

And then in terms of margin, what are you expecting?

In terms of project and services, we do expect that we'll come to about 66%.

Are you talking about the non-GAAP growth margin for the full year?

Yes.

Okay. And then G&A expenses declined almost $2 million sequentially. What caused the decline and from a modeling perspective, how should we think about that as a percentage of revenue?

That's a quarterly thing and you still should talk about the annual figures, which are -- which should be about 11%, 11.5% of total revenues.

All right. Then you talked about this increase in accounts receivable. Can you go a little more time -- I didn't catch the implications --?

We had an issue with -- there are some countries where we have to get specific documentation from the Israeli Internal Revenue Service, so we won't -- so the customers won't deduct withholding tax for us and we had -- there was a slowdown here with the IRS and that caused delay and that caused our customers to delay payment to us. This will be overcome in the next quarter or two.

So -- okay, so what should we expect for our cash flow from operations? Because if I look at the cash flow from operations, last quarter it was 20% of non-GAAP net income and this quarter it was negative. How should we think about capital from operation on DSOs?

As I said in our discussion, we are trying to bring down our factoring of receivables. That will affect our net cash from operations. We'll do it on a quarterly basis, so I just can't give you a figure right now. But it looks like it will lag after our net income.

Yes, but can you talk about the full year DSO at least, or where should we -- we saw [some major divergence]. Again you reported net income and cash flow, at least from a full-year basis (inaudible) --?

On a full-year basis, we will have positive cash flow. I think DSOs will run somewhere between 80 and 90.

Okay. Thank you.

The next question is from Amir Aviv of Poalim Sahar. Please go ahead.

Hi. I want to ask you two questions. About the selling and marketing, and the general and administrative, I see you reduced this cost significantly. o do you think it's sustained the full year at the same rate that we saw in the first quarter? Second question is, I look in the GAAP reports and I see that the net -- your net revenue is about -- one second -- there are almost no net income in this particular -- okay, what I mean is, you said that the lower -- the lower forecast of net income is $9 million in the GAAP. Do you think that in this three next quarters you're going to reach that number?

Yes. To the first part of your question, we do think that sales and marketing will be around 15% -- and I'm talking non-GAAP -- and G&A will be somewhere around 11.5% to 12%, so those are the annual figures. As for the profits, since revenues are tilted to the second half of the year, the affect on operating and net profits is much larger and most of the profits will come in the second half of the year and we certainly stand behind our guidance.

Okay. Another question. I didn't hear it quite well before about gross margin of the services. Did you say it would be 66%?

Yes.

And about products?

About 56%.

Okay. Got any indications for 2008?

No, we do not give guidance as to 2008. We do that somewhere in the fourth quarter of this year.

Okay. No, I'm not talking about guidance, but indication about how the year is going to be?

If you listened to Barry's descriptions of the wins and the deals, certainly a lot of them do affect 2008.

Okay. Thank you very much.

Thank you. The next question is from Ehud Eisenstein of Oscar Gruss.

Hi, thank you. Nice numbers guys. First, just a couple of housekeeping. Danny, I apologize, but can you repeat for the third time the margins that you -- did you say you had 63% and 56%?

Yes and a combined one of about between 62% and 63%.

Combined for the year?

Yes.

Okay. Can you please repeat the geographical breakdown?

Yes, 58% came from the U.S. and 42% from international, and international includes Israel, of course.

And what was the balance in the comparable quarter?

I think about 60% -- it's around about 60/40.

Okay. And do you still see the existing customers representing 80% to 85% of '07 business?

Yes, 805 of our revenue comes from existing customers.

80% came at the March quarter?

Yes.

And what do you see for the balance for the year? Is it still within the 80% to 85% guidance?

I don't understand what's the 80/85 guidance?

When you provided the guidance for '07, you stated that you see 80% to 85% of '07 revenues coming from existing customers, and my question is [is the case now]?

Yes, traditionally that's how our revenue -- our revenue is generated 80% to 85% from existing customers and between 15% and 20% from new customers.

Yes. I guess the question is not about traditional, the question is about how do you see the state of the business now?

Same thing.

And if you can refer to the (inaudible) in the pipeline as well?

Same -- it's the same situation. There's no change.

Okay. Head count at the end of the quarter?

15 -- about 1,520.

1,520?

1,520 employees.

Yes. Is it down by any chance. I have 1,530 at the end of the December.

You know, the ups and downs, but we are -- we have on our list of additional requests somewhere between 50 and 60 that we are looking to hire.

I see. Great. Can you just give us an update on the momentum that you see in the emerging countries? You spoke about India and China and Japan and Europe (inaudible) in the past?

Yes, I'll refer that to Barry.

No doubt that we are -- as evidenced at our international business is growing at a high rate. We've got several wins and you will be hearing of a few more wins in the Far East, mainly in China. I think the Chinese market is very interesting. We are investing a lot in that market and we are -- there's proof of success around that area. So I believe that in two to three years time, we have to see a 50/50 ratio between the contribution of the international market and the U.S. market.

Okay. Excellent. Thanks so much, guys. Good luck.

Thank you.

The next question is from -- is a follow-up question from Raghavan Sarathy of Ferris, Baker Watts. Please go ahead.

Thanks. Could you update us on the point-of-sale -- of great opportunities in the U.S. grocery sector and what's holding some of the tier 1 grocery vendors upgrading point-of-sale applications?

There's no doubt that there's lots of activity in that area. I see point-of-sale and Loyalty being linked totally together. Most of the RFPs are a combination of the two with our proven track record in the international market with several and we haven't announced, but there are several successes in the U.S. with a combination of Loyalty and POS. I think that we will see the movement that we've been expecting starting in 2007.

Now, when you say you have several successes, what are you referring to tier 2's or are you referring to tier 1 or --?

At this stage, tier 2.

All right. Then -- so you talked about several customer names in the commentary. How many new customers did you add in first quarter?

We don't give that, but it's -- for us we divide our business probably 70%, 80% is direct and 30% is indirect through our channel. In our channel, there's tens of new customers if not hundreds a quarter. In the direct, it's five -- maybe five new customers and that's the trend and we may be a bit above the trend at this moment.

And this compares to -- so as prior-year quarter, how does it compare to prior -- same quarter last year?

We are seeing a growth. I can definitely tell you that our pipeline is stronger than ever.

And one final question. What was the revenue mix between store solutions and headquarters in the quarter? And what were they for 2006 and first quarter '06?

I'd say it's about 35% to 40% headquarter solutions, 65% to 70% store solutions.

65% to 70%?

Sorry?

And what was -- so did you say 65% to 70% for store solutions?

Yes.

Okay. What was -- was there any change from last quarter or prior-year quarter?

No, it's about the same. It's about the same. Somewhere down the line, we do expect headquarter solutions to increase more than store solutions.

Right. And then, Barry, you mentioned in terms of the In-Sync, what's available today and what would you be releasing through this year? Did I hear the Warehouse Management will be available later this year?

Today, virtually everything is available; the Buying, the Purchasing, the Invoicing, all the products that we acquired from OMI in 2004 we've made available in the In-Sync product. The only thing that will be available towards the end of the year, which we've got a commitment to a customer, is the Warehouse Management is the second product that we acquired and now we are replacing.

The Warehouse Management also came from OMI, right?

That's correct. The first version, although IDS has got their own version of the Warehouse Management and our newly developed Warehouse management eventually will replace both of them. At this stage, we are focusing on grocery wholesalers and retailers to replace OMI product.

Right. So on that note, if I look at -- in the press release some of the customer wins, you spend a lot of considerable amount of dollars reengineering OMI product, but it seems to me a return on investment is minimal at this time. so could you help me understand why we are not seeing a stronger adoption of this product by the marketplace? Is it driven by market conditions, market factors or where you are in the product cycle?

First of all, you are correct that most of the revenue is not driven from these products. \But as management and with the vision of where we want to be in two to three years time, we see that Warehouse Checkout, this end-to-end product, being the strongest solution in the marketplace. We all know that at the beginning, when the early adopters the revenues are nonsignificant, but we are strong believers of this strategy and I believe that we will continue to invest, because in two to three years time we will prove that the investments of today will give the benefits in two to three years time.

Okay. And then just one final classification question. Danny, did you say that you're expecting sales and marketing 14% of revenue?

I said 15%.

15%?

Right.

Okay. And then you said the services gross margin, 63%?

Yes, the overall margin.

What's that?

The overall margin.

Overall margin. What about the services margin,66% or 63%?

66%.

Okay. All right, thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) We have a follow-up question from Ehud Eisenstein of Oscar Gruss. Please go ahead.

Yes, thank you. Just a final question for me. This year I believe Retalix celebrated a 25th anniversary. Barry, can you share with us your strategic view on Retalix? Do you continue to see it as an independent software vendor, say, five years from today? And what's your view on -- what's your strategic view looking forward? Thank you.

Good question. It's not because we're celebrating our 25th anniversary that we've got a strategic view. We've always had this view.

Absolutely.

We continue to strive to provide solutions to our customers -- valued solutions to our customers. Going back to the previous question, fortunately we are lucky that we've got the ability to invest in what we believe are future needs of retailers and distributors in the verticals that we are operating, the grocery, convenience, fuel, food service to provide this end-to-end solution. This end-to-end solution I believe is the answer what retailers need, because most of the energy and expense is spent today around integration of point solutions. Of course, we are competing on point solutions and we believe we are the best in each point solution that we are providing. But in two to three years time, integration will be the key to success and that's -- the integration will be the fastness of the -- or the ability of the retailer or distributor to change their system and to have the end-to-end solution react to the changes that they have applied, and this is where we are investing. We have invested in the platform, we are finished with the platform. We now are finished with applications and now we are in the process of having our first customers adopt the solution that really provides the end to end.

So I believe that we will continue to look to execute on this vision -- this end-to-end vision within the verticals that we are active, and over time we will adopt more and more verticals once we see success in our -- in the verticals that we are active. I am a true believer that a company has to be profitable, has to show returns to our shareholders. Not only that we have to show returns to our shareholders, our customers look at us, how we run our own -- how we run our own Company. Meaning, showing that we can show growth in investments while we are still profitable is a strong message to our customers that we provide products that will help them do the same thing. So I will continue to encourage investment while we will still be profitable to be a significant player in this industry that so many big players are trying to come into.

I see. But, Barry, in two or three years, integration becomes a key to success, do you feel like your end-to-end offering is wide enough to address this market need?

In our verticals, we are the widest, the most comprehensive solution. Our strength is the main knowledge in the vertical. Is a retail application good for the automobile industry? No. Is a grocery solution good for general merchandise? That maybe in three years time we will expand it to address both markets. Currently, we want to achieve success in the vertical that we are active and then broaden it to other verticals over time.

Excellent. Just last question for me, would you consider a share buyback in the future?

Look, I haven't thought in depth to that question, but if we do a share buyback, we buy $10 million or $20 million worth of shares to increase EPS versus to invest another $10 million to $20 million in R&D, I'm probably one of the largest shareholders in this Company, I personally would prefer investment in R&D. But I would consider it because sometimes financial meaning has also got a meaning for shareholder's value. But in general, I repeat that investment in R&D, while the opportunity -- we probably active in an opportunity markets of $7 billion to $9 billion and we are at $200 million. There's a big stake out there. Let's run for the -- to put a stake in the ground where we can achieve something rather than give back more dividends or increase EPS.

You invest 28% of your revenue in R&D into generating cash, so, yes -- Thank you very much.

We have another follow-up question from Raghavan Sarathy of Ferris, Baker Watts. Please go ahead.

Thanks. Danny, looking at the stock-based comp, it was about $1.4 million for the quarter and you still kept the year-end guidance. What are we expecting here, expecting stock-based comp to decline? At this rate, I would think it was probably about $5.6 million.

It's something around $4 million, $4.8 million. It's $4.8 million for the year.

For the year?

Yes.

Okay. Thank you.

There are no further questions at this time. I would like to remind participants that the replay of this call is scheduled to begin two hours after the conference. In Israel, please call 03-925-5940 or 1-800-286-285. In the U.S., please call 1-888-326-1930. Internationally please call 972-3925-5940. I would now like to turn over the call to Mr. Barry Shaked.

Thank you, everyone, for listening and I'll be happy to see you and hear you next quarter. Bye-bye.

This concludes Retalix first quarter 2007 results conference call. Thank you for your participation, you may go ahead and disconnect.