NCR Voyix Corp (VYX) 2007 Q3 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 are Avinoam Bloch, the Company's Chief Operating Officer and Hugo Goldman, 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 from continued support; impacts of currency fluctuations; the expected tax rate; analysis of market conditions; investment in R&D and professional services; pipeline of prospective 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 these risks and uncertainties contained in the Company's filings with the SEC and in particular on Form 20F.

Also, I would like to remind you that Retalix reports its net income and earnings per share on both a GAAP basis and on and adjusted non-GAAP basis. This presentation of 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 the Company's website at www.Retalix.com.

I will now turn the call 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. With me are Avinoam Bloch, the Company's Chief Operating Officer and Hugo Goldman, who recently assumed the role of Chief Financial Officer.

We are very pleased with the results of the third quarter. Total revenue reached a record of $58.1 million compared to $50.4 million in the third quarter of 2006. GAAP net income grew to $3.1 million compared to a loss of $1.1 million a year ago. Adjusted net income was $4.6 million compared to $700,000 in the third quarter of 2006.

We are also pleased looking at the results of the first nine months of 2007 with total revenues for the period reach a record of $166 million compared to $147 million the same period last year. GAAP net income for the period was $1.2 million compared to a net loss of $2.3 million in the same period last year. And adjusted net income for the period was $7.1 million compared to $2.7 million in the first nine months of 2006. As you can see we have improved on both fronts.

Hugo will discuss financials in greater detail. But first, Avinoam will review some of the operational and business achievements during the third quarter.

Thank you, Barry, and hello to everyone. The third quarter has been exciting for us both in signing new contracts, executing existing deals and continuing development efforts. Our product revenues in the third quarter include a number of significant new contracts. In the United States, Love's Travel Centers contracted us to provide an integrated point-of-sale and headquarter system to serve more than 200 convenience, fuel and foodservice stores.

Big Y, a midsized grocery chain which has been a longtime user of Retalix point-of-sale decided to expand their use of our technology with Retalix Loyalty. This win is especially important because Big Y is well-known in the grocery store market, is a leader in customer loyalty and consumer targeted marketing. Having Big Y selected Retalix Loyalty is an important show of confidence in the rich functionality and robustness of our Loyalty product offering.

Save Mart Supermarkets, a Tier 1 grocery chain based in California licensed multiple components of our supply chain management application suite for implementation in their three distribution centers.

In the distribution segment, the Odom Corporation, a leading distributor of beverages in the Pacific Northwest, signed a deal to install the Retalix Power Enterprise suite. This enabled the wholesaler to synchronize -- excuse me, sorry. In the international business unit, during the third quarter we have made significant progress with Carrefour across Europe. The rollout of our point-of-sale to Carrefour hypermarkets and proximity stores in Italy reached 160 stores.

We progressed with the customization for Carrefour (inaudible) supermarket chain in France and went live in the pilot store two weeks ago. We also progressed with the development required for the Carrefour stores in Belgium where we plan to pilot during Q1 next year. Carrefour plans to deploy our point solutions in more countries in 2008 including Russia, India, Malaysia and Taiwan.

Also in Europe, a major grocery retailer based in the Baltics selected our point-of-sale solution for deployment across their 200 stores. This will further enhance our presence in these emerging markets.

During the year's third-quarter, we started working on the PetroChina project which we have recently announced. PetroChina recently became the biggest company in the world by market cap overtaking ExxonMobil in becoming the first trillion dollar market cap company. PetroChina wants to have 1200 fuel sites up and running with the new hardware and [also offering] several regions before the opening of the Olympic Games next summer. Succeeding with PetroChina will position us as the leading software provider in China. With this in mind, we are dedicating significant effort to take execution of the PetroChina project as well as other two contracts we have recently won in China.

The development of Retalix InSync is progressing as planned. During the third quarter, a grocery wholesaler in the U.S. went live with Retalix InSync data staging. This enables the wholesaler to synchronize supplier data from the global data synchronization network called GDSN into their existing Retalix buying system.

Two other implementations of Retalix InSync have been released to the customers and are currently being tested by the user. We are very encouraged by this first success and look forward to going live with other parts of Retalix InSync offering in the coming months.

Another solution that is already getting momentum is Retalix DemandAnalytX or DAX, which is used by retailers to focus the consumer demand and optimize their store ordering and replenishment processes. All our DAX customers are enjoying strong ROI and a reduction of stock, reduction of inventory levels, and reduction of spoilage. DAX is already being used in more than 900 grocery and convenience stores in North America and we expect that number to reach 1000 stores by the end of the year.

I look forward to meeting you and having more good news to report on the next conference call. And now back to Barry.

Thank you, Avinoam. As you can hear, it was a very busy quarter for us but I actually want to touch on the point that Avinoam mentioned, the Chinese market, an unequal market in terms of opportunity. Retail researchers estimates that continued economic growth will boost retail sales for the foreseeable future. Grocery retail sales in China have seen impressive growth, increased strength by around 50% between 2003 and 2007 to US$565 billion. Research estimates that by 2012, grocery retail in China will be $879 billion and eventually may even outgrow the U.S. markets.

In light of these opportunities, we see it necessary to dedicate or require resources to succeed with our first three customers in order to support further sales in this region.

Now I'm pleased to introduce to you Hugo Goldman, who took over as Chief Financial Officer three weeks ago replacing Danny Moshaioff, who served as the Company's CFO for eight years and has been appointed to EVP Business Development. Also thanks to Danny on all his achievements with the Company.

Hugo brings 25 years of experience in finance and executive position in high-tech and public traded companies. Most recently he served as CFO of AxisMobile, a provider of mobile technology traded on the AIM, the London Stock Exchange. Prior to this he was CFO of the NASDAQ listed VocalTec Communications and he spent 16 years at Motorola Semiconductor in different financial and executive roles in Israel and in the U.S.

We believe Hugo's experience will be extremely valuable as we grow our Company. Some of you already had an opportunity to meet Hugo at our user conference in Dallas or at the AEA event in California. And we look forward to introducing him to many of you in the coming months. Welcome Hugo, and a good luck.

Thank you, Barry. Good morning or good afternoon to all of you. It is a pleasure to be here with you today. I am very happy and very excited about joining Retalix and would like to thank Barry again for his trust and for his kind words.

Since I took office as CFO of Retalix, I have had a chance to meet all of the Company's management team members and key people both in Israel and in the U.S. and I am very impressed by their enthusiasm, their professionalism and the dedication that they share. Together with Avinoam, we are focusing on ways to improve efficiencies across all the Retalix operations and to maintain sustainable growth both in revenues and in healthy profitability.

Now turning to the results of the third-quarter of 2007. I am very pleased to join Retalix in a quarter in the year in which the Company achieved record revenues and better profits. The challenge now is to continue growing our top and bottom lines. Our total revenues were up 15% compared to the third quarter of 2006. Our U.S. operations generated 68% of the revenues during the third quarter and 42% were generated from our international and Israeli operations. The increase in revenues was mainly due to increased product sales primarily software licenses which grew by 40% year-over-year.

During the third quarter, our R&D expenses decreased by over $1 million compared to the second quarter of 2007 as the Company started reassigning employees from R&D to professional services as planned. As products such as a DAX, Loyalty, and [Store.net], our future voice solutions, maturing the R&D cycle and are gaining more and more paying customers, we are reassigning the resources accordingly. This trend is expected to continue.

The depreciation of the U.S. dollar negatively impacted our gross profit and our operating income during the third quarter by $700,000. Overall we estimate the weakening of the dollar to add about $3.3 billion to our costs for the full-year 2007.

The tax income for the third quarter is primarily attributable to the year-to-date adjusted tax calculation, the tax calculation for the first nine months. For the year -- for the full year of 2007, our effective tax rate will be about 22%.

As of September 30, 2007, our balance sheet has $43.3 million in cash and marketable securities net of short-term bank credit compared to $50 million in the end of the second quarter. This $6.7 million reduction in our cash is mainly due to the negative cash flow from operations or $3.9 million and to $2.5 million used for the purchase of additional property in our corporate headquarters building.

While in the past Retalix felt that we need a strong cash position in our balance sheet in order to demonstrate financial viability to large prospect customers, we feel that now as a strong Company with a roster of Tier 1 retail customers and with the market leadership position that Retalix has, we are decreasing the level of factoring. In the longer-term, the reduction of factoring will save us financing expenses going forward.

DSOs for the quarter was 99 days. Improving the payment terms and collection services is one of the main items that I will be focusing on in the coming months.

Long-term debt for the end of the quarter was $900,000 and shareholders equity was $220.9 million. The basic number of total outstanding shares for the quarter was 19.9 million and the number of shares fully diluted was 20.1 million.

The number of Retalix employees and subcontractors at the end of the third quarter was 1580 which is a net increase of 30 people compared to the previous quarter. We are not expecting headcount to increase in Q4.

That completes the financial review. Before I turn the call back to Barry, I just want to say that I'm looking forward to an ongoing and open dialogue with the investment community and hope to speak to many of you in person in upcoming months. Barry, back to you.

Thank you, Hugo. I would like to address our outlook for the full year. We are having a record year in sales and we expect our total revenue for the full year 2007 to be above the midpoint of a range of our guidance. We feel that we can still achieve net income at the low end of the range through a few deals that we are working on.

The unchanged business fundamentals, the strong demand for our product, and the long-term relationships with our customers, supports our estimate. Although there can be no assurance, we are optimistic about closing these deals by the end of the year. We are aware of the need to improve our operational efficiencies and margins and Avinoam, Hugo, and the rest of the management team are making that top priority.

Our strong position in the industry was demonstrated at our customer conference in Dallas three weeks ago. Several of you have joined us at this outstanding event which was attended by 800 customers, business partners and Retalix employees from all over the world. The conference reaffirmed our leading position in the food, retail, and distribution industry.

I would like to share with you some of the takeaways that we heard from customers at the conference. First, as retailers and distributors think about investing in next generation technology, they are increasingly looking for integrated application suites. CIOs are less interested in point solutions. They realize that internal development is not an option and wants to stage transition from legacy and home-grown applications. These CIOs want to see solutions that incorporate deep domain expertise. And they are concerned about the viability of the software partners. For these reasons we found customers were very supportive and they are interested in Retalix and in our value proposition.

Second, IT investment is being driven by ROI calculations. Therefore, we are seeing increasing interest in applications such as our demand driven replenishment solutions, DAX, and our advance customer Loyalty system. The fact that we are able to demonstrate meaningful improvement in metrics like [Apple] stock, spoilage, and inventory turns, make these applications very strategic.

Just two years ago, we had only one customer using DAX in 40 [U.S]. stores. Now we have 15 retailers implementing DAX in more than 900 stores. Two years ago we had only one customer using loyalty solutions. Now we have 17 retailers signed up to implement our solution.

I sense a change in the food retail market with grocery and convenience retailer adopting second generation loyalty. I believe this advance to more sophisticated customer loyalty programs will lead to a point-of-sale upgrade to enable the realization of the full benefit of our Loyalty system.

And finally, what we hear, the breath and maturity of applications that Retalix now offers is unmatched in the food, retail, and distribution market. During the conference we made it clear to our customers that while we dedicated great efforts or dedicating great efforts to our next generation solutions, we will continue to enhance and support our existing products. Our customers continue to get innovations in the current releases and choose when they are ready to move to the next generation technology. This message was also very well received across our customer base.

I would like to thank our customers, business partners, guest speakers and employees for the time and energy they've invested in making the Retalix Synergy 2007 global conference a great success. 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.

Thank you for your attention and now we would be happy to answer your questions.

(OPERATOR INSTRUCTIONS) Ehud Eisenstein, Oscar Gruss.

Thanks for taking my questions. And welcome Hugo, and thanks, Danny. Just on the tax, any thoughts on the fluctuation between the quarter and are you taking the '07 guidelines from 22 to 25 to the lower range?

Hi, Ehud. Good to have you with us does today and I am also glad to have you with us and altogether let's talk about the tax. We made some calculations for the nine months and we -- our current computations call for about a 22% for the full year. That is why in this quarter we made the adjustment accordingly so there was actually tax benefit for the quarter. It this answering your question?

Sure. Thank you. And on the remaining guidance for the year, it looks like you guys are working on closing some deals. Maybe Barry, if you can give the some more color on that? Is it ongoing business that you should reach a certain milestone or it's a new business? How many deals we are addressing here? Which geographies? What is the business segment? Is it the store enterprise? Any incremental data would be helpful. Thank you.

We are talking about deals with all existing customers, long-term relationships with them that they've been looking for additional product from the company.

In the international market?

All over.

And is it a [bigger] digit number of deals or more than that, what is the magnitude?

We are working on closing these deals and we feel optimistic of closing them and that is the information I can give. I can assure you that if there will be made any negative impact, we will not notify the market.

Sure. And on the penetration to the new territories, you specifically elaborated on China. Can you give us the milestones where you are now in terms of penetrating each territory and what do you see looking forward?

The significant milestone is that we've done quite a bit of the localization of both the Chinese, Japanese and Indian markets, those are the three growing markets in terms of Retalix opportunity. There's still work to do, but we've got live stores in all these places working and local languages with the local regulations. So that is very important. We know that the first few customers are the bigger efforts and once you get through that, then you can see much higher margins. It also affects sometimes your professional service margins. We're [now] penetrating to a new country so that's where we stand.

Thank you. And can you give us an update on [BP] please?

With BP, this is Avinoam, hi, Ehud. We made good progress this year. We are on rollout phase in Australia and in quite a quicker pace also in the UK where we have close to 260 stores already installed. And we plan to pilot before the end of the year in the U.S. and New Zealand and we will see rollouts coming next year in these countries as well.

Thank you. And just last question from me. On the Tier 1 opportunities looking into '08, with compared to where were you a year ago, is it pretty much the same pipeline or do you see larger Tier 1 opportunities looking into next year? Thank you.

As I was trying to say on the first part of the call, my indication to the interest of Tier 1 in next generation is actually around loyalty. Because loyalty causes a change in business processes, adopting second generation loyalty, second generation meaning more one-on-one marketing, more sophisticated sophistication at the point-of-sale which eventually calls for upgrades of the PRF. So for me that is the strongest indication that the U.S. market is ready for its upgrade cycle.

We've seen this in the international market. Many of our customers chose Retalix because of our strong loyalty and PRF. That was demonstrated very strongly with Carrefour. So I believe that we heading for that direction in 2008 and 2009.

Very good, thank you and good luck.

Raghavan Sarathy, Ferris Baker Watts.

Good morning and thanks for taking my question. You talked about (inaudible) selecting the (inaudible) solution. I presume you haven't started to recognize licensing (inaudible), is that correct?

That is correct.

When do you expect to start (inaudible) licensing (inaudible)

2008.

2008? Okay. You've been cautiously optimistic about the full-year outlook and I think you see (inaudible) But in terms of meeting your guidance, are you looking at expanded commitment from existing customers? Are you looking at significant number of new deals that you should close? Can you give us some color on this?

As I told you before, or mentioned on the call, we are talking about deals with customers that have been looking for our products for a long time. It's not abnormal business.

All right. I'm not sure if you are ready to type about 2008. But without getting into detail, if I look at the market growth rate based on the anticipated 2008 revenue growth, the operators are fellow participants in this market like [Micro], Radian, [JDA] and [Manhattan]. I would think that the market is growing below double digits.

Is it reasonable to assume that you will be able to do it at the market rate and what specific drivers are you looking at?

We haven't given guidance for 2008 but we did mention in conferences that we still believe that we've got potential to grow double digits. What is pushing us to believe that we can grow more than just the market is the fact that the retailers are shifting from home-grown solutions toward package solutions. And that is where the growth is in the market and that is our stronger point. But more guidance on that, we will give later this year.

And a few questions, (inaudible). It seems like you had a higher license content in product sales in the quarter which seemed to [include] product margins by almost 10 points sequentially. Should we be looking at similar (inaudible) product margins in the fourth quarter that would tend to be strong from license contribution (inaudible)?

The answer is yes to your question, correct.

All right. And then in terms of services margin, you talked about some of the costs shifting from R&D to services impacting the margins. Was the reseller a factor as well? And what could we expect from the services margin next quarter?

Basically we are as previously mentioned, we are now implementing and deploying them to customers whether or (inaudible) for professional services attached to those. So in the short term, we may see a slight reduction in the margin from services as we go differently in this implementation. So in terms of the first stage, we are going to see a slight reduction, maybe a couple of points in the margin services.

Just adding to that, you are correct that the weak dollar is also influencing our margin because most of the professional service on the international side is done from Israel. And actually just from that what we are telling you is that we incurred an additional $3.3 million let's call it unbudgeted which has impacted our bottom line and we are still believing that we will get to the lower end of the range. I think Ehud asked a question, is that one of the reasons that we moved. We are targeting the bottom end of the range and not anything else.

Okay. But in terms of we are looking significant improvement in profitability in the fourth quarter to the third quarter and you are talking about similar impact on Retalix margins. Where do you expect to pick up the shortfall? Is it going to be on the product margin side?

Yes, it will be licenses.

Okay, and then one final question and I will jump in the queue. The deferred revenue declined throughout the year and this trend has been totally different from last year. Hugo, can you talk about what is included in deferred revenue and what is guiding this trend this year?

Deferred revenues is something that depending -- is something first of all that being new in the position, there are some things I need to get deeper into them. In general as we get to closer into the end of the year, if we go to example (inaudible), you are getting closer to the end of the year, this is tendency to be lower amounts? If you want to dip further into that, we can take it off line and answer more questions later on.

Okay. Just one verification question. The tax rate that you mentioned, the 22% for the full year is a GAAP or a non-GAAP tax rate?

GAAP.

What is the non-GAAP tax rate that you anticipate for the full year?

Well, it is a bit different. Let me get back to you on that. But it is not a big difference. I need to get back to you.

All right, thank you.

(inaudible), a private investor.

Good morning everybody. I have two questions to Hugo. First of all, I'd like to congratulate you for the new appointment and I wish you all the best.

Thank you.

My first question is regarding the trade receivables. Can you break down the balance of the 61.5 million into billed and unbilled?

Do you mean billed and then invoiced?

Exactly.

I mean the -- this is all billed -- I mean invoiced. We are talking about invoiced to customers. This is receivables.

And the unbilled receivables, are they in the other (inaudible)?

No, unbilled is not in the numbers. If it is unbilled we are not actually stating them. You can be more precise in your question.

I'm talking about recognizing revenue without billing a customer.

You mean about the accrued receivables? I mean without --

Yes, for example, yes.

It's about $50 million.

$50 million, out of the 61?

Right.

Okay. The second question is we can see the increase in the turnover and also in the net income in the last quarter. However, it is hard not to notice that the increase in the trade receivable balance which went up from approximately 60 million in the last two quarters to approximately 70 million including the long-term portion, long-term portion in the third quarter. This resulted heavily on the operating cash flow. You used almost $4 million in the last quarter. Can you explain this situation? I mean it looks like a very bad cycle. What I'd like to ask is how well would the trade receivable balance look in the next quarter and how will the cash flow be?

Okay, it early to tell you the receivables at the end of the year. But I can answer to the earlier question on as follows.

Okay.

It is a combination of on one side is increased revenues which are increasing receivables. Now on the other hand, we are reducing the level of factoring that we used to do in the past. So we are trying that is why we mainly we thought to bring the decrease in the total operation of cash flow.

Okay. And in the foreseeable future you --?

We are going to reduce -- continue reducing the factoring. So we will be seeing -- there will be a combination on the one hand -- that will on one hand increase these receivables. On the other hand as I said earlier, we will be looking as one of my main issues to focus on is on improving the payment terms to customers and putting more emphasis on the collections in order to as much as we can improve the trade receivables balances. Definitely this is an issue we should be looking into it -- we'll focus on it.

The collection issue?

Yes.

Okay, thank you very much.

You are welcome.

Raghavan Sarathy, Ferris Baker Watts.

Thank you. Hugo, can you give us a geography (inaudible) contribution from three segments year-to-date?

You say geography?

Yes, year-to-date through nine months of this year.

We're roughly similar to what we had in Q3. They are 58 and 42%.

58 (inaudible) --

Yes.

Okay. And then this is a question for Barry. Last time you talked about three major product developments including Store.net, excuse me. When do you expect to make this product generally available and are we -- I'm also wondering if customers are holding back waiting for this product?

Store.net is a product that we are targeting very selective customers. We are not going to release it for the next two years. It is very technical and product with specific customers. Our current StoreLine and StorePoint are our main products and we will continue with them.

It won't be if I understood correctly, it won't be available until 2009?

We will not make it a general release. We will go after technical customers with this product.

All right, thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In Israel, please call 03-9255-940, or [1-800-286-285]. In the U.S., please call [1-888-26-310]; internationally please call 9723-9255-940. I would now like to turn over the call to Mr. Barry Shaked.

Thank you, Julie. Thank you everyone for being with us today. We look forward to talking to you again after the next quarter. Bye, everyone.

This concludes Retalix third-quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.