NCR Voyix Corp (VYX) 2007 Q4 法說會逐字稿

Welcome to the Retalix fourth quarter and year-end 2007 conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded March 19, 2008. Leading the call is Retalix Chairman and CEO, Barry Shaked. Joining him is 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, net income, margins, expenses and tax rates, company's ability to improve cash flow and profitability and cut expenses, product development efforts, expected increased revenue and productivity from services, reduced costs from inefficiencies and expected costs from the depreciation of the U.S. dollar, anticipated demand for the company's software products, expectations with regards to implementation, rollout of existing license agreements, analysis of markets conditions and penetration in emerging markets, 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'd like you 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 a both GAAP basis and on an adjusted non-GAAP basis. This presentation of net income and earnings per share will enhance our understanding of the company's historical financial performance and will facilitate analysis and business and meaningful period to period comparisons. Today's press release includes a reconciliation of non-GAAP information to the most directly comparable information and is posted in the investor section of the company's website at www.retalix.com.com.

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

Thank you, Julie, and welcome to all of you, and thank you for joining us on this call.

While 2007 has been another record year in revenue, we did not meet our bottom-line goals for the year. Today I would like to discuss two themes with you. Our current business and the initiatives we are taking to improve Retalix performance. Regarding the current business we continued to see strong demand for our -- from retailers for our solutions. We continued selling products and services and meeting the needs of our customers. Briefly, let me touch on some of the highlights for the fourth quarter. Our new customer loyalty solution won two grocery customers in the U.S. These were expansions of our relationships with these customers which already use our point-of-sale systems. An American grocery chain recently started using Retalix InSync master data management, GDSN, to synchronize data between the suppliers and the existing Retalix buying system.

In the U.S., we are signing new contracts for our headquarters and store solutions for small and medium grocery chains and also for our new transportation product line which we added during 2007. Our demand forecasting and ordering optimization solution, DEX, has been successfully deployed in more chains in the U.S. In Europe, an important new deal was struck with Delhayes, Belgium, which was European's pioneer in customer loyalty many year ago, and decided to upgrade its loyalty system to the new product Retalix. In Italy we completed the first stage of the rollout of Kofu convenience stores following the successful rollout to Kofu Hyfa markets. In China our first pilot store of (inaudible), deployed the Retalix point of sale solution, and we are progressing in the project as planned. In Hong Kong, Park and Shop supermarkets operated by Swanson went on line with Retalix point of sale.

As you can see, the business front continues to be strong. However, we understand the focus of 2008 must be on improving our performance and profitability. In the last few months, we have been busy implementing a change within Retalix in order to improve our performance, our profitability, and our cash flow. Our top priority this year is not top-line growth, but bottom-line improvement. We have discussed this both with managers and with employees across the organization throughout the world. We are pleased by the understanding of the company objectives and the commitments of our employees to make this happen in 2008.

As part of the continued effort to measure the efficiencies of our operations, we looked very carefully at our headcount. From a peak of 1,600 employees during the fourth quarter, we are now at 1,539 employees, which is a net decrease of 61 employees. We expect our ongoing right-sizing will provide cost savings that will have more significant impact beginning with the second quarter. In addition, our current efforts are largely in the following areas. One, improving the utilization of professional services. Two, prioritizing our product development efforts. To improve our performance, we are changing how we are managing -- how we manage the ongoing developments and enhancements of products. We believe there's an opportunity to increase service revenues.

Historically, even after we released our product into the market, we continued to develop -- to do development as part of our R&D efforts. As new products mature in the development cycle, we are reassigning resources that were dedicated to product development to professional services. Now we can charge customers for services connected to new products that have matured. We are tracking more closely these resources being used for the services we provide to customers. This should enable us to identify and eliminate instances where the efforts to do -- the efforts do not justify the return. It in the short term, these changes are reflected in more cost of services. However, we are now monitoring services profitability more tightly and will determine where resources should be allocated and identified -- and identify opportunities to improve performance. As such, these efforts should either turn into more revenues from services, or we will reduce the cost of services by eliminating the inefficiencies on those efforts that are not producing satisfactory returns. As a result of the reassignment of resources from product development to services, the gross margins in services in the fourth quarter of 2007 was 47%. We expect to continue this trend with a similar impact in the first quarter of 2008. However, as our cost reduction measures take effect, we aim to be at a 49% gross margin for professional services for the full year of 2008. I would also like to remind you that we will continue dedicating resources to our penetration into emerging markets even at a cost of low margins on services.

According to an AMR research report released just yesterday, software spending by retailers in China, India and Russia will top $1.5 billion in 2010, an increase of 45% over 2007. We believe the market potential in these emerging markets justifies our current investment. Another step we have taken is to enhance the management of our product development.

In January we appointed Isaac Shefer, Executive Vice President of product development. Shefer has 25 years of experience in information technology and software development. He has worked both for software development and as well as for retail chains, most recently as CIO of the Israeli largest grocery chain, Supersol. Since he joined Retalix he has made significant internal changes to the development organization in order to focus on on-time delivery of new products.

We have prioritized our deliveries -- our development efforts. The development priority for Retalix InSync are the master data management, which has been deployed to the first two customers, the InSync purchasing model, and Retalix InSync installs. As these three products are released successfully during 2008, we will then evaluate the time lines for other InSync models. Also, we continue to invest in the development of our next generation point of sale and store management system, store.net. The first version of our new dot-net POS is already live in Supersol stores in Israel and now our efforts are focused on development required to take the product to global markets. We are confident that the efforts described to you today will help us to address the issues that affected our performance in the past and will help to improve our further performance. Now would like Hugo to review the financials of the fourth quarter and our financial outlook for 2008.

Thank you, Barry.

As we discussed with you in January, the fourth quarter fell short of our expectations primarily due to the three license deals which we expected to close by the end of the year. These deals were expected to contribute around $8 million of license revenues to our product revenues line item. As a result, product revenues were 37% of revenues and the gross margin in products was 47% due to the larger share of hardware in the product revenues of this quarter. As Barry discussed, our gross margin on services is being impacted by the increase of cost of services as part of our plan to increase the potential service revenues. These efforts are having an impact on the gross margin on services which we expect will improve as we undertake future efficiency efforts and also allocate more of these costs to individual customers. For the longer term, we aim to be at 49% gross margin on services.

Our selling and marketing expenses in the fourth quarter were lower due to (inaudible) commission and other cost savings. General and administrative expenses were higher in the fourth quarter, primarily because of some budget reserves and higher fees for legal, audit, and tax (inaudible). The difficulty of the U.S. dollar in the fourth quarter had a negative impact on our non-dollar wage costs, primarily in Israel, amounting $1.4 million. We are monitoring the ongoing changes in currency exchange rates and in the general economic conditions and are evaluating different options if necessary. I am pleased that as of December 31, 2007, our balance sheet had $27.6 million in cash, cash equivalents and marketable securities in spite of the fact that we discontinued the factoring of receivables. Overall, in 2007 the factoring of receivables cost us $1.8 million gross, as we are not in incurring any new expenses in factoring our financial income in the fourth quarter amounted to over $600,000. DSO for the quarter were 180 days -- sorry, 128 days. As we have already announced we are giving increased emphasis to improving the receivables cycle, payment terms, invoicing, insuring customer credit and collections.

Based on our operational plans, we expect to be cash positive in 2008. However, this is a process, so we expect the improvement of cash flow to be gradual and to come into full effect within four to six quarters. (inaudible of course to work the shorter payment terms into the new contract and to negotiate payment terms in existing engagements. We have practically no debt. We only had long-term debt of $800,000. And our shareholders equity was $220.1 million. Now looking forward to 2008, we expected total revenues for the full year 2008 to exceed $232 million, GAAP net income to exceed $8 million, and the adjusted non-GAAP net income to exceed $16 million. We expect a gross margin of around 51%. We expect product development expenses to decrease and be below 20% of total revenues, selling and marketing expenses will be similar to 2007 at average $7.6 million per quarter. G&A expenses are also expected to be similar to 2007 at an average of $6.5 million per quarter. We estimate effective tax rate to be around 21% of total revenue. All the figures I have just mentioned are adjusted non-GAAP figures which exclude amortization of intangibles and stock-based compensation expenses. Please be reminded that the reconciliation to GAAP figures is available on our website at www.Retalix.com. Now I will turn the call back to Barry. Barry, please.

Thank you, Hugo.

The management and the board of directors are focused on the initiatives that we discussed today and share the same intention to improve the performance of Retalix and to ensure we deliver meaningful results for our shareholders, customers, and employees. As I'm sure you have read, FIMI, a well-known private equity Israeli fund has recently purchased about 12% of Retalix shares. Ishay Davidi, the CEO of FIMI shares my view of the opportunity that lays ahead of Retalix. We both believe that it is in the best interest of the company to continue to pursue the end-to-end solution that Retalix is working on. FIMI believes that they can contribute to the company's performance and assist management in achieving better profitability. I appreciate FIMI's interest in contributing to the company -- to the company's future. To ensure that we remain focused on those goals, FIMI Brian Cooper, the cofounder of Retalix, and a member of the board, and myself, recently signed a shareholders agreement. The shareholders agreement gives the company broad and solid backing in a period of many challenges and opportunities. The board of directors is already moving forward with many of the points recommended in the shareholders agreement. Yesterday, the board of directors approved the appointment of FIMI's nominees, Ishay Davidi and Gillon Beck as members of the board. I would like to take this opportunity to welcome Ishay and Gillon to the board. I'm sure they will contribute to the future success of Retalix.

In closing, let me discuss our outlook for 2008. The economic concerns that are being reported daily in the media are more likely to impact retailers outside Retalix markets. As the consumer spending on food and fuel is expected to be the least affected. The latest U.S. census report on retailer sales, which was published last weekend shows that sales in grocery stores grew by almost 5% in February compared to the same period last year. At the same time, sales in other retail segments, such as department stores, motor vehicles, furniture, and others declined in February by 4%. However, we will continue to monitor the economic conditions and the outlook for the U.S. dollar. Overall demand for our software solutions remains strong, allowing us to reconfirm the outlook we provided in January.

As Hugo stated earlier, we continue to expect total revenues for the full year 2008 to exceed $232 million, GAAP net income to exceed $8 million, and adjusted non-GAAP net income to exceed $15 million. As the first quarter of 2008 is nearly ended, I can update you on our performance so far this year. We expect total revenues in the first quarter to be around $54 million and non-GAAP net income to be between $0.5 million to $1 million. Gross margins are expected to be similar to the fourth quarter at around 48%. We expect we will see these margins improve gradually during the year as our cost savings and processes of improvement will take effect. Thank you for your attention, and now we will -- we are open for questions. Back to you, operator.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you are using speaker equipment kind lift the handset before pressing the numbers. Your questions will be polled tin order received. (OPERATOR INSTRUCTIONS) Please stand by as we poll for your questions. The first question is from Ehud Eisenstein of Oscar Gruss. Please go ahead.

Hi, thanks for taking my questions. Congrats on the March quarter numbers. Hugo, can you please go and repeat for us the '08 model, what is the gross margin breakdown? It looks like you're starting from a lower base on the product side. And then the -- did you say 20% decline in R&D? Can you just repeat it for us? Thank you.

Hi, Ehud. How are you?

Great, thanks.

Just to -- your last question there, we expect R&D to be below 20% for the year.

Of revenues.

Yes, of revenues.

Okay.

Regarding the margins, gross margin for the year to be altogether 51%. Products margin about 54%. Services margin around 49%.

Say it again, please.

54% and 49%.

50 -- okay. And then sales and marketing and G&A?

Sales and marketing around 15%, G&A around 11%.

Percentage of revenue?

Yes.

And how quick do you expect the cost structure to decline?

The costs to decline?

Yes. On the sales and marketing, G&A, R&D.

Well, basically, sales and marketing, we said that we expect this to be similar, right, to 2007. And G&A to be similar to 2007. Alright? So the numbers I said in the earlier were $7.6 million for sales and marketing and $6.5 million for G&A, per quarter.

Right.

The average per quarter.

And that's significantly lower -- that's lower than 2007.

Well, depends on the -- not all the quarters were the same. So in some cases G&A was higher later in the year, sales and marketing was lower later in the year, so (inaudible) using averages will be better.

Sure. And the (inaudible) is not helping me here, obviously.

Right. We're looking into different options (inaudible) We're looking closely.

Okay. And you saw a significant decline in working capital. I understand that some of it is related to the factory. Can you break down the increase in account receivables versus the non-factoring portion of it?

Yes. Just to give you very simple numbers that in Q4, we just did not renew $28 million in factoring of receivables. Nevertheless, if you look at the total cash and the cash equivalents went from about $44 million to $27 million, which is just $17 million decline.

Right.

So just when you look that, you see that we had, let's say, a good quarter in terms of collections. So we still need to wait over the quarter to see, to see this to the very end. Right now, the only remaining, let's say, factoring that we will not renew is $10 million throughout the next quarter.

So it is existing factoring that you choose not to renew, it's not new business that goes directly to the cash flow?

Right. (inaudible) We totally discontinued factoring. So what you see right now in the cash is cash solely deriving from the regular business.

Right.

So I could not increase the cash by $28 million just by renewing factoring. So we didn't do that, and the good -- the other side of is it that we got financial income. We don't have the financial expenses.

Yes, sure. And Barry, maybe just quick update on the progress in Japan, China, other emerging territories.

We have been investing quite a bit of money since 2006 in these markets. We are starting to see the fruits of these investments. Particularly, actually in Japan, we're starting to be in a break-even situation, which means we can start making profits in the future. China, we still will be investing in 2008 to penetrate into that market, but we -- as I mentioned, we've got live stores with Wal-Mart, we expect to go live with PetroChina in June. PetroChina is kind of a landmark for other retailers to see what's happening over there and to probably adopt Retalix even more strongly.

Okay. And, Barry, are you comfortable sharing with us the expected headcount by the end of '08? Or are you not ready yet for that?

We're not ready yet for that. That I'm just saying that we will continue to drive efficiencies, and part of that is to continue to right-size the company.

Great. Thanks for taking my questions.

Sure, thanks.

The next question is from Raghavan Sarathy from Ferris, Baker Watts. Please go ahead.

Good morning, thanks for taking my questions. With regard to licensing, you talked about (inaudible) Could you refresh my memory on what led to the (inaudible) a bit on the progress that you said you expect to close by the end of the year?

Yes, the licenses, the three main deals are just deals that, one of them, the customer decided not to do anything, and two of them will probably happen in 2008 from our point of view, which we took that into account, but I assume that there will be some deals in Q4 of 2008 that will shift to 2009. Therefore, our projection remains the same.

Now, this is an exception? Why would the deal flip? Is it nothing to do with the macro economy?

No, it is just to do with customers making the decision and -- and timing, nothing more to do.

Okay, and then, Hugo, you mentioned -- if I look at the G&A excluding (inaudible) tax on non-cash charges increased by $1 million, you said something like legal and audit issues. Can you (inaudible) I didn't quite catch it. Can you explain what led to the increase in G&A?

Yes. I said that we had some additional expenses, lawyers and the tax consultants, some things, and those auditors that were hired. Altogether those -- those are the fees I related to.

So you had about, you had -- you saw one-time one-time expenses (inaudible) by the guidance?

Yes, I would say, not exactly one-time, but were just some additional expenses in fourth quarter which is not going to be there in the base for the model at '08, you should look at the average.

Alright. And then in terms of the content side, again, looks like you said you are looking roughly $6.5 million in G&A expense per quarter. Would seem to imply that (inaudible) impact going forward, or may be a time to balance it out. How should we think about the (inaudible) impact, given the dollar falling?

So basically, we have -- in the G&A, we have, some of it is impacted by the currency, some is not. On that piece that is impacted by currency, we will be looking how to mitigate that impact. That's one of the things we will be looking at different ways, to look at cost savings, or other options that we are looking into.

Right. How comfortable are you, given that you took a big hit in the fourth quarter, but your guidance implies that you're looking at $6.5 million in G&A expenses the first quarter, which basically implies that you're not going to see impact from currency, that you're still looking at options.

Just to explain, the 1.4 was not just G&A. It was across the board across all the line items altogether. So only a (inaudible) the G&A.

Okay. Alright. And then, in terms of the profitability, I think you talked about your first quarter expectations, given what you saw in the fourth quarter, you burned $16 million in cash flow from operations. You only have left roughly $28 million in cash. How confident are you that you will not need additional cash going forward?

Right now, we are monitoring this very closely, and we feel comfortable with the cash levels we have. So no issue.

So you are assuming you will be cash flow positive, cash flow from operations positive starting 2008 --

For 2008, that's the -- our target is to be cash flow positive, that's true. For the (inaudible) on every quarter, it's more harder to say, but definitely that's our effort.

Okay, thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Please stand by while we poll for more questions. The next question is from [Steven Levy] of ION. Please go ahead.

Hi, guys. If I -- if this was asked, I apologize. I missed a couple of minutes of the call Your 2008 guidance, what shekel/dollar rate is it based upon?

For Q1?

For the full year, the $8 million of net income.

You are asking a question -- there are two questions here. One question is, what was the budget we prepared, and the original budget that we prepared was obviously higher than the existing rate. But the other thing is that our budget is not -- it's not rigid, and we are also using flexible items to mitigate for fluctuation of, among other things, the exchange rate. So it's not something you should stick to it. Definitely it is an impact, we are looking at options how to address it, but just not to look at it as something that you cannot move.

I understood that, Hugo. I just wanted to know what shekel/dollar rate that you are using when you gave the original guidance. I understand that you're looking at options.

It was 3.9.

3.9. Since you put that original guidance out, have you hedged any of your shekel position?

We are monitoring that closely with the (inaudible) investment community. We did some protection, but not much, and we are building -- we are trying to build the hedging. It is a matter -- it will take time, basically. We have some on the revenue side. We have some currencies actually have a little bit of offsetting that, like Euro, et cetera. And, that's, I guess the best answer right now.

Could you maybe just elaborate a bit when you talk about, you're considering options. You're talking about just extra headcount cuts? What are the options on the table to you at this point?

We are looking at different things. One can be pricing adjustments or services, price adjustments, headcount is one more, looking more into different expenses worldwide, all kinds of contracts, et cetera.

And again, since we've got so many projects in development, we can prioritize these projects and decide to delay things to next year according to -- as we continue with the progress of 2008.

Can you give us a sense, what's your total exposure to the shekel in dollars?

I can't give you the -- I mean, in general, we have about -- more than 700 people in Israel, so that gives you the people. You can do the math. Roughly this is shekel-paid salaries.

So you are saying that your shekel -- I was asking more your net exposure, Hugo. You said you have some offset. It's quite common to ask the question of companies what their net exposure is, just so we can understand what the impact of the currency (inaudible). When you look at your net exposure, can you give us a rough idea what your shekel exposure is?

I don't have that number right now with me. I will be happy to talk about it later on. I just want to ask that, for Q1 we were using already in our plans that Barry mentioned about the delta for Q1, we were using 360, so you have a better idea.

Okay, thanks.

Thank you.

The next question is a follow-up question from Ehud Eisenstein of Oscar Gruss. Please go ahead.

Yes, Hi. Just a quick one. Out of your cash and cash equivalents, do you have any auction rated securities or anything that might have to impair? Thank you.

Actually, fortunately, out of the $27 million, we have $1 million in one ARS, and that is basically behind this ARS, has nothing to do with mortgages, but with credit, and this is because of the liquidity, we had reduced -- we made a reserve of $200,000. So instead of the $1 million, it's $800,000 in our cash and marketable securities.

Okay. Thank you very much.

You're welcome.

There are no further questions at this time. I would like to remind the participants that a replay of this call is scheduled to begin in two hours after the conference. In Israel, please call 03-9255-940 or 1-800-286-285. In the U.S., please call 1-888-326-9310. In the U.K., please call 0800-028-6837. Internationally, call 9723-9255-940. I would now like to turn over the call back to Mr. Berry Shaked. Mr. Shaked, would like you to make a concluding statement?

Thank you everyone for listening, Haga Purim (inaudible) to everyone, and I will be happy if you join us on our next call in three months time. Bye-bye.

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