NCR Voyix Corp (VYX) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Retalix second-quarter 2008 conference call. 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 and expectations about revenues, net income, margins, and expense and tax rate; the Company's ability to improve cash flow and profitability and to cut expenses; expected benefits from investment in product developments and penetration into new territories; expected costs from the depreciation of the US dollar; anticipated demand for the Company's software products; anticipated rate of growth; and management's expectations as to the Company's future financial performance.

Such forward-looking statements are subject to risks and uncertainties, and therefore, Retalix claims the protection for such statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and we would like to refer you to a more detailed discussion of all of these risks and uncertainties contained in today's press release and 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 operating income, net income, and earnings per share on both a GAAP basis and on an adjusted non-GAAP basis. 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 over to CEO of Retalix, Barry Shaked. Mr. Shaked, would you like to begin?

Thank you. Welcome to all of you and thank you for joining us on this call. I am very pleased to report yet another quarter of improved profitability and a record quarter of revenue for Retalix.

Total revenue in the second quarter of 2008 reached $59.3 million. After reporting two quarters of net losses, we have today reported net income for the second quarter of $1.5 million and adjusted non-GAAP net income of $3.2 million compared to $0.6 million in the second quarter one year ago.

We are encouraged by the progress we are making with our turnaround plan. We believe we continue to build on these results. While we expect to keep expenses at the current level, we will focus on increasing revenues in the next quarters. This should improve our operating margins even further.

Before we discuss the financials, let me briefly touch on some of the highlights of our business and operations. During the second quarter, PetroChina accomplished the go live of 30 pilot sites in a variety of provinces using Retalix software. We are very proud of this milestone, which was achieved through great effort of many dedicated employees. The effort continues as PetroChina plans to deploy our software in an additional 1207 stations by the end of 2008. The potential for 2009 and beyond is the remaining 16,000 petrol stations of PetroChina.

In Europe, a Tier 1 grocery retailer selected Retalix for a chainwide point-of-sale upgrade project. This means that 10 of the top 30 grocery retailers worldwide will be using Retalix software.

In the US, we further expanded our relationship with Big Y Foods, a prominent mid-tier grocery chain in the Northeast, which has been using our point-of-sale systems since 2000. Last year, Big Y selected our Loyalty solution, and during the second quarter, Big Y selected Retalix HQ and Retalix InSync Purchasing to replace its current merchandising system. This is another example of a customer that is going in the direction of our vision, selecting Retalix applications gradually, integrating them with each other, and over time, expanding the Retalix system to an end-to-end solution.

I believe that as our new products mature, we will see even more customers going this way, like Big Y and Hy-Vee.

Meanwhile, Associated Food Stores, a Salt Lake City wholesaler, purchased Retalix TRICEPS wholesaler -- warehouse management system for two additional distribution centers, replacing a homegrown solution. AFS is already using TRICEPS in their main distribution center. When this latest contract is completed, Retalix TRICEPS will manage all their distribution centers.

Also during the second quarter, an additional food distributor in Australia signed up for our Power Enterprise system.

In convenience and petroleum segment, BP completed the rollout of Retalix software to the 300 plus sites in the UK. We continue the project for BP sites in the US, and we are starting to roll out these things.

In Mexico, ampm Convenience Stores, a BP brand, completed the rollout of Retalix point-of-sale and Headquarters software solution. And 7-11 stores in Oklahoma are deploying our Retalix DemandAnalytX, or what we call DAX, [for costing] and replenishment solutions at its 100 stores.

As you can see, the business front continues to be strong. Now we would like Hugo to review financials for the second quarter.

Thank you, Barry. Total revenues during the second quarter reached a record $59.3 million, which was up from $55.5 million the same quarter a year ago. In the six-month period ending June 30, our revenues totaled $113 million, which is 48% of our guidance for the year.

Our product revenues, and especially license revenues, traditionally build during the year, and this remains our expectation for 2008. Our product revenues grew by 7%, representing 36% of our total revenues this quarter, similar to the second quarter a year ago. Sales of software licenses represented 13% of our sales in the second quarter compared to 18% in the same quarter in 2007.

Sales of hardware represented 23% of our sales in the second quarter compared to 18% in the same quarter in 2007. Sales of maintenance included in the quarter represented 24% compared to 23% second quarter of last year.

Gross margins were 38%, reflecting the higher proportion of hardware sales in the total mix of revenues, as well as the continued impact of the weakness of the US dollar on the cost of professional services.

As we discussed with you on prior calls, beginning in the first quarter, we took a number of steps moving resources into professional services as some of our products matured in the development cycle. These efforts, which are reflected in the increased cost of services, are designed to help us better track the resources devoted to projects and better manage profitability. We continue to monitor these to ensure that our resources are aligned with the market.

The weak dollar continues to be our biggest financial challenge. The dollar has declined 12% from the beginning of the year until the end of June, and is still 7% weaker than our original budget for the year. We estimate that the negative impact of the dollar weakness on our costs and expenses, primarily in Israel, will amount to approximately $6 million for the whole year. Half of this impact, though, is already reflected in the results for the first two quarters.

We continue to monitor closely the impact of currency exchange rate on our financial outlook for the coming quarter. Our current plan is based on the assumption that the dollar will remain at an average level of around 3.5 shekels per dollar for the remainder of 2008.

As we told you during our previous call, we implemented a reduction in force. While this reduction was part of our plan for 2008, it also provided cost savings that mitigated the effect of the strengthening of the shekel against the US dollar. At the end of the second quarter, we have [1,410] employees worldwide.

We reported a small tax benefit in the second quarter because of too main factors. First, as a result of the quarterly calculation for tax purposes, partly deriving from the strength of the shekel, and partly because of a change of a specific tax regulation in Israel. For the year, we expect an effective tax rate of around 20%.

During the second quarter of 2008, we used $1.2 million in operating activities compared to $1.5 million used in the second quarter of 2007. This included a tax payment of $2.3 million for a previous year. We expect cash flow from operations to continue the improving trend in the coming quarter.

During the second quarter of 2008, we have also used $1 million in investing activities, mainly related to the sales floor of our headquarters buildings, which we acquired last year and is being prepared for use later this year.

As of June 30, 2008, our balance sheet had [$20.48] (sic -- see press release) million in cash, cash equivalents and marketable securities. We have practically no debt, with just $710,000 in long-term debt. Just to make sure I said -- as of June 30, we had $28.4 million in cash.

Shareholders' equity grew to $26 million at the end of June.

DSOs improved from 145 days in the first quarter to 133 days in the second quarter. To remind you, we discontinued the factoring of the receivables beginning in late 2007. Accounts receivable amounted to $88.1 million compared to $87.5 million at the end of the first quarter of 2008.

As we've told you in the past, the improvement plan for our receivables cycle is a gradual process which we expect will continue in the coming quarters. We continue to expect the improvement of cash flow to take a total of four to six quarters.

Now, I will turn the call back to Barry.

Thank you, Hugo. Now let me take a few moments to update you on the efforts we outlined earlier this year, designed to improve our financial performance. We have reviewed our expenses structure, as well as our resources we need to be able to serve our clients, bring new products to the market and seize available opportunities.

As we told you previously, we redefined some of our developmental priorities and restructured some of our R&D teams. In addition, in recent months, we have cut expenses in all areas, held back on new hires, and focused on reassigning and promoting existing employees.

We feel that we have reached the right size and the correct level of expenses. We are confident that all our ongoing efforts will help us to address the issues that affected our performance in the past and will help to improve our financial performance.

Regarding the general economic situation, I would like to quote from the AMR Report, retail IT budget benchmark report, which was published last week. AMR said, "Although retailers are continuously evaluating economic conditions as they head into the second half of 2008, they are largely moving ahead with IT investment plans. The economy may cause delays in planned investments. However, few will be willing to turn their backs on IT investments, realizing that slashing budgets in the short term jeopardizes their health in the long term."

AMR's comments reflect what we are experiencing in the market. Although new deals are taking longer to be closed, we believe that we can achieve the goals we have set for 2008 of a total revenue exceeding $232 million, GAAP net income of $8 million and adjusted non-GAAP net income of $15 million.

We also continue to believe that our investments in product development and in penetration into new territories will pay off in the coming years. We appreciate the dedicated effort of our employees worldwide and their continuous focus on driving a profitable business.

We also appreciate your continued interest and support. Thank you for your attention, and now we are open to answers. Operator?

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) Ziv Tal of Oscar Gruss.

Good afternoon, Barry and Hugo. My question is regarding gross margins. They were significantly lower this quarter. Can you please elaborate on that?

Sure. Hi, Ziv. On the revenues, we had hardware revenues more than the normal. This is one reason whether we had this, I would say, a few [millions] above, and on the other hand, the license revenues were softer. And those are the main reasons. One more reason, the services margin, where we had additional costs and we had the impact of the currencies that added the cost into that number. So all together is the reason for the declining amount.

Although the revenues went up, one of the reasons it went up much more than the expectation was on the hardware, which has -- they have, as you know, margin which is much lower than the other.

All right. And what are your expectations? They were 47.5% for the year previously. Does that still apply?

For -- you mean the total -- the gross margin for the year?

Yes.

About 44 -- 44%.

44%. And can you split that product and --?

46% product, 43% service.

How much for the service -- 43?

43%, yes.

Okay. And will you be able to push OpEx further down? What are the expectations there? Will we see the same OpEx going forward as Barry mentioned?

We believe we've reached levels of operating expenses that will come in full effect going forward. So basically, we don't expect major changes in the operating expense.

What we are saying is that a sector of the reducing expenses, you will see more effect already in --.

Q3.

-- in Q3.

Okay. And again, with regards to the top line, the sort of expectations for the second half of the year, fairly back-end loaded. What are you seeing into the second half? Is the demand exceptionally strong?

We are seeing a strong pipeline, but as I mentioned, we are witnessing delays in decisions. Our maintenance has grown a lot, our professional service backlog has grown. So with the moderate increase in licenses, we feel confident that we can reach the goals and exceed 232. We have already done 48% of that in the first half.

Yes. And Hugo, with regards to financial income, what are you -- what should we model for for the rest of the year?

Because of the currency fluctuations, it is very hard to model, so I would expect to go back to the level like it was in Q1, with close to 100 per quarter. So in Q2, we experienced certain financial income, so let's assume it will be at the 100 per quarter.

Okay. With the strengthening of the shekel against the dollar, will you be executing activities that you maybe sidelined previously, earlier during the year, because of the exchange rate, or will that go straight to your bottom line?

First of all, when you say going forward, strengthening of the shekel, just to make sure, to clarify. Right now, at the end of June, the dollar rate was about 3.35 and today is 3.57. So right now, we have to monitor this very closely. Basically our plans are -- until the end of the year, is an average of 3.5 shekels per dollar. So this is the plan going forward. So maybe you can replace your question just to make sure if you are talking strengthening or weakening of the shekel.

No, I am talking about -- if it strengthened, if it goes up to 3.6, 3.7, 3,8, would that --?

So in that case, we have some protection that can mitigate at least part of that.

I understand that. I'm not talking about mitigating. If the dollar -- if the shekel gains strength against -- sorry, if the dollar gains strength against the shekel --

That will help our bottom line, exactly.

Yes, that is what I am trying to understand. Will you execute some activities that you sidelined before or will that go directly to the bottom line? That is my question.

Right now, as I said, since we are achieving the levels we wanted to achieve, any dollar gain will go to the bottom line.

Okay, great. Thank you.

(Operator Instructions) [Eric Best], [Best Holdings].

Yes, hi. Good afternoon. Congratulations on a finally good quarter. I have a couple of questions. What were the maintenance revenues for the quarter and for the six months?

The maintenance revenues -- hi, Eric, how are you -- Q2, 14.3 compared to 14.0 in Q1.

And for the six months, Hugo?

Let's put it together; it is 28.3.

Okay, so it is very linear?

Yes, I mean, it is a bit of an increase from Q1. Q2 last year -- Q2 last year was 12.6. So if you compare year-to-year, 12.6 to 14.3, that is the increase of about 1.7, which is close to 14% year-to-year.

So for the whole year, I mean, is it something -- the number should be around $60 million?

The numbers should be similar, maybe a bit better than Q2.

I see, okay. Did you recognize any revenues from China?

You mean PetroChina, for example?

(Multiple speakers) and Wal-Mart?

We have -- in the current quarter, we have not.

Okay. But in the past, did you recognize any revenues yet, or --?

There were some, yes, in the past.

Okay. And my last question, in Q4 2007, there were three deals that slipped and caused the earnings warning, as all of us remember. Were any of those deals closed since then?

One of them, I think, was closed; and one was completely -- the customer decided not to go ahead with the project; and one we are still working on.

Okay, great. Thank you.

There are no further questions at this time. I would now like to turn the call over back to Mr. Barry Shaked. Mr. Shaked, would you like to make your concluding statement?

Thank you very much for listening to the second-quarter results, and see you all in the third quarter. And I would like to remind all our investors that we have a conference in Dallas in October and you can see it on our site. Thank you very much.

Thank you.

Thank you. This concludes the Retalix second-quarter 2008 conference call. Thank you for your participation. You may go ahead and disconnect.