NCR Voyix Corp (VYX) 2012 Q3 法說會逐字稿

Welcome to the Retalix conference call. As a reminder, this conference call is being recorded today, November 14, 2012. Leading the call is Retalix's CEO, Shuky Sheffer. Joining him is Sarit Sagiv, the Company's Chief Financial Officer.

Before I turn the call over to them, I'd like to remind all listeners that management's remarks contain forward-looking statements. These statements include, but are not limited to, comments regarding the guidance and expectations about revenues, DSO, financial income, and profitability; expectations about the Company's pipeline of customers, addressable market and market trends; expected drivers of the Company's growth; anticipated demand for and expected investments in the Company's products, services, and new offerings; management's expectations as to the Company's future financial performance, outlook for 2012, and future strategies, plans, and opportunities.

Such forward-looking statements are subject to risks and uncertainties, and therefore, Retalix claims the protection of such statements contained in the Private Securities Litigation Reform Act of 1995 and other securities laws. Actual results may differ from those discussed today. And we'd like to refer you to a more detailed discussion of all these risks and uncertainties contained in today's press release, and in the Company's filings with the SEC, and in particular, in its Annual Report on Form 20-F, filed with the SEC on April 5, 2012.

Also, I'd like to remind you that Retalix reported income from operations, operating margin, net income, and earnings per diluted 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 Relations section of the Company's website at www.Retalix.com. The press release showing the third quarter and nine-month non-GAAP reconciliations can also be found on this site.

Now I will turn the call over to the CEO of Retalix. Mr. Sheffer, please proceed.

Thank you, Adam. Welcome and thank you for joining us on this call. This morning, we announced our financial results for the third quarter and the first nine months of 2012. It was our 11th consecutive quarter of growth for Retalix.

We are making good progress executing our growth strategy, and delivering innovative and unique solutions for retailers. This was another big execution quarter for Retalix. We continue to win new programs and logos for our unique Retalix brand products, services, and Software-as-a-Service offering.

We signed a multi-year strategic partnership with Delhaize Group to become the preferred provider of installed software for the 3300 locations worldwide. We also successfully executed our strategy to expand into additional adjacent high-value, high-complexity retail segment with the acquisition of Cornell Mayo, a leading provider of store systems serving top-tier department stores and large specialty retailers.

Our growing strength in the markets helped us to achieve record quarterly revenue, improve operating margin, and strong growth in operating income. Revenue grew 15% year-over-year to $17.5 billion, the first time Retalix quarterly revenue surpassed this mark. Our non-GAAP operating income was up 34% year-over-year to $7.3 million in the third quarter, and we had a solid $5.3 million in non-GAAP net income.

We are continuing to receive strong positive feedback from retailers, including from the customers, partners, and industry analysts who attended our Synergy User Conference three weeks ago in Dallas. Retailers continue to tell us that they need to transform their business, the platforms, and to build innovative customer-centric retailing environments that enable them to interact and build consistent ongoing relationship with their consumers.

This interaction is to take place on any channel at any place or time desired by the consumers. Retailers want solutions that permit them to easily add new technologies and capabilities, including leveraging the advantage of mobile and social media, while at the same time, helping them to improve the efficiencies of the system operations. Our products are addressing these critical needs.

Further, building on great products, our product-led services more than ensure that Retalix is not only providing the leading platform, but that we are positioned to provide consistent value that's detailed in the implementation, ongoing testing and support of our product, thus paving the way for long-term deep partnership with our customers.

In a moment, I will talk in more detail about our progress this quarter. Before that, let me hand the call to Sarit, who will review the financial results.

Thank you, Shuky. Retalix maintained its solid financial performance with good results for the third quarter and the first nine months of 2012. Total revenue was up [15%] in the third quarter to $70.5 million versus $61.6 million in the year-ago third quarter. For the first nine months of 2012, total revenues were up 18% to $404.4 million versus the year-ago period.

Looking at the revenue mix in the third quarter, total revenue was 12% of revenues. Hardware was 9%. Maintenance revenues derived from our products were 23%, and professional services, including our SaaS revenues, was 56% of total revenues. As we have indicated in the past, the percentage of [flexible] revenue is varying from quarter to quarter, in part due to some of the recent large wins.

We continue to report improving non-GAAP operating margins due to our growth in revenues and disciplined management of our expenses. We reported a 10.4% non-GAAP operating margin in the third quarter versus 8.9% in the year-ago third quarter, and 9.9% in the second quarter. Non-GAAP income from operations was up 34% to $7.3 million in the first quarter of 2012 versus $5.5 million in the year-ago third quarter.

GAAP income from operations was $5.1 million in the third quarter 2012 versus $3 million in the year-ago third quarter. For the first nine months, non-GAAP income from operations was up 32% to $20.2 million, and GAAP income from operations was up 36% to $13.8 million. Again, this quarter, R&D, sales and marketing, and G&A remained largely stable as a percentage of total revenue, as we continue our investments and work to expand on the market position we have achieved.

Our total headcount was up 10% to 1716 this quarter, reflecting our recruiting efforts designed to grow our headcount to ensure successful delivery of our customer wins and the addition of Cornell Mayo. As we said on previous calls, we expect little or no financial income this year. We reported a small financial expense of $0.1 million in the third quarter, which includes interest income, the net impacts of currency fluctuations on the value of our non-dollar assets, and currency translation costs. This compares to financial income of $1.1 million in the third quarter of 2011.

Net income for the third quarter reflects both the change year-over-year in our financial income and our taxes. As you will recall, last year, we recorded a tax benefit to close our effective tax rate for the quarter and the year. This year, we had a financial and tax expense. Our non-GAAP net income was $5.3 million or $0.21 per diluted share in the third quarter versus $7.7 million or $0.31 per diluted share in the year-ago first quarter.

For the nine months, non-GAAP net income was $16.5 million in 2012 versus $14.9 million in the year-ago nine-month period. Our GAAP net income was $3.6 million or $0.14 per diluted share in the third quarter versus $5.5 million or $0.22 per diluted share in the year-ago third quarter, also reflecting this issue. For the nine months, GAAP net income was $10.8 million versus $10.6 million in the year-ago nine-month period.

Our balance sheet strength continues. This quarter, we generated $5.3 million in cash flow from operations. As of September 30, we had over $134 million in cash and cash equivalents, deposits, marketable securities, and long-term investments. And this was after the completion of the Cornell Mayo acquisition. We have no debt.

Total trade receivables were $78 million at the end of the third quarter, reflecting the growth in our business. Our DSO was 94 days at the end of the third quarter compared to 90 days in the sequential quarter. As we commented in the past, we expected the DSO might increase while entering into larger and longer-term customer contracts.

In conclusion, we continued our strong financial performance in 2012, reporting good growth in revenues, operating margins and operating income. We have a strong financial platform, which will continue to help us in pursuing opportunities in our market.

Now, I will turn the call back to Shuky.

Thank you, Sarit. As I said in my opening remarks, we achieved good progress this quarter with each of our growth engines. On previous call, we had detailed our strategy and discussed the building blocks that we have put in place. I wanted to briefly update you on the execution of our strategy.

Our products and services strategy has been designed to provide unique value to our customers, paving the way for us to build deep, long-term, strategic relationships. A good example is the multi-year global strategic partnership agreement we announced in the third quarter with the Delhaize Group, leading to [viral] growth on retailers.

Based in Belgium, Delhaize has operations on three continents and in 11 countries, including the United States. Retalix will become the preferred supplier of installed software for the Delhaize's 3300 outlets, including 20,000 point-of-sale terminals. As part of the agreement, we will continue to provide a wide range of products from Retalix installed suite, including solutions from the POS as well as other customer touchpoints like sales checkout.

The agreement also includes solution within Retalix's loyalty and marketing suite, including capital management and targeted marketing. We are building on the strength of the Retalix brand, and continue to receive strong recognition for its multi-channel capabilities, strong architecture, low cost of ownership, and flexibility in upgrading new tenant needs.

We are making good progress with the Retalix 10 wins we discussed with you on prior calls. We are also starting to work on a new Retalix 10 project for leading Tier 0 retailers. This is an additional large retailer of selected Retalix 10, because of the unique advantage it offers. Last quarter, we also discussed with you Retalix 10 Mobile. As more and more consumers are using smartphones, mobile is clearly one of the highest priority channels for retailers. We are excited with increasing number of Retalix 10 mobile projects we are winning, including at several Tier 0 retailers.

We are very pleased by the speed in which we are able to deploy new consumer touchpoints. This is enabled by the unique architecture, which I will explain. We recently deployed a new Retalix 10 mobile touchpoint for a Tier 0 retailer, as well as a third checkout touchpoint, each in just a matter of weeks. In the past, it used to take retailers a long time to produce new touchpoints. With Retalix 10, we have shortened the deployment period to weeks or months, thus delivering on our promise to provide our customers flexibility and speed in responding to ongoing and changing customer needs -- consumer needs.

Our services business also continue to create advantages for us with retailers. All our product services, including our outside services, are generating wins. As we discussed in prior calls, our affirmative strategy is a product list where the majority of our offerings are focused on or around our products. Here, we have clear competitive advantage, due to our intimate knowledge of our products, our focus on the retail industry, and our (technical difficulty) over the 30 years of activity in these segments.

We are positioned to continue to grow our managed services business. We already have several successes in managed services, and we continue to move forward with our plan to go after more of these opportunities. As we discussed during the last quarter, by adding managed services to our offering, we can serve a customer's full IT environment and provide more value to the strategic relationship. Earlier this week, we issued a press release about an important managed services engagement with Woolworth's Ltd., a leading retailer in Australia.

Software-as-a-Service is another growth engine that is performing on plan. We are continuing to generate good customer wins, including two connected payments programs, each for a retailer with thousands of stores. We're also expanding our SaaS offerings. For example, we recently launched our loyalty solution on the cloud. This demonstrates our strategy to enable customers to deploy the system in multiple sectors, best suited for the former geographical location and line of business.

In September, we announced the acquisition of Cornell Mayo, a US-based leading provider of store systems serving top-tier department stores and large specialty retailers. With the acquisition, Retalix continues to execute on its strategy to expand into additional high-volume, high-complexity adjacent retail segments.

Cornell Mayo is deployed in nearly 4000 stores, primarily in North America. Like Retalix, Cornell Mayo is known for its strong customer focus. Cornell Mayo customers include household names such as Saks Fifth Avenue and Barnes & Noble; each of them well-recognized market leaders, serving seven of the major 21 department stores in the US. These retailers are also working to build customer-centric environments by deploying innovative solutions and enhancing the shopping environment. We are pleased to welcome Gene Cornell and his team to Retalix.

As I mentioned in my opening, three weeks ago, we had our most successful user conference in the history of Retalix. It was a very exciting event, which spotlighted our innovative and unique products and services, and hosted a panel discussion with some of the world's leading retailers on the future trends that will shape retailing. Synergy provided an important platform for Retalix to gain recognition with customer industry analysts for thought leadership in the industry.

Retalix were also honored to receive the second consecutive year Microsoft Alliance's ISV 2012 Industry Partner of the Year award for the retail sector. We appreciate Microsoft's recognition of our industry leadership as the comprehensive innovative relative solution which it provides to the market.

There are still a lot of challenges in the market, including the continued concern with the global economy, but we also see a lot of opportunities and we're working hard to realize them for Retalix. As the [biggest volume increase], we must continue to execute well and have a good execution for our customers. We are moving forward aggressively with our sales and marketing efforts, including introducing our new branding, and launching our new pipeline, which is future-ready, which we believe captures Retalix mission and commitment to the market.

We have business in (technical difficulty) for the first nine months of 2012. We now expect we will exceed our revenue guidance that which was for a total of revenue in the range of $260 million to $270 million for 2012. [From mid-May], you will have a minimal contribution in the remainder of 2012, but we expect it will grow as we move forward.

In the first nine months of 2012, we also successfully achieved our goal of improving the profitability of operation versus 2011. We targeted 9% to 10% non-GAAP profitability from operations in 2012, and we expect to be at the high end of this range. As I said on my call last quarter, we expect to continue our investment to deliver our new wins, and capitalize on the market position, while balancing this investment against profitability.

In summary, we again achieved strong financial results and demonstrate -- and demonstratable progress in executing of our strategy, winning new customer programs, delivering good results and innovation for our customers, and expanding our market opportunities. The positive feedback from customers continue to confirm our positioning and the strength of our strategy, focusing on innovation for innovative products, and products and services. We are gratified by our strong results to date, and we continue to work to execute on our strategy and deliver innovative products for our customers.

We thank you for your support and look forward to sharing more success. Now we are opening the call to your questions.

(Operator Instructions) Andrew Uerkwitz, Oppenheimer.

Hey, thanks for taking my questions. Congratulations on the quarter. When you look at the different legs of growth here, what do you think would be the strongest driver? Is it the managed services? Is it R10? And how do you think that's going to change over time?

I don't think you can differentiate so much, and I think that this is what is very strong in our strategy. Basically, everything is pulling each other. For example, in every Retalix 10 win, it brings obviously a product win; but at the same time, it usually -- it comes with additional significant services or deliveries aside. But I don't think for us, we don't look at them as -- obviously, each one of them is a different growth engine, but they are really nice combining and supporting each other.

Great. I appreciate that. And then, secondly, with the acquisition of Cornell Mayo, do they have -- I'm unfamiliar with them -- do they have a full suite of services? Or are you -- I mean, how do you -- like, what's the advantages for Cornell Mayo and how does it fit in with Retalix?

Thank you. This is a good question. I mean, we have a lot of synergies with Cornell Mayo. So, they have a great product. They're serving the world's leading department stores. And there is a lot of systems or products that we have in Retalix like mobile that we can integrate with their platform; different outs and components like mobile mode. Cornell Mayo did minimal services, so we can now come and offer significant services to Cornell Mayo customers.

And another important thing is, Cornell Mayo operates mainly in the United States. And we plan to take Cornell Mayo globally. So, we see a lot of synergies, a lot of potential to increase the business.

Great. And then like on a timing of being able to integrate your software with theirs on some of these traditional services, is that six months away? A year away?

We see it happening already starting in Q1.

Already, okay. Perfect. Hey, thanks guys. And again, congratulations on the quarter.

Thank you.

Greg McDowell, JMP Securities.

Hi, Shuky and Sarit. Thanks for taking my questions, and nice quarter. My first question, so you guys have had nine quarters in a row now of sequential services growth. And based on some of the presentations I saw at your user conference from your customers, it feels like a lot of customers are either about to go live on Retalix 10, or are thinking about embarking on a project in 2012.

So, I was just wondering if you could talk about some of the go-lives or the large go-lives you expect over the next six months? And then a more general question on sort of how long you think it's going to take your entire user base to adopt Retalix 10?

Okay. For the first question, you know we don't sell the customer information. But I can tell you that we have several programs of Tier 0 Retalix (technical difficulty). And we are very happy with the topics resolved then. And not all of them are exactly in the same phase, but we have several programs that are running together. And the majority of them we start productions early next year or throughout 2013. So, this is for the first question.

Now, what I can tell you that you asked when any other customer base are in some process of moving to Retalix 10. Several of our customers chose to do like a big bang approach, meaning they want to replace all their store suites, and to get in all the benefit of a new platform. And some of the customers are taking a more conservative approach by introducing what we call a side-by-side situation that we integrate Retalix 10 with different touchpoints into their existing platforms.

So, the answer is, as we had discussion with all of our customers, some of them are choosing to do a -- major large projects. As you know, we announced some of them to do some complete store switch replacement. And then some of them are choosing a more conservative approach, it's based on the business needs. And also some of them want to start with first about to introduce -- we see a lot of situations that a customer wants to get an immediate business value and starting introducing touchpoints like mobile and service checkout.

But actually that we have discussions in all our customer base and all of them are in some type of process. Some of them are very advanced. Some of them are in early stages.

That's helpful. Thank you. And then one quick sort of operating margin question. And I know it's a little early to talk about 2013. But even in 2012, with the Cornell Mayo acquisition and your investment in services headcount, you're still going to end up giving us around 150 basis points in operating margin expansion. So, I just wanted to know how we should start thinking about next year, in terms of operating margin expansion? And will your hiring be at the same rate as it was this year? Thanks.

The phenomena that we are going to see and start to see -- and this is based on our strategy -- is that when you have a long-term engagement with customers, which is not like a one-month engagement, you have a lot of opportunities to introduce efficiencies to the engagement. So, the more we sign long-term agreements and long programs, our ability to increase the margin is much better. And we already see some of these trends with our long-term engagements, and we believe that we will continue to see improvements next year.

Great. Thank you very much.

Josh Schwartz, Flatbush Watermill.

(multiple speakers) Just two lines of questions. First a quick one, just you mentioned that you started a new 10 project for Tier 0. When you say this -- because, obviously, you've highlighted that there are some mobile application projects going on. But these things that you've called out, are they full point-of-sale installations at a full store suite?

Yes. When we called it, this is a full store suite for [replacing 10].

So is that -- we're currently doing four of these in Tier 0, is that accurate?

I think more, but [actually there is].

Okay. The other question I have is just a little bit -- thinking out a little longer. When you guys first started operating the Company, you had Horizon 1, Horizon 2 planning things going on. And I'm just curious, have you -- where you are in terms of thinking about the growth drivers beyond the ones that we're currently focused on?

In terms of three, five years from now, are there things that are going to drive the products, certain functionality that needs to be developed to drive the product, and therefore, keep us involved with the product-led services strategy, engaging the customers, you know, with some innovative products? Where -- what types of things do you think are going to become relevant?

So, you're right. We are now in the executing what we call Horizon 2 or maybe 2.1. And we are now working on to design what we believe is Horizon 3. I can share with you some of the things that we are looking into. Obviously, social media, total integration, couponing, moving everything to different environments. And we are looking in different areas.

Some of these activities already have some impact on our product roadmap; some of these might involve some acquisitions. But we -- this is -- we are now in the process, as you know, preparing our way, plans for 2013. And this is part of the plan is trying to see how we are making progress in what we call our Horizon 3.

How long do you think the current growth drivers can -- are going to be the driver of the Company before the Horizon 3 stuff becomes most relevant?

I think that the current growth engines of the Company and we continue to drive the Company growth for many years. If you remember, we are just starting with Retalix 10. Retalix 10, although we are talking about it a long time. But it is [non-resolved]. And we are just starting right now to have a long-term significant and managed services deals.

Software-as-a-Service, we did it mainly on payments and now we're taking into other areas. So, I believe that the growth engines year-to-date will serve the Company for a long time.

When we talk about Horizon 3, we look at it as adding to our existing growth engine, and improving them in a way that will make us even more competitive and more relevant. So it doesn't necessarily that we find some magic new growth engine, but we are going to make our current growth engines, especially in the product side, even more attractive and more relevant and more competitive in the market.

Great. Can I just -- one more question. I'm just curious if what you're seeing and what you're feeling is now, that some time's gone by since IBM chose its strategic direction and selling itself its point-of-sale business, is that having any notable impact on the market and our opportunities?

Well, we -- you know us; we always give a lot of respect to competition. IBM was always a strong competitor. And obviously, we believe we have a much better product today by far. But I think that definitely the complexity of the acquisition and supporting us in the short-term.

Great. Thanks very much. And good luck with everything, guys.

Thanks.

(Operator Instructions) Ron Senator, Sphera Funds.

If you can talk a little bit about the profile of the managed service contracts, and how does it sort of impact your overall margin over time? Assuming that this is going to be sort of a more substantial portion of your revenue base?

Okay, from the managed services side, we actually took all of this for level II and level III, and new store installation and a bit more for Woolworth's. And as you know, Woolworth's is a huge operation and this is a [five-years] deal, and I think it's a great deal for us.

And from margin perspective, first of all, I think that managed services currently is a new growth engine, as we've added growing very fast. But I think what is nice about managed services -- and this is what I indicated before -- is that when you do managed services a long engagement, usually it's at least three-years' engagement. And every year, the profitability gets better.

The more and more you get -- introduce efficiency to the business, so we -- the trend that we are going to see is that, first of all, if you're not going to do any impact on our margin, and if at all, it can even give us a better margin. Because, as I said before, we have a lot of opportunities to improve margin in long-term deals.

Can you at least give us some sort of a range in terms of your long-term margins in terms of the overall target? So this is something -- because you haven't addressed that before.

We don't share margin per line of business. What we've said that -- we gave the guidance for this year between 9% to 10% on GAAP. We are going to reach this in the top end of this guidance. And we've said all along that we would like to be a double-digit possibility company, and this is our plan for next year.

Thanks.

There are no further questions at this time. I would now like to turn the call -- sorry -- I would now like to turn over the call back to Mr. Sheffer. Mr. Sheffer, would you like to make your concluding statements?

Thank you, Adam. Thank you, all. And looking forward to talk to you again next quarter. Have a great day.

Thank you. This concludes the Retalix third-quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.