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Retalix Ltd. (NASDAQ:RTLX)

Q3 2012 Earnings Conference Call

November 14, 2012, 9:00 am ET

Executives

Shuky Sheffer - Chief Executive Officer

Sarit Sagiv - Chief Financial Officer

Operator

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 our 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 Web site 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.

Shuky Sheffer

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 eleventh 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 continued to win new programs and logos for our unique Retalix 10 products, services and software-as-a-service (SaaS) offerings. We signed a multi-year strategic partnership with the Delhaize Group to become the preferred provider of in-store software for their 3,300 locations worldwide. We also successfully executed on our strategy to expand into additional adjacent high volume high complexity retail segments 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 market helped us to achieve: record quarterly revenues; improved operating margins; and strong growth in operating income. Revenues grew 15 percent year-over-year to 70.5 million dollars, the first time Retalix’s quarterly revenues surpassed this mark. Our Non-GAAP Operating Income was up 34 percent year-over-year to 7.3 million dollars in the third quarter and we had a solid 5.3 million dollars 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 Users Conference three weeks ago in Dallas.

Retailers continue to tell us that they need to transform their platforms and to build innovative customer centric retailing environments that enable them to interact and build consistent ongoing relationships with their consumers. These interactions need to take place on any channel, at any place or time desired by the consumers. Retailers want solutions that permit them to easily add on new technologies and capabilities, including leveraging the advantages of mobile and social media, while at the same time helping them to improve the efficiencies of their systems and operations. Our products are addressing these critical needs. Further, building on our great products, our product-led services model ensures that Retalix is not only providing the leading platform but that we are positioned to provide consistent value and expertise in the implementation, ongoing testing and support of our products thus paving the way for long-term, deep partnerships 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 our financial results.

Sarit Sagiv

Thank you Shuky.

Retalix maintained its solid financial performance with good results for the third quarter and the first nine months of 2012.

Total revenues were up 15 percent in the third quarter to $70.5 million dollars versus $61.6 million dollars in the year ago third quarter. For the first nine months of 2012 total revenues are up 18 percent to 204.4 million dollars versus the year ago period.

Looking at the revenue mix in the third quarter, software revenues were 12 percent of revenues, hardware was 9 percent, maintenance revenues derived from our products were 23 percent, and professional services including our SaaS revenues were 56 percent of total revenues. As we have indicated in the past, the percentage of license revenues 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 percent non-GAAP operating margin in the third quarter versus 8.9 percent in the year ago third quarter and 9.9 percent in the second quarter.

Non-GAAP income from operations was up 34 percent to 7.3 million dollars in the third quarter 2012, versus 5.5 million dollars in the year-ago third quarter. GAAP income from operations was 5.1 million dollars in the third quarter 2012, versus 3.0 million dollars in the year-ago third quarter.

For the first nine months Non-GAAP income from operations was up 32 percent to 20.2 million dollars and GAAP income from operations was up 36 percent to 13.8 million dollars.

Again this quarter, R&D, sales and marketing and G&A remain largely stable as a percentage of total revenues as we continue our investments and work to expand on the market position we have achieved.

Our total headcount was up 10 percent to 1,716 this quarter, reflecting our recruiting efforts designed to grow our headcount to ensure successful delivery on 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 recorded a small financial expense of 0.1 million dollars in the third quarter which includes interest income, the net impact of currency fluctuations on the value of our non-dollar assets, and currency translation costs. This compares to financial income of 1.1 million dollars 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 that lowered 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 dollars, or 21 cents per diluted share in the third quarter versus 7.7 million dollars, or 31 cents per diluted share in the year ago third quarter. For the nine months Non-GAAP net income was 15.5 million dollars in 2012 versus 14.9 million in the year ago nine month period.

Our GAAP net income was 3.6 million dollars, or 14 cents per diluted share, in the third quarter, versus 5.5 million dollars, or 22 cents per diluted share, in the year-ago third quarter, also reflecting these issues. For the nine months GAAP net income was 10.8 million dollars versus 10.6 million in the year ago nine month period.

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

Total trade receivables were 78 million dollars 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 that 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 markets.

Now I will turn the call back to Shuky.

Shuky Sheffer

Thank you, Sarit.

As I said in my opening remarks, we achieved good progress this quarter with each of our growth engines. On previous calls we have 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 product-led services strategy is 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, a leading Tier 0 global retailer. Based in Belgium, Delhaize has operations on three continents and in 11 countries, including the United States. Retalix will become the preferred supplier of in-store software for the Delhaize's 3,300 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’s Store Suite, including solutions for the POS, as well as other customer touch points like self-checkout. The agreement also includes solutions within Retalix's Loyalty and Marketing Suite, including Customer Management and Targeted Marketing.

We are building on the strengths of Retalix 10 and continuing to receive strong recognition for its multi-channel capabilities, strong architecture, low cost of ownership and flexibility in addressing retailers’ needs. We are making good progress with the Retalix 10 wins we discussed with you on prior calls. We are also starting work on a new Retalix 10 project for a leading Tier 0 retailer. This is an additional large retailer who selected Retalix 10 because of the unique advantages 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 the 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 of Retalix 10. We recently deployed a new Retalix 10 mobile touchpoint for a Tier 0 retailer, as well as a self-checkout touchpoint, each in just a matter of weeks.

In the past, it used to take retailers a long time to introduce 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 consumer needs.

Our Services business also continues to create advantages for us with retailers. All of our services, including our SI services, are generating wins. As we discussed on prior calls, our services strategy is product-led where the majority of our offerings are focused on or around our products. Here we have a clear competitive advantage due to our intimate knowledge of our products, our focus on the retail industry and our deep domain expertise garnered over 30 years of activity in our segments.

We are positioned to continue to grow our Managed Services business. We already have had several successes in Managed Services and we continue to move forward with our plan to go after more of these opportunities. As we discussed with you 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 service engagement with Woolworths Limited, 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 are also expanding our SaaS offerings. For example, we recently launched a Loyalty solution on “the cloud.” This demonstrates our strategy of enabling customers to deploy their systems in multiple setups best suited to their format, geographical location and line of business.

In September we announced the acquisition of Cornell Mayo, a U.S.-based, leading provider of store systems serving top tier department stores and large specialty retailers. With this 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 4,000 stores primarily in North America. Like Retalix, Cornell Mayo is known for its strong customer focus. Cornell Mayo’s customers include household names such as Saks Fifth Avenue and Barnes & Noble. It is a well-recognized market leader, serving seven of the major 21 department stores in the U.S. 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 held our most successful users’ conference in the history of Retalix. It was a very exciting event that spotlighted our innovative and unique products and services and hosted panel discussions 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 customers and industry analysts for our thought leadership in the industry.

Retalix was also honored to receive for the second consecutive year the Microsoft Alliance ISV 2012 Industry Partner of the Year Award for the Retail Sector. We appreciate Microsoft’s recognition of our industry leadership and of the comprehensive, innovative retail solutions that we provide to the market.

There are still a lot of challenges in the market, including the continuing concerns with the global economy, but we also see a lot of opportunities and we are working hard to realize them for Retalix. As the business volume increases we must continue to execute well and have 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 tag line “Retail Future Ready” which we believe captures Retalix’s mission and commitment to the market.

We are pleased with our results for the first nine months of 2012. We now expect we will exceed our revenue guidance which was for total revenues in the range of 260 to 270 million dollars for 2012. Cornell Mayo 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 operations versus 2011. We targeted 9 to 10 percent Non-GAAP profitability from operations for 2012 and we expect to be at high end of this range. As I said on the call last quarter, we expect to continue our investments to deliver on our new wins and capitalize on our market position while balancing these investments against profitability.

In summary, we again achieved strong financial results and demonstrable progress in executing on our strategy, winning new customers and programs, delivering good results and innovations for our customers and expanding our market opportunities. The positive feedback from customers continues to confirm our positioning and the strength of our strategy focusing on innovative products and product-led services. We are gratified by our strong results to date and we will continue to work to execute on our strategy and deliver innovative programs for our customers. We thank you for your support and look forward to sharing more successes.

Thank you. Operator we are ready to take questions.

Question-And-Answers

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