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Retalix Ltd. (NASDAQ:RTLX)

Q3 2008 Earnings Call

November 17, 2008 9:00 am ET

Executives

Barry Shaked – President, Chief Executive Officer and Chairman

Hugo Goldman – Executive Vice President and Chief Financial Officer

Analysts

Ziv Tal - Oscar Gruss

Operator

Welcome to the Retalix third quarter 2008 conference call. Leading the call is Retalix President and CEO, Barry Shaked. Joining him is Hugo Goldman, 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 comments regarding the guidance and expectations about revenues, net income, margins, expenses and tax rate, the company's ability to improve cash flow and profitability and to cut expenses, expected benefits from investment in product development and penetration into new territories, expected costs from the depreciation of the U.S. 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'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 on Form 20-F.

Also, I'd 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'll now turn the call to CEO of Retalix, Barry Shaked. Mr. Shaked, would you like to begin?

Barry Shaked

Thank you, [Jonathan]. Welcome to all of you and thank you for joining us on this call.

As everyone is well aware, beginning in mid-September, the global economy took an unprecedented turn. I do not believe there are any business segments that have not been affected by this unforeseen turn of events.

While our third quarter results reflect the broad economic uncertainty, they also reflect the positive results of the internal efforts we discussed with you previously designed to improve our operating efficiencies. In a moment, Hugo will talk more about how we improved our gross margins on services, our operating margins and our cash flow from operations compared to previous quarters.

The crisis in the financial markets coming so close to the end of the third quarter impacted many company's timing of technology investment decisions. For Retalix, this resulted in a number of software license deals that we were actively working on to be delayed at the very end of the third quarter. As a result, our total revenues for the third quarter were $56.2 million compared to $58.1 million in the third quarter last year.

Since the beginning of the fourth quarter, we have made progress with some of the deals that were delayed in September. We have closed a few of these deals already and expect to close more in addition to new deals in the remaining weeks of 2008; however, our current market outlook assumes that some investment decisions will be deferred to 2009 and beyond. We therefore have recalibrated our full year 2008 estimates in view of the global economic slowdown.

We now expect fiscal year 2008 revenues to be between $221 million and $226 million, GAAP net income to be between $2 to $5 million, and adjusted non-GAAP net income to be between $9 million and $12 million.

While our Maintenance and Professional Services revenues remain as planned, the range in our net income largely depends on our ability to close new software license deals. While some of the license deals were delayed at the end of the quarter, we continued to move forward with many other projects and continued to see good business activity. Let me briefly touch on some of these recent highlights before we continue with the discussion on our financials.

During the third quarter, Morrisons - the U.K.'s largest supermarket group  contracted Retalix software for its 378 stores and 285 [inaudible] gas stations.

PetroChina rolled out Retalix software to 400 retail and petroleum sites by the end of the third quarter and by now has more than 500 sites running Retalix software.

BP started deploying Retalix software in its ampm sites in the United States.

McClain Company, one of the world's largest food service distributors and grocery wholesaler selected Retalix traffic management solutions for deployment at its 19 grocery distribution centers across the United States.

C and S, the second-largest grocery wholesaler in the U.S. deployed Retalix transportation solutions at its 34 distribution centers.

And Save Mart Supermarkets, a 225-store grocery chain based in California, rolled out our integrated [inaudible] Retalix supply chain and wholesale management applications to its headquarters and three distribution centers.

In a moment I will discuss in more detail the opportunities we currently see in the market, but first I would like Hugo to review our financials for the third quarter.

Hugo Goldman

Thank you, Barry.

Total revenues during the third quarter were $56.2 million compared to $58.1 million the same quarter a year ago. In the nine-month period ended September 30, our revenues reached a company record of $169.5 million compared to $166.2 million in the same period a year ago. Our product revenues in the third quarter represented 32% of our total revenues, with software licenses representing 8% and hardware representing 24% of total sales. Sales of Maintenance represented 26% of total sales.

As Barry mentioned, the [inaudible] of the internal improvement plan which we launched earlier this year continues to bear fruit. As a result, our gross margin on Services, our operating margin, and our cash flow from operations have improved in the third quarter compared to previous quarters.

Our overall non-GAAP gross margin was 41.6% due to the relatively large share of hardware in our product revenues this quarter. Our gross margin on Services was 43%, up 2% from the second quarter of '08. Our non-GAAP operating margin was 7% compared with 5.5% in the previous quarter and 2.4% in the first quarter of 2008.

It is important to note that during the third quarter of 2008 we generated $1.8 million cash from operating activities compared to a negative $3.9 million cash used in the third quarter of 2007. To remind you, this is cash from operations generated without factoring of receivables.

During the third quarter of 2008, we used $2.1 million in investing activities, mainly related to the third floor of our headquarters building which we acquired last year. We began moving employees into the space this month, and next year we expect our expenses for lease to decline as practically all of our employees in Israel will be working in facilities owned by the company.

As of September 30, 2008, our balance sheet had $27.6 million in cash, cash equivalents, and marketable securities.

We have practically no debt, with less than $1 million in debt.

Total accounts receivable amounted to $88.9 million compared to $88.2 million at the end of the second quarter. DSO in the third quarter was 142 days compared to 133 days in the second quarter.

Shareholders equity grew to $228 million at the end of September.

At the end of the third quarter we had 1,362 employees worldwide.

In conclusion, while our third quarter results were impacted by the crisis in the global economy, we continue to demonstrate strong improvements internally in our operations.

Now I will turn the call back to Barry.

Barry Shaked

Thank you, Hugo.

Looking forward, in spite of the current economic slowdown, the [inaudible] customers evaluating our solutions remain strong.

I'd like to remind you that Retalix is focused on the food-related segment of retail, namely grocery and convenience stores. These segments are likely to be hurt less than others by the possible recession. Last Friday, the U.S. Census published its monthly retail sales data. In October, grocery sales remained flat in comparison to September while retail sales in general fell by 3%.

Another indicator was our annual user conference, which was held in Dallas just three weeks ago, with more than 500 customers and partners in attendance. While everybody was obviously concerned with the current economic environment, retailers and distributors continue to look for technology solutions to help them reduce expenses, increase productivity and increase share of wallet. It is my impression that some of these big investments may be slowed, but operational-specific applications and ones with strong return on investment may proceed.

For example, as gas prices have become volatile and unpredictable, retailers and distributors are looking to optimize their transportation management processes. As a result, we are seeing increased interest in our suite of transportation solutions, which offer a relatively quick ROI. McClain and C and S, two of the largest grocery wholesalers in the U.S., are a recent example of this.

On the retail front, many retailers are interested in our technology solutions to optimize their store ordering to reduce the strong inventory levels and related financial expenses. During our conference, we've heard a case study presented by one of our convenience store customers who reduced his in-store inventory by more than 30%, nearly eliminating his out-of-stock, and achieving a multi-million dollar cost reduction using Retalix software.

Other retailers want to improve their customer loyalty and promotion programs in order to increase customer share of wallet and retention. In the increasing competition, this is [heavily discounted.] This is demonstrated, for example, by [Delay] in Belgium, which started upgrading its [inaudible] system with Retalix solutions just last week.

In spite of the near-term uncertainties, we continue to believe Retalix is well positioned as the leading software provider in our market. I also feel that we have taken several important steps earlier this year which made us better prepared for the challenging environment that now faces all of us. I would like to remind you that we have reduced our headcount by more than 10% compared to the end of 2007 and our product development has been restructured and reprioritized.

The initiatives we undertook are working; nevertheless, we are prepared to take additional measures if the economy deteriorates further. In addition, our balance sheet, which has close to $28 million in cash and equivalents and less than $1 million in debt, gives us a solid foundation from which to run our business.

We appreciate the dedicated efforts of our employees worldwide and their continued focus on driving our profitability. We also appreciate your continued interest and support. Thank you for your attention, and now we are open to answer your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Ziv Tal - Oscar Gruss.

Ziv Tal - Oscar Gruss

My question is with regards to gross margins. Should these deals not close in the fourth quarter or slip into 2009, should we expect the same gross margins next quarter?

Hugo Goldman

If we cannot close deals and similar behavior will be, I would say, similar results.

Ziv Tal - Oscar Gruss

Okay. On the product side?

Hugo Goldman

Yes.

Ziv Tal - Oscar Gruss

Okay. And last quarter you mentioned that you're focusing on the top line again. The situation was different. What are your -

Barry Shaked

We were focusing on the bottom line.

Ziv Tal - Oscar Gruss

Oh. You said that you have concluded focusing on the bottom line and said that you were ready to divert more attention to the top line. But what are you plans to handle potentially lower-than-expected revenues in 2009?

Barry Shaked

Look, we are continuing to focus on our bottom line and our profitability, and this is how we are driving our business and we will definitely continue to look at this in 2009.

Hugo Goldman

What we indeed is said is that after we saw that we are getting on track with our plan, we wanted to start looking more into the top line as well, but we couldn't anticipate the crisis in the markets. We are working with a lot of agility and flexibility [inaudible] and closely monitoring what we are doing, and this is what right now, as you see, are the Q3 results. We can see the improvements in the margins and the cash flow, etc.

Ziv Tal - Oscar Gruss

Why did your cash position decrease? Was that because of the capital expenditure?

Hugo Goldman

Can you repeat?

Ziv Tal - Oscar Gruss

Yes, the decrease in cash during the quarter. Was that because of the capital expenditures?

Hugo Goldman

Yes. Yes. We increased cash from operations $1.8. We have invested $2.1 million mainly because of the third floor in our headquarters.

Operator

(Operator Instructions) There are no further questions at this time. I would now like to turn over the call back to Mr. Shaked. Mr. Shaked, would you like to make a concluding statement?

Barry Shaked

Thank you, everyone, for listening, and we welcome you to join our next call in three months' time. Thank you.

Operator

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

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Source: Retalix Ltd. Q3 2008 (Qtr End 9/30/08) Earnings Call Transcript
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