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Retalix Limited (NASDAQ:RTLX)

Q2 2009 Earnings Call

August 25, 2009 9:00 am ET

Executives

Barry Shaked – Chief Executive Officer

Hugo Goldman – Chief Financial Officer & Executive Vice President

Analysts

Analyst for Ziv Tal – Oscar Gruss

[Mark Regenbergen] – Ohio State Teachers Retirement Fund

Operator

Welcome to the Retalix conference call. As a reminder, this conference is being recorded, August 25, 2009. Leading the call is Retalix’s 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 managements’ remarks contain forward-looking statements.

These statements include comments regarding the guidance and expectations about revenue, net income impairment testing margins, expenses and tax rate, the company’s ability to improve cash flow and profitability and to cut expenses, expectations about the company’s expected pipeline of customers, anticipated demand for the company’s software products and managements’ expectations as to the company’s future financial performance. Such forward-looking statements are subject to risks and uncertainties and therefore Retalix [inaudible] clearly for protection for 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 on its annual report on Form 20F filed with the SEC on June 22, 2009. 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 investors’ section of the company’s website at www.Retalix.com. Now, I will turn the call over to the CEO of Retalix, Barry Shaked.

Barry Shaked

This morning we are reporting our financial results for the second quarter and the six months ended June 30, 2009. The results were in line with our expectations reflecting both the continued market softness and our successful efforts to control costs and enhance our operating efficiencies. As we discussed with you on prior calls, we anticipated a difficult market conditions that would result in revenue decline. The market conditions remained largely unchanged versus the last quarter.

We are executing on our plans which focus on ensuring we meet customer needs while also maintaining profitability despite the continuing economic slowdown. During the second quarter we generated $3 million in profits from operations versus $1.1 million from operations in the second quarter of 2008. This improvement is despite more than 17% decline, over $10 million in revenues this quarter versus a year ago.

We also achieved substantial improvement in our non-GAAP adjusted net income in the second quarter. We reported $6.1 million or $0.30 per diluted share which was double the year ago numbers. For the six months ended June 30, 2009 we reported $7.9 million or $0.39 per share in non-GAAP adjusted net income. We also continued to achieve positive cash flow and maintained our strong balance sheet while working closely with our customers to understand the needs in the current market environment and ensure that we continue to support current programs. We are also monitoring the market closely for any near term opportunities while also working to ensure we are positioned for future improvement in the market.

Now, let me hand the call over to Hugo to review the financial results in more detail.

Hugo Goldman

As we anticipated, revenues continued to be impacted by the current market conditions. We recorded $48.9 million in revenue for the three months ended June 30th compared to $46.9 million in the first quarter of the year and $59.3 million in the same quarter a year ago. For the six months we reported $95.9 million in revenue versus $113.2 million in the same period a year ago. We are continuing to experience a decline in revenues in all areas of our business, in particular in product revenues that are about 57% lower than the same quarter a year ago.

Revenues from sale of software licenses in the second quarter of ’09 continue to be soft and were below 11% of total revenues down versus the same period in 2008. Our total product revenues in the second quarter represented 27.8% of our overall revenues that’s 36.3% in the year ago second quarter. Our largest increased versus the first quarter came in hardware revenues which were over 17% of the total revenues in the second quarter compared to 14% in the first quarter of 2009. We anticipate that in the third quarter hardware sales will again be a larger percentage of total revenues.

Software service revenues were over 72% of sales during the second quarter or over $55 million versus 64% of sales in the year ago second quarter or nearly $38 million. Maintenance revenues were basically stable accounting for 28.7% of total sales in the second quarter. As Barry discussed, market conditions are impacting revenues in 2009. Our efforts have been designed to manage our business, improve operating efficiencies and control costs based on our revenue expectation. We continue to see the positive impact of these efforts.

During the quarter our overall non-GAAP gross margin was 44.5%. Our non-GAAP gross margin in products was 37% reflecting the lower portion of license revenues in the mix and the non-GAAP gross margin on services was 47% in the quarter. Operating expenses in the second quarter were down more than 17% or approximately $3.7 million versus the second quarter of 2008 as a result of the operating efficiencies and cost savings.

For the first half of 2009 we reduced operating expenses by nearly 24% compared to the first half of 2008. As a result, income from operations reached $3 million in the second quarter of 2009 compared to $1.1 million in the year ago second quarter. For the six months ended June 30, 2009 we recorded $7.4 million in income from operations versus basically breakeven in the same period a year ago. Please note that audited 2008 financial statements and Form 20F filed on June included a subsequent event according to statement of accounting standard one of $1 million in bad debt which was originally reported in the first quarter of 2009 on [inaudible] income from operations.

Accordingly the income from operations for the six months ended June 30, 2009 has been adjusted to exclude that $1 million. A number of other factors also impacted our results. As we discussed last quarter, we have hedged a portion of our currency exposure for 2009. The dollar weakening for this quarter versus the Israeli Shekel resulted in adjustments to the mark-to-market value of our hedges of approximately net $1.4 million. The weakening dollar this quarter also produced a benefit for us in currency translations of around $2 million related to the exchange rates for our non-dollar assets.

During the second quarter we recorded financial income of a total of $3.7 million. This largely offset a similar financial expense recorded in the first quarter that was due to the strengthening of the dollar value during that period. For the six months ended June 30, 2009 we reported only a small amount of financial income.

On a GAAP basis, the net income was $4.9 million in the second quarter of 2009 versus $1.5 million in the year ago quarter. For the six months ended June 30, 2009 GAAP net income was $5.6 million versus just under $1 million in the year ago period. The adjusted non-GAAP net income in the second quarter 2009 was $6.1 million, nearly double the $3.2 million reported in the year ago second quarter. For the six months ended June 30, 2009 we reported $7.9 million non-GAAP net income versus [$4.4] in the year ago first half.

The reduced costs together with continued good collections helped us to generate nearly $9.7 million cash from operating activities during the second quarter of 2009. This compared with net cash used in the operations of $1.2 million in the year ago second quarter. Part of the cash flow increase this quarter is due to the timing of certain payments from customers totaling over $4 million and also from the receipt of the net proceeds from the successful arbitration of $1.9 million we discussed with you in the first quarter.

While we expected cash flows to moderate from the very strong levels of the first quarter for the six months ended June 30, 2009, we have generated more than $17 million in cash from operations and negative cash flow of $855,000 in the first half of 2008. Total accounts receivable amounted to $58 million at the end of the second quarter compared to $88.2 million a year ago.

The number of days sales outstanding continues to improve with a good decline versus last quarter. In the second quarter of 2009 our DSO was 105 days versus 125 days in the first quarter of the year. As of June 30, 2009 our balance sheet showed $66.3 million in cash, cash equivalents and marketable securities up from $66.9 million at the end of the first quarter 2009. We continue to operate with practically no debt on the balance sheet. We currently have approximately 1,200 employees worldwide.

In conclusion, while our 2009 revenues continue to be impacted by current market conditions, we have been successful in executing on our plan to increase operating efficiencies and manage our operations to maintain profitability improve cash flow. With that, I will turn the call back to Barry.

Barry Shaked

As we said on past several calls, we expected retailers and distributors to remain very cautious in 2009. We are still being very careful and forward visibility in the markets remains very limited. In speaking with retailers and distributors we continue to hear that they are focusing on near term enhancements in their operational efficiencies and costs. They remain focused on efforts to preserve capital and reduce unnecessary inventories as well as applications that can help maintain and improve their share of wallet.

This approach to the market is reflected in the new planned assignments we announced during the second quarter. For example, K-VA-T Food Stores, a regional supermarket chain that operates more than 100 stores selected the Retalix Loyalty as the next generation customer loyalty and promotion management system. At the full [inaudible] stores, Retalix loyalty will be partly integrated with their existing Retalix StoreLine Point-of-Sale and Retalix HQ price management system. Roche Brothers supermarkets, an 18 store regional grocer selected Retalix HQ store to replace its legacy pricing and store back process system. And, the large UK general retailer Argos is deploying Retalix Yard Management software system at its nine distribution centers across the UK to optimize resource and improve efficiency in day-to-day operations.

We are continuing to monitor the market closely. Despite the economic reports which point to improving segments of the global economy, we have not yet seen any significant shifts in retailers and distributors approach to the market. Therefore, we are prioritizing our efforts to ensure we are addressing the most pressing concerns for retailers and distributors and looking for meaningful enhancements that we can offer the market.

We recently announced the details for our Retalix Synergy 2009 Conference. It will take place on November 8th through November 11th in Dallas Texas. The theme is in the spirit of current times ROI; in this case, relationships, opportunities and innovation. The program is designed to help retailers and distributors learn how to better utilize current systems and explore new technologies to maximize business performance.

Based on the current market environment, we are maintaining our conservative outlook for 2009. Revenues to be between $180 and $200 million dollars; GAAP net income to be between $1 million and $6 million; and adjusted non-GAAP net income to be between $5 to $11 million. In closing, let me acknowledge our appreciation of the dedication efforts of our employees worldwide. We also appreciate your interest and support. Thank you for your attention and now we are open to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Analyst for Ziv Tal – Oscar Gruss.

Analyst for Ziv Tal – Oscar Gruss

First I have a couple of housekeeping questions, product sales slightly recovered from the first quarter, do you feel that the first quarter is the bottom of this [inaudible].

Hugo Goldman

Right now we are around the bottom in terms of the level, there can still be some changes here and there but we believe that is pretty much the bottom.

Analyst for Ziv Tal – Oscar Gruss

Can you provide some insight on gross margin? The margin for the product segments has decreased significantly compared to the last quarter, I was wondering how we should think about the second half of the year in terms of gross margins? Do you expect gross margins to remain at current levels?

Hugo Goldman

It will be similar to the Q2 levels for the margin.

Analyst for Ziv Tal – Oscar Gruss

Across all segments? I mean product margins should as low as it has been this quarter?

Hugo Goldman

Levels of the Q2 – the overall was 44.5%, product margin were 47%, services margin 47% so it will be roughly similar levels, maybe a little bit better but a small change.

Analyst for Ziv Tal – Oscar Gruss

What is the tax rate expected for next quarter?

Hugo Goldman

The tax rate basically we are doing are annual analysis of our taxes and right now we’re looking at 25%.

Analyst for Ziv Tal – Oscar Gruss

Giving the hedging expenses and currency differences, do you expect the same levels of financial income during the second half of the year?

Hugo Goldman

No. Actually, this is something that is very erratic, it depends on the currency fluctuation. It is something that is difficult to predict. We did some hedging on the dollar versus the Shekel and this is something, we did forward contracts at the beginning of the year. The more we get in to the end of the year, these differences will be smaller. On the other hand, as the dollar continues weakening we will see additional positive financial income on the non-dollar assets translation gains. It’s difficult to predict though.

Analyst for Ziv Tal – Oscar Gruss

Now, regarding cash you generated approximately $30 million of cash from operation during the first half, can you tell us what are your expectations for the remainder of the year?

Hugo Goldman

It’s very, very moderate. I think we shouldn’t take the first half as the basis for the second half, there may be a moderate improvement.

Analyst for Ziv Tal – Oscar Gruss

Can you tell us your D&A and cap ex for the year and for the rest of the year?

Hugo Goldman

Cap ex in the second quarter was close to $1.5, we expect another additional between $.5 to $1 million for the rest of the year maximum.

Analyst for Ziv Tal – Oscar Gruss

The depreciation and amortization?

Hugo Goldman

Similar levels, maybe some investments we’re doing were operational last quarter so the difference will be minimal this year.

Analyst for Ziv Tal – Oscar Gruss

Business related, how does your pipeline look for the remainder of the year, can you give some color on that?

Barry Shaked

While we’re not seeing any immediate improvements, we are seeing the pipeline growing but that’s all potential so we don’t want to start celebrating yet.

Analyst for Ziv Tal – Oscar Gruss

Now looking at your competitors, how do you feel about holding your market share at this time?

Barry Shaked

We are still winning our share in the market. We are the leaders in grocery and convenience. I think the softness is hitting all of us, it’s not that any competitor is taking any business from us.

Analyst for Ziv Tal – Oscar Gruss

Can you provide the geographic [breaks] for the first half of the year?

Barry Shaked

In terms of split of revenue?

Analyst for Ziv Tal – Oscar Gruss

Yes.

Hugo Goldman

We’ll get back to you on that point.

Analyst for Ziv Tal – Oscar Gruss

What indications do you think would find the recovery for your business? I mean, which patterns should we look for?

Barry Shaked

I think when you see our product revenue go up by 30% to 50%.

Analyst for Ziv Tal – Oscar Gruss

30% to 50%?

Barry Shaked

Just the product side.

Operator

Your next question comes from [Mark Regenbergen] – Ohio State Teachers Retirement Fund.

[Mark Regenbergen] – Ohio State Teachers Retirement Fund

We’re shareholders here and I have a question regarding continued media attention to various parties that may be interested in your shares. There was another media report this week and I know you can’t talk about specific offers or anything like that but I’m just curious, this latest media report said there may be an offer for your shares, a partial offer, but they may want to buy in at $9 or $10 per share. Is that a price that you would just laugh at or is that a reasonable price? I’m just wondering what your sensitivity is to any offers regarding the pricing of that?

Barry Shaked

As we stated two calls ago we will not comment or answer any questions regarding this subject. Once there will be news we will come out with a statement.

[Mark Regenbergen] – Ohio State Teachers Retirement Fund

Once again, I’m not asking about any specific offer, I’m asking a general question as to whether $9 or $10 would be anything near acceptability to you as shareholders and as managers or is that something you just think would be an outrageous price to even contemplate?

Barry Shaked

Unfortunately, I will still remain with my same answer.

Operator

There are no further questions at this time. I would now like to turn the call back over to Mr. Shaked for concluding statements.

Barry Shaked

I would like to thank everyone who joined this call, thank all the Retalix employees and we’d be happy to speak to you again in three months time.

Operator

This concludes the Retalix second quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.

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