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Retalix Ltd. (NASDAQ:RTLX)

Q4 2011 and Year-End 2011 Earnings Conference Call

February 29, 2012, 9:00 AM ET

Executives

Shuky Sheffer - CEO

Hugo Goldman – CFO

Operator

Welcome to the Retalix conference call.

As a reminder, this conference call is being recorded today, February 29, 2012.

Leading the call is Retalix's CEO, Shuky Sheffer. 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, but are not limited to, comments regarding the guidance and expectations about revenues, DSO, financial income, tax rate and profitability, expectations about the Company's pipeline of customers, addressable market, expected drivers of the Company's growth, anticipated demand for, and expected investments in, the Company's software products and services and new offerings, management's expectations as to the Company's future financial performance, the 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 14, 2011.

Also I'd like to remind you that Retalix reported income from operations, net-margin, 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 section of the Company's Web site at www.retalix.com. The press release showing the fourth quarter and full year non-GAAP reconciliations can also be found at that site.

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

Shuky Sheffer

Thank you Michael.

Welcome and thank you for joining us on this call.

This morning we announced our financial results for the fourth quarter and the full year 2011.

We had a strong finish to 2011 recording record revenues in the fourth quarter and strong financial results in all our parameters. This was the eighth consecutive quarter of growth and continued profitability for Retalix.

Revenues increased 16.2 percent in the fourth quarter versus the year-ago fourth quarter to a total of 62.5 million dollars. Net income non-GAAP was up 13.5 percent versus the year ago fourth quarter to 4.5 million dollars.

We continued to achieve good, consistent results and solid execution across the Company. During the fourth quarter we won significant customers and made progress on our programs.

The validation of Retalix 10 as the leading platform for retailers continued to build. In a press release in January we announced that Target Corporation, a leading U.S.-based retailer, selected the Retalix 10 Store Suite as its next-generation store platform for Target's new retail operations in Canada. Included in this program for Target Canada is our software-as-a-service-based connected payments offering, demonstrating our success in integrating our acquisition of MTX into Retalix. Target is a significant new logo for Retalix, and is the Tier 0 win we mentioned on earlier calls. We are very excited to be working with Target, which is one of the largest and most successful retailers in the world, and look forward to building this relationship.

In the fourth quarter we had another Retalix 10 win with a Tier 0 retailer. After an extensive review this Tier 0 retailer selected Retalix 10 because of the significant advantages it offers including the fully integrated multi-channel capabilities, significant reduction in time to market and its advanced architecture.

Other wins this quarter included multiple new logos across our geographies, including wins for our products, services and software-as-a-service payments offerings.

We also completed significant milestones for our customers during this quarter, including as you saw in our January press release which announced a successful initial pilot with Tesco of the Retalix 10 Store Suite software.

The strong market response for our offerings is continuing to build demonstrated by the largest ever attendance of retailers and partners at our Synergy User Conference. It took place in November in Dallas. Participation rose by 10 percent versus 2010 and included presentations by major retailers, partners and leading industry analysts.

Moving to our full year results, through consistent and solid execution of our strategy we achieved solid double-digit growth in 2011. This morning we reported new records for both total revenues and Non-GAAP net income for the year. As we said last quarter, we expected to exceed our guidance for 2011 as our growth engines began to contribute consistently across our markets and geographies.

Revenues were up 13.8 percent in 2011 to a total of 236 million dollars. Net income non-GAAP was up 13.9 percent to 19.4 million dollars and GAAP net income was up 26.9 percent to 13.7 million dollars in 2011.

We also generated strong cash flow from operations and maintained a strong balance sheet with no debt.

All of the achievements in 2011 demonstrates that our strategy is creating strong results for Retalix and highlights that we have successfully positioned the business for the future.

In a moment I will talk in more detail about market trends and our outlook. First let me hand the call over to Hugo to review the financial results for the fourth quarter and the full year.

Hugo Goldman

Thank you Shuky.

We continued our solid financial performance reporting record total revenues for the fourth quarter and the year and record net income Non-GAAP for 2011. Profitability was maintained while we proceeded with our investments. We also continued our strong collections and efficient cash management generating good operating cash flow in 2011 and improved DSO. Our balance sheet is strong.

We reported a 16.2 percent increase in total revenues in the fourth quarter. Total revenues were 62.5 million dollars for the three months ended December 31, 2011, compared to 53.8 million dollars in revenues in the year-ago fourth quarter. For the full year total revenues reached 236 million dollars in 2011 versus 207.4 million dollars in 2010.

Looking at the revenue mix in 2011, software revenues were 10 percent of full year revenues. Maintenance revenues derived from our products were 26 percent, professional services, which includes our SaaS revenues, were 52 percent, and hardware revenues were 12 percent of total revenues for the year.

As we discussed with you on previous calls, we maintained similar levels of profitability in 2011 while we proceeded with investments in strategic programs that are enhancing our strengths and creating new opportunities in the market. These investments are reflected in our income from operations but our non-GAAP net margin – net income as a percentage of sales – remained at 8.2 percent in the full year 2011, consistent with the 8.2 percent recorded in 2010.

Our non-GAAP operating margin was 7.9 percent in the fourth quarter and 8.6 percent for the full year.

Adjusted income from operations non-GAAP was 5 million dollars in the fourth quarter versus 4.5 million dollars in the year-ago fourth quarter. For the full year 2011, we reported 20.3 million dollars in adjusted income from operations non-GAAP versus 19.8 million in 2010. GAAP income from operations was 3 million dollars in the fourth quarter versus 2.7 million dollars in the year-ago fourth quarter. For the year we reported 13.2 million dollars in GAAP income from operations versus 12.4 million dollars in 2010.

Looking at our expenses, our total headcount was up in 2011 by over 240 people, including the acquisition of MTX, as we grew our operations to realize opportunities in the market.

R&D expenses grew in total dollar amounts as we proceeded with investments in Retalix 10, our services and other products including our SaaS and connected payments efforts and the addition of MTX in the second half of 2011. R&D remained stable as a percentage of revenues. Sales and marketing expenses increased in 2011 as we addressed new market opportunities. In the fourth quarter we also had the expenses for Synergy, which was the largest users’ conference for the Company. G&A expenses were largely stable and for the year were 11% of total revenues.

We recorded a net financial income of 0.6 million dollars in the fourth quarter of 2011 and a total of 1.8 million dollars for the full year which includes interest income, the net impact of currency fluctuations on the value of our non-dollar assets, and currency translation costs. In the year-ago fourth quarter we had a net financial income of 2 million dollars and a total of 3.5 million dollars for all of 2010. The 2010 financial income included 2 million dollars in interest income related to a tax refund, which we knew would not be repeated in 2011. Looking forward, in 2012 we expect little or no net financial income.

In the third and fourth quarter we achieved significant tax benefits that lowered our effective tax rate in the quarters and for the full year. We do not expect to realize similar tax benefits in 2012. We expect our effective tax rate to be approximately 25 percent in 2012.

As Shuky said in his opening remarks, we reported strong year-over-year gains in our Net Income both on a GAAP and non-GAAP basis for the fourth quarter and for the full year.

Our non-GAAP Net Income was 4.5 million dollars, or 19 cents per diluted share, in the fourth quarter of 2011 versus non-GAAP Net Income of 4 million dollars or 16 cents per diluted share in the year ago fourth quarter.

For the full year 2011, we reported a 13.9 percent increase to 19.4 million dollars in non-GAAP Net Income, or 79 cents per diluted share. This compares with 17.1 million dollars, or 70 cents per diluted share in the full year 2010.

Our GAAP Net Income was 3.1 million dollars, or 13 cents per diluted share in the fourth quarter of 2011, versus 2.6 million dollars, or 11 cents per diluted share, in the year-ago fourth quarter.

For the full year 2011, we reported a 27 percent increase to 13.7 million dollars in GAAP Net Income, or 55 cents per diluted share. This compares to 10.8 million dollars, or 44 cents per diluted share in the full year 2010.

Turning to the cash flow, this quarter we generated 1.7 million dollars in cash flow from operations and a total of 20.1 million dollars in the full year 2011. This includes an immaterial adjustment in some of the earlier reported cash flow from operations to cash from investments.

We continue to pay careful attention to receivables and had another strong collections quarter. Total trade receivables were 57.6 million dollars at the end of the fourth quarter versus 61.3 million dollars at the end of the third quarter. Our DSO was 85 days at the end of the fourth quarter versus 83 days at the end of the third quarter and 103 days at the end of 2010. As we commented in the past, as we enter into larger and longer-term customer contracts, DSO might increase from the current level.

Our balance sheet strength continues with 135.7 million dollars in cash and cash equivalents, deposits, marketable securities and long-term investments at the end of 2011. This is after we used approximately 18.95 million dollars of cash in July 2011 for the acquisition of MTX. We have no debt.

In conclusion, we had a solid financial performance in 2011 with strong growth in revenues and Net Income, good cash generation, strong collections and improved DSO. These strengths permitted us to pursue our investments in our operations, growth engines and strategic projects for our customers and prospects in 2011 and will continue to help us to pursue opportunities in the market in 2012.

Now I will turn the call back to Shuky.

Shuky Sheffer

Thank you, Hugo.

2011 was a defining year for Retalix as our leadership positioning was strengthened. We delivered on our promises as all of the growth engines began to contribute and we began to drive Retalix to new levels.

As we discussed with you previously, we defined a series of growth engines for Retalix including innovative products and product-led services, expanding our software-as-a-service offerings, and growth through geographic and adjacent markets, as well as M&A activity that supports our strategies.

Let me briefly review our achievements with each growth engine.

Our innovative product, the Retalix 10 Store Suite, was launched at NRF in January 2011 and is now recognized as the leading platform for high volume high complexity retailers. Retalix 10 has been endorsed by prominent industry analysts. As the first fully integrated platform, Retalix 10 enables a consistent shopping experience across the multi-channel store environment. Retalix 10 provides unique advantages, including an architecture that provides flexibility while streamlining deployment and management of in-store systems, accelerates time-to-market and enhances central management capabilities. As I mentioned in my opening remarks, the customer wins for Retalix 10 include Tesco, Target Canada and a third Tier 0 retailer. Interest continues to build for Retalix 10 both with our current customers and a wide range of prospects.

The second growth engine we defined is our unique business model that creates product-led services that leverage our retailing expertise and provide differentiated, value-added services around our products for our customers. In 2011 we won a broad range of engagements for these services, which include system integration services such as testing, automation, training, deployment and support. We are successfully integrating services into our customer relationships and using these offerings to expand our share of wallet.

Software-as-a-service (SaaS) is another growth driver. In July we acquired MTX and have successfully integrated connected payments into our platform with a new Global Payments Group. We are winning customers, including as I mentioned Target Canada, for our software-as-a-service payments offerings. We are starting to see growing contributions from our connected payment offerings.

We grew our customer list adding major new logos and expanding with new geographies and adjacent markets. For example, in the United States we won Walgreens, a leading drug store chain, while in Russia we won DIXY, one of the fastest growing food retailers, and in China we won a new grocery customer. Additionally we successfully rolled out more than 16,000 retail and fuel locations for PetroChina.

We also won new logos and expanded our customer relationships with regional chains including Tops and Weiss Markets in the U.S., Family Express in convenience stores, and The Southern Co-Operative in the U.K.

The successes in 2011 give us even more confidence that our strategy is the right one. We identified the market trends and positioned Retalix with the innovative multi-channel solutions to help retailers enhance their operations. Major industry analysts are highlighting the impact of the empowered shopper and confirming that retailers are focusing their investments on the store with attention to the customer, customer service, and mobile. The trends are playing to our strengths and expertise in high volume, high complexity store operations. Retalix 10 is the leading platform for the multi-channel environment.

We received additional confirmation of our strategic direction and Retalix 10’s market leadership from the strong response from customers and prospects at the National Retail Federation annual conference which took place in January 2012 in New York.

The strong response for Retalix 10 is coming both from new customers and from proactively engaging with our current customers. We are providing them a compelling migration path to upgrade their store operations to take full advantage of the new technologies designed to enhance their interactions with shoppers and fully integrate all the consumer touch points.

With smart phones and other new technologies, consumers now interact with retailers across multiple channels, making it critical to have the solutions to ensure a consistent shopping experience inside and outside the store. To enhance the shopping experience retailers must integrate multiple touch points, ranging from the web and mobile shopping to POS, self-checkout, mobile payments, self-scanning, customer scale, customer kiosk and fuel sales, and continue to interact with the shoppers after they leave the stores. Our products are all true multi-channel solutions while a lot of our competition continues to offer products for individual silos that cannot seamlessly integrate across all the touch points.

Retailers need solutions that integrate all these elements of the shopping experience and can incorporate applications including their loyalty and customer management to ensure they differentiate their stores, remain competitive and are able to quickly adapt to meet increasing consumers’ expectations.

All of our customers are now focusing on multi-channel retailing. We are constantly hearing this in our discussions with customers and we are ready with the best solutions available in the market that address the touch points available today and in the future. We recently announced that Retalix 10 is “cloud ready,” meaning it not only addressed the multi-channel demands but also enables our customers to deploy their systems in multiple set ups best suited to their format, geographical location and line of business. This further demonstrates our future looking strategy anticipating both existing and emerging needs of our customers as the industry continues to transform.

A key component of the multi-channel environment is mobile shopping solutions that seamlessly connect consumers to the stores. In January at the National Retail Federation we released our Retalix 10 Mobile Shopper, a new set of mobile applications that is another significant differentiator for Retalix in the market.

Retalix 10 Mobile Shopper is designed to provide value throughout the entire shopping cycle, integrating a broad range of functionality for the consumer. With this application retailers provide consumers the ability to manage their shopping inside and outside the store. Consumers can find store locations, access product information and pricing, view special offers, receive targeted promotions and coupons, scan items, perform payments, and more. For the retailer our Mobile Shopping seamlessly integrates into the store and provides the ability to tie in their loyalty and customer management programs.

The retailing market is large and growing and continues to change. We will continue to invest in programs designed to provide unique advantages to retailers and leverage Retalix’s expertise.

We are excited by the opportunities we see in the market. Our goal for 2012 is to leverage what we have built and take advantage of our lead achieved through our unique products and services to gain market share.

Our efforts in 2012 will continue to focus on executing on our strategy to expand the leadership for the Retalix 10 Store Suite and leverage the advantages we offer with our unique multi-channel solution. We will expand on the successes with our services, System Integration and Software-as-a-Service offerings, and build on what we achieved with our global payments offerings since the acquisition of MTX in July 2011. We will also continue to explore the opportunities for non-organic growth through M&A designed to support our strategy.

For 2012 we expect to continue double digit revenue growth and continue to improve profitability. Today we are announcing guidance of total revenues in the range of 260 to 270 million dollars and 9 to 10 percent profitability from operations for 2012. Our guidance for 2012 is based on organic revenue growth for Retalix's products and services. As in 2011, we expect to build on our results as the year progresses.

In summary, we are very pleased by our strong performance in 2011 delivering on our goals and returning Retalix to double-digit growth. Our strategy to have leading products and product-led services produced record total revenues and net income Non-GAAP in 2011 and is providing us with a strong position on which to build in 2012. As we projected, the trends are playing to our strengths in the multi-channel environment in and around the store and mobile. We focused our efforts to prepare for these opportunities and we have the innovative solutions that we believe provide retailers with unique advantages. We are gratified by the strong positive responses we are getting from retailers, our partners, and industry analysts and will continue to work hard to realize the opportunities in the market. We thank you for your support and look forward to sharing more successes with you in 2012.

Question-and-Answer Session

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