Retalix's mission POS-sible
CEO Barry Shaked: Public companies must be ready for buyout offers - I'd like to be the buyer.
Ofer Levi 12 Dec 05 13:59
2005 was the year of acquisitions for Retalix Ltd. (Nasdaq:RTLX; TASE:RTLX). The supplier of software solutions for supermarket chains and gas stations made back-to-back acquisitions in April, buying Integrated Distribution Solutions (IDS) and TCI Solutions for $80 million altogether. These acquisitions boosted Retalix’s revenue by $50 million and expanded its basket of pricing and storage products.
This year was also one of retail software systems acquisitions. In 2004, Germany’s SAP (NYSE; LSE: SAP; XETRA:SAPG) acquired Triversity Inc., a provider of applications for stores; and last week SAP acquired Khimetrics Inc., a developer of retail pricing software. SAP also fought to acquire Retek, a developer of retail pricing applications, mostly for clothing. SAP lost this battle to Oracle (Nasdaq:ORCL), which paid $631 million for Retek. Oracle also acquired ProfitLogic and G-Logic.
The decision by enterprise software giants to put their weight behind retail software is the best evidence of the positive momentum projected for this market in the coming years. The main reason why the retail software market is likely to grow lies in a desire on the part of major retailers to replace their hardware and software infrastructures. Many retail chains are about to replace their legacy systems with more open and flexible systems that will allow them to maximize their business activities.
AMR Research analyst Scott Langdoc predicts that the retail software market will grow from $6 billion in 2004 to $6.6 billion in 2005, including $2.2 billion from the sale of licenses. He says that systems replacement will boost the market to $9 billion by 2009. Acquisitions by the giant enterprise software companies turns the spotlight onto Retalix as a likely acquisition target. The question is whether it will be the first company in SAP or Oracle’s sights, or if they will focus on its competitor JDA Software Group Inc. (Nasdaq:JDAS). It seems that JDA, a developer of supply chain management solutions, will probably be the preferred target over Retalix, simply because JDA’s products target the retail market as a whole, whereas Retalix focuses on the food and gas station niche markets.
It should nevertheless be borne in mind that Retalix is the only company providing end-to-end solutions for the retail food market, from solutions for individual stores, through solutions for retail chain headquarters (a kind of enterprise resource planning (ERP) for chain management), to storage solutions.
When Retalix CEO Barry Shaked is asked whether the company received any buy-out offers from one of the large companies, he replies with a laugh, "Do you want to hear my answer? Because [executive VP and CFO] Danny Moshaioff's standard answer is that he opens his mailbox every day expecting to find a check".
“Globes”: I’d prefer hearing your answer.
Shaked: “Our field is very hot now, and the big companies want to be players. We believe that there’s much more room before the market becomes saturated. As a public company, you’re always prepared for a buyout offer, and you have to act according to procedure when someone tries to acquire you. But I want to be the buyer; I want to become the gorilla of the retail food market.”
What if you were offered a 25% premium on Retalix’s market share price?
“I must weigh everything. Obviously, a company must be sold if it’s very successful, and if someone offers a suitable premium. I am the founder and builder of the company, but I don’t consider it sacred and hang onto it just because I built it. Retalix is a business that is available for buying and selling every day.”
Nonetheless, entrepreneurs are very emotional about the businesses they built.
“An entrepreneur who brings a company to the stock exchange plays the game like everyone else. He uses his power to raise capital on the public market, develop the company and make acquisitions. At the same time, he also faces the possibility of being bought, and he cannot decide on his own whether to accept an acquisition offer in same way he could decide whether to accept an offer if he ran a private company.”
Retail is detail
Whether or not Retalix is acquired, the company continues to benefit from the growth in information technology, even as it has to cope with an increasingly competitive environment that promotes consolidation.
Retalix published an excellent financial report for the second quarter of 2005, beating analysts’ forecasts. It subsequently published a good financial report for the third quarter, albeit a slightly poorer one than predicted. Retalix posted a profit of $4.7 million for the third quarter, and revenue rose 55% to $52.5 million. The company’s revenue included $29.2 million from the sale of products, and $23.3 million (44.4% of total revenue) from services and projects, compared with $21.7 million from the sale of products, and $12.2 million (35.9% of total revenue) from services and projects for the corresponding quarter of 2004.
Retalix posted a profit of more than $15.5 million on $190 million in revenue in 2004. Analysts were more optimistic about the company’s revenue guidance, and overestimated its revenue by several million dollars above the company’s guidance.
Retalix’s share has risen 26% since June to $25, reflecting a market cap of $480 million.
Is there any chance that you’ll expand your applications to other fields besides retail food and gas stations?
“There’s always a chance. Our vision is to become the leading global vendor of solutions for the retail industry. We started out as a vendor of computer solutions for stores, and we’re now making progress on enterprise solutions (retail chain management, warehouse management, and so on). In the coming years, I want to continue to focus on food, and provide end-to-end solutions.
“We acquired IDS, OMI International, and TCI in order to succeed in the enterprise sector. Their systems are very good in terms of knowing what has to be done, but are obsolescent in terms of technology. We undertook to rebuild the applications using Java technology. It will take several years to complete development of these systems, even though some systems have already been rolled out. We’re focusing on completing development before we go out.”
What do you mean when you say ‘go out’?
“I’m referring to entering new sectors such as general goods or clothing. I assume that if we go there, it will be through an acquisition.”
Where do you feel do you have a technology gap that has to be closed?
“We lack all kinds of things, such as Khimetric’s technology, and solutions to prevent the theft of food. Food sales in the US total $400 billion a year, and theft amounts to 1%, or a huge $4 billion a year. By the way, the breakdown of theft is as follows: 50% occurs between the vendor and the store, 25% is by stores’ employees, and only 25% by customers.”
How can IT identify theft?
“By detecting different patterns in a cashier’s behavior. For example, if there’s a persistent surplus in a cash register, it’s a sign that the cashier is stealing. A cashier doesn’t know exactly how much he or she is stealing, so psychologically, he or she prefers leaving money in the till.”
Does expenditure on IT frighten retailers who have low profit margins?
“Retailers expenditures on IT amounts to 0.5% to 2% of turnover. A giant retailer like Britain’s Tesco (LSE:TCSO) spends $1 billion out of an annual turnover of $60 billion. It gets back analytical tools that optimize systems. We’ve been able to show Tesco that our systems make it possible to decrease inventory by over 15%, while simultaneously increasing orders by 80%, thereby improving the bottom line by 4%. In other words, IT boosted Tesco’s profit by $2.2 billion. Retail is detail, and in retail, where you have so many details, there’s always room to use technology to improve efficiency.”
The mix of services as a proportion of your revenue has grown substantially over the past quarters. Why?
“As we win more and more large customers, the demand for services expands. In addition, the service element of the companies we acquired, IDS and TCI, was fairly high.”
Growth from large retail chains
It seems that most of Retalix’s growth in the coming years will come from tier-1 retail chains (over $2 billion in turnover), and tier-2 chains (turnover of $500 million-$2 billion), as they upgrade their systems. “Retalix’s products are mainly suited for large companies, and tier-2 and tier-4 retailers are marginal for Retalix,” says Bank Hapoalim analyst Nir Amikam. “Retalix does not provide figures, but it’s estimated that 90% of sales are to tier-1 and tier-2 retailers.”
Retalix’s most important contract was signed in November with Woolworths Ltd. (ASX:WOW), Australia’s largest retailer. Retalix did not disclose the size of the contract, but tier-1 contracts are usually around $4-7 million a year over seven to ten years. The contract was probably toward the upper limit of forecasts, suggesting that Retalix will earn tens of millions of dollars over the coming years. Retalix says Woolworths is Austrialia’s largest retailer, with a 28% share of the household products market, and over $20 billion in sales a year.
How long is the average sales process to a retailer buying your products?
“A large contract like the one with Australia’s Woolworths took three years. The sales process can take between six months and a year, since the customer first publishes a tender, and doesn’t yet know what it wants to buy. Large chains also begin with pilot stores. With smaller chains, a deal takes three months, and they install all the systems simultaneously.”
“We’re already part of the game in China”
How important is China as a growth engine for you?
“The entire Far East is a key growth engine. In 2005, our in-house growth was in markets outside the US and Israel. The Chinese market is huge, and is growing. Everyone wants to market and sell in China, but to succeed, it’s necessary to be in the game. We’re already part of the game, we have systems translated into Chinese, and adapted to the local market. We’re working with a domestic retail chain called Lotus, which has 200 stores. We’re also seeing that our large European customers will be major players, and we’ll sign substantial contracts with them.
“India, for example, is privatizing a great many businesses. These private companies have begun selling gas, and we have a very large customer in the sector. It asked to buy systems for five gas stations, and when refused, explaining that our systems were only effective for large chains, they said, ‘That’s OK. By the end of the year, we’ll have 5,000 stores.’”
How much does the Chinese market want software solutions for the food sector?
“China yearns for systems like ours. Customers understand that they’re not buying technology, but solutions that teach them how retail chains manage themselves, how to optimize prices, manage inventory, and so on. They learn all this from our applications.”
Published by Globes [online], Israel business news - www.globes.co.il - on December 12, 2005
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