Park City Group, Inc.
Q1 2022 Earnings Call Transcript

Published: 15 Nov 2021

[Operator:]

Greetings, and welcome to Park City Group Fiscal First Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rob Fink, with FNK IR. Mr. Fink you may please begin.

[Rob Fink:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group's First Fiscal Quarter Earnings Call. Hosting the call today are Randy Fields, Park City Group's CEO and Chairman; and John Merrill, Park City Group's CFO. Before we begin, I would like to remind everyone that this call could contain forward-looking statements about Park City Group within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not subject to historical facts. Such forward-looking statements are based upon current beliefs and expectations. Park City Group management is subject to risks and uncertainties, which could cause actual results to differ from those forward-looking statements. Such risks are fully discussed in the company's filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks. Park City Group does not assume any obligation to update information contained in this conference call. Shortly after the market closed today, the company issued a press release overviewing the financial results that will be discussed on today's call. Investors can visit the Investor Relations section of the company's website at parkcitygroup.com to access this press release. With all that said, I'd now like to turn the call over to John Merrill. John, the call is yours.

[John Merrill:]

Thanks, Rob, and good afternoon, everyone. The September quarter progressed as expected. We delivered another reporting period with solid results

[Randy Fields:]

Thanks, John. Our momentum continued into fiscal 2022, resulting in our first quarter double-digit recurring revenue growth. It's worth noting, by the way, that recurring revenue is now 97% of our total revenue. That's up significantly from only 64% a few years ago. We've grown recurring revenue by a 15% compounded annual growth rate since we began this strategy to reduce onetime and focus on recurring revenue. During that same period, our GAAP earnings, note GAAP, has had a growth rate of nearly 40% on a compounded annual growth rate basis. It's uncommon, to say the least, during this kind of a business shift. Beyond the recurring revenue growth this quarter, we've made progress on several important initiatives. First, we're preparing the entire company for our Track & Trace solution, both to meet the coming FDA mandates that importantly also to enable us to onboard theoretically, thousands of suppliers quickly and cost effectively after the mandates are finalized. Second, we're continuing to transition our Marketplace offering to a subscription model, more in line with our overall SaaS business plan and with much more appropriate contribution margins. Just like with our transitioning one-time license and services that we've now completed, this Marketplace effort will take some time, but you can already see progress on our quarterly margins. Third, we are continuing those cross-selling activities that we mentioned on many prior calls. We've had a number of successes this quarter, including expansions of our out-of-stock work from an existing compliance customer, expansion of our compliance business, et cetera. All of our activities are now directed toward recurring revenue, cash building per customer revenue expansion. Our aim is to continue to grow our GAAP earnings at a rapid rate. Our core business is exceptionally strong. Our recurring revenue significantly exceeds our cash fixed costs, enabling systemic profitability and free cash flow. As John mentioned, we made the decision to pay down more than $6 million of our line of credit. So as of September 30, we still had more than $20 million in cash, no debt, and we're generating more than $1 million a quarter in cash from operations. This enables us to fund our share repurchase, our growth initiatives and improve our already strong balance sheet. The objects to our customers and our important focus on our balance sheet work. In fact, our balance sheet will continue to serve us very well as the industry begins to focus on traceability. Our Track & Trace initiative represents one of the largest opportunities we've ever seen at Park City Group, and the FDA mandates will effectively do the marketing for us. The proposed Rule 204 creates burdensome new requirements for those who manufacture, process, pack or hold the products on the food traceability list. Paper-based systems will no longer work. the FDA has actually said as much. Producers, suppliers, logistics companies will be forced to adopt numerous new technologies to meet these requirements. As a company, we're very, very focused, as you know, on our customers. The traceability mandate will negatively impact them, and they need to find a solution. We've carved out a particular piece of the traceability problem space, and no one can do it any better than we. We are not doing labeling. We're not doing scanning, et cetera. Our focus is on the niche between trading partners. We certainly are not shy about the revenue opportunity it presents to us, but we have a moral obligation to look ahead for our customers and help them avoid the crisis that traceability could create. To put this in context, given our 25,000-plus customer base, we've identified about 6,000 suppliers whose products could be affected by Rule 204. At a modest monthly subscription rate, this opportunity could, and I say could, result in an additional $10 million to $12 million per year of recurring revenue, and that's on top of our existing $18 million in recurring subscription revenue after the mandate is in full force. Hence, our need for laser focus, deemphasizing non-core offerings and once again delivering flawless execution. The issue of traceability is really one of massive micro execution, the ability to process and handle for us literally billions of transactions per year and do it accurately. We've been doing this in our supply chain arena for many years, and we're sure that we're up to the challenge. Case in point, one of our existing long-term customers has nearly 2,000 Rule 204 affected suppliers. They've committed to a test and are most certainly a thought leader in the industry. If just this one customer used our solution for its thousands of suppliers would represent nearly $5 million per year in incremental revenue. Yes, we are working with more than one customer on the solution and ultimately, every retailer, every distributor, every supplier and every logistics company affected by the products on the traceability list will be impacted. Our mission is to make sure that we are positioned to respond to what could be a significant influx of calls when this mandate is made official. As I've said before, every aspect of our company has to be ready from finance to marketing. Since we already do Track & Trace successfully, affordably and at scale as part of our supply chain platform, this opportunity is clearly right in the middle of our wheelhouse. With over a decade of addressing compliance and supply chain challenges, we are the obvious vendor to address it. In a sense, traceability is a marriage of compliance and supply chain. Wow, almost designed for us. The traceability pawn is a huge one with many exploitable niches. We've picked ours. We will aggressively go after it. Other players will likely go after different areas. Success of a myriad of technologies in these other areas of traceability actually augments our appeal. It doesn't impinge on it in any way whatsoever. Our business model for traceability is incredibly simple, make it very low cost, very easy to adopt and expand our existing compliance and supply chain offerings. As we said a few weeks ago in our fourth quarter call, this fiscal year will be about synchronization of these issues, which I must quote, we're very, very good at. The FDA mandates are coming. It's not a matter of if, but when and how robust. It's important to keep in mind we think that the FDA has entered into a consent decree that requires the adoption of a set of rules regulating traceability. Nevertheless, we're not expecting meaningful revenue from traceability in this fiscal year. This is the year we want to do the hard work and get all aspects of the solution ready. In essence, all hands on deck working with our customers to make sure that it's organized around their needs. The FDA's timeline makes us a top priority for us and, frankly, even more so for our customers. I want to emphasize that even though the year is about preparing for the FDA rules, we're confident that we will grow our recurring revenue and drive earnings substantially right on plan. As I said, we're converting Marketplace into a recurring subscription offering. During our fiscal fourth quarter, two subscriptions were initiated, and we expect more. But since our focus is on traceability this year, we're not putting significant resources against the marketplace transition for now. In addition, the SaaS components of our platform are both growing well. We are adding and growing customers in both areas. Barring a worsening of supply chain problems, we believe that we will grow recurring revenue 10% to 20% for fiscal 2022. Yes, we achieved this growth rate in the first quarter, and we're on plan to see some acceleration as the year unfolds. As part of our traceability focus, we have sunsetted a product that had limited market potential for us. The number we reported included the reduction of revenues from that decision, and they're still right in line with our plan. Simultaneously, we continue to focus on expense control, profitability, increased margins and, of course, cash. Because of our business model, we're structurally set up for a successful 2022 year. To reiterate, our key goals for the fiscal year are

[Operator:]

We will now begin the question-and-answer session. It appears our first question today comes from Thomas Forte of D.A. Davidson. Please go ahead.

[Thomas Forte:]

Great. I have a couple of questions. I think it's the harder questions go by. We'll start the easy one first. So John, did you say that you think you took $1 million of cash costs out of the business? Is that a permanent change or a short-term change?

[John Merrill:]

Permanent change. And yes, $1 million. It's actually over $1 million.

[Thomas Forte:]

Great. And then, Randy, you've talked about the current stated distraction for your core customer, a food retailer. Can you give us an update on your current thoughts there?

[Randy Fields:]

Yes. Not really much change in the last month or so since we did our year-end call. And so long as things stay about like they are, we're comfortable with the current configuration of attention. If things get worse, it will slow us down. If things improve, it could help us a little bit.

[Thomas Forte:]

Great. And then I wanted to bring up a subject we discussed last quarter, which has only worsened since then. Can you talk about - so historically, food inflation can be good for a food retailer. Do you still feel that way and is it good for you?

[Randy Fields:]

The answer is, and I have a mixed message here, but for retailers, inflation is generally good to very good. Therefore, it's good for us. Unfortunately, for people in the kind of economic situation, which they find themselves out of work, et cetera, it's not so good. So sadly, food inflation benefits the industry, participants in the industry, but it makes it worse for society, for sure.

[Thomas Forte:]

Okay. And then can you repeat why you're not expecting any incremental revenue from traceability in this fiscal year?

[Randy Fields:]

Well, a lot of that has to do with our own internal preparedness because there is no aspect of our business that this doesn't touch. We need more certainty around what the possible Rule 204 or that's called regulations are going to look like. We're getting ready to do a number of tests actually, more tests than we had thought about in the beginning. Those tests really now just because of the season, Christmas is coming, for example. We're not going to begin those tests until sometime in December. January, they'll run for a few months then we'll develop a rollout plan, et cetera. So it's really just timing. There might be a slight impact toward the end of this fiscal year, which would be May-June. But our current plan is it will happen after the end of the fiscal 2022 year.

[Thomas Forte:]

All right. So last question, and it's interrelated. So you've talked about - both Randy and John, you've talked about your ability to essentially sell more services to your existing customer base. Can you provide your updated thoughts there? And then can you also talk about now that you've converted Marketplace to a SaaS offering, your ability to, again, sell it to existing customers? And then are you selling the product on a standalone basis as well? How should I think about that?

[Randy Fields:]

But let me go backwards in that. We actually have signed up a couple of people who are not customers for the use of Marketplace. So I think the answer to the question is we think it's a very appealing concept. But as I mentioned, we just can't focus on this year. The ramifications of traceability are so large not just from an economic top line, bottom line perspective but from the various parts of our business that it touches that we can't focus on other things. We've got to keep that in the center of our plate. Secondly, the cross-selling activities are actually doing pretty well. I'm pleased. I've always been kind of - I've been not as excited about how well we're doing the cross-selling as I'd like, but it's definitely getting better. But the bridge to the cross-selling, strangely enough, is likely to be traceability, meaning that, in fact, the traceability as the FDA is looking for it is indeed a combination of our supply chain and our compliance activities. It's almost as if the FDA understood all of our capabilities and said, well, how would we get them to deploy them across their entire customer base. So the way we see this unfolding, we are continuing to up-sell our customers for products that they have. To us, cross-selling means that they go from supply chain to compliance or for compliance to supply chain. That's a cross-sell. The others are just up-sells within those two different suites of applications. And although we continue to do the up-selling, I think the cross-selling will be massively accelerated when traceability becomes the law of the land because it already then takes everyone, those 6,000 or more, into an experience of both our supply chain and our compliance capabilities. This thing really is made for us. That's why we're devoting so much time to it. And in the meantime, we're going to continue to - along our 10% to 20% top line growth and a much more rapid growth of our earnings. So it's an add-on to what we're talking about in terms of acceleration. It's an accelerant. It's not a substitution. So we feel very, very good about where the business is today.

[Thomas Forte:]

Thank you for taking my questions, Randy and John.

[Randy Fields:]

Thanks, Tom.

[John Merrill:]

Thanks, Tom.

[Operator:]

At this time, it looks like we have no further questions. I would now like to turn the call back over to Mr. Randy Fields for any closing remarks.

[Randy Fields:]

We appreciate everybody taking time today. We hope that we've given you the optimistic sense that that we have about the business. We feel very good about where we are, the customer satisfaction that we see, everything that we would want in terms of enrolling the future in a desirable way is happening for us. So if you have additional questions after the call, reach out to John or to me, and we'll get back to you just as soon as we can. In the meantime, thanks a lot for taking the time.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.