Park City Group, Inc.
Q2 2021 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Greetings, and welcome to the Park City Group Fiscal Second Quarter 2021 Earnings 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, Rob Fink with FNK IR. Mr. Fink, you may begin.

[Rob Fink:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group’s fiscal second 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 fact. Such forward-looking statements are based on current beliefs and expectations.

[John Merrill:]

Thanks Rob and good afternoon everyone. Today we report financial results for the second quarter of fiscal 2021 ending on December 31st. Highlights of the quarter are as follows. Recurring revenue growth for our SaaS business, which includes compliance and supply chain, was up 7%. MarketPlace revenue grew 112%. With growth in all three product lines, our consolidated revenue grew 7% from $4.8 million to $5.2 million. Sales and marketing expenses decreased 17%, net income increased 145% aided by a gain related to the forgiveness of our PPP loan, cash from operations year-to-date was $3.8 million and our balance sheet remains strong with $23.9 million in cash. The bottom line is we continue to deliver a profitable diversified growing business with a strong recurring SaaS component with a modest cost structure and a MarketPlace business whereby we source hard-to-find things for our customers. Considering the significant challenges related to the pandemic and ongoing uncertainty, I am encouraged with our results thus far for fiscal 2021. As we have said previously on earnings calls, our software business comprised of compliance and supply chain services is now effectively all recurring in nature. This recurring revenue more than covers our fixed cash costs resulting in predictable profitability. I believe we are now at scale for the software side of the business, so incremental revenue, either recurring or transactional, largely falls to the bottom line at roughly an 80% to 85% margin. Therefore as the software side of the business expands, we are able to support higher revenues without meaningful increases in our SG&A lines. While the pandemic continues to extend the sales cycle for our software business, we believe there is pent-up demand as things begin to normalize. When this will occur and what is the new normal, it is everyone’s guess. As a reminder, we still have only a 10% penetration with our existing software customers, so farming our own customer network remains a top priority for opportunity. As I’ve said before, we can significantly grow our software business just by farming the existing network.

[Randy Fields:]

Thanks, John. The second quarter continued our momentum and validated the progress we’ve made in driving the earnings power and cash generation ability of the company. All three segments of our business grew, highlighted by our MarketPlace offering. We’ve now reached sufficient scale with our decreased and modest fixed cost base that we’re positioned for sustainable and growing profitability.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from Ananda Baruah with Loop Capital. Please proceed with your question.

[Ananda Baruah:]

Hey, good afternoon, guys. Happy New Year. And glad you guys are doing well. Good to year. Congrats on solid results. And congrats on the stock acting well as well of late, reflects performance. I guess I have a few, if I could. I guess, the first one would be – they’re all sort of revenue related, but the first one, sort of – this is probably for John. You mentioned you guys are at scale in software and sort of incrementally, the rest falls to EPS at 85% margin. Is that – what should be – is that – I guess that’s baseline revenue dollars, John? And what should we use roughly as sort of that baseline dollar? Should we use the dollar for the quarter? And then should we just literally think of the incremental dollars going forward and that’s the drop through?

[John Merrill:]

Yes. I think – again, we’ve said this on prior calls. It takes about $12 million to $13 million in cash, forget the accounting, to run our business, specifically the software business. So as we incrementally add more recurring revenue, then that dollar – about $0.80 to $0.85 of a dollar falls to the bottom line. That’s the software side of the business. But as we add more MarketPlace revenue, obviously, after the far lower margin, call it, 5% to 10%.

[Ananda Baruah:]

Yes, I got it. So it’s just $0.80 to $0.85 on $1 after the $12 million to $13 million? Or is it from the above the cash or is it from the…

[John Merrill:]

Yes. So if you look at the, call it, the recurring software side of the business, call it, $16.5 million or so on top of that, any incremental dollar over that would fall to the bottom line, 80% to 85%. But again, our – it’s about $13 million in our basic cash costs.

[Ananda Baruah:]

Totally got it. Totally got it. And then just on the pent-up demand and just the context you can give us that sort of indicates that to you, I know timing sounds like it’s – understandably, like to have not – not perfectly clear. But what are the indications that are pointing to pent-up demand? Like what’s the feedback you guys are getting in that regard?

[Randy Fields:]

John, you want me to answer that?

[John Merrill:]

Randy, you – yes, you could take that one.

[Randy Fields:]

Well, we’re seeing more inbound inquiries, which is usually a very good sign. The reception to our new products has been very strong. And for reasons, it must have something to do with people and I don’t want to say normalizing because that’s a – we’re a long distance in the world from that, but people adjusting to the current environment is creating a better selling environment. We’re getting people on the phone. When this first started to happen, honestly, for the first six months, you had people that had never worked from home before. So just getting them to talk to you is like, really, that’s tough. And now I think there’s been an adjustment to the Zoomization of the supermarket industry. So to a certain extent, it’s not quite business as normal because people are still struggling to keep things in stock. There’s – if you were a supermarket chain, you’ve got to worry about your frontline workers. You’ve got to worry about gloves, masks, cleaning it. I mean, running a retail business today is exquisitely difficult. So in the midst of all of that, we are seeing more interest, and we’re – we suspect that, that will begin to show up in our P&L late in this fiscal year, which is – would be June – May, June or early in the next one or both of those, July, August. It just feels very good to us at the moment. And interestingly, we have several of the – we call them Tier 1s, the largest accounts in our pipeline, are starting to roll out and get more aggressive about what we can do for them. So it just feels good at the moment.

[Ananda Baruah:]

That’s awesome. And just with regards to – you guys, the 10% penetration of – I’m going to call it your installed base. I think you said your software customers. And this year is going to be a big focus on increasing that penetration. Is there anything that you can – well, is there anything that you guys are deciding to do a bit differently to press that penetration? Or is it a matter of sort of just you’re doing the right things, just keep doing what you’re doing, the penetration is going to come naturally?

[Randy Fields:]

Well, I think I want to be careful how I characterize this because it will sound a bit more negative than it might otherwise. We are extremely good at taking care of our customers and servicing our customers. And that requires both good work on our part and excellent communication on the part of the people in our business that manage the accounts, clearly. And our lack of turnover, our customer success reflects that. But what we haven’t been very good at, historically, is asking the customer literally as simple as we’ve done this for you, shouldn’t we do more? Oh, I didn’t even know you guys did that. So I would say that we’ve not been very good historically beyond the – I’m going to call it servicing of our accounts and we’ve been fabulous at that. So we’re beginning to create more sales in not just incentive, but sales environment for our people, better support from them, better marketing, et cetera. And it’s not a quick fix. It’s a slowly changing the culture to a more sales oriented culture. And we’re – a year ago as we got started on this, we did it in fits and starts and then sadly the world went to sleep because of COVID. But it’s beginning to wake up and our people are getting better, they’re more excited about it because they’re learning new skills. And I think that that change positions us really well. We’ve had a number of competitive wins where pieces of our business that others have customers have come to us because of failures with other customers. Our financial strength has really been a competitive advantage. So I think all the pieces are in place. I’m not satisfied with how well we’re doing it. I am satisfied with how we’re approaching it. And I would expect the pace to begin picking up. I’m going to guess honestly though it’s at least another year until we’re at a pace that I’m pleased with.

[Ananda Baruah:]

Got it. Randy, that’s super helpful. And then just my last one that dovetails into my last one. I always enjoy getting updates on every quarter. How you guys are viewing the revenue growth potential longer term of the recurring business? And I think right now I didn’t check my notes, but I believe it’s north of 10% or 10% plus or something like that in that ballpark. The last time I asked you guys just is that still the case? And so Randy, if can get – and if you can get meaningful install-based penetration, would that have the potential to move higher over time?

[Randy Fields:]

Well to a certain extent, our service mentality and the need to really wrap ourselves around our customers creates a constraint. It’s not just bringing them in a wham, bam, thank you ma’am and move on. It’s nothing like that. It’s very intense. Consequently, I still believe for the next year or two that the recurring revenue growth is going to fall somewhere in the bracket of 10% to perhaps 20% per year. Over time as we do what we talked about today, add more easily upgraded modules and get better at cross selling, given the scale of the white space in our customers. There really isn’t a reason that not only is that achievable, but yes, it possibly, possibly could go higher. And the reason that that would be acceptable to us is that if it’s more revenue from the same customers, it doesn’t mean that we’re spreading an increasingly thin service group over that customer set.

[Ananda Baruah:]

Yes, I got it.

[Randy Fields:]

So, yes – the answer to your question is we really do feel good about where we are. Quarter-to-quarter it may vary from that, but we can’t see why 10% to 20% a year. And remember what that does to our bottom line. It’s pretty highly leveraged, not in a debt sense, but in an operational sense. The bottom line should – and cash generation should be explicit. So as I say, we feel very good about where we are. This is going to be a very good year.

[Ananda Baruah:]

That’s really helpful. I asked you before. Thanks so much.

[Randy Fields:]

Thanks, Ananda.

[Operator:]

Thank you. Our next question comes from Tevis Robinson with D.A. Davidson. Please proceed with your question.

[Tevis Robinson:]

Thanks so much and congrats on a great quarter. So first off on your new products offering, one, an extension of the MarketPlace and the other the compliance. How should we think about their potential financial impact during the next 12 months? And additionally, what’s the backstory on your effort with FEMA? How would you secure that opportunity? And I have a follow-up after that.

[Randy Fields:]

Okay. Well, let me answer – let me try and give you an intelligent answer to that, starting with the more difficult piece of it, the government. We did some government work in our last fiscal year. It’s not like dealing with the private sector. It’s quite different. Again, we need to learn more about that and get more proficient at it. And as a result of that work, we stumbled into a couple of other interesting opportunities. One of which we’ve seized on and initiated a pilot, the pilot is with the state emergency management group. The director of that management group has made the decision to use our technology. I would think, so far, the way they’ve laid out the requirements that we should be quite successful over the next six months in helping them. If that happens, going from state to state will just become part of our sales process, and we’re already learning the mechanisms for doing that. It’s simply too early to see what the outcome would be with any degree of certitude, but we’re bringing it up because we periodically do these new things. We did Compliance. That turned out very good. We did MarketPlace. That’s turning out to be very, very good. And now we’re going to try some government activity that kind of combines those two activities. So we shall see. But we do feel good about it at the moment. On the new modules part of our business, we are increasingly going to be modularizing what we do so that we can, as we develop new functionality, and it’s usually customer-driven. Typically, a customer will come to us and say – and I’m not exaggerating it. This is true. They will say, "We love working with you guys. We wish you could do this because this is a problem that we’re having, and we would love it if you could solve that problem." So we typically then take a look at the problem, assess it, decide how it can fit into our platform, and then we go off and do it. It’s rarely more than a few months of development time line for us to bring a new module to market. We then typically start with the customer that asked about the problem. We then go to a couple of others. And at that point, it’s been productized, if you will, and should be sellable. So this is a somewhat different approach than we’ve taken before. And I guess, in a way, I’m just trying to keep everyone on the bus in the know. Historically, we’ve just sort of included everything. We are the everything platform. And now what we’re saying is that our customers are going to begin to pay for the additional functionality as we deliver it. We think that gives them more, literally, investment on what we’re doing. And obviously, it has the salutary impact of increasing our revenue. I think both of these new products have the potential in the next fiscal year, not the one we’re in, but next year, to make a significant contribution. So we feel good about the direction. There’s a lot of work going on internally in terms of this modularization of our platform. But watch this space. We’ll be talking more about it over the next year or two. Was that too indirect, Tevis?

[Tevis Robinson:]

No, no, that makes sense. Yes, just for a follow-up, I was wondering if you could talk about the current level of distraction at the food retail level. Like when it comes to your core decision-maker and how they may or may not be affecting your sales cycle, like, for instance, can you quantify what this is doing to the sales cycle? Yes.

[Randy Fields:]

Yes. I can’t – it’s a really good question, but let me give you a couple of examples. These are absolute examples within the last 30 days. We will call to speak to – and remember, we sell quite high inside of an organization. So when we’re calling on our customers, it’s typically somebody in the C-suite or very close to the C-suite. On several occasions that I’m aware of, here’s what we were told, "He’s not in to take your call. He’s in the stores working because we are short staff. So it’s not clear when he’ll be able to get back to you." Literally, there’s such a shortage of – and remember that the horrible position that grocery store workers are put in, they stand all day long – and sure, they have masks and gloves, but zillions of people going in and out. They’re exposed to the virus. It’s not an easy thing. So the absentee rate, the sickness rate is higher than anybody would like, which puts pressure on these companies to get as many people in the field in the stores as they can. It’s – I’ve never seen it like this before. So it does impact – and if the question is, quantification, it’s not years, it’s months. And now as this – the situation seems to be normal, I – God, I hate to use that word, but whatever the word should be. As that’s beginning, we’re seeing it’s easier to get some phone calls and whatnot. It’s just we – – internally, we refer to it as people who are able to now move their attention to other things. The industry as a whole is very thin managerially. It’s always been that way because it’s a low-margin business. Consequently, they can’t handle 5 or 6 or 10 things at a time. It’s sequential. So right now, it’s staffing the stores, stocking the stores, et cetera. And over time, it’s been getting better, and we feel good about that. Not that – it’s not where it was before the pandemic, maybe 1/3 of the way back is probably the best way to put it.

[Tevis Robinson:]

Great. Thanks so much for taking my questions.

[Randy Fields:]

Of course.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Randy Fields for any closing comments.

[Randy Fields:]

Not much to say. I think we’ve given you a pretty good indication that the year is going to be an excellent year. We are continuing our focus on our balance sheet. And as we mentioned, we feel increasingly good about the position that we’re in. So Rob, anything else that we need to cover off on? Or are we there? Sounds like we’re there. Thank you, all. Talk to you soon.

[John Merrill:]

Thanks, everyone.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.