Park City Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 14 Sep 2017

[Operator:]

Good day and welcome to the Park City Group Fourth Quarter and Fiscal Year-End Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Dave Mossberg, Investor Relations. Please go ahead, sir.

[Dave Mossberg:]

Thank you, Melissa. Before we begin, we will be referring to today’s earnings release, which can be downloaded from the Investor Relations page on the company’s website at parkcitygroup.com. I also want 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 the current beliefs and expectations of Park City Group’s management and are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements. Such risks are more 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 the information contained in this conference call. Throughout this call we may be referring to both GAAP and non-GAAP financial results, including free cash flow, EBITDA, adjusted EBITDA, net debt, net income and earnings per share which are non-GAAP terms. We believe these non-GAAP terms are useful financial measure for our company primarily because of the significant non-cash charges in our operating statements. The reconciliation of non-GAAP results in earnings release and on the Investor Relations section of our website. Our speakers today will be Mr. Randy Fields, Park City Group’s CEO and Chairman; and Todd Mitchell, Park City Group’s CFO. With that, I’ll turn the call over to Todd?

[Todd Mitchell:]

Thank you, Dave, and good afternoon, everybody. We put up a record quarter in terms of total revenue and revenue growth. This capped off a great year that just got stronger and stronger. Results continued to be driven by growth from ReposiTrak. We signed three more Tier 1 retailer hubs in the fourth quarter and continued to see strong momentum in adding Tier 2 supplier hubs. As a result, we ended fiscal 2017 with nearly twice as many ReposiTrak hubs and supplier connections as we had at the end of fiscal 2016. The sense of urgency among industry participants has steadily risen. Food safety compliance is now one of the most critical issues on industry executive minds and they are coming to us. We are growing as fast as we can, while maintaining our high-level of commitment to our customers’ success. Our customers’ success is the bedrock of our company, because if our customers are successful and they feel in relationship with us, then they’ll want to buy more from us and they will refer us to others. I want to make some clarifying comments about our product offerings. ReposiTrak is our compliance management platform. We believe ReposiTrak is at an inflection point this year with regards to market acceptance as the industry’s standard compliance management platform. And I want to be clear, that’s what we’re referring to when we make that assertion. We believe there are certain attributes that every buyer needs to know about every supplier in the U.S. food and consumer products supply chain. ReposiTrak enables a retailer, wholesaler or product supplier to know that every one of its suppliers is compliant with any attribute. It determines to be important, whether they be the obvious regulatory attributes, such as a clean food safety audit, or proof of insurance, or less obvious attributes specific to a particular hub, such as GMO or kosher certification. ReposiTrak has also been exclusively endorsed as a platform for aggregating this information by the most important industry groups, including FMI, ROFDA, and now you’ll notice, GMDC. With the industry’s need, its unique capabilities and these endorsements, we believe ReposiTrak, as the industry standard compliance management platform could one day link virtually every buyer to every seller in the U.S. food and consumer products supply chain. Vendor Portal on the other hand is our unified service delivery platform. Vendor Portal offers buyers and sellers a much broader set of capabilities than ReposiTrak’s Compliance Management platform. Vendor Portal enables commercial activities between a buyer and a seller on ReposiTrak’s compliance network. Vendor Portal does this by layering on our supply chain applications through ReposiTrak’s self-implemented cloud based compliance platform. Vendor Portal has many applications. Some of these, such as scan-based trading, we are already the leader in, and we know there is a significant market for these. Others such as Track & Trace do not yet have a proven market. We think Track & Trace is an obvious extension of ReposiTrak’s compliance capability. Our technology for Track & Trace is embedded in Vendor Portal, and we think we can do it better and cheaper than anyone else. But so far, we’re not seeing broad-based demand for Track & Trace nor are we seeing any sort of industry consensus about a common approach, the two necessary conditions for a real market opportunity. So we’re waiting for a better point of entry before pursuing Track & Trace more aggressively. That being said, we feel very good about the prospects of Vendor Portal in fiscal 2018. This is based on our assessment of the market for already proven applications in Vendor Portal and the feedback we’re getting from ReposiTrak’s growing networks of hubs and suppliers. So let’s talk about the numbers. Revenue. Fiscal fourth quarter revenue grew 37%. As a result, full-year revenue grew 35%. Fourth quarter revenue and revenue growth is the highest the company has ever generated. As a result, full-year revenue came in at the high-end of our annual goal of 25% to 35% growth. This was due to revenue growth, driven primarily by the addition of larger hubs, power of the smaller hubs, supplier hubs are also beginning to move the needle, and fourth quarter results were aided by a small contribution from MarketPlace. Profitability. Fiscal fourth quarter net income was $883,000 or 17% of revenue, up from $498,000 or 13% of revenue in the same quarter a year ago. As a result, full-year net income was $3.8 million or 20% of revenue, up from $667,000 or just 5% of revenue in fiscal 2016. This increase in profitability demonstrates the operating leverage inherent in our business model. With regard to expenses, total operating expenses rose 30% in the fourth quarter, while total operating expenses for the full-year rose 13%. This steady increase in expenses was expected. The company is stronger than it’s ever been before. Our business is taking off. We’re generating positive net income. We’re generating positive cash flow. We have a significant and growing cash balance. Therefore, we will invest against our customers’ success. Specifically, we are investing in scaling our success team. We are investing in internal automation via our 10X project. We are investing in developing new compliance capabilities for ReposiTrak, and we are investing in the launch of MarketPlace. These investments will drive customer success and that in turn will drive revenue growth and more operating leverage. Now we’ll drill down on the expenses by component. But as I said before, these numbers tend to fluctuate from quarter-to-quarter as we invest in our future. Cost of service increased 50% in the fourth quarter for a 24% increase for the full-year. This was primarily due to incremental expenses associated with the development and scaling of MarketPlace. Cost of service will grow as we continue to invest in new capabilities and new products. But the fourth quarter was a step up and we do expect gross margin expansion in fiscal 2018. Sales and marketing rose 10% in the fourth quarter, but declined 5% for the full-year. The drop for the full-year was due to savings in the first-half of the year associated with the repositioning of our sales force. While the increase in the back-half of the year was due to us beginning to scale our success team once we had repositioned the sales force. Our success team doubled in size in fiscal 2017, much of this in the third and fourth quarters. We expect it will likely nearly double in size again in fiscal 2018. But we don’t see ourselves as having that marketing heavy profile of most SaaS companies, and we expect any increases in sales and marketing expenses in fiscal will continue to be far lower than revenue growth. General and administrative rose 38% in the fourth quarter for a 31% increase for the full-year. This increase was primarily due to higher consulting fees and investments associated with our 10X project. We will continue to invest in automation and other enabling technologies, but we also expect G&A to fall as a percentage of revenue in fiscal 2018. With regards to cash flow and liquidity, we ended the year with $14.1 million in total cash. This was up $2.7 million from fiscal 2016 year-end. Operating cash flows for the year were $2.3 million. This was up from $500,000, the year before. Accounts receivable and DSO did both rise significantly. This was because we shifted ReposiTrak from an annual prepaid business to one with a regular accounts receivable cycle. We did this, because it is substant - it substantially reduces the time it takes to get a hub’s suppliers connected and compliant. As I said, we’re stronger financially than we’ve ever been and therefore we will continue to invest in our customer success. Similarly, our capital expenditures in the fourth quarter was higher than usual because of the purchase of a small aircraft. We believe a key aspect of our execution success is going to the customer site and having our teams sit down with their team to define their success. The purchase of the plane followed a careful analysis of where our team is, where our customers are, and what is the most effective way to achieve this objective, particularly as the number of larger customers continues to grow, is putting greater demands on the travel schedules of key members of our team. So what does fiscal 2018 look like to us at this point? We expect revenue growth to be in line with our annual goal of 25% to 35%, with the caveat the growth may vary substantially quarter-to-quarter. We expect higher operating margins in fiscal 2018 and fiscal 2017. Even with our plans for continued investment in 10X, in Vendor Portal, in MarketPlace, we still expect an incremental contribution margin of 50% to 60%. We also expect to see a higher percentage of net income convert into operating cash flows, which should translate into an even larger increase in our cash balance, which we view as a competitive advantage. In short, things are going well, and it’s a pretty exciting time to be part of Park City Group. Now I’m going to turn it over to Randy for a more qualitative review.

[Randy Fields:]

Todd, thank you. Dave, thank you. Once again, Dave asked me not to mention the fact that I will be reading these notes, and he’s now smiling. Okay, here we go. I’ll do this relatively quickly, so we can get a few questions at the end. Yes, it was an extraordinary year. Financial results were strong, but importantly the scale and scope of our network is growing at a terrific rate. And I would say at this point, we all feel as if we have a very clear vision going forward. On a more basic level, 2017 was a year of frankly incredible execution. We talk about execution all the time and I suspect through my comments and I know you just heard it from Todd. We’re in the execution business, why? Well, superior execution makes our customers successful, that’s the focus. Customer success makes them want to buy more from us and customer success is why in fact we now have a greater than 90% customer retention rate. Interestingly, those numbers have actually trended up with the addition of ReposiTrak. So superior execution is really the key for us in terms of our top line growth. But nearly as importantly, execution is important to the operating leverage that we want and desire, because if we execute well and we drive customer success then they will refer others to us. As we’ve always said, at least in this industry, the retail food industry, you start slowly with a few leaders. You execute well for them to drive their customer success and they begin to send others to you. That’s why we’ve been saying for the last several years that the growth rate of the company was limited by our execution ability, and we frankly still believe that. If referrals from our existing customers are a cheap source of new customers and we don’t need to spend nearly as much on sales and marketing as a typical sales company. In the long run, the shareholders that benefits all of us. So what do we see? The next three to five years, we see this company having hundreds of thousands of connections, tens of thousands of customers and a multitude of application across three tightly-knit platforms

[Dave Mossberg:]

Melissa, can you give instructions on how to poll up for questions.

[Operator:]

Certainly. [Operator Instructions] And our first question will come from Ananda Baruah from Loop Capital.

[Ananda Baruah:]

Hey, guys, thanks for taking the question. Hey congrats on a solid year, finished your strong year and a solid quarter here. A few, if I could, just with regards to ReposiTrak, this is really an ASP question. Given the acceleration of Tier 1 connections, and Randy you spoke of your layering in Tier 2, and I think you actually used the word that they’ve begun to accelerate although I don’t want to sort of misstate the - sort of really the tone of the message. How were ReposiTrak ASPs in the June quarter relative to the March quarter? And I guess, specifically, I’m wondering if they bottomed here. And then how should we think about blended ASPs as we go through 2018, given it sounds like you expect Tier 2 to become a bigger part of the mix? And I have a couple of follow-ups. Thanks.

[Randy Fields:]

Great question, Ananda, it’s even a difficult one internally. Rather than give a specific answer, let me identify the forces and there’s several forces. There is a one force, which is to maintain the current ASP, which is the large hubs that we do business with are all at in essence in MSRP. So they have all the same price, so if that’s all we did, the ASP would be the same. Well, on the other hand, we’re also introducing these other applications, products, et cetera, which tends to increase the ASP. Having said that, we also charged less to Tier 2, so the greater the percentage of Tier 2s going forward, the greater the downward pressure. So the truth is three different forces, one trying to keep it the same and you can argue that, because the base is becoming larger and larger. The largest of those three forces is the force that says the ASP will be stable. And then what we suspect happens in the long-term is, as we move down, no pun intended the food chain. The pressure to bring down that ASP, which will be Tier 2s that because they’re smaller. What then happens is, there is downward pressure, but we suspect that will at least be offset by customers taking up our other offerings, which increases the ASP. I know that’s confusing. But probably from where we are, we see most of the force to stay the same, some force to push it down and some force to push it up. Todd, do you agree?

[Todd Mitchell:]

I would agree, and I don’t think we really saw any change in trends in third quarter versus fourth quarter.

[Ananda Baruah:]

Okay.

[Todd Mitchell:]

The bulk of the business is still Tier 1 and the pricing on Tier 1 is still pretty stable. I think that dynamic pretty much continues through most of next year. I mean, that’s where the bulk of the revenue is going to be coming from. And frankly, from where we sit, we can’t really say where the countervailing forces of more Tier 2s versus upsell into Vendor Portal on the Tier 1s, will take next year’s ASP. As Randy highlighted, we think Tier 2s really become more material in fiscal 2019.

[Ananda Baruah:]

Right, right.

[Todd Mitchell:]

And hopefully by that point, we have deeper penetration of Vendor Portal to offset when those numbers, in isolation, would be to help with downward pressure on ASPs.

[Ananda Baruah:]

Okay great. That’s really helpful, guys. And then the second one is just with regard to the success team, could you just sort of framework for us kind of where you are in the process of what it is that you’re looking to accomplish? And I know this is always a moving target. But you clearly have a strategy with how you want to kind of construct the sales, like the selling mechanism for the next meaningful stage of the company. And so, however, that - however, you guys think about that if you could just sort of, you kind of fill in that mental roadmap for us to give us some sense of what it is you’re shooting again? And not necessarily numerical targets because it could be sort of subjective stuff that you’re using and you talked about building a culture, maybe some of the things that underpin that, some of the metrics and the milestone that you want to have in place to really be able to go and scale the business? And I have one more, thanks.

[Randy Fields:]

Yes, that - of the things we’re working on, that is the one. My life experience before this in Mrs. Field Cookies was that the best way to supervise people is with a culture, not with managers. Meaning that most of the time people are unsupervised, you cannot hear every word every person says to a customer. So the question is, how do you get people to care about the customer and deliver the kind of message that you would like to be delivered. So we’re highly focused on getting people inside this business and the success team that care about customers. And interestingly, many of them are younger. And what’s begun to happen and I think this is pretty peculiar, but I think an indication of our success at it. Virtually all of the recruits that we’ve had in the last six months into the success team have come from the success team. They are bringing people that they know in and therefore our turnover is extraordinarily low. And more importantly, people in essence are saying to friends and people that they know, you’ll like working here, this is a good place to work. So that we get people who care, because my - again, my life experiences, I can teach you almost anything, I cannot teach you to care. You have to find people that care about a customer that they feel personally connected, and I can give you some interesting vignette, in fact, I’ll give you one. So I think it sounds - it’s appropriate. The other day I was talking to the group about things that were meaningful. And in the middle of my talk, so imagine, here’s the CEO of the company talking to the newest group of recruits. And in the middle of that, the phone rang. Well, the only time our phone rings here is a customer. And you can tell, you could just tell the room was what are we going to do about that. And I thought here’s a chance to see if culture is working. And what happened was, one of the people on the success team got up, went over and answered the call and dealt with the customer. Now you could argue technically he was interrupting the CEO, which is exactly what I wanted. I mean it was - I clapped at the end of it. I just said, that was extraordinary. What mattered to you most was not whether the CEO would be mad, you were interrupting him. But you knew the most important thing was that customer call. You - that stuff you can teach people. They have to come to the party with that as a feeling. And so these young people take tremendous care of our customers. They care about their compliance and their success, and it’s becoming self-reinforcing. I get a letter or two a week from customers saying how remarkable our services or how quickly we got back to them. So it’s working and this team will help our customers to buy ultimately more of our product. But the real job is just to help the customer be successful with what they have today. Is that okay, Ananda, is that?

[Ananda Baruah:]

It is. That - that’s helpful and actually dovetails into my third question, guys. And so look, this is going to be the annoying analyst question of my trio of question, but I’ll ask it anyway, because you finished. You put up 35% revenue growth for the quarter. Clearly, you talked about how Tier 1 - if Tier 1 connections are up too actually year-over-year. You talked about, you gave some color being up again next year, you’re sort of scaling it to Tier 2, and Todd, you would talk the Vendor Portal also starting to layer. And so my question is, why not remove the low end of the guide or raise the low end of the guide, the 25%? And then the part B is, look, I think we all fully appreciate not allowing the guide to get ahead of itself. So I won’t ask why not raise it, but what would be the sorts of things that would allow you to kind of tease up the 35% high end of the guidance next year? Thanks.

[Randy Fields:]

I want that question. First of all, what we said is, for the next three to five years, that’s the range that we expect. It’s not year-to-year. So rather than every year give you a different guidance number, I really think that’s a sustainable long-term growth rate for us in that bracket 25% to 35%. And if the question is and I just need to be very cautious here. What kind of factors take us to the high end versus the low end? We’ve taken a lot on our plate this year between Vendor Portal, MarketPlace, et cetera. And to a certain extent, we just don’t know. So we’ve got a pipeline that we think keeps us well in that range. We know our ability to execute. And what you don’t want to do with a company that has this much potential is to stretch it too thinly, because then of course you run the risk that none of the good stuff you want to happen, happens. So, I think people at the midpoint of that range are closer than anybody at either end, it doesn’t really matter. So that’s not additional guidance. Some years in the next five are going to be 25%, some years in the next five are going to be 35%, and I also said, when we put this out there last year, it’s possible depending on those three forces that we talked about. If the force that pushes our ASP up is stronger than the force that pushes it down then that growth rate can move to the higher end of the range we might have a couple of years outside the range. But it’s really a function of the number of new customers we take on and our ability to bring people inside the culture who can take care of those customers, that’s the constraint. So we’re not being coy, we’re being straight, and it’s not easy to give you a narrower range.

[Ananda Baruah:]

Okay, got it. That’s helpful. The context is good. I really appreciate. I’ll cede the floor now. Thanks a lot of guys. Good luck and congrats.

[Todd Mitchell:]

Thank you.

[Randy Fields:]

Thank you, Ananda.

[Operator:]

[Operator Instructions] And our next question will come from Joe Feller with ATW Company.

[Joe Feller:]

Hello, Randy, how are you doing?

[Randy Fields:]

Hi, Joe, how are you?

[Joe Feller:]

I’m pretty good, pretty good. How are you, Randy?

[Randy Fields:]

Excellent, thank you.

[Joe Feller:]

Al right. Well, I have two questions. Two of the - according to your own thing from last year, two of the five biggest retailers are not doing business with you guys. And now with the buyout of Whole Foods, there will be three of the five, I expect, because I don’t believe you guys have done business with either of the partners in that buyout. How do you guys hope to deal with that? And how do you hope to deal with blockchain?

[Randy Fields:]

Okay, good. is that the one question, or is that two questions, Joe?

[Joe Feller:]

Let’s say, it’s one question. How do you plan on dealing with blockchain?

[Randy Fields:]

We’re not going to deal with blockchain, it’s a non-event. Remember, I don’t want to be too techie here. Blockchain is a way of storing information. There’s nothing interesting or intriguing about it except this presumed security, that’s the presumed idea. The way people are thinking of using blockchain is for tracking and tracing, that’s not our business. It’s our capability. It’s just that we don’t get any revenue from it. And as Todd mentioned, we see very little market interest. Blockchain underneath has a real problem, as do - anybody who has an RFID tag, or any tracking and tracing mechanism. All mechanisms required, they be put on a cart. So it doesn’t matter, whether it’s an RFID tag or a label. Blockchain has to get the information from somewhere. It’s just a database. It’s a distributed database is the way to think about it. So somebody has to scan the information in, that requires a physical device and human labor. And the problem with that is, I can just assure you, because people have been trying this now for, I don’t know, 10 years. They can’t get it cheap enough at the labor level to do it. So the top 50 CPG companies, consumer packaged goods potentially could afford to do something like that. And so the top 50 CPG companies with a few retailers might do something around tracking and tracing their good. But the reality is, people don’t die from Kraft macaroni and cheese, that’s not our - that’s not the risk profile out there. The risk profile is the smaller vendors. So it’s the cost of creating the label, scanning the label at every single stop, that’s the impediment. When people want to do tracking and tracing, we believe what they’ll want to do is do it inexpensively, and we have a really inexpensive solution for doing tracking and tracing. But candidly, there’s just not much interest, lot of marketing, not much interest. By the way, the way we calculate it, we do business with three of the five largest supermarket chains in the U.S., by the way, Whole Foods is not one of those, they’re not one of the top five either regardless of who own them. So we do today do business with three of the five largest. And who knows could be another - we might get another one. There’s certainly a few we’ll never do business with. So and it’s not important to what we do. In other words, the only - it’s hard to explain. When you’re doing compliance work, the only revenue in essence we would miss would be of suppliers that are captive to any one of the retailers. So if it was [indiscernible] as a retailer and he had 22 suppliers that only sold to him. Those would be the 22 we wouldn’t get, because other suppliers supply other retailers and therefore end up in our network. So I think we’re broad enough now. And as we look out, our pipeline is such that, we’re going to get very, very deep into the total size of the supply chain, so none of that concerns us, so.

[Joe Feller:]

Well, then my next question is, with the buyout of Whole Foods, don’t you think those guys are going to be in the top five? I mean, from everything I’ve seen, the purchaser not to name names has always ended up in the top five of whatever genre they end up being in?

[Randy Fields:]

Yes, I think, let me go back to what I think is fundamental. There are hundreds and hundreds of supermarket chains from a few stores to thousands of stores. Strangely enough, they all have a comparable number of vendors. So if you’re a chain of 10, you still have a 1,000 to 1,500 vendors on your shelves. And if you’re a Whole Foods, you have a 1,000 to 1,500 vendors. So in our business model, it really doesn’t matter to us whether it’s a large chain or a small chain. And honestly, sometimes easier to get the smaller guys to do business with you than the larger guys. But we do have three of the five and frankly it doesn’t make any difference to me if it’s three of the six or whatever it would be. We’re certainly pleased with where we are. We do not have to get everybody. We’ve never thought we would get everybody in the retail world to do business with us, but we’re getting more than our fair share at this point. So…

[Joe Feller:]

Fair enough. Thanks, Randy

[Randy Fields:]

Oh, you bet, Joe. Thank you.

[Operator:]

And that does conclude our question-and-answer session for today. I’d like to turn it back over to our speakers for any additional or closing remarks.

[Dave Mossberg:]

Okay. Thank you, everyone. This is Dave Mossberg. Our phone number is on the press release. If you have follow-up questions, we are available for those, and look forward to you, our next call, which will be in…

[Randy Fields:]

The 9th of November.

[Dave Mossberg:]

9th, around the 9th of November.

[Randy Fields:]

Around the 9th.

[Dave Mossberg:]

Okay. Take care.

[Operator:]

That does conclude our conference for today. Thank you for your participation.