Park City Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 8 Nov 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to Park City Group's Quarter One 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) And as a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Dave Mossberg. You may begin.

[David Mossberg:]

Thank you, Michelle. Before we begin, we will be referring to today's earnings release, which can be downloaded from the Investor Relations page of the company's website at www.parkcitygroup.com. This conference 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 historical fact. Such forward-looking statements are based upon the current belief and expectation of Park City Group's management and are subject to risk and uncertainties, which could cause actual result 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 risk. Park City Group does not assume any obligation to update the information contained in this conference call. Throughout today's conference call, we may be referring to both GAAP and non-GAAP financial results, including the terms free cash flow, EBITDA, adjusted EBITDA, net debt, net income loss 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 statement. There is a reconciliation of non-GAAP results in earnings release and on the Investor Relations section of our website. Our speakers today will be Randy Fields, Park City Group's Chairman and CEO; and Ed Clissold, Park City Group's CFO. Ed?

[Ed Clissold:]

Thanks, Dave. Good afternoon, everyone, and thank you for joining us on the call today. My remarks will cover our consolidated operating results for our fiscal first quarter year ended September 30, and I will also comment on certain cash flow and balance sheet items, and then I will turn the call over to Randy for his comments. I will begin my comments by discussing top line revenue. For the first quarter ended September 30, subscription revenue increased 24% to $2.6 million, which was another record for the company. Breaking out for ReposiTrak related revenue from the comparison, our supply chain management services business grew 29% year-over-year, which was also a record. Our revenue was $696,000 for the quarter, which is a 9% increase from the same period last year. And we expect contribution from other revenue will remain at approximately 20% to 30% of our total revenue. Overall, total revenue increased 20% to $3.3 million, which is also a quarterly record. Moving onto operating expenses. Total operating expenses were $3.8 million which was essentially flat in comparison with the same period last year. A flat comparison was a result of offsetting expense items. Sales and marketing and cost of services and product support increased 8% and 12% respectively, which was offset by a 22% reduction in general and administration cost. At the end of September, our headcount was 68 which were up from the same period a year ago. Below the operating line interest income increased to $59,000 compared to $1,500 in the prior year which reflects the increase in cash and decrease in debt levels. Touching on profitability, on a non-GAAP basis which excludes non-cash related expenses we posted net income of $120,000, or $0.01 versus a non-GAAP net loss of $699,000 or $0.04 per share during the same period last year. Adjusted EBITDA turn from negative to positive year-over-year and was $303,000 for the quarter. GAAP net loss for the September quarter was $530,000 as compared to a net loss of $1.2 million during the prior year period. The improvement in profitability was indicative of the operating leverage in our business. As sales growth continues, it should more than outpaced the growth and expenses and result in a bottom line that is growing at even faster pace than the top line. Now I'll address our cash flow and financial position. Overall, our balance sheet is in great shape. At the end of the quarter, we had $3.3 million in cash and $1.8 million in debt, which are relatively unchanged from the beginning of the year. Notable changes to our balance sheet include a decrease in accounts receivable and an increase in note receivable. The AR balance reflected day sales outstanding of 71 days versus 84 days as of the end of last year and 77 days at the same time last year. Based on the timing of our billings, our AR balance can fluctuate significantly from our targeted range in the mid 70s. Our note receivable balance of $3.5 million relates to notes due from ReposiTrak. As we have discussed in prior calls, in June of 2013, we renegotiated our relationship with ReposiTrak. In exchange for a note receivable from ReposiTrak, we negotiated more favorable terms for Park City Group and our shareholders, including an increased subscription fee, which gives Park City Group greater participation in ReposiTrak revenue. Also we received the fixed cost option to purchase a much larger ownership stake in ReposiTrak which included a longer exercise period for that option. Given the progress that the venture made at that time, we felt it was in the best interest of our shareholders to increase our potential ownership stake from slightly less than 50% to approximately 75%. Since that time, ReposiTrak has continued to make significant progress in establishing itself as the industry standard food safety platform for the global food supply chain and we are even more confident that this decision was in the best interest of our shareholders. ReposiTrak has continued to onboard new customers at an increasing rate and based on its current pipeline of connections, the venture has a clear path to meaningful cash flow generation over the next 12 months, which could reduce or even payoff our note receivable. We currently expect that ReposiTrak will begin generating positive cash flow by mid 2015. According to the terms of agreement, we have provided a $5 million line of credit that ReposiTrak can use to fund its operations. We expect the amount drawn on this line will likely peak during this fiscal year and then begin to decline thereafter. During the September quarter, we turn the corner on free cash flow generation turning from negative to positive. For the quarter, we generated $479,000 in free cash flow and compared to using $662,000 in cash during the same period a year ago which a $1 million improvement. We expect to spend approximately $500,000 on CapEx this year. The bulk of which is related to a major upgrade to our systems which is occurring in this current quarter. As our revenue and earnings continue to ramp, we expect to be cash flow generator this year. And with the current strength of our balance sheet, we have more than adequate liquidity to fund our growth plans. As of September 30, we had 17.1 million shares outstanding. And that concludes my review of the financials for this fiscal first quarter. I'll now turn the call over to Randy.

[Randy Fields:]

Thank you, Ed. Obviously; we had a great first quarter. It is difficult to comment on the obvious but equally excited about how the rest of the year looks, and frankly we see the next several years stacking up in the very exciting way. I think it's important to note that what we call our core supply chain management business is obviously accelerating. On standalone basis we broke it out just for your interest for this quarter, and it was up 29% year-over-year. So the core business is doing very well. I think a little bit color around that. We have a relatively culture driven way of growing our business and it really hinges on our brand promise which is to enable our customers to Sell More, Stock Less and See everything. And I promise every conference call will reinforce hopefully with you the fact that's deeply driven into our culture. But when we are successful and enabling our customers to achieve that brand promise of selling more, stocking less and see everything, the net result is they naturally want to do more with us. So our growth is a very organic form of growth. And virtually all of the increases in revenue from this quarter were from customers who are with us last year. And we expect that to continue. We would imagine in the strategy that we began executing the couple of years ago of working with larger and larger customers, what you are going to see is that same adoption cycle. Try some, see how it works from services perspective from Park City Group, if it works well and certainly we will most always delivered on that, do more with Park City Group. So that's the mantra that we have internally. It has been driven very well into our culture and in my views over the next several years that absolute obsession with our customers' success at selling more stock and less and sees everything is really the fuel; it's driving the business forward at an increasing rate. Interestingly though it is fair to say we are putting in place several strategic relationships. And those strategic relationships should help us extend our reach into both additional vertical markets of retailing as well as the market that we are in. So I would expect over the next several years that we will be adding significantly to our retail and wholesaler hubs with which we do business. Our backlog remains very strong, our customers think very well of us. And we continue to focus on doing what we consider to be brilliant execution. I am as proud of the team as a CEO can possibly be. They are doing an incredible job at the delivery of our services. Shifting to ReposiTrak, the food and drug safety platform, the venture that we have with Leavitt Partners. Little bit of background again, the US and global food supply chain is contending with the Food Safety Modernization Act that was put into law in January of 2011. Important to note that this is the most radical transformation of regulatory concerns in food in the last 70 years. Interestingly and this is not well known as-- well certainly not as well know as it should be within the industry. It creates what we would call a Sarbanes–Oxley like environment in the FDA, meaning that no longer will the FDA be contempt to deal with problems at the level of the corporate bad citizen, but is fully intent that now legally has the capability of going after the management of a violating company. We believe -- this actually since we've seen the compliance is lower than all of us would like, we believe that threat of action both civil and criminals against corporate executive will increase the focus of companies over the next year as FSMA comes into execution status if you will. We believe that that's going to significantly increase people's attention to putting in food and safety system such as ReposiTrak. There is recently been some significant legal settlements, some of the largest retailers in the world have been successfully sued now for products that they simply sold but they didn't manufacture. It pretty fundamentally changes toward and the liability associated with retailing products. We believe that ReposiTrak is the premier system for addressing in the global food supply chain compliant issues, cracking and tracing issues etcetera. As you all know, we have somewhere between $125 million and $150 million invested in this technology. It works well, it executes on the scale basis many, many millions of transaction a day, been endorsed by several very large trade associations, the importance of which to the industry are high. We think we are wonderfully positioned in terms of ReposiTrak can address the food safety changes coming over the next several years. A very large opportunity down millions of participants in the global food supply chain that cut food or grow food or handle food in a way that all of us would be concerned about. Drugs supplement etcetera in terms of the US consumer. We mentioned that ReposiTrak had a great start to the fiscal year. We just recently announced that a six member of RAFT organization will be on board with suppliers, and interestingly and I think noteworthy that a last couple of releases from ReposiTrak indicated that what we call level one suppliers meaning companies that take and sell food from others or manufacture themselves or handle themselves have indeed decided that their supply chain need additional compliance. So we call the suppliers that they are bringing into the system now level 2. We consider this noteworthy because we didn't expect for several years that level 2 suppliers would be brought on to the system. So the fact is ReposiTrak is growing very rapidly. We are very comfortable now reaffirming from our perspective that there will be 2,000 or more connections in ReposiTrak by next June. The pipeline is continuing to grow and there is the Food Safety Moderation Act approaches implementation date, and those two dates are August of next year and October of next year. So less than 12 months away that people [fighting] in for small cause even a more rapid acceleration. I said several times that we worked diligently to become more adapt to the on boarding process. We've added staff to that function. And frankly they are performing absolutely wonderfully. We couldn't be happier with how the business is scaling. We continue to add features and functions to the system. It is very compelling. We are getting lots of compliments from users and interestingly there was a press release this week from ReposiTrak. It noted that the use of the ReposiTrak system in a very short period of time has a significant impact on the compliance rates of those people who are on the system. So not only is it a potentially important system to the industry, well already beginning to demonstrate that there is efficacy to using ReposiTrak to improve the compliance and safety of your supply chain. So clearly we are moving closer to the point where we would make a decision about that option. I know somebody wanted to ask question about that. We don't have defined timeline. It's certainly not going to be the seven or eight years that the option gives us. It's also not going to be in the next few months. We continue to evaluate the fit between the businesses and the Leavitt organization still has a number of opportunities that it is pursuing that it wants to make again contribution to ReposiTrak. So we are waiting for those things to happen. I think it's important to note that we are in the process of seriously exploring some strategic relationships for ReposiTrak, that would significant enhance the cost structure and financial desirability of been on ReposiTrak. I don't want to be too specific about that. But it is fair to say that we are on course by -- our fiscal year end and next June, the ReposiTrak should have some strategic relationship that enable it to reduce the cost structure and one of its users to a greater cost than ReposiTrak itself structured. So in other words I mean simple, ReposiTrak will become free for all the intensive purposes to its users. I am highly confident tha we will be able to get that done for the good citizens using ReposiTrak. So the net of it is business in the core is obviously doing very, very well at 29% growth rate is certainly the upper end of what we would reasonably expect. Our customer satisfaction is high. The team is coming together and it's a wonderful ways, the culture is getting better and better and more and more focused around the customer execution. And clearly on the ReposiTrak side of our business, what we are experiencing is a much more rapid on boarding process. So when a year ago we said we said we could get 2000 connections by June of 2015, it is clearing through that we will achieve that number. So everything is good, team is good; expenses as Ed mentioned are relatively flat. So as we see an acceleration of our revenue from here, we again expect relatively high contribution levels on that incremental revenue. So I guess where we are all of us having our fingers crossed as it continues to go as well as we expect. And we'll open it up for few questions.

[Operator:]

(Operator Instructions) Our first question comes from Todd Mitchell of Brean Capital. Your line is open.

[Todd Mitchell:]

Good afternoon. I am going to ask the question. So there has been a lot -- since I pick up the start kind of concern and misconception about the relationship between Park City and ReposiTrak. And I think you have been very clear, sort of analytically how it is structured and how it works. But I think it would be useful if you could sort of elaborate in your own words the kind of the genesis of the arrangement, why it was structured the way it was originally structured the way it is, and what your thoughts are in terms of -- we are not looking for a date, we are kind of looking at what is the benefits and disadvantages to keeping it out longer versus shorter and just sort of how are you thinking about that?

[Randy Fields:]

Okay. That's fair and good question. I think the first thing I have to admit is that when -- well I said at that at time, when we originally agreed to establish ReposiTrak with Leavitt, we didn't have nearly as optimistic of you as what it could be. So the result is we were more concerned with protecting the downside in ReposiTrak than we were maximizing the upside. So I think it's important to remember the framework. In fact, I think a pretty direct quote from [yours truly] on a conference call, public conference call was, ReposiTrak is either a nothing or it is a big deal, we just don't know. So we are going to go out and try it. So clearly the bias of the business because you have to remember at that time we were also in the process of adding infrastructure to Park City Group was, either we create a structure that gives us some upside if it works well, but protect us on the downside if things don't go well. And the obvious conclusion was, well, we will set it up so we -- it's a customer of our, because it's got this exclusive right to use our technology worldwide for food safety. And it will pay us as a customer so we participate if there is any success, and if there is any success we will have an option to buy some equity its founder prices. So the truth of the matter was at the time that we did it, that satisfied the needs of Leavitt Partners, and it certainly satisfied our objective at creating the structure that had downside protection for us. Well, as time went on it became clear and clear and at the same time we had gone out and with independent investors, third party investors and raised some equity capital. It became clear and clear that ReposiTrak had the minimums downside and frankly had much greater upside than we originally had guessed or estimated. It was -- we were wrong, especially [yours truly] was wrong. So that's what led to our desire to make sure that we wouldn't ultimately be diluted because the business plan of ReposiTrak called for additional money raises up to about $5.5 million. So would have permanently diluted how much of the business we could get. So what we did was to in essence we structured the agreement that gave us the ability to acquire a dominant share of the business. But allowed the investors in ReposiTrak to maintain their original position. So it was the restructuring of or ultimate capability to acquire the stock really left everybody intact. We just picked up what the outside investors would do. So that's how it came to be and I am simply saying as I have said before, it was because the view that we had of the business was associated with risks. So we tried to protect our downside and frankly if I knew what I knew now, it might have been little bit different in the beginning than not a lot different because Leavitt wanted an equity play and that's a very reasonable participation. That's what the way it should have been. So looking forward though what we-- the calculus that we are using, in fact-- let me make bold statement. This is the belief of management. This is not a forecast; it is just our internal belief. The first bullet point that I would make under this bullet, belief is that if you take a look at the growth of the core business, it is not being weighted down by ReposiTrak. The ReposiTrak is not in the current quarter clearly a contributor to our top line growth; it is a drag on growth. That's okay. In fact, the view of management is this year were consolidated, it wouldn't make any meaningful difference in our top line etcetera versus the current structure. So that's a way of saying that it is doing well enough that the current structure is strong and intensive purpose is couple hundred thousand year or whatever. It's neutral in terms of its impact on Park City Group. So the calculus that we were using is not the revenue or whatever of ReposiTrak. It is getting it to the point that Leavitt has made the maximum contribution that they can make. That we are comfortable in operating the business. And that we can evaluate the synergy between these two different sets of products and services. And we are not years away from doing that. This is one of those things and only don't mind laying out time horizon. But I just don't want to be held to this one. But if I were guessing person, I would guess that some time in the next 24 months, we are going to make it definitive decision about what happens with ReposiTrak. So the time is near and that the belief of management, we don't see a significant difference to our financials specially the top line this year with our without ReposiTrak in. And our core supply chain business obviously is growing very nicely. So I think from a reality perspective that's about the best I can do it evaluating what will happen. And it continues to make significant contribution to the business. I mentioned in my remarks earlier that we see an opportunity to create some strategic alliances. For example with insurance companies that could cause the cost of ReposiTrak to be absorbed by those insurance companies in a way of premium reduction. Which means the good citizen using ReposiTrak in essence would find it net cost including the ReposiTrak goes down by being in a user. I think that's an extraordinary accomplishment if we can get it done. And I am pretty confident, highly confident that we will. So we need Leavitt Partners continue to participate to the maximum extent that they can. And we continue to evaluate the timing. It is not going to be in the next quarter or two for sure. But it is also not going to be four or five years from now. So the time horizon is both approaching and narrowing in terms of win. Sorry for the long winded answer, Todd.

[Operator:]

(Operator Instructions) Our next question comes from Amit Dayal of H.C. Wainwright. Your line is open.

[Amit Dayal:]

Thank you, Hi, Randy. Just following up on your -- the last comments you made. If this agreement should be insurance companies come through, I mean could retake that as one of the catalyst that could prompt you to then exercise your option with ReposiTrak.

[Randy Fields:]

Well, it would be -- here is what the Park City Group shareholders actually want or should want, I think is a better way to put it. We want Leavitt Partners to maximize the contribution that they can make to this venture as quickly as they can. And then we want to exercise the option. That gives them the maximum potential value and the Park City Group shareholders long, long profit from that. So if we had a check list of things that they could contribute that is one of them, is getting us into the insurance area. You wouldn't have to Google very far to find out that the Leavitt family owns one of the largest insurance brokers firms in America. I think they are number 12 over 13 in America. So let's just say that we are going to the door with Leavitt family to insurance companies. We are going through the door with somebody that is well respected, well thought of and the larger user of these underwriters. So they are making a very important contribution. So I can -- that piece gets checked off the list for sure. And that's a fair thing to say I mean that's definite. But there are a couple of other things that we want them to be able to do. We have an interest in the supplement industry. They are very well connected there. We think there is a great opportunity in ethical drugs. And they are working in that area as well. And the third area is internationally. I would love to see the ReposiTrak begins an adoption cycle outside the US. We are not the only people who care about food safety. There are other nations that do. And I believe Leavitt can take us internationally into these arenas. So all of our relationships are deepening. We are deepening with the rafter people. We've done a great job for them and they have done a great job for us. FMI has been a great partner and we continue to deepen our relationship with FMI. And then finally with Leavitt, we anticipate that they over the next year or two will maximize the contribution that they can make, maximize their potential gain in ReposiTrak. And then it's up to us to do whatever we are going to do it with that option. So sorry long winded answer again, but it is a big step towards that moment in time when we will do what we are going to do.

[Amit Dayal:]

I appreciate it Randy. Lot of color, in terms of LoJack pursued a similar model and their business group cross so hopefully same things happens for you.

[Randy Fields:]

Oh, yes. And I think, look, we really do believe and we've run the numbers, it is almost revenue neutral this year. So it won't make a big deal-- partially the shareholders worried inside the company as opposed outside as a customer. Our top line certainly wouldn't be significantly different. And by next year it will really not make any difference. So it's scaling very rapidly. I hate to give numbers but the pace is accelerating, the adoption rate is accelerating so getting to that 2000 number in next June, and it's probably the number when I said it, it probably sounded like a stretch. It is no longer a stretch. So we are feeling very good about how it is doing.

[Amit Dayal:]

Just one housekeeping question I guess. Your adjusted EBITDA numbers are growing pretty nicely now. Whether any one time costs around the adjusted EBITDA for the same period last year that could be kind of causing the numbers look stronger than what they might be or is it just the operational leverage side to kick in now in the market.

[Randy Fields:]

Yes. It is really the operational leverage. We're just looking out, we are doing a major transition as Ed mentioned this year in terms of our technology platform. That actually hitting our P&L in terms of some additional outside consulting and things like that. And I think we've said that we anticipate over the next several years that our cost will go up by roughly 5% to 7% a year. And obviously we expect -- since I said each of the next several years would be higher than last year. I am being coy here. So last year was 17%, so it is pretty reasonable to say we are going to -- we anticipate next several years being higher than 17% on the top line and that the cost element of our business isn't going to grow at more than 5% to 7%. So call me crazy but when those two things work that way mathematically, it is all good for us. So there is nothing terribly unusual in what we are seeing today in either the top line or expense line.

[Operator:]

I am showing no further questions at this time. I'd like to turn the call back over to Randy for any further remarks.

[Randy Fields:]

No. That's it. Think its cost it should be terrific yield, once again we and say in the beginning of the year that it's going to be record on many count. The team has just done a spectacular job. And there is no piece of the business that I can see that isn't performing extremely well. So we've got great top line growth coming, we've got expenses well controlled and we are feeling very good about the future. So thank all of you for your support. And we will talk to you in a few months.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.