Park City Group, Inc.
Q1 2023 Earnings Call Transcript

Published: 14 Nov 2022

[Operator:]

Greetings, and welcome to Park City Group Fiscal First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today, the 14th of November 2022. It is now my pleasure to introduce your host, Jeff Stanlis with FNK IR. Mr. Stanlis, you may begin.

[Jeff Stanlis:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group's fiscal first quarter earnings call. Hosting the call today are Randy Fields, Park City Group's Chairman and CEO; 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 on current beliefs and expectations. Park City Group remarks are subject to risks and uncertainties which actual results could differ materially. Such risks are fully discussed in the company's filings with the Securities and Exchange Commission. The information set forth herein should not -- 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 company's financial results that we will discuss 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 that said, I would now like to turn the call over to John Merrill. John, the call is yours.

[John Merrill:]

Thanks, Jeff, and good afternoon, everyone. Our successful transition to a SaaS company continues to be evident in the numbers. Our business is now easier than ever before to model and the results reflect our ongoing strategy. Let's get right to it. Recurring revenue increased 6% year-over-year for the September quarter. Total revenue was up 4%. Even with significant investments in our ReposiTrak Traceability Network or RTN, in advance of the Office Federal Register publication of FISMA 204 ruling, our SG&A costs were up just 3%. GAAP net income increased 36% to $1.3 million. Earnings per share increased 50% from $0.04 to $0.06. Cash from operations increased 62% to $1.8 million. And we bought back 20,000 common shares, reduced our bank debt by half and have $21.6 million cash in the bank. With the transition from onetime revenue to SaaS recurring subscription now fully behind us, our comparative results have far less noise than in prior periods. Hence, we expect to continue to deliver year-over-year revenue growth, increase margins, accelerated profitability and significant cash generation for the balance of fiscal 2023. Investors should take note that we expect our profitability and cash flow to continue to grow faster than our revenue. What do I mean by that? Starting with revenue, we ended the September quarter with an exit rate of annual recurring revenue of $19.5 million, meaning fiscal year-to-date revenue plus signed contracts in hand at September 30, 2022 quarter that are billing monthly multiplied times 9 will generate $19.5 million of recurring revenue for the balance of fiscal year 2023, absent any new contracts or anticipated growth. Keep in mind, this is organic revenue growth, meaning existing suppliers or retailers expanding compliance and supply chain services. adding stores or locations and adding trading partners from existing business lines. This does not include any revenue contribution from a projected customer or any new initiatives, including traceability due to FSMA 204. Now cash spend. As many of you have heard me say it before, it takes approximately $12 million in cash to run this place. Annual cash spend excludes non-cash accounting costs such as depreciation, amortization, bad debt expense, stock compensation expense and other non-cash accounting costs. As we have said it before, going forward on each incremental recurring revenue dollar over and above our fixed cash cost of roughly $12 million per year, $0.80 to $0.85 will fall to the bottom line. As you have seen in the current quarter, there have been little increases in SG&A expense as a result of ongoing spending or investment in the ReposiTrak Traceability Network or RTM. We accomplished this by automating as much as we can, utilizing our own tools built in-house. This drives exceptional productivity across our entire business. The result is expansion of our ability to focus on customers, keep operating costs in check and continue improvement in internal productivity. So profit and cash will grow faster than revenue. It is reflected in the numbers. A 4% increase in revenue for the September quarter translated to a 36% increase in GAAP earnings and $1.8 million in cash from operations. To summarize, we are systemically profitable with more than 5 consecutive years of GAAP profitability through strong cycles and weak cycles as well as a global pandemic. Our strategy remains very simple, grow recurring revenue, control costs, increase net income, accelerate EPS, buy back shares and drive cash. Turning to the quarterly numbers. Fiscal year 2023 first quarter revenue was $4.7 million, up 4% from $4.6 million in the same quarter last year. Recurring revenue as a percentage of total revenue was 99.9% for the quarter. As I mentioned, recurring revenue in the quarter grew 6% over the same period in fiscal 2022. We have continued to streamline our revenue eliminating smaller non-core revenue streams that mostly sit outside the food industry and have limited growth potential. This frees up resources to prepare for meeting the FDA's food traceability standards, but it also serves as a modest headwind for revenue growth. Total operating expenses increased 3% from $3.4 million in Q1 2022 to $3.5 million in Q1 2023. Sequentially, operating expenses were essentially flat. Sales and marketing expenses were flat year-over-year and G&A was up approximately 12%, reflecting investments in the ReposiTrak traceability network, a tight labor market and its impact on salaries, recruitment fees and benefits. For the first fiscal quarter of 2023, GAAP net income was $1.3 million or 27% of revenue versus $947,000 or 21% of revenue. Net margins above 20% are now the norm. Net income to common shareholders was $1.1 million or $0.06 per common share based on 18.8 million weighted average shares versus $800,000 or $0.04 per common share based on 19.7 million weighted average shares. As of November 14, 2022, 18.4 million shares of the company's common stock is outstanding. Till now, we have reduced our capitalization by over 8% for the repurchase and retirement of shares since our stock buyback plan began. Turning now to cash flow and cash balances. For the quarter, we generated cash from operations of $1.8 million compared to $1.1 million last year, an increase of 62%. Annualizing our cash from operations for Q1, call it, $7.2 million reflects a five-year compounded annual growth rate or CAGR of 27% since 2018. Anyone who knows me knows I'm not a tout. Instead, I believe it is important to highlight results of our strategy for shareholders. I know some have found it hard to stomach when we have communicated that we have a sunset of certain revenue products with little upside, ceased low-margin revenue streams and hence walked away from revenue even recurring revenue. I assure you that there is a method to the madness. Total cash at September 30, 2022 was $21.6 million compared to $21.5 million at the end of fiscal year 2021. The $21.6 million is inclusive of the paydown of $1.3 million on a revolving line of credit during the quarter. The company now carries approximately $1.3 million on its revolving line of credit. On June 30, 2022, that balance was $2.6 million. Given rising interest rates, it only makes sense to reduce our debt. In the first quarter, we 20,859 shares at an average price of $4.97 per share for a total of $103,667. The company has approximately $10.7 million remaining on the $21 million total buyback authorization since inception. Since inception of the buyback program, the company has repurchased a total of $10.3 million worth of stock, retiring 1.73 million shares, hence reducing capitalization by almost 9% since 2019. Our business model is sound and easy to model. We have a growing recurring revenue, no meaningful customer concentration, very little churn and 80-plus percent gross margins. We have a fortress balance sheet, including $21 million in cash, little debt and a shrinking capitalization. The proof is in the numbers. As I communicated on our last call, the Board has added an additional lever to our capital allocation strategy in the form of a quarterly dividend. The first of which will be paid to shareholders of record at October 15 and to be paid on or about November 15. Subsequent quarterly dividends will be paid within 45 days of the share of record date of December 31, March 31, June 30 and September 30. From time to time, the Board will evaluate its capital allocation strategy and may adjust the different levels, including the dividend, buyback and considering M&A opportunities, paying down debt and retiring the preferred shares based on whichever lever is more favorable to shareholders at that time. Therefore, it is an ongoing goal to allocate a meaningful portion of our free cash flow to returning capital to shareholders and other levers I have outlined previously in our capital allocation plan. So all I have today. Thanks, everyone, for your time. At this point, I will pass the call over to Randy. Randy?

[Randy Fields:]

Thanks, John. We're continuing to grow revenue and managed expenses. We're growing our net income even faster and with our share repurchase program ongoing, we're doing even better yet in terms of earnings per share. Simultaneously, we've also grown our cash balance, paid down half of our debt and we've begun paying the dividend. As you can see, we've built a consistent cash generation machine with more than 5 consecutive years of GAAP profitability. I believe an important metric that we have not historically talked about that warrants pointing out is our current ratio. That current ratio is now 5.2

[Operator:]

[Operator Instructions] Your first question comes from Thomas Forte of D.A. Davidson.

[Thomas Forte:]

Great. So Randy and John, congrats on the quarter and thanks for taking my questions. I have 1 question and 1 follow-up. So Randy, at a high level, how should we think about the impact, if any, of Kroger and Albertsons merging? And generally speaking, can you remind me on your customer churn which historically is kind of very low?

[Randy Fields:]

Okay. Yes. The -- this industry that we serve, retail food, is in the continual process of consolidation and spin-off, Albertsons is the result of a spin-off, other pieces of Albertsons were the result of the spin-off. So -- if this is approved and that's a big if, what will happen is a substantial number of stores will be sold off and become either independent or parts of other chains or another chain in and of itself. So there's no real impact on us from that kind of activity. The industry is rife with it. From a churn perspective, it's typically in the area of less than 1% of our customers each year, typically of that, about half are a result of what we would call merger or acquisition. So 2 customers become one which obviously reduces our footprint. And the other is more typically, they cease doing business with a trading partner. So rarely does it actually happen that someone says, we don't like you or you're not successful with us go away? That's really rare. As John mentioned, we're still looking at some of the rationalization that we have to do in order to accommodate what we believe is going to happen with traceability. Your follow-up.

[Thomas Forte:]

My second question. So Randy, you did do a good job of explaining the traceability that you're going to ruin the question that I had on traceability. Now that you've initiated the dividend, you left me the boring question. Now that you've initiated the dividend, are you going to think about once a year on an annual basis, potentially raising the dividend? How should we think about your -- the prospect of you raising the dividend in the future?

[Randy Fields:]

Yes, you're probably going to hate this answer, but it's truthful. Each year, we're going to look at where we are and that that, by definition, means what -- how much cash have we generated? What have we done over the last year? And now how does the next year look and where is the stock price. So if the stock price at that point in time looks attractive to us, meaning lower than we think it ought to be, we'll probably allocate some percentage of our cash flow to more stock buyback. Kind of if you said overall, what do you expect to do looks about like this. Roughly half of our cash flow each year will end up on the balance sheet in the form of cash. The other half of the cash flow is likely to be divided in some ratio between dividend and, of course, the stock buyback. So that ratio is really a function of what's the stock price. So if the stock price is too low in relation to what we think intrinsic value would be, we're likely to allocate a higher percentage of that half, if you will, to stock buyback. So over time, if we continue to do as well as we're hoping it's reasonable that both the dollars of stock buyback will go up and the dollars of dividend will go up. John, you agree with that? Did I speak out -- I just want to make sure John isn't going to slap me for saying something.

[John Merrill:]

Yes, that's spot on. I mean like we discussed before, there are levers that we will utilize when it makes the most sense for all shareholders. And as I described in this quarter, I thought it made the most sense to pay down $1.3 million of bank line debt as those interest rates are going up. So as Randy said, we would definitely take - our goal is to take 50% of our cash from operations and return it to shareholders and the other half goes on the balance sheet. That's the goal, but conditions may change. And as we look out 12 to 18 months, that may change. But right now, we're very confident using that 50% marker.

[Operator:]

At this time, there are no further questions. So I will turn the conference back to your hosts for any closing remarks.

[Randy Fields:]

Okay. Well, this is Randy. Thank you all for taking your time this afternoon. Just in summary, we feel really good about where we are. We like new contracts that we have in hand and certainly the traceability initiative is likely to be a big part of our future. So thanks for the support. Talk to you all soon. Bye-bye.

[Operator:]

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for participating and ask that you please disconnect your lines.