Park City Group Inc (PCYG) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2007 Park City Group conference call. My name is Katie and I'll be your coordinator for today. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS)

I would like to now turn the call over to today's host, Mr. John McNamara, Cameron Associates. Please proceed.

Thank you. Good morning, everyone. And thanks again for participating in Park City Group's fiscal year 2007 year-end conference call. By now, you should all have a copy of the press release issued this morning. If anyone still needs one, please call my office at 212-554- 5485. With us from the management of Park City Group is Randy Fields, Chairman and Chief Executive Officer.

And before we begin, as usual, we would ask that you please take note of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning's conference call. This call will contain time sensitive information, as well as forward-looking statements which are only accurate as of today, October 1st, 2007. And Park City Group expressly disclaims any obligation to update, amend, supplement or otherwise revise any information or forward-looking statement contained in this call or replay to reflect events or circumstances that may arise after the date indicated, except as otherwise required by applicable law. For a full list of the risks and uncertainties that may affect future performance, please refer to the Company's periodic filings with the SEC. We'll begin the call with a brief overview of the full year, and then we will open up the line for questions. With that, I'll now turn the call over to Randy Fields. Go ahead, Randy.

Good morning, everybody. Thank you, John. We'll be relatively brief this morning. I think the last time we did this, it was about six months ago. And at this point we anticipate probably two calls per year, unless there's a compelling reason to do conference calls more frequently. Okay, let me summarize the fourth quarter of last year and year-end. As you can probably see by doing your own addition, multiplication and subtraction, we actually did somewhat better in Q4 than we had thought, and we ended the year a little bit more strongly than we had anticipated during the quarter. Having said that, the important thing is not what happened in fiscal year '07, but from a financial perspective, so much as what happened to the business model. And if I sound just a little bit restrained, it's only because, frankly, we've had some tremendous successes, and I'm trying not to sound too enthusiastic on the call. Let me go through what the business model was, the basic elements of the business model. And I think the headline, if you wish to have one, is that every element of the business model is, in fact, currently working. We have evidence of all of that and we are all feeling internally very, very pleased with what's going on. So the rest of my remarks this morning will really relate to progress along the lines, that those of you who have met with with us before, know as our business objectives, in terms of this recurring revenue model that we've embarked upon.

Probably four important elements. Let me repeat them, and then I'm going to come back and give you some detail on each one of these elements. First element was, could we get retailers or suppliers to test the technology and the consulting that we call Supply Chain Profit Link with us. That was step one in the business model. Step two in the business model, and I think this is where many on Wall Street were focused, not so much where we were focused because we, frankly, subsumed that this part would happen. Which was could you convert these free trials to paid engagements? Element three is was the success of our work good enough that not only would people convert, but more importantly, would they expand the area, the number of categories, if you will, in which we were working? And then the fourth element was could we get more retailers from the suppliers that we were working with? In other words, we can start the business model, as you know, either by going to a supplier, having him take us to retailers. Or as we've done the last six months, focus on retailers who take us to suppliers. And the next link in the chain is those suppliers brought to us by the retailers in turn, taking us to additional retailers so we get a (inaudible) marketing effect. So let me go back through those elements, give you some evidence, and hopefully, you'll be as excited about what we are doing as we are currently.

During the fiscal -- calendar year '07, we began the year with one retailer involved with us. Incidentally we update this monthly on our website. If you go to the website this morning, you'll see it's updated through September. And we love the look of that chart. And if you want to look ahead a little bit, we're feeling very good about how things are going. I'm going to come back and summarize that at the end, as well. We grew from one retailer involved with us in January, currently to 11. We see continued high levels of interest, excellent traction on the part of other retailers that we're visiting with, in terms of becoming engaged at the trial level. Equally importantly, beyond just now working with brokers -- I'm sorry, with retailers and suppliers, we've begun working with the brokerage community. They also have an interest in using data to improve the economics of their customers who would represent both suppliers and retailers. And I think over the course of the next six to nine months, you're going to see some excellent work being done with some of the national brokers. If you have questions about that later, I'll be happy to answer them. So in terms of getting tests with retailers and suppliers , bingo, we've done that. Feeling very good about it. If you remember, our plan was to add roughly one retailer per month over the course of the year. We're quite comfortable with that as a forward-looking likelihood for us.

Next question that everybody was focused on was can you convert the tests to paid engagements? The fact of the matter is, through the end of September we now have three retailers who have engaged and converted from testing Supply Chain Profit Link to actually arranging between us and their suppliers to be on a paid basis. More importantly than the fact we've already got three, we're right on plan, is the fact that in every instance that I am aware of, and I believe that's each of the categories that we're currently looking at, we are finding very, very, very significant economic opportunity. And that economic opportunity increases the likelihood, when you can show a retailer and a supplier substantial amounts of out of stock shrink, et cetera, large dollar amounts, it increases the likelihood that they convert from a trial to a paid engagement for the obvious reason. It puts money in their pocket. We've demonstrated the efficacy of what we do. And the follow on result is that they, in fact, convert to paying us. So the leading indicator of conversions, frankly, for us has always been can we find economic opportunity in the trial work that we are doing. And in fact, we are doing that. More importantly, the numbers are substantially exceeding what we expected, which also implies that there's going to be some interesting price elasticity, and I'll come back to that in terms of what we charge.

Speaking to that point, we just renewed with one of our suppliers at a 300% increase in terms of the annual charge by virtue of the size of the findings that we were able to produce for him. Let me be specific. This is a supplier in the meat category. We are working with one of their retail customers, it's about a 1,000 store chain. We're only working currently in about 300 of the 1,000 stores. And we have identified in excess of $30 million of out of stock opportunities that can be closed with good work on the part of the supplier and the retailer. So needless to say, a $30 million opportunity for that supplier is resulting in a substantial increase in the amount that they pay us, demonstrating that price elasticity that we were hoping for.

Another example that we're working on today, we have also begun to work with smaller retailers to see the extent of where this offering could go in terms of size of prospect. This is a less than 30 unit chain in the East Coast. That chain, we're working in the fresh beef area, and we've identified in excess of $10 million a year in a 30 unit chain, again of out of stock opportunities. So I think the net of it is that we are finding much larger opportunities than we originally had anticipated. I don't know that that will continue. But certainly at this point in almost everything we're looking at, and we're taking those learning and we're applying them, of course, to future tests where we can direct the retailer and the supplier in areas where there's greater opportunity. As you can imagine, when you're working with a supplier and they suddenly see in one of their retailers where they thought they were doing well, that there's another $30 million or so on the table that could be had for them, they are anxious to use the technology and our consulting in other retail engagements. So the size of the finding is perhaps the single most important thing that's going on in the business today, and I have no doubt whatsoever but that that will drive us, not just to additional categories within the retailer, but to additional retailers from the suppliers.

Third element of the business plan, could we get retailers to expand once they had experienced us to additional categories? As you can see from the chart on our web page, we're up to 34 categories that we are working in currently. We've had a number of examples now in which the retailer, liking what we've done, have expanded the categories within which we're working. We have a couple who have actually expanded the purview under which we're working even during the trial period, which certainly demonstrates that the retailers are liking what we're doing. We have one retailer, and I think if you watch the website here at the end of October, you'll see some very interesting changes and results. But one retailer which is one of the largest retailers in the world, has really become excited about what we are doing. We had been working in three or four of their, they call them banners, or think of them as retail names or divisions. It got sucked up to the corporate level. The corporate people have become increasingly excited about it. I anticipate that they will expand the tests that we are doing. It's purely in test mode at this point with them. Although one of the banners has already converted to paying. But the rest of the banners and corporate people are still in test. But I expect to see a very substantial expansion with this retail chain, and frankly, we could virtually build a business around them. So that's ongoing at the moment. We're very excited about that.

Additionally, in terms of this expansion potential, we now have evidence, I think those of you who have met with me and talked with me, I suggested that although we're currently focused in the supermarket arena, we suspect that there is an opportunity in the non-supermarket area and in the non- perishable area within supermarkets and non-supermarkets for our technology and our services. In the current quarter, we actually signed up our first non-supermarket retailer as a customer, very excited about that as a beginning step, as expansion. And we're not going to try and do too much more in that area until we've worked with this customer for six months to nine months. We'll get through a test period again, and see how we're doing. But I suspect there will be some evidence that we're not limited to the supermarket arena in what we're doing.

Of the things that have me the most excited, it's the expansion of the supplier list that we are working with. I'd like you to pay attention, again, monthly to the website. I think you're going to see some names added to that, and expansion to the number of suppliers we're working with, because remember, the business model is retailers take us to suppliers who fundamentally are paying for us anyway. But let me give you some names: Tropicana owned by PepsiCo, Minute Maid owned by Coca Cola, Frito Lay owned by PepsiCo, Perdue, Fresh Step owned by Clorox, et cetera. I think you're going to see some additional names of some of the largest consumer packaged goods companies on planet Earth here very shortly. I am extremely excited about that, by virtue of the fact not only do they have the financial capability to take this long distance, they obviously are in virtually every retailer in the world. So we are getting the absolute Tier One suppliers. And without an exception, the feedback from the suppliers is this is a unique offering. It gives them an opportunity to address their out of stocks. It gives them an opportunity to work more collaboratively with the retailers. They are all excited about it.

Several of them, as a matter of fact, have offered us the opportunity to make presentations at the corporate level. So we think there's some very interesting opportunities that are going to present themselves. It's perhaps the thing that I'm most excited about at the moment, is the expansion into the consumer packaged goods arena. One of the things to remember is that when you're doing business with somebody like a Coke or a Pepsi or a Clorox, not only do we have the chance to expand categories at the retail level, but now we've got suppliers that are excited about us, where we can expand into additional categories with that supplier and drop back down into the retail world. So obviously, Coca Cola does more than Minute Maid Orange Juice. PepsiCo does more than just Frito Lay. And when you see the rest of the names that we're dealing with, many of them are multi-branded retailers that have substantial expansion capability for us.

And then the question, the last element of the business plan was could we get suppliers to take us to more retailers ? Well the goal here is first to get the number of retailers up, then the supplier community has jumped in with both feet, as you'll see from the website. And in fact, yes, the suppliers are already beginning to take us to additional retailers. So the fact of the matter is, of the four elements of the business plan that we wanted to prove over the course of 2007 calendar year, we're there. We're very, very excited. From where Randy sees the business in my role and capacity, I can say that we did a -- we made a very interesting shift last year to this recurring revenue stream based on what we considered to be an excellent business model, this four element business model, Supply Chain Profit Link. And I would have to say at this point, we can now begin to shift from whether or not strategically it will work, because it's working, to the executional aspect of it. How do we now grow that? How do we secure the customer base? How do we in fact, address the customer base's needs, et cetera? How do we build the infrastructure against it? So we're moving frankly, from does the idea work, to the implementation aspect of it, which is a lot of blocking and tackling for sure.

I think some other points that are worth mentioning on terms of where we've gotten, we are obviously moving beyond just perishables and beyond supermarkets. I think that bodes well for the future. It suggests that there's many more categories and many more companies with whom we can work. I don't want to imply from that, though, that we cannot build a very large business of recurring revenue just in the supermarket arena, because we can. But it just suggests that there's certainly opportunities beyond that.

I hope very shortly in the current quarter to demonstrate that at least some of the licensing revenue from the ActionManager Suite can be converted into a recurring revenue stream. Remember, whenever we do this, it hurts the top line in the short-term, but improves the recurring revenue and we think valuation of the business in the long term. So during the course of this year, we're going to continue to focus on opportunities to convert ActionManager Suite opportunities from licensing to recurring. We've already done that now once on the Fresh map -- Market Manager side. We expect to do others in the course of the current year. In the long run, we'll never be able to get completely away from licensing. But what we hope is that the dominant piece of the business going forward, and certainly the most rapidly growing piece, is going to be the recurring revenue stream from our subscription-based business.

On the people front, because at the end of the day to execute the plan, we're going to need a superb group of people, and I could not be more pleased with the people we are attracting. Last year was more difficult to get people. And now in the last few months we've seen some excellent progress in getting, not just people, but exactly the people that we want with precisely the backgrounds that we need to move the business ahead. We're in the process of making some major technological infrastructural changes to add to capacity. We're going to be quite absorbed in that here in the next couple of months as we shift platforms and increase the capacity to do what we're doing. We're quite comfortable that that should go relatively well here.

Qualitatively, and I think that's important, is I think for those of you who have ever had conversations with me, I'm an absolute near-religious believer that quantity follows quality. Quantity follows quality. And the fact is the quality of our work product, the quality of what we're presenting to our customers, is better than it was six months ago. We are getting better. That's why I think we're finding more opportunities in every category, and the fact is that's our focus. The business reality is, as you probably know, retailers slow down starting November/December as they're getting ready to execute their holiday plans. So kind of October is our last month where we'll be adding much. That gives us November and December of a slowdown that's an expected seasonal slowdown for us to kind of consolidate and absorb what we've got. I think you're going to see, as I said before, a very interesting pop here in the current quarter in terms of number of categories and a few more retailers that we're working with, in spite of the fact that there will be a fourth quarter slowdown. I just don't anticipate adding any additional retailers in November/December, but we'll certainly add some in October. Again, I think one of the things that bodes very well for the future, the size of the opportunities that we are finding I think allows very interesting price flexibility going into second years of renewals. And again, we only have limited evidence at this point. But when you identify $30 million of opportunities for someone, you obviously have some price flexibility. We are using that flexibility to improve our revenue stream.

Okay, a little bit about the quarter that we just finished, the first quarter of fiscal '08. Just a few comments about it. The revenues, I think you're going to see, are up significantly compared to last year. As I mentioned, fourth quarter of last year was stronger than we had anticipated during the quarter. This quarter again, is beginning the year very, very well. We will see a significant increase in revenue. Subscription revenue in the current quarter is up, oh, from like $20,000 last year to about $70,000 in the current quarter. So what's that, more than a 300% increase year-over-year in subscription revenue. It's exactly what we wanted to see. Pipeline at the moment is excellent. And interestingly, our burn rate is down from last year. Our burn rate has declined about 10% from last year, and that's in spite of the fact that we've added a number of people. We anticipate on the people front that we've got most of the people we need in business analytics. There may be a few more headcount hires there between now and the end of fiscal '08, but primarily now the model works. We're going to be adding salespeople, account management types to the mix to grow the revenue base substantially. Again, quality comes first, quantity comes second. But we are feeling very, very good about how things have gone and what we anticipate.

On the [distaff] side, the only negative that we've experienced so far is that it is harder to get the data in terms of timing from retailers in terms of tests than we had anticipated in our original business plan. If you remember originally, we thought well we can get things up and running in 30 to 60 days. Well in many cases, it's taking six months just to get to the data. I suppose in retrospect, had we thought it through, the fact that retailers need the service is probably an indication of the fact that it's hard for them to get data. This basically is a one-time shift, meaning that once you get through this, it will always be that same four to six months to get the tests going and then two months to run the test before you get to a paid engagement. It will be a one-time shift. And in retrospect, we probably should have anticipated that. But we are where we are, but feeling very good about it. Recently in the last couple of retailers, to suggest that there's some internal dialogue about this, those have gone quite quickly. I am a little bit more cautious about it, and I just suspect it is harder to get data than we would like to think that eventually we would get it, and the results that we produce with it are pretty astounding.

That's really the sum of my comments. Just to kind of wrap that up, the year ended a little bit more bit more strongly than we had anticipated. The first quarter is going to show significant revenue growth compared to the same quarter last year. The business model is working. And we're very excited at the moment. Take a few questions, and we'll let everybody go get to their business today. Anybody still

Operator, we'll take questions now.

[OPERATOR INSTRUCTIONS]. [Howard Haperra]

A couple questions. I guess starting off with the chart actually, and the number of retailers. You have three that are paying.

Correct.

Of those three, how many categories or engagements are they paying for?

Let's see, eight, ten, I think I'm going to guess. Don't hold me to this, about 11 categories.

Okay. And then -- ?

11 or 12. I think it's 11 or 12, Howard.

Okay. And then in terms of what you just went over towards the very end, about the increasing the amount of time to get the data. If we were to, I guess follow, would it be fair to say that we'd sort of take a six to eight month lag, and that's -- you look six to eight months back, and then at that time, approximately those are the number of retailers that are paying for approximately those number of categories, in terms of revenue modeling going forward?

Howard, in the interest of candor, we don't internally agree on how it looks at the moment. In other words, we had two customers, out of the eight or ten, three -- well, let me see, let me explain that differently. There were three or four that are owned by the same large company. That large company went through a major acquisition, a multi, multibillion dollar acquisition last year. That company has had the most difficulty getting data.

We think it maybe largely due to the fact of the acquisition, consolidation of IT, et cetera. So it may be that there's a one-offness in it. As I mentioned in the last couple of customers we brought on, it went very quickly. We're trying to reformulate the test period so that we don't need as much data and streamline it. So I think what I'm saying is historically it's taken four to six months to get to the test, then it's two months of testing. We are getting more categories than we imagined from those retailers, and we're hopeful that that initial lag can be brought down somewhat.

It won't be a 30 day lag, as I had hoped. It's certainly going to be a 60 to 90 day get started period. I think that's much more likely over time to be the average now. This first group we went through, as I say, we're lucky in some sense, because it was a few very large retailers. Unlucky in the sense that they had just gone through a major acquisition and getting data was an SOB of a problem.

Okay, and with the Source Interlink agreement you have, and the testing that's going on there, how long do you anticipate that testing to go on, and then conversion into a nice revenue stream?

Wow, I apologize. That's a major omission on Randy's part. Shame on me. We are very, very, very excited about the potential for that. If you remember, historically, I've been somewhat reserved. I think the idea of the Scan Based Trading Initiative that we've launched was one that I said had a great deal of upside, but I was not completely confident that after trial we would be able to seize the opportunity and make it into a business line. The deeper we get into it, my confidence is growing that this could be a very significant winner.

Our first test is with Wal-Mart. We expect to be up and running in the process part of it shortly, by the end of October, and I would expect to have some results by March. We'll actually be passing data somewhere around year-end, again, Christmas interferes with this. We've actually written some letters to major Christian churches asking them to postpone Christmas on our behalf so that we could get this done faster, but so far there's not been much response.

But I would expect that by the end of the first calendar quarter of '08, we should be through a test period. We may expand from Wal-Mart to one other major -- one of the largest retailers in the U.S. for the Scan Based Trading Initiative with Source. So at this point, that's going better than I had guessed. Not -- we're nowhere near the level of confidence that we have in the Supply Chain Profit Link offering because we've proven that model. But I'm feeling better and better about both the scope of the opportunity and our ability to seize it. I apologize for not having mentioned that. Thank you, Howard.

Okay, but real significant revenue recognition from that probably won't occur until the end of this fiscal year or beginning of the following fiscal year?

Well, we've got -- I would say that it's -- I'm not sure there will be significant revenue in the current year from it because I think even after we go into trial, there's a ramp up period, et cetera.

Okay.

On the other hand, I think once we start to experience revenue from it, if we prove the case, the ramp up will be exceptionally quick and will require a great deal of focus on our part, because it's going to be driven by the wholesalers. In other words, I think if this works at all, it will work on a very large scale because we will become the industry platform, and the economic need to adopt that platform is a compelling one. We're now inside the tent. We understand the economics to the wholesale and publishing community, and it is gigantic. So if we can make this work, and I'm confident at the moment we can, this is a bigger opportunity than I had originally anticipated.

Okay, and one final question. Tesco Lotus and your relationship there?

Yes, as you know, we've been very, very successful with them in Asia. I think it's fair to say that we have been approached by them to create a proposal for a worldwide rollout of our technology. We have so much on our plate, and all of that is outside the U.S., that we've kind -- we're at the point of economic indifference as to whether we do the deal with Tesco or not. So I think at this point, I'd just like to say that we are certainly having some conversations with them, and if we can get the kind of deal that enables us to focus on the pieces of our business that we need to without too much distraction , we'll proceed. Otherwise, we

Okay, keep up the good work.

Thank you. I think the important point of Tesco is that they have validated the economics of what we do. They did say, come to us, and we have -- so I think it's fair to say they have asked us to propose a worldwide rollout, and we have -- so that's a tremendous feather in our cap that somebody like Tesco says -- and by the way not just in the single department in which we were working. They want to roll it and our labor scheduling across every store in the world. And when I say across, that means every perishable department and labor scheduling to boot. So it is a tremendous feather in our cap. But if it's not done properly, there's an executional risk which I think would be a huge distraction for us. So we've been relatively -- we're approaching it cautiously. So I'm not willing to put that one in the win column yet at all.

Okay. All -- thanks and keep up the good work.

Thank you. We're pretty excited.

Jim Stone, PSK Advisors.

A couple of questions. I'm relatively new to this story. I heard you for the first time last spring. You're talking about Scan Based Trading. What is that? I'm not familiar with that.

Well, in the case of magazines, Jim, magazines in a sense, are a consignment business, and the way it works -- let me give you some interesting numbers.

I'm familiar with magazine distribution.

Okay, so as you know, it goes on consignment to the retailer and they pick them up, they count them, they ship them back to a distribution center, the unsold copies, they count them again, they shred them, and they send them to the Dominican Republic. So the net of it is, there's about 10 billion magazines printed in the U.S. and roughly 3 billion of them are sold, so 7 billion of them are an Al Gore-type problem.

So what everybody has been looking for, the holy grail has been, what if we could find this, think of it as independent third party, who instead of having to count all of this stuff, could settle our transactions for us. So they could say, here is how many came in, absolutely. Here is how many were sold, absolutely. And here is how much you guys, therefore, have to pay each other in the food chain.

Got you.

And that's what we're doing. We're building that platform. It will be an industry platform, third party independent. But again, it's based on all of our intrinsic technologies of processing all the transactional files from retailers.

I understand the problem there.

Yes, it's a pretty horrible problem.

I've been involved with magazine distribution.

Got it, and so you can imagine the economics, if suddenly they don't have to count all of those magazines and go through that horrible laborious process anymore.

Right. Okay, next question. You answered -- the question was asked about on the paying customers, 11 to 12 categories?

Correct.

Is that each or is that in total?

That's in total, but both of those are likely to expand. The ones that we've got still have very significant expansion capability.

Okay, what are we talking about for each one then, so I get a feeling of the overlap? Is it three to four?

Yes, in one case it's three, in another case it's eight or nine.

Okay. In your press release, and I'm asking this to get a better understanding of the market and where it is. In your press release, you said that there were two large retailers that had discontinued giving you revenue, and I wonder if you could give us some flavor of why they left?

Oh, you mean on the ASP side?

Yes.

These were very small companies that we were working with, and candidly, I have to be careful how I phrase this, it was more problematic to take care of them than the economics of what we're currently doing. So we just sort of mutually agreed that it was too intensive on our part and a little bit off strategy. There were -- so it was more our not being able to do what we wanted to do with these guys in an economic sense. They had no growth potential for us.

What is your current thinking on the revenue per category that's possible now?

Boy, it's changed, Jim. And again, in the interest of candor, I don't know, because the size of the opportunity that we're finding is much higher than I thought six months ago. So I'm just comfortable at this point saying that where we had one view six months ago, my view today is significantly higher. We're also finding -- I don't mean to complicate this, I'm just going to put an idea out and I'd rather not get into too much detail. There's two different ways we can get paid by the retailer.

One is we invoice the retailer, he in turn invoices his suppliers, sometimes marks it up. We get paid by the retailer. There's another situation that we're doing, and we're following this one very carefully, where the retailer says I'm just going to tell my suppliers I want this. You go to the suppliers. I'll set it up and twist their arms a bit here. And you charge what you want to charge to the suppliers. Well in that case, we're charging significantly more than we do when we -- because we have a higher level of risk, in essence, although we haven't seen that to be the case so far. But our price realizations in that case are also significantly higher than the original numbers we thought. And then if you layer on that, the added economics that we're finding, you can see that there's pretty interesting opportunity.

When you go to a supplier in a 300 unit chain, and you identify $30 million of your out of stocks, and he says I can only get half of that or a third of it, you can imagine that what you charge is a very interesting number. So, we're just optimistic. I just don't have enough evidence yet to be completely confident. We only have evidence of one, and that was a triple. We were able to raise the price almost 300%, and it's still a bargain. So we just think there's some more interesting pricing stuff. Here is what we don't know. Maybe just the categories we've looked at so far we've been lucky, and that's why we found such good economics.

Maybe the next 50 categories we look at won't have the opportunities. It's too soon to say. But we'll know by the end of Q1, in calendar year '08 for sure, because we've got so much more stuff coming on. If you were asking me to make a bet, my bet is that what we've found is indicative of the industry and that suggests that there's upside on pricing. And by the way, and it's still cheap. It's still -- we're trying to be in the 5% to 10% of savings area in terms of what we charge, and that's still terribly cheap, obviously.

Hopefully they're making more than 10%.

Yes, that's the point. We're charging about 10% of what the -- less than 5% of what the gain potential is.

Oh, okay. When you were speaking last spring, you had thought that there was a pretty high potential of getting a large percentage of the major retailers into the tests, and I'm wondering what that number is now? How many out of the -- ?

Oh, yes, let's go back and look. Hold on. Let me look at the top ten here. Okay. One -- yes, we're about where we were, I think four of the top ten. I think you'll see one more -- one or two more of those come into the fold here, maybe even three. We're talking three more of the top ten. We expect to see at least one or two of those happen before the end of Q1 '08 calendar, so we're making good progress. We're a little bit stuck here because the -- in terms of remember capacity, because the large chain I mentioned is the largest one. It's the largest.

Right.

So, it's got -- I can't even tell you how many banners. It has thousands of stores, so we are really absorbed. I think, think of it this way, they've got five different departments in which we're going to be working. Five different perishable departments. I would anticipate anywhere from one to three tests per department with multiple banners. So if we went into two banners with three more tests across five divisions you can suddenly go -- not divisions, but five different departments, you can begin to see how, when you get into one of these large ones, it becomes quite consuming. But we've got a couple of others that are cooking that could kick over here pretty quickly. We now just have to again, put quality in front of quantity. Just be damn sure that we're doing it exactly right.

Of the folks who have been testing it, how many of those have stopped testing without converting to a paid status, and what were their reasons?

None.

That's a good sign.

None. I think, let me tell you where I think there is a risk. There's a risk that somebody will say yes, I want to test it. And then once they start to put together the data requirement, they may back out at that point. But look, as we build this business case, remember, when we first went to people, we didn't have a lot of numbers to show them as to why they should do this. We didn't have the $30 million in that one company and $10 million in another. We are building a data set right now that simply is amazing. In other words, when we go in now, we go in with guns blasting and say your neighbor down the road saved this. The guy down the street saved that.

Do you want to try it? So we're putting hard numbers on the table which will increase the likelihood that somebody tests. And if we continue to find hard numbers of that sort, certainly increases the conversion rate. My original plan, if you remember, is I thought we would probably convert about 75% from test to paid. I have no reason at this point to think that it will be any number lower than that, maybe even higher. But nobody has said no as yet. But that will happen. We only expect 25% fall out, though.

That's a very nice hit ratio, to say the least.

Oh, yes. And as I say, remember if we -- if you were -- category managers per se typically have multiple categories. That's in a mid size chain, a guy doesn't just run one category. He typically can run multiple categories. So if we get an introduction to this guy and we only do one of his categories, and we're successful, he will want to propagate it across all of his business, as will each of the category managers that we touch. So I have increased confidence that the basic strategy and model is spot on, just spot on.

Of the three who have converted to paid, could you give us a little more flavor of what was the convincing thing that finally made them turn, and just give us a little more flavor so we can understand that process?

I think the basics are, again, what we do is unique. Everybody who has looked at it, every supplier who has looked at the offering, and retailer, has gone, wow, nobody else does this. This isn't Nielsen, it's not IRI. It's unique and it's actionable. Think of it this way. If you were a retailer and we showed you that you had a product, pick a product, say chicken. And you could increase your sales and your supplier of chicken could increase his sales by $30 million a year, and specifically what stores didn't have your product on what day, and we could tell you that day by day. It is evident that there's money on the table and you can take action and solve a significant piece of that problem. So it's not hairy fairy stuff. It's very concrete, very specific.

On the three that converted, are they doing overnight data, are they connecting to cash registers? What -- ?

Yes, eventually they all go to daily feeds to us, daily overnight feeds to us of their transaction logs.

Okay, but nobody is yet looking at tying the point-of-sales in?

Oh, yes, no, no, we capture that. We know exactly what time the product was sold.

No, no, but I'm talking in realtime.

No, there's not much -- this is so advanced from where they have been, nobody has wanted to go realtime. But that's a future product offering. We have a number of new products in our pipeline that are coming. In other words, we think at the end of the first year, we have some new products that we'll introduce to each of our customers that expands their ability to grab the opportunity of lost sales and shrink. And that also will be sold under recurring revenue stream. So there's some new products in the offing, including the ability to go realtime to help these guys.

Okay, but basically the three who converted, they are all doing overnight data?

Correct. And that's all the market wants at this point from, what we can see. But we can tune it.

Of the other eight that are in test, at this point, what is it you're looking on average? Something like one a month to convert to a paid status?

Yes, I think it's going to be something on that order, although November/December, again, are going to be dead months, so I think one a month or so is probably realistic. The other thing that's happening is, if you look at the chart , you see a more rapid growth of suppliers. You're going to see a number of new suppliers come on here in the next few weeks and months. They in turn are getting very excited -- way better acceptance by the suppliers, way better. Because they now see the economic opportunity for them. So watch that space. The supplier piece of this is going to be

Again, to understand, I'm asking this to understand the process. Folks who says, woops, we're leaving $30 million on the table, how in the process -- early in the process did they discover that?

We put that in the trial part. In other words, basically we spend the first few weeks cleaning data with them. It has huge value to them, because they've never had their data scrubbed before. So we kind of get the categories right, prices right, promotions right, et cetera. So the first few calls are really relatively dull. Then we do the wow call, which is by the way, here is the size of the opportunity. And in general , there is Oh, my God, slack jawed amazement at the opportunity size, because they've never seen anything like this before. So, the goal is within the 60 days to demonstrate to the customer we can identify actionable opportunities of a significant scale, so that once they actually start to move into a paid engagement, we're at the level of taking action, getting the money, go get the

Now this fellow who saw the $30 million, how long ago did that occur, and are they starting to see some of it being captured now?

I would anticipate this quarter they will see some of it being captured. They just discovered it, we just presented it to them in the last 30 days, and it's moving up the food chain very nicely there. Meaning that there's -- the retailer is -- remember, we were brought there in that case by the supplier. The supplier took us in. That's the case of retailer taking us to supplier -- supplier taking us to retailer. The supplier was thrilled because it said -- incidentally this supplier was up 18% year-over-year. So he looked at his gross numbers and said, God, I'm doing great. We showed him his numbers and said you could double that, double your volume, double it, except that you've got distribution and out of stock issues. They were floored. So their gross numbers that they look at said we're having a hell of a year, we're up 18%.

Our numbers showed them they were missing huge sales opportunities, 100%. So, once they got comfortable that the numbers were right, they got very excited. That's why we were able to say, okay, now let's go get the money together. We'll help you. That's why we're able to raise the price. Now, we just presented the data to the retailer last week. It's the first time the retailer saw what the economic potential was because we'd been working with the supplier. The retailer looked at it and went, Oh, my God, would this work in some other categories?

Okay, the solution then was what? These were out of stocks?

Yes.

Were they potential out of stock, so I could get to the -- ?

No. These are real out of stocks.

Okay, so I have actually lost some sales before I can get product there?

No doubt. Now, the thing you can't measure is substitutability.

Gentlemen, we've got a couple more questions in the queue. Perhaps, if we could get to those questions, we'll circle back?

I'll pass it on to the next.

Okay, but great questions, Jim.

Thank you.

Michael Taglich, Taglich Brothers.

I just want to say good going and I'm looking forward to seeing Q -- the September quarter, Q1. Randy, do you want to give any guidance for this coming year?

No.

Okay.

We're just feeling very good about the model. I mean, in a certain sense, if we convert -- if we're more successful than I anticipated converting licensing to subscription, for example, this ActionManager one that we're working on, it's a multiple, it's probably -- if we were selling it on a licensed basis, I'm going to guess, it would probably be $350,000 or $400,000 of revenue this year. If I'm successful at converting it to a subscription, this year -- first year, it will probably only be $60,000 to $80,000, second year about $100,000. But long term revenue. So we keep moving revenue from licensing to subscription, which is what we want, so I don't want to give any guidance. I just want to say that the model is working. I think everybody at this point internally is extremely satisfied with the progress we're making, and I would anticipate seeing a very interesting acceleration on the subscription side of the business.

Good, keep up the good work. Thanks.

We're trying, thank you.

[Gale Leksol]

Appreciate chatting with you and I think you're doing a great job.

Thank you, we're trying.

A question, what about cash plans for cash needs?

As you know, we did a significant raise. Our burn rate is down. Our revenues are going up. So at this point, we're feeling pretty good. I think the unknowns in terms of capital requirement is what does scan based trading do to us if it works? What's the capital requirement, growth requirement against the opportunity? If we get more of our revenue on subscription than license, it obviously reduces short-term cash input into the business. But I don't think those are things we know at this point. At this stage, as I say, our burn rate is down, our revenues are going up. That's exactly what everybody, I would hope, would want to see. So at this point, we're comfortable.

So the cash position right now is a comfortable position for the Company?

Correct.

Okay. And one other question. I know at one time it was a big issue, or at least it seemed to be, and that was a lawsuit. It was some people were encroaching on your patents.

Yes, we're still involved in two pieces of litigation around our patents. We do protect our intellectual property. We think there's revenue potential. Sometimes we'll sell patents. Sometimes we'll license patents. And sometimes we will sue people. And it's been a significant expense for us last year. It continues to be a significant expense. But you have to defend your intellectual property. It's a cost of business, and those suits are proceeding. In one case we have, it's a smaller company, they have offered to settle. I'm not sure what will happen in that case. In the other case, we are continuing to litigate, and it goes to trial next spring.

Thank you very much. I appreciate what you're doing.

At this time, you have no further questions. I'd like to turn the call back over to Mr. Randy Fields for closing remarks.

Okay, well thank you, guys, for spending the time with us this morning. Thanks for all the support you've given us. We are certainly doing the -- we're working hard, we're working long. And so far, I think we're really working successfully. I am, at the moment, could not be happier about how the model is evolving. I think we now have a huge step to take in terms of the executional mode of the business.

There will be substantial changes around the area of the sales part of our process, account management, et cetera. But those are tried and proven techniques that we'll be working with to expand what we're doing. But at this point, I think as shareholders, all of us can feel comfortable that the shift that we've made over -- the painful shift that we've made over the last 18 months to the Supply Chain Profit Link strategy and recurring revenue model is, in fact, working. So, thank you for your support. And if you guys have questions, et cetera, if you ever need to, please feel free to get in touch with me. Thank you.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.