Park City Group Inc (PCYG) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second-quarter 2008 Park City Group earnings conference call. My name is Danielle and I will be your coordinator for today. At this time all participants are in listen-only mode and we will be facilitating a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. John McNamara with Cameron Associates.

Thank you, good morning everyone and thank you for participating on Park City Group's fiscal year 2008 second quarter conference call. By now, you should have all received a copy of the press release. If anyone still needs one, please contact my office at 212-554-5485.

With us this morning from the management of Park City Group is Randy Fields, Chairman and Chief Executive Officer.

Before we begin as usual we would ask you to 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, February 15, 2008, and Park City Group expressly disclaims any obligation to update, amend, supplement or otherwise revise any information or forward-looking statements 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 will begin the call with a brief overview of the quarter and provide a strategy update and then we will open up the lines for questions. With that I will turn the call over to Randy.

Good morning, John, and thank you very much. I think beyond the information that was provided in the press release, I would like to cover a few developments within the quarter and things that are ongoing now that I think will be of interest to our investors.

Important to remember that there is a seasonality to our business as we have talked about previously that the so-called Christmas quarter if you will is a very difficult one from a selling to retail perspective because they are naturally quite preoccupied with their own Christmas selling season. So we expected certainly a slowdown in the quarter. Interestingly though, we were able to get one conversion in SCPL from a trial to a paid engagement, and I think that speaks well for how we are doing on the SCPL program.

There was a note in the press release and in our financial statement that a significant part of the year-over-year decline in revenue was actually due to an issue that was associated with one of our customers being acquired by a larger chain and that put the receivable and the SCPL program in doubt during a transition phase to the new ownership. We're still in the process of working with that customer and hope to in essence resell them by virtue of the acquiring company which is substantially larger and if we're successful creates a larger opportunity than we had before. But in the interest of conservatism, that receivable or rather that relationship from a revenue perspective was backed out and that really is the major difference during the quarter compared to the prior year.

Previously we had mentioned that instead of broadening substantially the number of SCPL customers that we're focused on since we found it pretty easy to get to trials with retailers that instead we were going to focus on the largest retailers as a strategy to be certain that each of them provided a very substantial economic opportunity. So as an example when you take a look at the top 10 U.S. retailers each of those has an SCPL potential of somewhere between 1 and 5 or even more million dollars per year of revenue potential if we're successful with them. So during the course of the last quarter as we noticed -- as we experienced the Christmas selling season slowdown, we also began to focus not just on the top tier retailers, but in addition to the suppliers who ultimately as you probably understand with the SCPL program pay for the program on behalf of retailers. In the course of the last probably six or eight weeks I think it's reasonable for us to say at this point that we have had more than expected success at both the top tier retail penetration strategy and at the suppliers strategy. I would like to spend a minute talking about that because I think it's importing going forward.

In the SCPL program, as I'm sure you understand, the concept is once a retailer has become engaged, likes the program, he would then go to his suppliers and in conjunction with us get those suppliers to ultimately pay for it. But that creates as you can imagine a two-step process. The key issue for us was in the long run how do we speed up the payment, how do we speed up market penetration. So during the course of the last quarter we began to focus on a number of the suppliers to retailers with whom we had contact by virtue of the existing SCPL programs in place with our retail customers. And at this point I think we are quite confident that we were successful at getting trials now and prepaid engagements in essence from a number of the best known, certainly in the Fortune 100 size consumer packaged goods suppliers to the retail industry. I think that bodes very well for paving the way for an acceleration of the program here in the coming quarters and years.

In addition, and this is a bit of a surprise to us on the good news front, when we originally were talking about this, what we hoped was that in terms of market penetration at the top 10 U.S. retailers that we wanted to have five or six by June of this year. And I would say that right now, we all are feeling reasonably comfortable that by the end of the current quarter, at least the top three U.S. retailers in terms of number of stores will actually have some sort of a program, some sort of a test program in place with us. And that certainly is well ahead of what we expected and each of them has very significant revenue potential for us.

I think the negative side, we've talked about this before and it certainly was from our perspective an error in understanding in the initial phase of this a year ago in trying to understand how long it takes to get a test going. We have found where originally the business concept was that it should not take more than 30 to 60 days from the time that a retailer says, yes, this sounds like a very interesting program, let's try it, to actually get the program underway. What we've found is that in specially cases at the larger companies it's taking as long as six or seven months to get the data flowing.

On the negative side, that certainly delays our revenue obviously from the SCPL program. It certainly does not change the underlying potential in any respect. In fact, what it likely does, is to show how difficult the retailers are from a positioning perspective in understanding their own information. So this kind of a onetime slippage that from a revenue perspective that we're just going to have to deal with and there is very little we can do about it. It's not under our control to get the data flowing, it's simply a matter of they are figuring out where the data lives and how to get it to us. But that is proceeding as well as it can and the program in terms of determining economic advantage to the retailers and to the suppliers is well ahead of what we would have expected. In virtually every case we're finding very substantial economic opportunity that -- and from our perspective, that allows us to maintain that 75% closing ratio that we're looking for in terms of SCPL trials to actual conversions to revenue.

Interestingly, too, last quarter another milestone was that we were able to -- and this was something we've been trying to do that had not been successful until that last quarter, was to actually get one of our ActionManager customers on the recurring revenue model that we're recurring transition to, and we were able to do that with our first ActionManager customer. We think this will be the first of a number we want to work the kinks out of the program. But so far, it seems to be going well. We actually, we should have them up and running from an implementation perspective in the next 45 days, and that is a potential 50 to $75,000 a year recurring revenue stream. And again, it's something that we had not been able historically to do before.

From where we are today, as I said I am optimistic at this point that between now and the end of the quarter we will have three of three as the potential of the largest retailers in the United States in the SCPL program and either in test or paying mode. I think that is an enormous achievement on our part. We're going to be slowing down the number of new retailers that we go to because we think we have enough in the program from a potential perspective to build a very exciting business for now and we want to focus our resources on brilliant execution with those that we have in the test phase. But simultaneously though, we're going to become more aggressive at going out to the supplier community in order to in essence be able to go to a retailer on a if you will prepaid basis where a supplier says I have the money in my pocket to go do this SCPL engagement. Here is a retailer that I think needs it, let's go hand-in-hand. So now the offer to the retailer is, we have already found out how we will pay for it, let's begin. I think that will make for an accelerated potential on our part.

From a pipeline perspective, we have three very large license transactions in the hopper, and I would anticipate that some percentage of those between now and June will actually get closed and bookable from a revenue and cash perspective. We were ramping during last quarter, rather, for a worldwide expansion of one of our largest customers, and we anticipate that that will begin the implementation here probably in the next few months. And from a revenue perspective, also very close in.

Maybe the most interesting new thing that has developed, we have not talked about this before and I think it's about to become very important to us, is that we have as a function of our relationship with Sourced InterLink, which we announced in the early summer of last year, there's been an interesting set of developments and so we need to spend a few minutes on that.

There is an opportunity with Sourced InterLink and with the trade associations associated with the magazine distribution business, and I won't get into the complexities of that supply chain. But there is a very interesting close-in opportunity that we're going to take advantage of in a attempting to become the industry centric clearinghouse if you will for information, and in particular for scan-based training. That initiative is well underway, the technology platform to do it is in place with us. We think this is a very, very interesting opportunity. We have some people who are from the industry working with us with the industry players to try and gain some acceptance with this. But it certainly has remarkable economic potential for us. And I think in the next 60 to 90 days, we will have either a go or a no-go from the significant industry trade associations as to whether they wish to anoint us as the independent third party scan-based trading organization. If so, that represents an enormous growth vehicle for us. It's perfectly consistent with our technology base and one with which all of us now internally have become very excited here over frankly the course of the last 30 days, which is the period in which it has been gaining heat, if you will, and gaining traction.

So those are my comments. We're feeling very good at the moment and I think at this point I will just open it up if there are some questions.

(OPERATOR INSTRUCTIONS). Howard Halpern, Taglich Brothers Inc.

Let me work backwards a little bit and start with this Sourced InterLink. You talked about the 60 to 90-day timeframe where you either get a go or a no go. If you get a go, does that mean a full out program, or would it be a slow trial ramp at that point?

Actually, a great question, and I think the answer is somewhere short of in the middle of those two possibilities. We are really in -- there's two concepts of trial here. One is, can it be done technically. And we're now persuaded -- we're in a trial actually with one of the largest retailers on planet Earth, and you can probably figure out who it is and others to make sure all of the pieces work technically. And of that, we're now quite confident.

So it's not so much a trial that is likely to happen, but the real question is the adoption rate. I think what's likely to happen here, if we get a go, it will be the industry trade association saying, yes, this idea, this group this platform is the platform for the industry. Now the question is, the adoption rate within the industry. There has been pressure to go to scan-based trading in the magazine industry for a long, long time. It has just never been -- let me see how to say this -- there has never been enough trust up and down the supply chain to allow for it to be effective. I think that is probably a fair way to say it. In other words, the retailer wants information that he provides to the wholesaler and then ultimately to national distributors in some way or other to be interpreted objectively. So each piece of the supply chain ran the risk that if they were the validator that they have a bias, if you will, potential bias. I don't know that it would be real, but certainly there's not enough trust is the simplest way to put it to create scan-based trading platform.

So our being an independent third party plus having this very interesting technology that facilitates this puts us in an exceptional position. The industry forces are pressured to make this happen. Let me give you a couple of facts that are fascinating. All of this is obviously in the public domain. Today, there is about 10 billion magazines that are actually printed in order to get less than 4 billion magazines actually sold. So that means the balance of those magazines on this call it 36% sell-through, all the rest of those magazines are sent out stocked, brought back, counted multiple times, shredded and transported all around the United States. If Al Gore knew about this, this would be in his baby. So the fact is, there's huge -- and historically, as everybody knows, the cost of paper was a non-starter, so the cost of the million and [one-th] magazine did not really matter. Well private equity has bought just about all the paper mills on planet Earth, so suddenly the cost of paper is up substantially in near-mid double digits, 30 some odd percent year-over-year. So the cost of magazine creation is going up, the cost of fuel to move the magazines around is going up. Certainly the cost of labor is. So everybody is suddenly interested in the wastage if you will in the channel. That creates the opportunity. That is pressuring everyone to get to the table to figure out exactly how to do it. So this is just a very lucky, fortuitous event frankly that would could be the beneficiary of.

So I think the answer to that long-winded answer is this. If we are lucky enough to get the position, then I think it's an adoption rate and some trial and error. But I think that means it would then be multiple retailers, multiple wholesalers and multiple national distributors involved in the initial effort. So the first year I'm sure will involve some trial and error, getting to know each other, getting some people on the platform. And the second year I think would see and third year the expansion to full market potential.

I don't know if you know the answer to this one though -- where would the revenue -- on which line would that revenue show up? Subscriptions, professional services?

Well probably, Howard, good question. I think we're going to end up creating a new line item, so that is highly visible.

Working back again with three license transactions that you say you have in the hopper. Is any one of them in the magnitude of what occurred fiscal year 2006?

Yes.

And then, I want to phrase it correctly. I know the license revenue will be a onetime event, but are you going to be able to work it in such a way that you will have recurring maintenance and support revenue, and even professional services revenue going forward, from that license?

Yes. That license has, two of the three have very substantial recurring and professional services around them, both of them do. Both of them are in the six-figure, excellent six-figure recurring stream and on the professional services side each of them has the potential for being in seven figures.

Okay. That is good to know. Now with SCPL, in the chart that you provide on the web site were you have 66 categories and 32 retail units, of the category units how many of those are actual paying customers? Or maybe I should break it out into -- how many trials do you have ongoing and how many recurring revenue paying customers that are beyond trials do you have?

We don't break that out yet, Howard. We probably won't until the summer when we have more meaningful numbers. But at this point, it's still fair to say most of these are still in trial. But the fact is that over the course of the next 90 days, most of those will either come to the fish or cut bait part of the equation. In virtually all cases now, we are getting data. Several of those have been up there for six and eight months where data has not even begun flowing until just recently. So in some cases, those trials are literally just getting going, even though they have been up there for some number of months.

Okay, because the one thing that -- and correct me if I'm wrong, because the one thing that was concerning me a little bit is that deferred revenue should be a leading indicator of the success of that program and the deferred revenue has started to come down. It's down I guess to $57,000 in the end of this quarter. Am I correct that the deferred revenue should be the leading indicator for this?

No, not necessarily, because in some cases now we're only billing people on a quarterly basis, so it will run right through the P&L. We really won't see it especially when we're at the supplier or level. And then, remember, there was a significant hit to deferred revenue from the cancellation that we took because of the uncertainty of collection with our largest SCPL paying customer. So that was a big piece of it. Plus our maintenance is typically annual and occurs after the first of the year, so deferred revenue will be going up this quarter. So deferred revenue is one of those arcane -- I refer to it as arcane accounting things that I don't think is a reliable indicator of where we are.

But with the billing then, while cash can run ahead now (multiple speakers) [billed] it won't run that far ahead since it's going to be -- it's not (multiple speakers).

That's correct. That will reduce it. To the extent that we're doing some quarterlies now as opposed to annuals, that does impact that aspect of the program.

I will let someone else have a chance, thanks.

At this time, there are no more questions in the queue. I would now like to turn the call back over to Mr. Randy Fields for any closing remarks.

I thank all of you for taking some time out this morning. I think the net of where we are is excellent from our internal perspective. Pieces that I did not talk about that I was hoping someone would ask a question is that from a technology perspective we're in superb shape. We have made some very interesting changes to the scalability of what we do and we are feeling very, very good right now about how we are positioned from a people perspective and from a technology platform perspective. So I think we are prepared. The [SBT] thing certainly adds an additional leg of opportunity to the stool that we have here, and what I'm excited about in particular is we'll get I think a yes or a no in very short order as to whether that program is going to go forward on the optimistic basis that we currently expect.

I think that all that we are hoping can happen can. I think it's important to remember that the team now is going to be focused increasingly on the execution of this. We're pretty much heads down with our existing customers and the results that we're getting from a customer perspective are right where all of us as shareholders would want to see it.

So thank you all and, John, back to you.

That's it.

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect and have a great day.