Park City Group Inc (PCYG) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Park City Group second-quarter financial results teleconference. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Terri MacInnis of Bibicoff + MacIniss. Thank you, Ms. MacInnis, you may begin.

Good afternoon everyone. We are pleased to welcome you to our discussion of Park City Group's financial results for the second fiscal quarter ended December, 2008. I am Terri MacInnis, Director of Investor Relations of Bibicoff + MacIniss. Joining me this afternoon from Park City Group is Randy Fields, Chairman and CEO.

Before we begin, let me remind you that the information presented and discussed today includes forward-looking statements which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our SEC filings.

Today's call is being recorded and archived. A replay of the call will be available on the investor relations section of the Park City Group website, www.ParkCityGroup.com. After his remarks, Randy will open up the call for your questions.

Now, it's my pleasure to turn the call over to Randy Fields, Chief Executive Officer.

Thank you, Terri, good afternoon, everybody and welcome to our second-quarter results conference call. I want to thank all of you for taking a few minutes out today. We won't keep you long. And by now, hopefully you've had a chance to review the Q2 results from our Form 8-K and the news release that we issued yesterday, but rather than review those numbers again, I would be happy to address any specific questions you have in the Q&A portion of the call.

Hopefully you are also aware that we have now completed the merger with Prescient Applied Intelligence; that closed on January 13, and I think our time is best spent today focusing on what we are going to refer to as the new Park City Group, the incredible opportunities that we see ahead, and frankly how we plan to capitalize them.

I wanted to clarify a point in our press release. You should keep in mind that we could not yet present the Q2 results on a fully consolidated pro forma basis, as the merger really closed just a few days after the end of the second calendar -- second fiscal quarter of our year. And we've previously stated that amongst many of the benefits that resulted from the merger would be the fact that if we combined on a calendar basis Park City Group's annual revenues of $3.3 million with the Prescient annual calendar revenues of $9 million, total revenues for the 12 months would increase to the $12 million mark.

We have in fact begun operating now on a consolidated basis. We have a clear view of our sales mix and have realized about $3.4 million of the $4 million annual identified cost reductions that we anticipated as a result of concluding the merger. We expect that our fiscal year 2010, which will begin July of 2009, will be one filled with very significant upside potential based on the new product offerings that have come about as a result of the acquisition of Prescient.

We expect to be EBITDA-positive beginning with the June quarter, and significant EBITDA growth commencing sequentially with the September '09 quarter. We are consolidating our product offerings; we are sunsetting several of the licensed products that we've had in our portfolio that now, if they cannot be sold on primarily a subscription basis, will cease to be part of our going-forward mix.

In the short-term, as we rationalize that, obviously, our top line will be slightly negatively impacted, but obviously this positions us for redirecting our resources toward the primary area of focus, which is the new Park City Group, and in fact the successor product to the scan-based trading platform that we acquired as part of the Prescient acquisition.

What we have created is a new, fully integrated, high-visibility platform that in a certain sense allows many retailers and suppliers to behave in the same way from a relationship perspective, as Wal-Mart does with its suppliers. I would like you to think of it as a hub and spoke system, in which a retailer or a wholesaler shares information through our platform with the suppliers, and the suppliers in turn keep ownership of the inventory until it's either received at a retail store or sold in a retail store. This gives the supply chain the most complete visibility that's ever been available before. In fact, it exceeds what Wal-Mart is able to provide to its suppliers.

Each hub and spoke has a buildout period lasting several years, and our revenues per hub can rise from typically, say, for the sake of analytics, assume about $100,000 of revenue for a hub in year one while it's nascent and the on-boarding process begins of the spokes, to well in excess of $1 million a year for each hub and spoke by the end of year three.

These hubs become, if you think about it, the environment for the sales not just of the legacy scan-based trading platform that we acquired as part of the Prescient acquisition, but the greatly expanded joint offering of our two combined businesses. The impact to the hub center is profound in terms of economics. The hub, meaning the retailer or the wholesaler, will experience substantially reduced inventory, reduced credit requirement and interest cost, at the same time increased sales.

The impact to the supplier spokes of the hub are equally profound. Substantially better visibility, from the point of sale all the way back to the factory floor is the goal, with therefore much greater control over the supply chain that as a manufacturer one has to manage, and the opportunity for substantially increased sales.

As a hub matures, we have the opportunity to sell our additional products, such as Supply Chain Profit Link that we've talked about before, store-level replenishment, vendor-managed inventory, and a variety of other possible add-ons to the hub participants.

From a looking-forward perspective, in terms of a goal, we have a goal to build a $25 million revenue company in the next several years. I believe that that is a reasonable and achievable goal, based on the idea of adding a reasonable number of hubs in each of the next several fiscal years.

In terms of milestones to be looking for, we would hope to have three hubs either signed or in the process of actual on-boarding before the end of the current quarter ending in March, and the addition of six hubs in total by December of this year, the end of a calendar year.

Interesting to note that this is a result of a substantial change in direction for the company we acquired, Prescient, in view of the fact that indeed they have not on-boarded and acquired a new hub in the last several years, prior to the acquisition. So that gives us a great deal of confirmation that the acquisition was a sound one. We've spent the last several months busily rationalizing costs, personnel, etc., run rate. We've been very successful at achieving those goals. We have simultaneously completely revamped the product offering, the products that we will sunset, the products that we'll go forward with. We've repositioned and branded those products, and we've begun to cross-sell them into our mutual customer set.

A few interesting I think data points to consider. For example, the combined company now -- the combination of the Prescient and Park City Group customer set -- gives us tremendous market branding strength. For example, we can now say that 10 of the top 10 US retailers in the food area do business with us, and hundreds of suppliers use us as their platform for doing business.

From a going-forward perspective as we now consolidate the concept of hub and spoke, we would anticipate to see very significant growth and I think that the benefit to our shareholders will shortly be obvious.

From where we are at this point, we do not anticipate the need for any additional equity financing, and we are quite comfortable that the next several years will be very good to us.

That's really the end of my prepared comments. So at this point, from a summary perspective I see before me a viable company, generating cash flow with all the tools necessary to become a major player in the retailing industry. We believe this concept of allowing suppliers to have visibility from the point of sale system back to their factory floor, being in control of their inventories and retailers participating in the growth of the sales that are caused by that level of control and visibility, is a market-changing mechanism. It is, we believe, literally inevitable and we want to have the first-mover advantage and grow our Company as a result.

So at that point, let me open it up for questions. And I'll be happy to answer anything that you would ask.

(Operator Instructions) Howard Halpern, Taglich Brothers Inc.

Good afternoon, Randy. I guess let's start at the point of the acquisition. How many hubs did you have at the start?

Well, the way we currently define a hub, there was really kind of a handful. There was a mixed set of products in Prescient and -- because as you know Prescient itself was the product of an acquisition or two.

So the way we would today define a hub, there's really I think certainly well under 10 hubs, I think just five to seven hubs, as we would define them.

Okay, and did you have to like -- are you in the process of repricing them or rejuvenating them? Because you talked about I guess the $100,000 for like the first year or so. I guess my question is, how mature are they or are you just going to try to revitalize them?

I don't want to get into too much detail, mostly to avoid confusion, but the world has thought of scan-based trading as a technique purely between companies that do direct store delivery, and retail. In other words, if you have a product and you take it directly to the retail store, then you are a candidate for scan-based trading.

That's the way Prescient designed its system, and that's the way the world has thought about scan-based trading.

We ask the obvious question -- why would you only do vendors that could deliver to the store? Why wouldn't you open it up to vendors that deliver to the warehouse? And that was the big idea.

And once you get to that, then you could ask the question, well why would it just be done between a retailer and suppliers? Why couldn't it be done between a wholesaler and suppliers? So the world literally changed.

So we have invented an idea, if you will. We have the technology to execute against the idea, and we have begun to introduce the idea. We are adding hubs, both under the old idea of just doing it with their scan-based trading partners as a retailer, but now we are expanding that vision to our existing hubs to get them to catch the vision of doing it on the wholesale or warehouse-based scan-based trading.

Okay. I guess now in terms of forward-looking, when you talk about three hubs coming up and then another three coming on, if we just look at the new way to look at it, how many or -- you know, you have a hub but is it merely an infinite number of spokes that can go to that hub, and can you cross-pollinate hubs?

Excellent, but you always ask these questions -- very good, okay. Let me answer the second one first.

Cross-pollination as it occurs, meaning will a supplier take you to another hub because he likes the ability to control his inventory, have visibility, reduces out of stocks, etc.? Absolutely. Absolutely, and we have experienced that, where suppliers are saying, I really like this idea; I've got another retailer that I want to take you to. So if that's what you mean by cross-pollination, yes, but there's a secondary effect.

The start-up period with a hub and a spoke -- meaning, the supplier -- has a certain amount to do with the technological infrastructure; in other words, exchanging data, synchronizing and so on and so forth. Once you've connected to a spoke once, the second time is easier -- and so on and so forth.

So we begin to gain time efficiencies and ramp-up efficiencies as the hub and spoke system builds itself out. So absolutely, that's the case.

Now, I think the way I would want to think about the business going forward, without giving you too detailed a road map, is you ought to think about just our existing base business and call it a run rate of -- pick a number -- let's say $10 million a year, ex-licensing, pretty much ex-licensing; $9.5 million, $10 million a year. And I would just sort of say that's the base, and that will continue to run and grow somewhat as they add things to the existing base.

Now, the growth of the company is going to come primarily from the addition of these new hubs. And sometimes a new hub will be literally a new hub, and sometimes it will come from re-energizing one of the existing hubs. And when one of those new hubs is added, the first year depending on when during the year, but on an annualized rate it will add about $100,000 of revenue. By the second year, that number should be in the multiple hundreds of thousands, and by the third year on a run-rate basis outgoing should be north of $1 million a year.

Now then the other question I think was -- how many suppliers or spokes can there be within a hub?

Right.

At this point, our approach to the market is to say, look, let's take all new products only. Let's take slow-moving products. In other words, we are chewing our way up the supply chain. But we would assume a typical retailer or a wholesaler is going to have a few hundred suppliers that would qualify as viable spokes, the way we currently define the market.

Right.

I think as time goes on, that number -- remember, it's not unusual for a wholesaler or a retailer to have several thousand suppliers. So at this point we're just making the assumption for our sake, just a few hundred per hub.

Okay, and I guess then the next question would be, in terms of the revenue recognition (multiple speakers) --

Okay, good -- let me get to that. It's very similar to how we're doing it now.

Each supplier, by the way -- so you can, if you want to model it -- each supplier, you can say anticipates paying us about $750 to $1000 a month. That's all they pay.

Now, there is going to be a revenue sharing with the retailer, so eventually the cost to the retailer or the wholesaler is zero. So there will be a give-back. So you can see as we ramp up from 25 to 50, 100, 200 suppliers, at $750 to $1000 a month, which is not very much money, suddenly the numbers start to be very interesting.

The recognition is as a subscription. We are doing a great deal to move the licensing to subscription where we can. For example, in the current quarter we were able to do a Fresh Market Manager, one of our legacy products, as an ASP or software as a service. Obviously that impacts the top line, because we lost a few hundred thousand dollars of potential license, but now we'll end up with $60,000-$70,000 a year and growing, of subscription revenue.

So these subscriptions get recognized on a monthly basis. Some may be prepaid for a few months in advance, but they will all look like monthly revenue recognitions. So the $100,000 a year is $8000 a month, plus change.

Okay. And is what now might become a little more lumpy would be the professional services in getting a hub up and running, or --?

To a certain extent, yes, and we are still unfortunately going to have some lumpiness in licensing where we simply can't get the purchasing party to shift to a subscription, we still have a number of large international customers that only license from us. So there will still be the cases, there will be some lumpiness from licensing.

Professional services tends to be reasonably smooth, and it ought to go up proportionately as we do these on-boardings of the hubs.

Okay, and maintenance and support, that should stay in proportion I guess to the (multiple speakers) --

Yes, exactly, you've got it right.

Okay. And then I guess, you talked about being EBITDA-positive, but how quickly, at what point --? Is it three quarters out, or two quarters out, to get that to that 15% of revenues?

Not very far away.

Okay, so --.

Certainly, we anticipate that within the next fiscal year, the 2010 fiscal year.

Okay. And --

I think it's important to appreciate, from how you would look at this -- as you run your numbers, what you'll see is that the buildout comes very quickly and the margins start to expand. So from a goal respective and from a disappointment perspective, I would be disappointed if we achieve our goal of $25 million to revenue and EBITDA was a mere 15%. I don't anticipate that would be the case at all.

And I guess one last question if you have the answer -- how many warehouses or wholesale operations are there out there, so to give an idea of maybe the potential market size?

Well, if we just said grocery, there's probably 35 or 40 wholesalers, that have the scale that would be appropriate. We are extremely well connected into the wholesaler community.

On the retail side, there are probably -- I'm going to guess 70 to 100 chains that certainly would qualify for this.

We've already created one relationship with one of the largest wholesalers in the world, that is taking our scan-based trading product and reselling it to its retail customers, which is in itself interesting.

So the market receptivity to this has been much better than we imagined. We hired an individual by the name of Mark Deuschle to run the sales and marketing organization. Mark officially began January 1. Much of what I've talked about is his creation. He comes from the greeting card industry on the consumer packaged goods side, which has done scan-based trading for many, many, many years. So he knows the ins and outs, the why's and why-not's, and is an extraordinary talent. We are honored to have him here.

We've made a number of calls on people to test the idea, and the receptivity is exceptionally good.

Now, having said that's the size in supermarkets, we're also going to test the idea with some specialty retailers. So you could have a specialty retailer with a number of 100 stores, and you can see that why wouldn't they want to move the inventory off their books and have better sales at the same time because their suppliers can now get visibility to where the out-of-stocks are occurring?

In fact, think of it this way. If you were a supplier in today's world where retailers are at some level distressed, and you are concerned about, well, should I ship to him? What if he can't pay me? Well, there's many retailers of size where you can't get credit insurance. You can't get your accounts receivable insured.

So now, do you walk away from the account? Well, with our technology and concept of scan-based trading, you can maintain a UCC ownership of that inventory in the retailer. So if something does happen to the retailer, you don't have to go through the same sort of problematic situation that would occur if you had sold it to him and didn't get paid. You own the inventory; go get it.

So there's actually some very interesting reasons in the current environment. And look, it makes me uncomfortable to say this, but it's in fact true -- to a great extent the current environment of credit, of uncertainty, causes people to want to lean out their inventories. That's driving up out-of-stocks; that's hurting sales.

So a solution that allows visibility so that you don't miss the sales -- at the same time, you get to shift the inventory burden -- is very attractive to a retailer. It's very attractive to a wholesaler.

One of the other major problems that has occurred here in the last 12 months, that we are finding of which we are a beneficiary, is the fact that wholesalers have on the one hand the problem of the leaned out supply chain back to their manufacturer-suppliers. So let's say the maker of some laundry soap who used to be able to predict with certainty what date you would receive a shipment, and the amount that would be in that shipment, is becoming less predictable because their supply chain is less predictable.

So the result is, wholesalers have involuntarily had to increase their buffer stock in the last 12 months. They would love to offload that. So the market receptivity of the idea is fabulous right now, thank you.

Okay, well keep up the good work in redesigning it and moving forward.

Oh yes. It's very exciting times, very exciting times.

Okay, thanks.

(Operator Instructions) And Mr. Fields, it seems that there are no more questions. I will turn the floor back to you for closing comments.

Okay. Well, I want to thank all of you for taking a few minutes out today, and we are, as you can tell, feeling very good about the completion of the acquisition and the integration that's taken place. And I think you'll see from us in the next year, a complete redirection for the new Park City Group.

So we are optimistic and feeling good, and hopefully if you have any questions or concerns, feel free to contact me or contact Terri MacInnis.

Terri, back to you.

That concludes our call.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.