Park City Group Inc (PCYG) 2009 Q3 法說會逐字稿

Greetings, and welcome to the Park City Group third quarter results conference call. At this time, all participants are in a listen-only mode. A 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, Ms. Terri MacInnis, Director of Investor Relations for Park City Group. Thank you, Ms. MacInnis, you may begin.

Thank you. Good afternoon, everyone. As Director of Investor Relations at Bibicoff and MacInnis, I am pleased to welcome you to our discussion of Park City Group's financial results for the third fiscal quarter ended March, 2009.

Joining me this afternoon from Park City Group is Randy Fields, Chairman and CEO, and John Merrill, Chief Financial Officer.

Before we begin, I remind you that the information presented and discussed today includes forward-looking statements, which may cause Park City Group's actual results in future periods to be materially different from any future performance that may be suggested in this earnings release and call, and are therefore 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 the Company's 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 web site, www.parkcitygroup.com. After Randy and John conclude their 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. I want to thank everybody for taking their time this afternoon to spend a few minutes with us to review the Q3 results.

Hopefully you have all had a chance either to review the Q that was filed with the SEC, or a recent 8(K) that we filed detailing our future view, or if not any of those things, perhaps the news release that came out this morning. I assume you have to have, otherwise you wouldn't have known the phone number to call. So I'll make that assumption.

What we are going to do is to spend a few minutes giving you an overview about the business, for those of you who are new to what we do.

John is then going to take you into a little bit of detail in terms of the results for the quarter, and exactly the reason that we are also giving you some guidance that relates to a non-GAAP presentation of our EBITDA performance. And why in fact, we think it's important for you to see the numbers in addition to GAAP in this fashion, and we will be doing this for at least the next five quarters, while the comparisons become more accurate in terms of year over year.

When John has concluded his discussion, I'll come back and give you perhaps a little bit of a view as to how the business is doing currently.

So let's go back to the business world in which we operate. I'd like, if I could, to position the kind of environment that we are facing, because our customers are indeed feeling some very, very interesting pressures. And I think to the extent that you understand the pressures in the world in which we operate, understanding why we are doing well and expect to be doing that on a going forward basis, I think will be very helpful.

Retail is a burning platform, and we serve retailers. It's a burning platform for a variety of reasons, but if you were to look at the close-in financial reasons, you can tell that on balance, many retailers have pretty highly leveraged balance sheets.

As a result, and especially given the consumer shift from wants to needs in the current recession, increasingly retailers are trying to lean out their inventories. When retailers lean out their inventories, and you go in the store as a consumer, what you increasingly find are out of stocks. Out of stocks mean less sales.

In addition to that as a problem for retailers and their suppliers, there is an enormous shift, as I'm sure you have heard about, for private labeling on the part of retailers, which is increasing the pressure on the suppliers that are serving retailers, as they are losing market share to the retailers' own house brands.

When you put all of these things together, we are finding that there's an increasingly adversarial relationship between suppliers and retailers. It's into that relationship that we are inserting Park City Group, and the products that we call, consumer driven sales optimization.

What we are doing at the Company is recognizing that those pressures are not just real but are accelerating, and are likely to continue into the future. And as a result, that's creating an enormous shift in the marketplace, in terms of the dynamics between suppliers and the retailers that they serve.

There are two elements, two primary elements to keep in mind, in terms of the products that we offer and the service that we offer. Two critical elements to this idea that we call, consumer driven sales optimization.

Number one, it's our goal to provide a completely unobstructed view from the point-of-sale device of the retailer, all the way back to the factory floor of the supplier. And we think that the benefits of providing that unobstructed view are clear and obvious.

At the same time, we are going to accelerate the supply chain alignment, if you will, by being sure that the retailer and his suppliers have an alignment of their financial interests. In other words, instead of suppliers selling to retailers, as is often the case now, we want them to start thinking in terms of selling through retailers.

So, to accomplish this as a mission, to make this idea of consumer driven sales optimization ubiquitous, what we are doing is not just offering a technology, we are not a software company, per se. We are actually offering a new business process to the retailing and supplier community. We are doing this through, and I'll come back to it in a few minutes, a concept that we call hub and spokes, which is comprised of a retailer in the center as the hub, and the spokes the suppliers to that retailer as the balance of the economic equation.

Simply put, it is the goal of Park City Group for its customers to turn information into cash and increased sales. Who are we? I think if you were to go to our web site and learn a little bit more about us, you would find that we currently serve in some form or another, ten of the top ten grocery retailers in the United States, the nations's six largest bakeries, four of the six largest dairies in the US.

Our scan based trading platform processes nearly $2 billion a year of transactions. And we have nearly 1,000 trading relationships servicing more than 300 distribution centers, and about 35,000 retail locations for which we provide information on nearly a daily basis.

If you were to examine the 8(K) that we published, I think now two to three weeks ago, it is our goal to achieve $1 a share in earnings within the next three fiscal years. And we recognize that that is an ambitious goal. We clearly have a plan to get there, and hopefully you will find that the third quarter results support the conclusion that we have a nice start to that ambition.

When we provide consumer driven sales optimization to a retailer and the retailer's suppliers, there are benefits to both sides of the trading equation, and it's from that economic value that the retailer is getting and his suppliers are getting, that we derive our economic benefit. In other words, as we help the hub and spoke improve its profitability, we do better as a business.

The benefits specifically to the retailer are, substantially reduced inventories, that means more cash, less debt, increased sales, reduced out of stocks, and labor savings.

From the supplier's perspective when you think about benefits, they also have a number of benefits that enure to their side of the equation, improved sales are critical, reduced financial risk from retailer failures with our consumer driven sales optimization. A supplier in many cases is able to maintain actual ownership of the inventory until it's sold, and that reduces his financial risk given the current concerns that people have about many retailers.

There is much better visibility from the consumer perspective, all the way back to his factory floor, which enables him to better plan from a demand perspective his business, and how he's going to respond to the changes in the marketplace. The competitive advantages that we bring, we have a patented, we believe one of a kind technology platform that enables us to do it. The company that we acquired, Prescient Applied Technology, has in excess of $100 million of investment to develop the technology platform that we acquired when we closed on the acquisition of the business in January of this year.

We have a superior Sales and Operational Management Team. As a team we have very, very deep experience in consumer packaged goods and retailing. We have a Board of Directors and a Senior Management Team with extremely good access to the key decision makers globally, in terms of retailing and consumer packaged goods.

I think if you were to summarize what I have just said, it's that clearly supply chain and inventory control issues are real. The pressures are increasing, and we believe so long as the economic environment remains as it's been, meaning more stringent credit conditions, more difficult, more sluggish economic environment, that plays to our advantage. It is increasing the interest in the marketplace in what we do.

We have developed a superb market reputation. I ask you to check with people that you may know in retailing. We are very well thought of as a trusted third party. We have proven solutions that have been developed over the course of many, many years, and we are very well thought of by our customer base.

In sum, I think you are going to see that beginning with the quarter we just finished, that we are on an aggressive plan. We are very comfortable at the moment with how the year is proceeding. As we mentioned in the press release, the quarter did exceed the guidance that we gave in the March conference call. We are still expecting the June year to be EBITDA break-even, although we will be reporting a negative net income for the year but EBITDA break-even.

We think that fiscal 2010 will be the financial break out year for us. It begins in July, where we will have not only positive EBITDA but we will also be experiencing positive net income. The early signs of that acceleration we think will be noted by some milestones that we will make you aware of, as we sign on additional hubs and spokes over the course of the coming year.

So with that, I am going to turn it over to John and let John speak to the Q3 results in more detail.

Thanks, Randy, and good afternoon, everyone. I will review our third quarter and year to date consolidated operating results for the Company, and the relevant factors relating to the Prescient merger. We will also comment on certain cash flow and balance sheet items.

Before I begin my discussion with the financial results, I believe it is important to speak to the presentation of Park City Group's third quarter results. It should be noted that the operating results as presented in our third quarter 10(Q), and the incorporated unaudited consolidated condensed financial statements for the three months ending March 31, 2009, contain the results of both Park City Group and Prescient Applied Intelligence, as a result of the merger that was completed on January 13, 2009.

It is also important to note that in accordance with generally accepted accounting principles, the results for the nine months ended March 31, 2009, and 2008, only include the combined results of Prescient and Park City Group for the three-month period March 31, 2009, and do not include the aggregated historical results as if the merger had been completed on July 1, 2008.

To reiterate, the nine months ending March 31, 2009, only includes the results of Prescient for January through March, not all nine months. I believe it is important to highlight that distinction to both the listener and reader of our 10(Q).

Also, on a going forward basis and as a result of the merger, the future operating results of Park City Group are likely to be different from historical operating results, and those differences will be material.

For the third quarter of fiscal 2009, the Company reported total revenues increased 118% to $2.503 million when compared with $1.150 million for the same period last year. The approximate $1.3 million increase in total revenue was largely due to the revenues contributed in conjunction with the Prescient merger. Total revenue in the comparable quarter in 2008 also included a $700,000 license sale that did not occur in the same quarter ending March 31, 2009.

Fiscal 2009 year to date total revenues increased 40% to $3.49 million when compared with approximately $2.5 million for the same period of fiscal 2009. Once again, I believe it is important to point out that the nine-month revenue results only include three months of legacy Prescient fiscal 2009 operating activities.

Okay, now shifting to operating expenses for Q3 and the nine months, the third quarter of fiscal 2009 the Company reported total operating expenses increased 134% to $4.08 million when compared with $1.74 million for the same period last year. The approximate $2.3 million increase in total operating expenses was principally due to the Prescient merger and a $1.15 million non-cash impairment charge for certain software that the Company acquired, and a $300,000 non-cash impairment charge for other software Park City Group developed internally.

The resulting impairment charge was measured on the basis of the comparison of estimated fair value, the corresponding book values, and relates exclusively to software recorded in connection with our acquisition of Prescient. These fair values were determined in accordance with the Company policies, as well as FAS 142 and other relevant guidance.

Year to date total operating expenses as reported increased 28% to $6.85 million when compared with $5.35 million reported for the same period in fiscal 2008. This $1.5 million increase in total operating expenses was principally due to cost of services and product support in conjunction with the Prescient merger, impairment charges, and higher depreciation and amortization. This was partially offset due to the elimination of redundant administrative personnel and other costs in rationalizing the combined Company's products and services.

Net interest expense for the third quarter increased to $257,000 from interest income of $3,000 for the same period in 2008. The increase in interest expense was principally due to debt financing in connection with the Prescient merger.

The Company's long-term debt as of March 31, 2009, was approximately $5.6 million, and it's comprised of a $2.8 million line of credit, $1.5 million in unsecured loans, and $1.2 million in loans provided by certain officers and directors in order to finance the merger. Interest rates on these obligations range from 7% to 12%, and have between a one and two and a half year term to maturity.

Shifting to EBITDA for the moment, adjusted for the non-recurring costs and charges the Company incurred in connection with the merger, including the impairment charge to software, consolidated earnings before interest, taxes, depreciation and amortization, or more commonly referred to as EBITDA, increased to $213,000 for the third quarter of 2009. The increase, when compared with the $422,000 EBITDA loss for the same period of 2008, is largely the result of operating efficiencies realized during the quarter, primarily through the rationalizing of products, personnel and other corporate spending.

As Randy mentioned earlier, this achievement of positive EBITDA also exceeded the guidance provided in our second quarter earnings conference call. Year to date pro forma adjusted EBITDA, which considers the results of operations as if the two companies were combined as of July 1, 2008, was positive $24,000 for the nine months 2009 when compared with an EBITDA loss of $160,000 for the nine months ending in 2008.

Let me take a moment to expand on the Company's belief on using EBITDA as an added metric to supplement the traditional GAAP measurements. The Company and Management believe that providing both GAAP and adjusted non-GAAP measures of its performance will provide meaningful, supplemental information regarding its operational effectiveness, and to enhance investors' overall understanding of the Company's current financial performance and prospects for the future.

Management believes that investors benefit from seeing its results through the eyes of Management, in addition to the GAAP presentation. It is Management's belief that while not in accordance with, or an alternative for GAAP, the adjusted information allows for greater transparency to supplement information used by management in its financial and operational decision making.

The adjusted information excludes items such as amortization of intangible assets, impairment charges, depreciation, charges to consolidate and integrate recently acquired businesses, and non-cash stock based compensation, and other non-cash charges that may have a material effect on the Company's net income and net income per share in accordance with GAAP. Management monitors these items to ensure that expenses are in line with expectations, and that its GAAP results are correctly stated, but does not use them to measure the ongoing bottom line operating performance of the Company.

Furthermore, the non-GAAP or adjusted information provided by the Company may be different from the non-GAAP or adjusted information provided by other companies. A reconciliation of the non-GAAP financial measure to the comparable GAAP financial measures is available on the Company's home page at www.parkcitygroup.com, by selecting reconciliation of non-GAAP financial measures under the Company tab.

On a GAAP basis, the Company reported a net loss for third quarter of fiscal 2009 of $2.035 million, or a loss of $0.21 per common share when compared with a reported net loss of $290,000 in the same quarter 2008, or a $0.03 loss per common share.

Some other key highlights as of March 31, 2009, are as follows. We had cash on hand of $1.1 million, cash used in operations year to date decreased by $2.2 million when compared to the prior year. Year to date, the Company has generated positive net cash flows of $241,000 when compared with a decrease in cash of approximately $2.5 million in 2008.

At this point, I would like to turn the call back over to Randy.

Thank you, John. Okay. I think that gives you a good summary of the business, not just Q3 but the sense that we have.

I think the key points here to remember are, number one, the marketplace for us right now is excellent. The kinds of economic pressures that we read about every day in the financial press are currently working to our advantage. We feel very good about the quarter that we have just finished, and obviously we have a degree of confidence in terms of the goals that we have set out to achieve, $1 a share of earnings within the next three fiscal years.

So with that, let's open it up to some questions, and let's see if we can give you some answers.

Thank you, Mr. Fields. (Operator Instructions). Our first question comes from the line of Howard Halpern from Taglich Brothers. Please proceed with your question.

Congratulations on the quarter, Randy.

Thank you.

I just want to make one, to clarify something, when you said EBITDA break-even or better. That's on the pro forma combined of the Company?

That's correct.

Okay. Just wanted to make sure on that.

I guess you described, with the transition, how long the introductory period is taking to create the hub and spoke compared to the prior supply chain (inaudible) link module.

You mean the sales cycle?

The sales cycle gathering the information, is it similar to that cycle or is it a little bit more efficient?

I think the answer is, the sales cycle is at this point I think we will have better measures here by the end of July or August as we add more hubs, but I would say right now our sales cycle seems to be somewhere in the four to six months range.

In terms of getting the data, is now, has been, is now and will be an issue. The reason that we have a business in the fence is that it's actually a matter that retailers don't have information at their fingertips, as Bill Gates would have liked to have seen it. It does take some number of weeks or months to get the data flowing the way we would like it to flow.

Are you, because you mentioned during the second quarter conference call, and let me get it correct, that you were going to sign on board or commence operations of three hubs. Has that goal been met.

I think what I said, to clarify was, I would be happy, we had a goal in the calendar year of six, and that before the new fiscal year began we wanted to have a total of three new ones.

Okay.

And we've done two so far. So I would say we are on track for both of those goals.

And the two new hubs, have they just signed on or have they actually paid the first, how the cycle is going to work.

They've both signed on and they are both in the process of a paid implementation, that's correct.

Okay, so that means based on the 8(K), and now that, you'll have I guess eight hubs going forward very shortly, then.

Yes, I think there's one that we would call a hub that's slightly not conventional, which would make it nine, but eight or nine.

We are really going to have two kinds of hubs going forward. I don't want to create too much confusion, so we will talk in terms of average hub, but there will be hubs that just do what's called scan based trading, based on direct store delivery suppliers. Those will be smaller.

And then we will have the expanded hubs, which will do not only scan based trading based on direct store delivery, but on wholesale deliveries as well. They will be much larger.

So, I think at this point we have to pick sort of a mid point in terms of a hub value, we think we've done that, some mix between small and large.

Getting back to maybe, what the upcoming fourth quarter, is there any seasonality with the Prescient part of the business that might not be as strong as the third quarter, or is that --

No, the business now is not terribly seasonal. It's pretty flat all year. That's one of the advantages. It's highly predictable because of the recurring revenue stream. So there's not a lot of seasonality.

And I guess two final questions, one on how cloud computing's going to help you moving forward, and two, how are you, because there's such a pressing need out there, how are you getting the word out?

I'm glad you picked up the cloud computing thing. It's actually going to be a topic here in a Board meeting shortly.

We are very good, I'm extraordinarily proud of our technology teams, and we have been working with the idea of cloud computing now for a bit. And it absolutely, without a doubt, has application to a number of the things that we are doing.

The advantage to us is that it would allow us the way we intend to use it, to scale very quickly without a lot of capital expenditure, and it's highly variable. So frequently, if you think about how we get data, Howard, when we are bringing on a new customer we might have an enormous, hundreds of millions of records to get them started as we go back to look at their transactional history, and then that quickly widdles itself down to a smaller number on a daily basis.

And the obvious problem from a CapEX perspective capacity is, how do you have your capacity expand and contract so as to accommodate that peak load kinds of issue, and cloud computing is just built for that. So we are, our advanced systems team is actually in the process of doing some stuff in the cloud, as we call it here, and to create a verbal we are cloudizing several of our applications. And unless we find significant problems with the concept of cloud, which can either be cost or could be just workability, we will in fact be increasing our reliance on the cloud going forward.

In terms of how we are getting the word out, our vision of consumer driven sales optimization is a senior level business issue. When you are talking about the balance sheet of a major retailer, and moving 20% to 30% of the inventory off of his books, when you are talking about increasing sales 3% to 10%, you've got to be talking to the CEO, COO, senior merchant, one of the C level executives.

So rather than try and chew our way up from lower levels of the organization, we prefer to call at the most senior level, and we do that through contacts with members of our Boards of Directors and Management Teams, who are as I mentioned, very well connected in retail.

So our pipeline right now is excellent. We are going to bring our new hubs on slowly at first, frankly, to be sure that we execute properly. I'm as proud as a parent over our ability to execute extremely well. That's why both Prescient and Park City Group have such great market reputations is that we care about our customers first and foremost. So, subordinate to, the fact is, the quality of what we do is more important than the quantity of what we do.

So we are going to bring them on relatively slowly in the next three to six months, as we scale things up. We've already signed more new, in current fiscal year, more new hubs than the Company that we acquired Prescient had done in the previous four years.

So we are, our foot is on the accelerator. We are being gentle, but most important thing is that our customers think of us as fabulous business partners.

Okay, well, keep up the good work.

Thanks, Howard.

Our next question comes from the line of Mike Taglich from Taglich Brothers. Please proceed with your question.

Hi, Randy, it's Mike Taglich. Congratulations on your first EBITDA positive quarter.

Great, thank you, sir.

Would, you're halfway into Q4, you want to give some guidance in the quarter from an EBITDA standpoint?

Let's just say that when we said the year would be a positive EBITDA on a pro forma consolidated basis, I'd rather that the listener and reader put together his own numbers. We are still comfortable with that. We feel very good about the quarter that we are in. So I think it's reasonable to assume that we are going to have a good quarter.

All right. Thanks.

(Operator Instructions). Our next question comes from the line of Richard Dernley from Long Port Partners. Please proceed with your question.

Good afternoon. Did you say your debt was something over $5 million.

The long-term debt, that's correct.

Yes.

And what's the short term debt.

We have short term debt of about $2 million.

And a line of credit of 700.

I see, and, well, if you annualize your quarterly interest, which is a little over $1 million, that would suggest an interest rate and about 14%. You said your interest rate was, ran from I think it was five--.

To 12.

To 12. Okay.

There's some fees and things that affected that slightly, but--.

I see. I'm obviously unfamiliar with your company. What's the nature and terms of the preferred?

It's a convertible preferred, and rather than get into the details of it, it's convertible at three. It has a 5% pick coupon, but I think if you check our 10(K), our last 10(K), it will give you any additional details you might need.

Okay, thank you.

It's non-trading, incidentally. It was a private placement.

Our next question comes from the line of Neil Goldman with Goldman Capital Management. Please proceed with your question.

Two questions, one, that dollar three years out, I assume that's pre-tax.

Correct.

And number two, based on your goals, at what point would you be able to pay off entirely your debt, both the short and long-term?

Well, if we achieve the goal, the debt will be retired before we've achieved the full dollar pre-tax. We have a substantial NOL, so we are not a taxpayer for some period of time. So as a result for us the odds of retiring the debt if we achieve the goal that we've laid out, is exceptionally good.

Okay. Thank you.

You bet.

There are no other questions in the queue. I would like to hand it back over to Mr. Fields for closing comments.

Again, I just want to thank everybody for taking their time this afternoon. Hopefully we've given you some encouragement to follow us, and I can tell you that, for certain, that the Management Team and the Board are not just highly committed, but the fact is that we are very well focused and in the process of building what I think will be a superb operating machine to achieve these financial objectives.

So, thank all of you for spending the time this afternoon. Hopefully you will be on next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.