Park City Group Inc (PCYG) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Park City earnings conference call. My name is Alicia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards 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 your host for today's call, Mr. Neal Goldner of Darrow Associates. Please proceed, sir.

Thank you, Alicia, and good morning. I'm Neal Goldner of Darrow Associates, and I welcome you to Park City Group's fiscal 2009 financial results conference call. Those who have not had a chance to review the earnings release and 10-K, they are posted and can be viewed on the Company's website at www.parkcitygroup.com. On the call with me are Randy Fields, Chairman and Chief Executive Officer of Park City Group, and John Merrill, Chief Financial Officer. Management will review the financial results and other recent developments in their formal remarks. The formal portion of the presentation will be followed by a question and answer session.

Before we proceed with the formal remarks, please advise that statements made during this presentation that are not historical facts are forward-looking statements for purposes of Safe Harbor Provisions under the Private Securities Litigation Act of 1995. These statements may include or not limited to revenue and earnings projections, statements of business plans and objectives, product development, and time to market issues, and capital structure and other financial matters. Forward-looking statements may differ from actual results and relying on these is subject to risk. Factors causing forward-looking statements and a statement to differ from this presentation, to differ from results are discussed in the Company's Form 10-K and 10-Q filings filed with the Securities and Exchange Commission. The Company is not obligated to update forward-looking statements.

With that, I will now turn the call over to Mr. Randy Fields. Randy?

Good morning, everybody. Thanks for taking the time with us this morning. I have with me John Merrill, who is our Chief Financial Officer. John is going to spend the first few minutes of this call discussing last year's results on both the GAAP and the proforma basis. I think that's going to give you a lot of insights into the year we just finished. He'll turn it back to me and I think I'll spend the bulk of my time talking about the year that we're currently in, fiscal year 2010. If you would, make a note of your questions and then we'll take questions at the end of our presentation. John?

Thanks, Randy, and good morning, everyone. Fiscal 2009 was truly a milestone year for the Company. It was a game-changing year for the Company in executing our strategic initiatives on the acquisition of Prescient. It also is a barometer and preliminary insight for fiscal 2010.

Before highlighting the financial results, I want to emphasize the key elements of our strategies with respect to the acquisition of Prescient Applied Intelligence. Our unrelenting theme in the execution of the Prescient acquisition plan was as follows. Number one, augment the depth and breadth of the legacy Park City Group product and service offerings on a recurring revenue basis more rapidly and more economically. Number two, evaluate, identify and expand untapped opportunities on Prescient's existing, and what we believe to be an undervalued 600-plus customer base of top tier household name customers. Number three, rationalize the products, service offerings, and personnel of the combined company. Number four, significantly reduce the general overhead expenses of the Company, the combined companies through the elimination of surplus facilities, terminating unnecessary maintenance and lease agreements, and considerable cost containment. Number five, pay down the debt incurred as a result of the acquisition.

If you would, allow me to digress for a moment. In the course of our due diligence, we identified significant opportunities in literally every area of our initial plan. Number one, we identified considerable revenue opportunity to cross sell both legacy companies' products and services across the combined customer base. Number two, we identified noteworthy product penetration opportunity on the legacy Prescient customer base to sell all of the existing products, not just a single solution. Number three, the combined company also gave rise to new revenue opportunities and enhancements to existing products, which the customers expect and will pay for. Number four, finally, in our due diligence process, there was a significant and quantifiable opportunity in cost containment.

Randy is best to speak to the product and services piece. However, with respect to cost containment, we've identified approximately $4.3 million of annual expense reductions in the combined entity, a 33% reduction to the total combined operating expenses of both companies. Since January, we have systematically and methodically reduced costs in literally every area of the Company, including personnel reductions, elimination of redundant facilities and data centers, capitalized on economies of scale benefits, and reduced public company costs, including duplicative or unnecessary spending. To date, the Company has achieved approximately $3.8 million in cash savings on an annualized basis. We also anticipate another $600,000 of annual savings that will be achieved starting September 1, 2009.

Turning to the GAAP financial results, revenues for the fiscal year ended June 30, 2009 increased to $5.9 million from $3.3 million in the comparable period last year, an increase of 78%. The $2.6 million increase in total revenue was largely due to the contribution of Prescient's total revenue since the merger was completed in January of 2009. Total revenue for 2008 fiscal year also included a $700,000 license sale that did not occur in the same period of fiscal 2009.

Before I continue with the discussion on the Company's financial results, as I stated in our previous call, it should be noted that the operating results as presented in our 10-K for the year ended June 30, 2009 contain the results of both Park City Group and Prescient as of January 13, 2009 and do not include the aggregated historical results of fiscal 2008. Therefore, in accordance with generally accepted accounting principles, or GAAP, the condensed consolidated financial statements only include the operating results of Prescient for January through June, not the full 12 months. I believe it is important to highlight that distinction to both the listener and reader of our 10-K.

Total operating expenses for the fiscal year ended June 30, 2009 increased to $9.3 million from $6.8 million in the comparable period last year, an increase of 37%. The increase was clearly due to the Prescient merger and a noncash impairment charge, which I discussed during our last quarterly earnings call. The impairment cost resulted in a $1.47 million noncash charge, or $0.15 per basic and diluted share charge for the year ended June 30, 2009. There was no additional impairment adjustment in the fourth quarter of fiscal 2009. The Company does not anticipate any impairment costs going forward at this time. The increase in total operating expenses also includes approximately $236,000 of acquisition-related costs that were not capitalized under GAAP.

Our interest costs increased to $505,000 for the year ended June 30, 2009. The increase in interest expense was principally due to debt financing in connection with the Prescient merger. Our listeners should note that the Company will issue an 8-K today with the Securities and Exchange Commission discussing the refinancing of two of its existing credit facilities. The combined credit facilities have a level term and a reduced interest rate, which are projected to be fully amortized and paid off by the relative due dates, or sooner in accordance with our pay-off debt strategy. In the next few months, the Company anticipates refinancing a significant portion of its debt that is anticipated to yield approximately $100,000 in reduced annual interest expense.

Shifting to EBITDA for a moment, adjusted for the nonrecurring 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 $357,000, surpassing our guidance for the full fiscal year 2009 on a proforma basis. The increase when compared with the $60,000 EBITDA loss for the same period in 2008 is largely the result of the accelerated operating initiatives implemented during the past year.

Let me take a moment to comment on the Company's belief on using EBITDA as an added metric to supplement the traditional GAAP measurements. The Company believes 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, supplemental 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 noncash stock-based compensation and other noncash 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 the 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 measures for the fiscal year of 2009 is available on the Company's website.

On a GAAP basis, the company reported a net loss for fiscal 2009 of $4.7 million, or a loss of $0.48 per common share compared with the reported net loss of $0.35 in the comparable period in 2008. Some other key highlights for the fiscal year ended June 30, 2009 are as follows. We had cash on hand of $656,000. The Company will not maintain significant cash balances as we pay down debt. Cash used in operations decreased by $2 million when compared to the prior year in 2008. Day sales outstanding, or the time in which the Company collects on its invoices, declined from 71 days in 2008 to 48 days in fiscal 2009. Head count has been reduced from 87 full-time employees to 67. And overall debt has been or is anticipated to be refinanced at favorable rates with a material reduction in interest costs.

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

Thank you, John. I'm going to speak to a few of the goals that we have for the fiscal year that we're currently in, fiscal year 2010, and perhaps add a little bit of color to some of the initiatives that John mentioned. For those of you who are not familiar, our basic business model and strategy involves what we call a hub and spoke system. In that case, the concept is really very simple, which is a retailer represents the hub, so as we add retailers, in our parlance, we would say we are adding hubs to our system. Each of the suppliers that works with that retailer is called a spoke. So there's hubs and spokes. We garner revenue from both the hub and the spoke in that system.

It's our goal in fiscal year 2010 to add seven new hubs in total. That will increase our total number of hubs very substantially. And currently our pipeline is such that we believe that that's quite achievable. The market reception to what we're doing in the current economic environment is very pleasing to us internally. Our sales and marketing organization has been augmented substantially with three new sales executives. We're proud to have those high-powered people on our team. I think they are finding, and our business is achieving, a market acceptance that exceeds what we anticipated some number of months ago.

The current economic environment with restrictive credit is certainly causing retailers to focus on their balance sheet. It plays to our strength, which is both improving the balance sheet of our retail hubs and at the same time providing significant increases to sales and margins for both retailers and suppliers.

We have in our pipeline the development of some additional product offerings that we think will broaden the appeal of what we're doing. Anticipate some kind of a pilot program with at least one of those significant new products in the course of the next two quarters.

I think another way of thinking about our goals for this year from an overall perspective, we certainly anticipate being positive cash flow to a very significant degree, hence the debt reduction strategy that John mentioned earlier, and perhaps most importantly, to you as investors, we will certainly be positive earnings per share in our current fiscal year. We don't anticipate any need for financing. We believe that our internal cash flows are adequate to amortize the debt very handily so that we see no need for equity financing at this stage of our development. The only possible change to that statement would be in the event of an acquisition. That perhaps would change our view of the need for financing.

I think that basically gives you a sense. We're excited, we're still in the process of rationalizing some of the process between the businesses. We're focused in terms of our ability to onboard our customers. I think it's critical to appreciate the fact that from a cultural perspective, we are obsessed with the quality of what we deliver to our customer base. And from an investor perspective, I hope you'll appreciate the fact that for us, quality comes before quantity. So we're currently limited in terms of the number of new hubs and spokes that we'll bring on in the course of the next year, and that limitation is not a market limitation from what we can see. That limitation is one that's based on our ability to bring each new customer on and have them thrilled with what it is the Park City Group is doing for them.

We have a tremendous market reputation. We're proud that the Prescient people that are part of the combined company now are extremely well thought of in the marketplace, just as Park City Group has been, and maintaining our customer reputation is absolutely paramount to our going-forward strategy. I think that over the course of the next several years, you'll see that this is the year we call it internally the year of the hub. We're aggressively adding hubs, as I mentioned. I think in the following fiscal year, you'll see that there will be an increased emphasis on bringing in new suppliers as spokes to the system, and that three years out, I think you'll see that we will be focused on broadening the number of products and services that we offer to the hubs and spokes that are then part of the network.

One of the more exciting things that we're seeing from a marketing perspective is that as we add additional hubs and retailers, we are becoming more attractive to suppliers as a mechanism for doing business with those retailers. Conversely, as we add more suppliers, we are seeing that the retailers are more interested in what we're doing. So there's a network effect in what we're doing and I think that the sales organization is doing a terrific job of creating the level of market awareness that we require.

So I think at that point, I'm going to wrap up and just say we feel terrific about where the business is, where it's going. I think you'll find that the recurring revenue stream that we have, that we've established as the base for the business here over the last couple of years, especially with the Prescient acquisition should provide a great deal of visibility to those of you who are Wall Street facing, if you will. I think you'll find that as you see how the hub and spoke model evolves, you will get very comfortable with your ability to, just as we can, see forward with the business.

So at that point, let's open it up to any questions that there might be.

(Operator Instructions) Your first question comes from Michael Fox from Fox City Capital. Please proceed.

Hi, Randy. How are you?

Good morning, Mike, how are you?

Good, thanks. Could you just remind us at the end of the quarter how many hubs you had currently.

The way we would describe the hub and spoke system, although we have a number of other retailers with whom we do business, in terms of the actual hub and spoke, it was about 11, I believe. I think we had 11 at the end of the last quarter.

Okay, great. Thanks a lot.

Your next question comes from [Gail Leetzow], please proceed.

Hello, Randy.

Good morning, Gail, how are you?

I think you guys are doing a fantastic job. I really enjoy working with you through my investment situation. I've been with you for several years, as a matter of fact. I just wondered, are we looking at, from the investor's standpoint, looking at moving further into the NASDAQ or into maybe even the New York exchange? And are mutual funds or any of those people able to be looking at us yet as possible investment for their portfolio?

Gail, great question. Thank you. I think that sometime during the current fiscal year, we are interested in obtaining a listing on the AMEX. I think our first step would be the AMEX, ultimately NASDAQ, and wouldn't it be wonderful if in the next few years we were also New York Stock Exchange listed. But first step is certainly AMEX. And we will do that in the course of this year. We'll certainly make application in the course of this fiscal year.

I think the question as to whether institutions can buy our stock, in general they can. I think the limitation is one of liquidity. We are focused on getting more Wall Street interests in what we're doing. I think as that happens, you'll see the liquidity naturally improve, more buyers and sellers. We know that that is an obstacle and are concerned about it and we're going to do whatever we have to do to improve that. So we do actually have a number of small micro cap hedge funds as investors, and I think over time, we expect to expand that. And I think once we've got an American Stock Exchange listing, interestingly, we'll probably attract more individual investors. So thanks for the loyalty, Gail, and we'll keep working hard here.

Thank you.

(Operator Instructions) Your next comes from Neal Goldman from Goldman Capital Management. Please proceed.

Hi, Randy.

Hi, Neal.

Could you give us what your goals are in terms of the revenues per hub and spoke type of situation going forward?

Do you mean total revenues for the business, or what a typical hub and spoke model should yield?

What a typical hub and spoke model should yield.

Yes. I'm going to give you the problem of averages here. We're currently bringing in relatively smaller hubs, and that's a deliberate strategy. And over the course of the remainder of the fiscal year, there will be an increase in the potential average size of those hubs. So if we take all of that into consideration and you look at the revenue from both the retail side, as well as the supplier side of the hub, I think it's pretty reasonable for us to assume in the first year that a hub should generate somewhere in the order of $100,000. We anticipate that in the second year, a hub is going to be somewhere between $250,000 and $350,000m if you want a range. And by the third and fourth year, we're talking about somewhere on the order of $500,000 to $600,000 as a possible range. I think if you use the lower end of those ranges, we should be okay. Over time, we would anticipate that the average size of a hub will increase as we increase the number of products sold into both the retailer and the supplier, and as we improve their profitability.

Historically, the results that we've obtained for both the retailer and the supplier are really, really remarkable. Remarkable to the extent that I think, and I could be wrong, but I believe we have seven additional retail hubs that have been brought to us by our supplier community because they have experienced the kinds of economic results with what we do, that they want to use this as a platform with other retailers. So I would say that those are pretty reasonable numbers to be using in terms of looking at the business going forward.

And you can see that what that does, and this is perhaps a bit difficult to visualize, in any given year, you have first year hubs, you have the prior year hubs that were signed at second year hubs, and you in theory, as we go further out in time, you now have third year hubs that were signed two years ago. So what you start to get is that rapid expansion of both revenue and margin as that happens since your costs are obviously not going up at the same rate that your revenue is. So you do get an exponential increase.

And your revenues per hub is tied to a commission based on each side, or how does that work?

Yes, in essence, we are being paid by both the retailer and by the suppliers. So ultimately, by far, the larger source of revenue in that hub and spoke system are the spokes, and there are many of those and only one on the retail side of it.

And every retail chain is considered one hub?

That's correct. A chain is considered a hub.

So whether it's one store or 50 stores, you are dealing with one hub for that particular retailer.

Exactly right, absolutely correct. We tend now, I think we have some hubs that will be on the order of 20 stores, that will be on the small side, all the way up to many thousands of stores. So there will certainly be a range and that's why the average hub size is a little difficult to gauge at this stage of the game.

Okay. Thank you very much, Randy.

There are no further questions in the queue. I would now like to turn the call over to Randy Fields for closing remarks.

Again, I appreciate everybody taking the time this morning. I think it's important to appreciate the milestone, as John pointed out, that we accomplished in the last 12 months. We certainly have done a job that we're proud of internally in terms of the integration of these two businesses. We now have a breadth of product offering that is unparalleled in the marketplace. There is no one else that can go from scan-based trading to the deep dive kinds of analytics to vendor-managed inventory, store level replenishment, demand planning and even line sequencing for manufacturers. So we now have an extremely broad footprint that creates a much larger market opportunity than either of these two companies had alone.

You'll see some very significant developments on the product side here over the next couple of years. We're excited about those opportunities. And I think from an investor perspective, it's most important to appreciate that this will be a year of positive earnings per share and significant positive cash flow. So we're excited about not just this year, but as we look out, we're building a foundation for what we hope will be a very exciting business for all of us as shareholders. You all know how to reach me, if there's any questions, feel free to ask. And I appreciate all of you, again, taking the time this morning. Thanks very much.

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