Park City Group Inc (PCYG) 2010 Q3 法說會逐字稿

Good afternoon. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Park City Group conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Darrow, you may begin your conference.

Thank you, operator. Good afternoon, everyone. I'm Jordan Darrow of Darrow Associates, and I welcome you to Park City Group's fiscal 2010 third-quarter financial results conference call. For those who have not had a chance to review the earnings release, it's been issued by the wire services and may also be viewed on the Company's website at www.parkcitygroup.com.

On the call from Park City Group are Randall Fields, Chairman and Chief Executive Officer, 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 formal remarks, please be advised 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 Reform Act of 1995. These statements may include, but are 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 actuality and relying on them is subject to risk. Factors causing forward-looking statements in this presentation to differ from results are discussed in the Company's Form 10-K and 10-Q filings with the Securities and Exchange Commission. The Company is not necessarily obligated to update forward-looking statements, whether as a result of new information, future events or otherwise.

I will now turn the call over to Park City Group's Chairman and Chief Executive Officer, Randall Fields.

Thank you, Jordan. Good afternoon, everyone. We obviously very much appreciate your taking time out of your day spend a few minutes with us this afternoon. At Park City Group we clearly pride ourselves on delivering on our promises for both our customers and for our shareholders. And in terms of our fiscal third quarter, why don't we take a little bit of a dive into the numbers and see how we did in terms of living up to those expectations.

First, because this is, after all, an investor conference call, let's see how we delivered upon our assurances to our shareholders. In terms of revenues, we said that you should expect growth. Due to the less predictable nature of our license activity, revenues in any given quarter may be a bit skewed clearly from any prior period. But subscription fees, which are typically paid monthly, represent the largest component of our revenues and they do continue to rise. With that contribution we reported fiscal 2010 third-quarter revenues of about $3 million, an increase of about 20% compared to last year.

In terms of EBITDA, our adjusted earnings before interest, taxes, depreciation and amortization, we saw $734,000 in the third quarter of fiscal 2010, which was an increase of more than 250% from the comparable prior-year period. This was our sixth consecutive quarter of positive adjusted EBITDA. This performance, along with the benefits of our recurring revenue model have made us increasingly confident that we'll exceed our stated goal of achieving adjusted EBITDA of $2.3 million for the year ending in June.

Given the fact that we have reported it through the nine months our adjusted EBITDA is in excess of $2 million, obviously our confidence of achieving the $2.3 million target that we set isn't as challenging as it appeared from the beginning of the year.

Earlier in the year, we said that we'd begin generating positive cash flow in fiscal 2010. In fact, we did have positive cash flow from operations in the third quarter of fiscal 2010. Year-to-date we've produced about $0.25 million in operating cash flow as compared to a loss of $800,000 in the same period last year. And I suppose, finally, then in terms of delivering for our shareholders, the price of our stock has increased from about $3.50 at the time of our last conference call, to about $4.00 today. While the trading in our shares is, to a certain extent out of our control, we're pleased to see that investors are beginning to better understand and appreciate how our business model works.

Our model will continue to drive us to better results. It's important, however, to remember that we are not a quarterly sequential business as yet. We're best viewed on an annual basis certainly for the next couple of years.

So now let's examine how the business model has enabled us to deliver for our customers. This is important to understand, because at the end of the day what we've achieved in terms of financial performance really is a result of what we're doing on behalf of our customers. Internally, we certainly think that we have just begun to scratch the surface. Although our service can be used in other retail sectors, such as specialty retailing, big-box retailing, amongst others, for the time being we're primarily focused on food retailing. Our team continues to perform extremely well. I'm very, very proud of them and the results that they've generated. Our market traction, importantly, is accelerating. We're on track for adding 10 hubs or retailers as we call them, before the end of our fiscal 2010 year, which ends next month. The 10 hubs that we expect the add by the end of this year ensure that next year will experience growth as they begin to add spokes and move from the start-up phase toward about a three-year maturity.

The increasing market acceptance reflects retailers' desire to engage us for our economically sensible, we call it software as a service model, where their initial capital outlay is substantially minimized. But in the long term, our subscription-based fees ensure a lasting and cohesive relationship with our customers. Our platform starts at the customer edge of the retail supply chain with what we call scan-based trading. It works backwards from there to the consumer goods supplier's factory floor. We think we have a complete view of the supply chain and we're generating results for our customers, up and down the entire supply chain arena.

We have the industry's only third-party scan-based trading platform. Our process is even more unique in that we take what we would call a reverse approach to how the supply chain should work. We started from the point-of-sale system, in other words, what's actually moving, and back it all the way up to our supplier's business and indeed even our suppliers' suppliers. And that stands in distinction to a more traditional method of tracking the supply chain, thinking from the suppliers forward to the retailer's shelf.

The present fiscal year, we had our sites on signing up these retailers. We said that our focus in the current year was to get more hubs, and in fact, obviously, we feel very comfortable with the number that we've achieved. We've been brining in hubs at the rate of one per month, with the exceptions of the more difficult time for retailers, which is November and December of any given fiscal year.

What we said, in addition, was that next year would be the year of the spoke. So the intention is, as we exit the current fiscal year and move into our next fiscal year, we'll be focused on creating more connections to our hubs. In addition, we'll bring in, on a continuing basis, we hope, more retail hubs to the system. So, what we have now is a-- an environment in which we're paid by both parties, both by the retailers and by the suppliers. We help them get their products accurately on the shelf on time, so as to optimize the sales for both the retailer and the supplier.

We enable suppliers to drive more sales to the retailer and at the same time tie us less capital in inventory and finished goods. Typically, in our experience, we lean out the supply chain by about 30% of the inventory, and that's being done at the same time that the sales for both parties are usually increasing in the high single digits or better.

00 to 11:00 a.m. for those kinds of suppliers, which allows a supplier to deliver bread virtually all day long. That expands the route size, it eliminates the need for many trucks and it increases the opportunity to provide for last-minute demand on the part of consumers who may be coming into the stores later in the day.

Obviously, for retailers, if they have shelves stocked on time with products that are selling, then they can expect more sales overall and much more efficient store management. Our base of prospective customers is growing as a result of our focused sales effort and frankly as a by-product of delivering exceptional results to our existing customers. They, in turn, are talking to industry colleagues about Park City Group.

All told, for our customers, we helped improve sales, we improved their working capital and we certainly improved their efficiencies and their profits. We are definitely gaining market credibility. We are better positioned than ever and our financial performance, I think, all of us would agree, is performing much better than we had any reason to believe a couple of years ago.

I will now pass the call to our CFO, John Merrill, to provide more detail about our operating results and our improving financial condition.

Thanks, Randall. Good afternoon everyone. I will now review our fiscal 2010 third-quarter and year-to-date consolidated operating results for the Company. I will also comment on certain cash flow and balance sheet items. Before I begin my discussion of 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 unaudited consolidated condensed financial statements incorporated therein for the three and nine months ending March 31, 2010, contain the results of both Park City Group and Prescient as a result of the merger that was completed on-- in January 13, 2009.

It is also important to note that in accordance with Generally Accepted Accounting Principles, or GAAP, the fiscal 2010 results for the three and nine months ended March 31, 2010, include the combined results of Prescient and Park City Group. Conversely, the fiscal 2009 results for three- and nine-month period of 2008 do not include the pro forma aggregated historical results of both companies, as if a merger had been completed on July 1, 2008.

For the third quarter of fiscal 2010, the Company's total revenues increased 20% to $3 million when compared with $2.5 million for the same period last year. An approximate $500,000 increase in total revenues was principally the result of a license sale that occurred during the third quarter in addition to organic growth through new retail hubs and suppliers and an additional two months of revenue from the Prescient acquisition.

Fiscal 2010 year-to-date total revenues increased to $8.2 million when compared to approximately $3.5 million for the same nine-month period of fiscal 2009. The increase in revenues during the first nine months of fiscal 2010 was approximately $4.7 million or 134%. The increase in total revenue for the nine-month period is principally the result of higher revenues resulting from the acquisition of Prescient in January of '09, and expanding base of retail hub customers including their suppliers.

At this time, I will cover our operating expenses for the third quarter and nine-month periods ending March 31st. For the third quarter of fiscal 2010, the Company's total operating expenses decreased by $1.4 million. This reduction in total operating expenses was the result of a $1.5 million impairment charge against acquired software development costs, recognized in the third quarter of fiscal 2009 and did not occur in the same period in fiscal 2010.

Total operating expenses in the third quarter of fiscal 2010 were $2.7 million consisting of the following; $1.3 million for cost of services and product support; $343,000 for sales and marketing expenses; $826,000 for general administrative expenses; and $207,000 for depreciation and amortization. When compared with the same period of fiscal 2009, cost of services were essentially unchanged against our 20% topline growth, which illustrates, to an extent, the leverage of our business model.

Sales and marketing expenses declined by over $100,000, G&A expenses increased by about $179,000, and depreciation amortization declined by about $30,000. Gross margin, which is calculated using the cost of services and product support against total revenues, expressed a percentage of total revenues with 56.2% for the third quarter of fiscal 2010, compared to 48.3% for the 2009 period. SG&A expenses, as a percentage of revenue for third-quarter 2010 was 39.4% as compared with 43.7% for the third quarter of 2009.

The improved performance reflects the higher level of total revenues and lower sales and marketing expenses, partially offset by higher expenses for nonemployee sales commission, non-cash stock compensation costs, legal fees, higher employee benefits, and recruitment fees.

Year-to-date total operating expenses increased 8.8% to approximately $7.4 million when compared with $6.8 million reported for the same period of fiscal 2009. The increase in total operating expense is principally the result of the acquisition of Prescient. Gross margin for the nine-month ended March 31, 2010, expressed as a percentage of revenues was 59.4% compared to 33.2% for the 2009 period. The improved performance is attributable to the natural elimination of duplicative costs resulting from the merger, rationalization of staff personnel, facilities closures and termination of un-needed maintenance and service contracts.

SG&A expenses, as a percentage of revenue for the nine-month period of 2010 was 43.1%, as compared with 73.1% for the same period of fiscal 2009. The improved performance reflects the higher level of total revenues in the 2010 period and the higher costs from the Prescient acquisition, which had been rationalized throughout the 2009 period. Depreciation and amortization expense in the third quarter the first nine months of fiscal 2010 was $207,000 and six hundred and six-- $617,000, respectively, as compared to $238,000 and $512,000 in the 2009 periods. Higher depreciation and amortization expense in the nine-month period is principally the result of amortization of certain software and customer list value as a result of the Prescient merger which in accordance with Generally Accepted Accounting Principles are to be amortized over it's useful life.

The Company reported income from operations of $292,000 for the quarter ended March 31, 2010, compared with a loss from operations of $1.6 million in the same period of 2009. The Company reported income from operations of $709,000 for the first nine months of fiscal 2010 compared with a loss from operations of $3.4 million in the same period of fiscal 2009.

Turning to earnings before interest, taxes, depreciation and amortization or EBITDA for a moment. With respect to the Company views of EBITDA as an added metric to supplement the traditional GAAP measurements, I won't recite the entire disclaimer and conditions of-- other than to note that we provide a reconciliation of non-GAAP financial measures to comparable GAAP financial measures in our quarterly press release and SEC filings, which are updated quarterly and annually on the Company's website at www.parkcitygroup.com.

Park City Group utilizes adjusted EBITDA not as an alternative to GAAP measurements, but rather for investors to benefit from supplemental measurements through the eyes of management. Adjusted EBITDA excludes certain cash and non-cash items such as stock compensation expense, allowance for doubtful accounts, costs incurred as a result of closed and unused facilities, non-cash impairment charges and other acquisition-related costs. Adjusted EBITDA increased to $734,000 for the quarter ended March 31, 2010, as compared with an adjusted EBITDA of $213,000 in the same period of 2009. Year-to-date adjusted EBITDA increased to $2 million for-- $2.023 million for the nine months ended March 31, 2010, from an adjusted EBITDA loss of $1.13 million in the same period of fiscal 2009.

On a pro forma basis, adjusted EBITDA increased to approximately $2.023 million for the nine months ended March 31, 2010, as compared with pro forma adjusted EBITDA of $24,000 for the prior fiscal year period. Once again, a reconciliation of GAAP and non-GAAP financial measures are available on the Company's website.

Net income applicable to common shareholders for the quarter ended March 31, 2010, was approximately $42,000 or break-even per common share, compared with a net loss of $2 million in the prior year's third quarter or a $0.21 loss per common share. Fiscal 2010 year-to-date, the net loss applicable to common shareholders was a negative $22,000 or essentially break-even on a common share basis, compared with a net loss of $4.4 million in the prior year's nine-month period, or a $0.46 loss per common share.

In addressing our financial position, the increased revenues and margins associated with the Company's expanded base, software as a service to customers along with continued effective management of our expenses as we scale the business, resulted in an improvement in operating cash flow. We reported positive operating cash flow of $251,000 for the first nine months of the year as compared with pro forma negative operating cash flow of $800,000 for the same nine-month period of 2009.

As of March 31, 2010, the Company had a cash balance of just under $700,000 and long-term debt of approximately $8.5 million. The long-term portion of debt is comprised of a $3 million cash secured line of bank credit, $3.2 million in unsecured loans, a $600,000 line of credit secured by receivables, $1.8 million in loans provided by certain officers and directors in order to finance the Prescient acquisition.

The Company is currently paying down debt principal at the rate of about $200,000 per quarter, and anticipate accelerating it's debt reduction payments over the next three to nine months as larger sales transactions occur. The Company maintains that it will not carry large balances of cash until such time as it significantly reduces its long-term debt obligations. Interest rates on these long-term debt obligations range from 3% to 12%, and have terms from about one year to 52 months.

The effective rate of interest on all outstanding long-term notes is approximately 8%. Listeners and readers should also note that the Company has recently issued an 8-K as it relates to recent refinancing of certain loans and obligations. As of May 5, 2010, the Company has entered into a term loan agreement with its-- with US Bank, and issued a term note to the bank in the principal amount of $445,712, which loan agreement and term note replaces a term note in the principal amount of $500,000 originally issued on September 30, 2009. The term note bears interest at the annual rate of 4.9% and is fixed. Principal and accrued interest under the terms of the note are payable in 52 installments of $939,000, each beginning May 15, 2010, and on the same date on each consecutive month thereafter, until maturity, or September 15, 2014.

In addition, on May 5, 2010, the Company entered into an amendment to loan agreement and note pursuant to which the bank has agreed to modify the maturity date and interest rate. Under the terms of the amendment, the maturity date of the note has been extended from November 24, 2010, to November 24, 2011. And the interest rate has been changed from an annual interest rate of 4.25% plus the one-month LIBOR rate charged by the bank, to 3.25% through November 23rd, 2010. After November 24th, 2010, the note goes to 2.25% up to the one-year treasury rate for a one-year period, adjusted for any reserve requirement, any subsequent costs arising from a change in government regulation. Amounts due under the terms of the term note are guaranteed by Randall K. Fields, the Chief Executive Officer and Chairman of the Board of the Company.

That concludes my review of the financial third-quarter first nine months of fiscal 2010. At this point, I will turn the call back over to Randall.

Actually, I think that's pretty much a wrap on the quarter. Obviously, we're feeling very good and at this point, Jordan, why don't we take a few questions and then let people get back to their business.

Okay, operator, would you introduce the Q&A polling process, please.

Yes, sir. (Operator Instructions). Our first question comes from Michael Taglich of Taglich Brothers.

Hey, guys.

Hey, Mike.

Hi, Mike.

I just wanted to congratulate you on a good quarter.

Thank you.

Good work.

Thank you.

Thanks.

Thank you. Our next question comes from Michael Fox of Park City Capital.

Good afternoon, guys.

Hi, Mike.

Hi, Mike.

I just wanted to ask you if you could give us an idea of how many hubs you might add in fiscal '11, and then you talked about, you know, it's going to be more of a year of the spokes. If you have a-- kind of a goal or target of how many spokes you think you might add during that year?

Well, I think what we've said is that we're comfortable bringing in our hubs at the rate of about one a month, with the exception of the November, December period when retailers don't do anything.

Right.

So let's say that for the foreseeable future, I think, kind of a 10 per year of new hubs is right. I think you'll see us next year focus on the idea of a couple of what we're calling mega-hubs where the prospective size of those hubs, in terms of number of spokes, is very substantially larger than a typical hub that we've experienced to date. So I think next year we'd be very happy if we could do one or two of those mega-hubs and let's call it eight of our more typical, call them retail hubs.

So we don't have an estimate yet, in terms of the number of spokes. Frankly, that depends a lot on this mega-hub concept and how successful we are at bringing that to market and actually getting some experience in doing it. Next year we're going to be very much focused on issues around scaling of the business. I mean, the good news from a shareholders perspective is that, and this is the wonderful part of the kind of business relationship we have with our customers on a subscription basis, it's that by virtue of the fact that we know that we have new hubs this year, next year what we know is, next year calender-- I'm sorry, fiscal 2011 will see an increase in revenue, and we're quite comfortable that it will see a significant increase in EBITDA or adjusted EBITDA measure, just on the basis of what we've brought in this year, as they begin to build out.

In our experience it takes about three years to build out a hub, so that-- in the sense that this whole new business model for us doesn't give us 100% assurance, but it certainly gives management a lot of confidence that the next couple of years look very, very good to us.

Right. Right. Great. And then, I mean, it seems like the business has quite a bit of visibility, so when you-- when you're bringing on some of the hubs and mega-hubs, how much lead time do you have and can you talk about the pipeline of business that you had, because I know in the past you've said that, you know, if you wanted to, you could grow faster but the, you know, quality is first, which leads me to believe that the visibility is quite high. So could you talk about that a little bit?

Yes, I think your assumption is correct. We have excellent visibility both into our pipeline which is growing and getting deeper as our market reputation spreads, so our pipeline of new possible business is growing. We are going to continue on this track, as I say one per month. And the reason for not accelerating that next year is the addition of a mega-hub because we just don't understand yet completely how that impacts our resource utilization, etc. And, again, I think we are growing and getting more referrals by virtue of the fact that our execution is frankly something that all of us as shareholders and certainly those of us in management can be proud of.

Our team is exquisitely good. Our customers appreciate what they do. And I think that's the best long-term path to both much higher profitability and frankly, therefore, a higher stock price for all of us. So our visibility is very good. We certainly have our arms around how the build-out of this year's hubs impacts next year's business, which is why we're quite comfortable that-- in knowing that next year is an up year, and frankly the year following, just on the build-out that we've experienced historically, is also going to be an up year.

Great. Congratulations on a great quarter.

Thank.

Thanks, Mike.

I think it's important to remember that we're not sequential, so I know I mentioned that earlier, but I think realistically, for the next couple of years and I hope this sorts itself out after fiscal 2012, we should be more sequential. We have some degree of seasonality, as you know, in the fourth calender quarter of the year and until licensing is none of revenues, it's not likely that we can always be sequential, but the trends are all excellent, all of us internally are feeling very good about the business and the quality of the result, and frankly the economics that we are delivering to our customer base.

And it's for that that we have to thank-- for the growth that we've experienced this year and the growth that we see coming up.

So thank all of you. Appreciate your taking time today. If you have any questions, et cetera, obviously feel free to contact us and we'll do our very best to get your questions answered. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.