Park City Group Inc (PCYG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Park City Group's second quarter fiscal year 2011 earnings release webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this webcast is being recorded.

I would now like to turn the conference over to Dave Mossberg, Investor Relations representative. Please begin.

(Inaudible) and we'll be referring to today's earnings release which can be downloaded from the Investor Relations page of the website at www.ParkCityGroup.com.

The conference call could contain forward-looking statements about Park City Group within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not (inaudible) fact. Such forward-looking statements are based upon current belief and expectation of Park City Group's management and are subject to risks and uncertainties which could cause actual results to differ from the (inaudible) statements.

Such risks are more fully discussed in the Company's filings with the Securities and Exchange Commission. The information set forth [herein] should be considered in light of such risks. Park City Group does not assume any obligation to update the information contained in this conference call.

Throughout today's conference call, we may be referring to both GAAP and non-GAAP financial results including the terms free cash flow, EBITDA, adjusted EBITDA, net income, loss and earnings per share which are non-GAAP terms. We believe these non-GAAP terms are useful financial measures (inaudible) our company primarily because of the significant non-cash charges in our operating statement. There is a reconciliation of non-GAAP results in the earnings release and on the Investor Relations section of our website.

Our speakers today will be Randy Fields, City Group's Chairman and CEO, and Dave Colbert, Park City Group CFO. Dave?

Thanks, Dave. Good afternoon, everyone, and thank you for joining our call today. My remarks today will cover our consolidated operating results for our second fiscal quarter ended December 31. I'll also comment on certain cash flow and balance sheet-related items and then I'll turn the call over to Randy for some additional comments.

First, I want to reemphasize the Company's strategic direction since our January 2009 acquisition of Prescient Applied Intelligence. The Company continues to move away from the one-time license model towards a subscription-based model. We're not completely abandoning license revenue. However, we continue to focus our activities and initiatives on [increasing] the number of retailers, suppliers and manufacturers that use our software on a subscription basis.

With that in mind, total revenue for the second quarter was 2.7 million which is a [10% increase] year-over-year and a 7% increase sequentially from the first quarter. Our subscription revenue grew 9% in the second quarter to 1.6 million. While the growth is in line with our plan, we did experience an offset to our year-over-year revenue growth due to the non-renewal of several customers negatively affecting our growth rate. Two of our large baked-good customers were acquired by a larger competitor and one retail customer filed Chapter 11.

While our product does have a quality of stickiness to it, subscription revenue can be negatively affected by customers either being acquired, customers going out of business or a retailer ceasing to do business with them. The aforementioned customers did negatively affect our year-over-year second quarter subscription revenue growth [rate] by approximately 6 percentage points. We expect our base of subscription customers to continue to expand at an accelerating rate. As our subscription base grows, the loss of any single customer will have less effect on our growth rate in the future.

Of our four revenue categories, we encourage investors to focus on the growth of subscription revenue which is the strategic focus of the Company. Given the one-time nature of license and professional service revenue, revenue trends from these categories can fluctuate significantly from quarter to quarter, especially as large projects are started or completed. This was the case in the second quarter, as license revenue increased 276,000 due to a large one-time sale to a new customer and sales to several existing customers. Over time, as our recurring subscription revenue grows, fluctuations in other revenue categories will have less effect on the [overall] results.

Now moving on to some operating expenses -- during the second quarter, total operating expenses increased 3.5% year-over-year to 2.5 million. When compared to a 10% growth in our top line, that means we were able to grow our top line at about three times faster than our expenses which is indicative of our leverage of the business model. [This is] even more impressive considering that our sales and marketing expense [was] 43% due to the increase in payroll expenses, travel-related costs and trade show expenses. These sales and marketing costs directly reflect our efforts of dedicating more time meeting with current and prospective customers.

Touching on profitability -- during the second quarter, the Company improved its GAAP net loss to 22,000 compared to a net loss of 151,000 from the prior year. On a per share basis, we broke even versus a loss of $0.01 per share a year ago this quarter. We achieved positive adjusted EBITDA of 687,000 for the most recent quarter compared to 567,000 from the prior year. Our non-GAAP net income for the second quarter ended was 336,000 or $0.03 for fully diluted share compared to prior year net income of 138,000 or $0.01 per diluted share.

Now I'll address our financial position. We're introducing free cash flow as a metric this quarter which is operating cash flow less capital expenditures and capitalized software expense. As we enter into the next phase of growth for our company, we expect to generate improving cash flows and believe this metric will be useful for investors to track our progress. During the second quarter, free cash flow increased to 481,000, a 69% increase compared to prior year. The improvement in free cash flow is largely due to our increased profitability.

As of December 31, 2010, the Company had a cash balance of approximately 1.2 million and a debt balance of 4 million. Debt decreased approximately 300,000 versus our balance as of June 30. Our total liabilities were 7.1 million as of December 31, a decrease of approximately 670,000 when compared to June 30. The decrease stems primarily from a reduction in debt and a paydown of accounts payable.

Quickly comparing our December 31, 2010 balance sheet to our balance sheet from one year ago as of December 31, 2009, total liabilities have decreased approximately 5 million from over 12 million to today's balance of 7.1. The decrease is primarily due to a reduction in total debt. This is in line with the Company's stated objective of balancing growth initiatives with its pursuit of overall debt reduction as operating cash flows allow.

That concludes my review of the financials for the first quarter of fiscal year 2011 -- I'm sorry -- the second quarter of fiscal year -- it's 2011, excuse me.

At this point, I'll turn the call over to Randy.

Thank you, Dave and Dave. I'm going to keep my remarks unusually brief today. I think the numbers speak for themselves. We're obviously very pleased with the growth in our adjusted EBITDA, especially focused on the free cash flow. I think that one of the things that we will see going forward that we've talked about is the inherent earnings leverage that we have in the business and that we continue to anticipate that is our revenues growth of where they are. About $0.75 of every dollar we've established as a goal (inaudible) will become a contribution margin. So we're feeling very good about the financial position of the business and the operating results from last quarter.

Last quarter we saw two additional retail hubs which brings now a total of 28 all in. We've added year-to-date the first six months, five retail hubs, which is right on track. We created 25 agreements for connections, as we call them, between retailers and suppliers in the quarter that we just finished. And perhaps most importantly, the backlog of pipeline, if you will, of anticipated connections with our suppliers grew from 300 at the end of Q1 to in excess of 500 at the end of Q2. So we continue to add very significantly to the identified connections that our retail hubs [wish to make] through our platform.

If you remember, we said that last year was the year of the hub and we certainly have demonstrated our ability to attract retailers to our platform that retailers clearly see the economic benefit of what we're doing, but I think we expressed the need from the long-term growth perspective to have a series of scaling initiatives in the current year to provide the foundation for growth going forward. And if you remember from previous conversations, there's really two sorts of scaling activities that we set out to accomplish in the course of this year.

The first was what we're calling technical scaling activities and that really just means the ability to make a connection between a retailer and a supplier through our platform with far less manual content than would be historically necessary. Again, just for the sake of refreshing memory, historically the Company has never done more than about 100 connections between retailers and suppliers in any given year, and obviously, the plan is to scale that very significant by five or 10 times.

We feel as if now from a technical connection perspective, which is the first half of the scaling activities, that it is moving exactly as we would have anticipated. We've now done two tests of the technical onboarding platform and both of those tests were significant. In fact, they exceeded our internal expectations. So I'm feeling very, very good at the moment about the first half of the scaling activities which were the technical piece.

The second half of the scaling activities was what we call the administrative piece, the contracting, onboarding, project management, etc. All of those pieces where -- required, I think, at one point when we looked at the internal process, five different humans had to touch paper as it moved through our system. Dave has been responsible for developing the administrative onboarding process and I think the current plan is that the major pieces of that will be up and live in the month of March, and assuming that goes well -- and certainly we anticipate that it will -- in April we'll be using that platform that enables us to drastically reduce the amount of touch required to get our connections made.

When both those pieces are in place, we still have a goal and anticipate the ability to do many times the number of connections in a fiscal year as we've historically been able to do, and we still do have as a goal in the next quarter not to (inaudible) in the last quarter of this year, as we've said before, to do about 100 connections in the single quarter, which is more than we've ever done in an entire year. So we're gearing for that internally and at this point, my confidence in being able to accomplish that is very, very good.

From a what else is exciting perspective, I think there's something that we need to mention that represents a potentially significant opportunity for the business, and that is the recently enacted Food Safety Act. As you know, because we do business with retailers and suppliers, the new Food Safety Act requires that retailers, suppliers, all the way back to the farm eventually, must be able to track and communicate with one another one forward, one back, in terms of who has purchased the product. And as luck would have it, the platform that we've developed is a perfect technology platform by which suppliers and retailers and suppliers' suppliers can in fact track food products as they move through the supply chain.

So in view of the fact that our customers are going to be needing this capability, and in view of the fact that food safety over the next 18 months, as the regulations emerge, is going to become a terribly important part of what our customers require, we are taking a look at how we could provide that sort of service to our customer community. I think it's only reasonable to assume though that as we expand that activity, if in fact it turns out that it's one that we should pursue, we would be looking for a strategic partner who could accelerate the penetration that we would like to have in that burgeoning market. So we will be looking at that carefully from a management perspective and obviously, we'll keep you informed as we make our progress.

Okay. So taking a look back from a conclusion and outlook perspective, I feel very, very good that we did what we did in the last quarter. We continue to think that this is going to be an excellent year from a financial perspective, remembering that the most important thing we can do from a business long run is to continue to deliver to our customers exquisite service and superb results. So the focus is on making sure that the implementation of what we do remains in an extraordinarily high level of the customer satisfaction that drives our business. In the supermarket industry, if you make multiple mistakes, you're going to have a limited future.

We continue to feel good about the development of our Mega Hub platform, as we indicated that we would be implementing the first of our Mega Hubs with the goal of getting two of those signed up in the current year, and we hope to have one of those begin implementation before the end of our fiscal year which would be next quarter. We are continuing, as I said, to see an expansion of our pipeline of potential connections and all of that becomes, as we are successful at making those connections, future cash flows and future increases in profitability.

The most important thing that we will have accomplished this year, I think when we look back several years from now, is the scaling initiative and the purpose, if we remember, of the scaling initiative is to enable us to maintain the quality of the service we provide to our customers, but do it with far less labor and far less time than otherwise would be required. And that enables us to maintain those 75% contribution margins that we're hopeful of achieving and maintaining.

So we're feeling internally very good about the business. Continues to develop and accelerate and I think we're -- all shareholders are going to be pleased with the results in the future quarters.

So with that, let me stop, turn it over to Dave, and see if we can answer a few questions.

(Inaudible) go ahead and poll for questions.

Yes. (Operator Instructions). Our first question is from Gary Giblin of R.F. Lafferty. Your line is open.

Yes, hi, good results, everybody. I'd just like to understand a bit more how the impact works out of corporate events that affect your customers. So in the case of the retailer bankruptcy that you mentioned, are they still operating stores or why did the business disappear, since at least sometimes, the operation continues?

Good question. Actually, this turns out to have been a highly over-leveraged retailer that did a prepack and a restructuring and they were in bankruptcy for about 12 months, just came out, but one of the things that occurs in the context of a bankruptcy is the inventory issue becomes a -- let's say a messy one is perhaps the best way to describe it. So until that is sorted out, having people decide who has inventory and owns it, where it is, etc., is certainly (inaudible) is off the table. So we've been back in touch with the company now that they've recently emerged and the indication is that sometime this summer, they'll be back up and running with us again.

Okay. So it is -- that's good news. There's a silver lining there. And then with the two baked goods companies that were acquired, is there any chance that that could have a silver lining, that you could get business from the acquiring company?

Well, unfortunately, in that case, it was two of our customers. We've now had one of our customers buy two others, so what it means is that instead of getting paid by three different people, we're now only paid by one. So it did have actually a -- it did have a negative effect, but as our base grows, that kind of thing will be less important. And this occurred in a category that's about as fully consolidated now as you can get, so this was relatively flukey that this in fact occurred. So we wouldn't anticipate that this kind of thing would occur routinely.

Okay, thanks. And just finally on the Food Safety Act potential, are you as differentiated in your software for following the product flow for food safety purposes as you are, let's say, on the scan, SPT and other applications?

Well, that's part of what we're investigating and about all I can say at this point is the initial blush is pretty remarkable because it's not just tracking and many people are focused on the issue of, well, what went into what? We think that there's a bigger underlying issue which is synchronizing all of that information from the farm all the way to the grocery shelf. And as you know, as products morph, this whole idea of synchronization inherently becomes more important.

So at least at first blush, this certainly represents a very interesting opportunity and maybe the reason that for us, it's more interesting than I would have guessed six months ago, is first of all, six months ago, the legislation didn't seem to have enough oomph to get through. It was signed just after the first of the year. There's other pieces of that legislation coming also for the drug industry, which is another logical adjunct for us.

But the nature of our customers is that they will be forced to comply, so we may represent -- if the research goes well, we may represent a relatively cost-effective, time-effective way for our customers, or anybody in that supply chain, that food supply chain, to be compliant and gain the halo associated with being one of the good guys. So first blush, looks very good, but we're certainly doing active exploration right now.

Okay. Well, good luck with that. Thank you for taking the questions.

Oh, of course. Thank you.

Thank you. Our next question is from Michael Fox of Park City Capital. Your line is open.

Good morning, Randy, good morning, Dave.

Hi, there.

Good morning.

Good afternoon, actually. Could you update us on the progress of the implementation on the Mega Hubs and then also give some color around some of the spokes that you might be bringing on or anticipate bringing on throughout the year?

Yes. Let me start with the second question first. We are beginning now to get some of the larger CPG companies involved with us. They [take] a little bit more time, but they are potentially very important. I can't mention names at this point, but before too long, you will be hearing names from us, but they're household names, let's put it that way. And therefore, they have lots of leverage as spokes, if you will, against each of our hubs because they all do business virtually everywhere in the United States and indeed, abroad. So the nature of the spokes that we're bringing on now, very exciting.

On the Mega Hub, we are still in the process of getting the -- remember the sequence is first get the retail hub up for that retailer and then when you have a certain penetration of those suppliers, the retailer is likely then to shift and build out the Mega Hub with us. So to a certain extent, it's under the retailer's control. At this point, it looks as if that implementation [is] going to occur. I think if you remember, we said it would begin sometime before the end of our fiscal year and at this point, that still looks to be accurate. It wouldn't be possible though without the scaling activities that we've been involved in, so the cart before the horse was to make sure that we could do those scaling things and bring onboard the hundreds of spokes technically and administratively in a short period of time.

And you can tell from the tone of my voice that my confidence in the scaling activities is increasing because I have now seen a significant piece of it with my own eyes, and it's -- internally we think of it as remarkable, how well that has gone. So we just recently brought on a whole category of merchandise from a retailer and we did it in a matter of, I believe -- I could be wrong -- I think it was about two days when historically, that would have taken something near a month to accomplish before.

So it's working; I've seen it. We've done it twice now and it's very impressive. So that had to happen first. The second piece is the administrative piece. As I say, we can't even really test that until the month of April. It depends on the new accounting system which should be up by the end of March and running by the end of March, so that puts us into the month of April. Assuming that goes well and we have no reason to believe that it won't, then that means that we'll be ready to do the first Mega Hub in the June-ish timeline. Could it slip into the first month of next fiscal year? Yes, but at this point, we feel like we will begin that implementation before the fiscal year is over. So all in, all of that stuff is good, is feeling very, very good.

Can you talk a little bit about the backlog for other Mega Hubs?

Yes. I think we said the goal was to get two people to agree to the Mega Hub concept in this fiscal year.

Right.

And we have formally announced that one of them is there and I'm still very confident that you will see another announcement before the end of the fiscal year. So I'm very confident two people will have agreed within their contractual relations with us to move to the Mega Hub idea.

Okay. And then with regard to -- I think you mentioned a strategic partnership with regard to the food requirements. Can you elaborate a little bit on what you mean? Do you mean that you'll buy somebody in that field or you're looking at it still or just to kind of get your color on that.

Well, I think if you think about it, the people that make decisions about food safety in both the retail world and in the supplier world is a different audience than we historically talk to because we typically talk more on the merchandising side and the financial side of the business. So it would be attractive to us to have a strategic partner, not an acquisition, but a strategic partner that had access to the right audience because if this issue comes up and becomes a regulatory requirement, you want to be talking to the right people, get their attention and onboard them.

So we're in the process of formulating the right strategy for the execution of this kind of a business opportunity if it comes to pass, and it looks as if initially the best way for us to stay focused on what we're doing is to have a strategic partner that would focus on the food safety part of the business.

Right, okay, great. Thanks a lot for all the color.

You bet. Thank you.

Thank you. Our next question is from Mark Stafford of Stafford Capital. Your line is open.

Hello?

Hi, Mark.

Hey. I had a hard time hearing you in the very beginning. Were you just reading off of a press release?

No.

Oh.

Don't know.

Okay. Well, it --

I have my normal booming voice, so -- and we have an analog voice system now as opposed to the voice system we had before, so I don't know what to say. If it wasn't audible, I'll have to go take voice lessons or something.

Okay. Well, my basic question was on the three customers that you weren't able to book. Was that about 300,000 in potential revenue or a little bit more?

It was a little over 100,000 for the quarter.

Okay. Yes, I was trying to figure that out. Yes, that was just my only question.

Okay.

Okay. Thanks, Mark.

Thank you. Bye.

Thank you. (Operator Instructions). Our next question is from Robert [Meder] of [CS] (inaudible). Your line is open.

I'm actually in Kansas City, as you know, Randy. A couple of questions -- the first one, could you talk a little bit about how many spokes are hooked up and actually generating revenues? And have you done an evaluation of those recently as far as number one, customer satisfaction on either side, and if the economics are pretty much what you laid out a year ago when you really starting doing the stuff?

Yes, I can answer probably about half of it. We're developing a set of metrics as this new amazing accounting systems gets up and running so that we don't have to have people with abacuses -- whatever the plural of that is -- in the back room. So it's several hundred connections for sure. The exact number I don't have, but as soon as we've got that number, Bob, and that's not going to be until the new system is up so we can do an instant count, I'm not going to have an exact number.

And I think it's fair to say that the economics to us are what we expect and increasingly, as we go forward, there's two ways of looking at this. One is what I call price realizations and as I've mentioned, there will be a difference in the price realizations that we get for what we're calling the retail spoke connection and the Mega Hub spoke connection.

And the primary reason for that is although the charging algorithm is the same, in general, the people who do business under this retail spoke connection scenario we talk about, tend to be larger volumetrically. So smaller vendors to a retailer will pay us less than the larger ones, which is probably not a gigantic surprise, nor out of line, and therefore, as we move into the Mega Hub, the average annual subscription will be significantly lower than it is for the retail part of the business. Does that make sense?

Oh, sure.

Okay. So it'll be significantly lower. We're not sure what that number is. We just know that it will be significantly lower because they're much smaller vendors by and large.

But from a hub and spoke perspective, are your assumed economics seemingly playing out to the benefit of your customers?

Oh, oh, oh, from the customer side?

Yes.

Oh, yes, yes. One of the things that we did several years ago that drove the acquisition of Prescient was our [deep-dyed] analytics. We called it Supply Chain Profit Link. And the ambition that we had was to basically drive that into all of our customers because it has a profound impact. When you get lots of data, unless you have capable analysts on your staff, you may miss many of the obvious economic opportunities. So we're now able -- in fact, we just did this last week, excitingly enough, is when we got that whole category of data from a retailer on an initial feed that we'd never been able to do before that quickly, we immediately turned that over to the business metrics group. So basically within a few days of information flowing, we identified in this one category something on the order of 9 million or $10 million annual rate of lost sales.

To give you an idea -- and by the way, a retailer can never capture all of that. That's perfection, if you will. That's potentially where several millions of dollars a year to the retailer to capture those lost sales and we certainly were able to identify, at least by way of indication, direction, etc., where that might occur. So we think that as we go forward and the acceleration of the connections occurs, that gives us more comparable data to look at, and enhances the value of the conclusions that we come to on behalf of the customers. So as we go through this, I suspect that the economics to our customers will actually improve or will -- what they've seen historically.

Okay. And one last question -- on this kind of spoke connection backlog that jumped from 300 to 500 or so quarter-to-quarter, can you give us some color on that? Are these things that you actually have a contract with? Obviously, for some of them, there's going to be a two-year waiting period for them to get connected or a year and a half. Is that okay? How do you scrub those numbers to have the confidence that those are indeed going to become connections?

Is that one question or 17?

I can't count that high.

Okay. Here's some color and hopefully, it answers your question. What we did was to do what's classic with the pipeline, the sales pipeline. We created internally a ratio of let's call it expected penetration of different kinds of spokes that have been identified by our retail hubs. So it's pure percentage pipeline. So for example, the -- if you were to look at the raw number of possible -- possible -- the universe, we're not going to get them all, ain't going to happen, no way, Jose. The number is 1500. So we scaled that number down on a percentage basis it will continue to do each quarter, as we move through the progression of implementation, and that's how we came up with the 500. Does that make sense?

I don't want to go through the exact construction of the pipeline, but those are all people that have been named by retailers in terms of we want them to be part of this system, but some of them are in the Mega Hub category, some of them are six months out, nine months out, etc.

Um-hum.

But your observation that it could take 18 months to get through those is true, but what's also happening is as we now grow the system, the raw numbers will also begin to increase pretty dramatically, so kind of the constant percentage against the larger number will start squeezing the toothpaste pretty dramatically. So the raw number is much larger than this 510 and as we get more competent experientially at the percentage of the universe that will say "yes" and actually come onboard, this number will be modified over time.

We feel as if that number is a pretty good number for where we are and how long it will take us to get all those guys onboard is probably a year. I doubt it's 18 months, but in the meantime, there will be others that are not in that pipeline yet that may come even faster. So this is really just a gauge of what the -- what our retail hubs identifying in terms of what they want to have happen.

Now, one thing that could happen (inaudible) is they begin to see the kinds of metrics that we're generating in terms of lost sales opportunities. This could also cause some acceleration, as well as additional penetration of that pipe. So hopefully, that answered many of your 17 questions.

It did, and 18 and 19 are basically are you finding more interest in the spokes? I know this is something -- they're basically footing most of the bill for this program -- more interest in them signing on as they see the economic benefits to them, number one. And number two, I kind of assume that as you connect more and more spokes, you'll have lots more data and potential referrals from existing customers to help you out with their marketing.

You got it. The answer is we don't have enough connected yet of this new round. Our existing customers, I think we've done business with over the years, they're easy. They get the benefit. We have a number of them, as I think I've mentioned before, to whom we are strategic; that is to say when we go to a new retailer and we contact them, they say "Put us at the top of the list." We actually -- we have one that says "We always want to be the first one." We want to be number one to sign up at that customer because for them, the data that we provide is so valuable that it's a strategic initiative.

Now, as I've also mentioned, the initial obstacle is that if somebody does not know us from Adams or Fox -- sorry, Mike -- the business reality is that it's like, hey, why do I want to do this? What am I paying for? Who are these people, etc. So it's up to us to kind of get them calmed down, in the boat, show them the power of information so we move from tactical to strategic. That's critical, absolutely critical. And we don't have enough experience yet, to be perfectly candid, at doing that. We're going to have to get to be very, very good at it over time. That's -- the future lies ahead, if you will, but we're feeling very good about our ability as we see the data to convince people that they're leaving a lot of money on the table in terms of [sales]. Our value proposition, my confidence in our value proposition, the more data I see, done.

Okay. That's great. I appreciate it.

You bet.

Thank you. Our next question is from Michael Taglich of Taglich Brothers. Your line is open.

Hi, Randy.

Hi, Mike.

Good numbers. Would you -- do you want to update your guidance for revenue for the balance of the fiscal year?

Now, we really haven't given guidance; we've given goals, so we speak in [mumbled] terms, I think it would be reasonable to call them. One day we'll grow up and we'll be able to do real guidance, but I would say at this point, we're still feeling as if a goal for the year is something less than 20% growth in top line and at the EPS level about a double from last year. And that's still feeling just right to us.

Oh, you mean the non-GAAP EPS?

Non-GAAP, yes.

Non-GAAP EPS.

Like everybody else, it's a software company, and when you're in this kind of a business, the non-GAAP numbers from a managerial perspective certainly make more sense. So we're feeling -- we feel very good about where we are. Lots depend on the initiatives that we're taking and all I can say in terms of progress report is exceeds expectations. The scaling initiatives expectations at this point.

Now, at my conference a couple of years ago and last year, you were talking about making about a buck a share in the next fiscal year pretax.

Yes, I think it's too early for us to comment on that. I think some of it now is -- also it depends on the scaling activity, but I think everybody is going to be very pleased with how the next two to three years turn out. Remember, the nice thing about how these come on is they don't come on for a year and go away; they come on and stay. So internally, we have pretty good visibility for 18 months to 24 months. I think both of the next two years look very good.

When does top line really make a dramatic increase, not just a couple of hundred thousand or so, year-over-year on quarterly?

You -- remember there was a (inaudible) software is a service model, you're primarily dependent ultimately on subscription. So just to give you an idea, if it gets -- under a license model, if I sign something March 31, it counts for the whole quarter. With a subscription model, if I do it March 31, I get a day. So one, that's an impediment, and so the nature of a FAS business is subscriptions cannot grow as fast as licensing -- be mathematically essentially impossible, but I think you'll see the next couple of quarters begin the acceleration because of the connections accelerating and going through next year as far out as we can see, so long as what we want to do from a growth of connections perspective and hubs, all of that should just continue to accelerate revenue growth.

Maybe the best way to show that is if you show your end of quarter subscription run rate.

Yes, yes, we can do things like that. Once this new accounting platform -- I mean, remember when we acquired the business, we went from one accounting system to another, and combined them. It's just been really labor-intensive and not very helpful from a support perspective. So the new system and all of the automation lets us more or less push buttons and get to good metrics. So we recognize the need for that and we will definitely be paying attention to it.

Good.

But I think for now, the things that people ought to be looking at are -- we'll continue to report the number of new hubs that we bring in because in the long run, that becomes a significant driver, and that backlog of that pipeline, if you will, of supplier connections becomes very important. And we've got to be able to chew into that because if that continues to grow, you want -- at a minimum, you want to be able to connect as rapidly at some point as that backlog is growing. So that's going to be, I think, an important metric, but that all represents future revenue and we recognize Wall Street wants us to do it tomorrow. Directors and management are going to be here for a long time, so we want to make sure that when we do it, we do it exquisitely well.

If we continue to execute as well as we are for our customers, we're building a tremendous long-term company and I'm so proud of the feedback that I get from our customers when we complete an implementation, and that's what's critical because many, many technology companies have suffered from poor implementations and customer dissatisfaction and that kind of thing. So for us, this is a small industry. Exquisite execution is critical, is critical.

All right. (Inaudible).

Okay. Thank you.

Looking forward to it. Thanks.

Thank you. Our next question is from Robert [Kaksack]. Your line is open.

Hello.

Hi, there.

I got on a little bit late, so I -- and I haven't really even got a chance to read the press release, so I'm going to try to ask something that maybe you haven't said already. As far as the hubs go, is there a number of them that I should think of as kind of what the core is that's already implemented and contributing, if you say -- even if you want to look at year-end fiscal year last year, in other words, out of the 28 that you have now.

Yes, I think -- yes, let me take a crack at a way of looking at it the way we do. In a sense, we have some hubs that are already at a pretty high level of maturity that are no longer actively adding very many spokes just when they have a new vendor, and we have a whole group of those. We have another probably 10, so let's say about 18 of our hubs are what I would call historical legacy, not going to grow very rapidly over the short-term. We have another -- internally, three of our most recent hubs are hubs that have very significant potential and are going to be the -- are absorbing a great deal of our services capacity to grow. So a lot of our growth over the next year will actually come disproportionately from three of the 10 newest hubs that we've signed in the last couple of years.

In addition, if you remember, last year we said our focus was on relatively smaller hubs so that we could prove out the strategy, prove the ability to do everything that we wanted to do. We did not want to risk taking on a customer that was too large that we couldn't be successful, and then we said toward the end of last year we would begin to increase the size of the average hub that we were working with, and both of those things have been true.

So some of the hubs that we brought in last year relatively small; therefore, will not contribute significantly in the out years to our top line or bottom line, but they're still nice to have and great references, etc., and the newer ones are larger and we're scaling the implementation. So we have a few very large ones and now the ones we're bringing on in the last nine months will also be the types of hubs that have between 1 million and $3 million a year of revenue potential at maturity.

When you say the size of the contribution, Randy, is that relative to the number of stores that they have (inaudible)?

Yes, exactly, exactly right.

And then one other thing on that, along that same line, is there a relationship to the volume of business that they do because you had said something once before that they're getting away from the number of transactions. It was really the number of (inaudible).

Yes, basically what we charge both the spoke and the hub is a function of two things. Number one, how many rooftops, how many stores, does the hub have [as the] primary determinant? And the other is how many items is the supplier selling to that retailer?

So the SKU count?

In other words, make it -- yes, the SKU count.

Um-hum.

And we used to have a volumetric charge like how many transactions, but we're moving away from that as rapidly as we can because it just slows down our days outstanding. Let me give you one other goal for the year because one of the things that we're being very cautious with is our spending and our balance sheet. I think in the next year or so, our balance sheet is going to become more important as we get higher visibility with more perspective customers and as a result, we're [being] very cautious in making sure that our balance sheet looks better and better. I could not be much happier with how it's gone year-over-year.

I think as a goal, a reasonable goal, that before the end of this calendar year -- not fiscal year -- calendar year, the Company will be in a net cash position in relation to its debt, meaning we will have more cash on the balance sheet than debt by the end of this calendar year. That is a pretty remarkable turnaround from where this company was 18 months ago. So just a little bit like patting your head and rubbing your tummy -- you can tell I have a lot of dogs and kids (inaudible) stomach -- because it means that we will be growing, increasing cash flow and significantly improving the balance sheet simultaneously.

The other question I had was at the end of your fiscal year '10, [I guess] June of '10, was -- I was trying to get a read on the [connection] buildup, but was that at around 500 connections that you had?

(Inaudible).

No, no, what was our total -- I think we took a guess last year that our total number of existing connections was about 500.

Yes.

Whatever the number was, I think I said, Bob, that we would get a definitive number here by the time we have our next call because we will have had a better accounting system. It's up from whatever it was. Whatever it was, it's bigger, it's growing.

Right, right. You're saying you had about 25 each in the first two quarters of this fiscal year?

No, we only did about eight in the first quarter.

Eight in the first quarter, about 25 in the most recent quarter we just finished --

Okay.

-- and accelerating through this year.

Right, with the goal of getting to 100 by Q4?

Correct. So that to us is the kind of [scaling] we want to see and it still seems quite achievable from where we are.

And then the addition of the new accounting system that you were talking about was -- you're trying to get that in by March?

Yes, correct.

And am I right in thinking that that was the last piece that you (inaudible) just able to accelerate the number of connections?

Yes, that --

Was there a connection between those two?

There is. That's the last piece administratively. Once that and the -- we call it the Customer Portal were in place -- that means that a customer can come to our portal when they've decided to hook up, if you will. They'll come to the portal, they'll fill out some brief information. That connects them to our billing system, accounting system, project management, the whole deal.

So all of the administrative piece gets handled with a Web interface instead of any kind of manual process and that, conjoined with the technical onboarding process that we talked about before, the way we now get data and speed that process up, that gives us the ability to sign people up rapidly. So then it's just a matter of the sales organization getting with the suppliers that are -- have been listed by the retailer and herding them along like cats to the finish line. That's the piece we'll never be able to automate. That's that human piece of getting the suppliers onboarded and the retailers [in the system].

I was going to say on the experience curve of benefits between the hub, grocery owners and their vendors, could you give us sort of an idea of what you think the experience is like for each of those parties in general? In other words, if (inaudible) has an experience at the grocery chain and they have kind of a -- I'm just going to say like a 70% [enlightenment] that this is really benefiting them to a large degree, I just was wondering if you could characterize where that is for the vendors as a group.

Well, I think both parties need to see the kind of information flows that point them in the direction of how to avoid lost sales. The problem for the supermarket industry, therefore, for its suppliers is that -- and we're seeing it up close and in person -- huge losses of sales. I would estimate 9 to 10% lost sales in an industry comping year-over-year 1%. So the danger for a retailer, when a customer goes in to buy a product that's not on the shelf is -- I've seen numbers that say 31% of the time, the customer goes somewhere else to buy it. Well, if you generate a 30 or 31% customer churn every year and you have to (inaudible) those people, wow, that's expensive. So the retailer clearly gets significant benefit being able to maintain an on-shelf performance.

The supplier, on the other hand, also gets a sales gain to a lower extent than the retailer because if you're brand-loyal and you want, for the sake of argument, Coke or Pepsi, and you go someplace that doesn't have what you want, and you're brand-loyal, you'll go someplace else. So the supplier seems to lose less than the retailer, so in that sense, the supplier, if you will, has less overall to gain, but in today's world, if you can move your sales 10% just by staying in stock better, wow, there's not much cost associated with that. That's not like running a marketing campaign. So the economics for both sides are extremely good, but I would have to say it probably slightly favors the retailer.

Okay. Thank you.

You bet. Thanks, Bob.

Thank you. Our next question is from Mark [Chapelle] of Benchmark Company. Your line is open. Pardon me, Mark, please check to see if your line is on mute. Okay. We'll go to our next question from Gary Giblin of R.F. Lafferty. Your line is open.

Yes, hi.

Hi, there.

Would you characterize the overall supermarket IT expenditure environment for 2011 as good, mediocre or bad? I mean -- and the same for general mass retailing.

Yes, we're -- in an odd way, we're not really in touch with that. We don't go through the IT budget because we're sold as a service, so I wouldn't be a good person to comment, but what I can tell you is that there is a heightened concern at the senior level of the supermarket industry, and all the suppliers that we talk to, about the environment that's creating a real sales pressure. And you're seeing comp sales now from most supermarkets flat, down a little, down a lot. So the focus is clearly on how do we stop the sales erosion which causes what we do to be pretty interesting to these people. So I don't really have my arms around increases or decreases in IT budget because we don't run through those budgets.

Okay. And so the fact that supermarkets are pretty darn well challenged now, it's not hurting your general receptivity of the customer base and probably helping? Is that the right conclusion?

Oh, yes, we're such a low-dollar investment because we sell this as a service that I don't think cost is a significant issue. I mean, what people are looking for is there's got to be another way other than just promoting and offering dollars off (inaudible) the margin. There's got to be a more effective way to get business than simply cutting prices. It's much easier to sell what is not being sold, right?

In other words, if you're losing 8 or 10% of your sales because people come in to buy it, they want to buy it, they're willing to buy it, but they can't buy it because you don't have it, that's a pretty cheap 10% increase in sales versus $1 off a case or $0.15 off a can. So we are a cheap way to get better sales.

Okay. I understand. So you're not going through a budget approval process at the retailer company might. It's just whether they view it as an effective (inaudible) as effective marketing basically, right.

I think that's probably a nice way of looking at it.

Yes. Okay. That helps, thanks.

Oh, you bet. Thank you, guys. We appreciate it. Thanks for taking time this afternoon.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.