Park City Group Inc (PCYG) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to Park City Group fourth quarter and year-end earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I'll now turn the conference over to David Mossberg, Park City Group's Investor Relations Representative. Please begin.

Thank you, Tyrone. Before we begin, we will be referring to today's earnings release, which can be downloaded from the Investor Relations page of the Company's website at www.ParkCityGroup.com.

This 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 historical fact. Such forward-looking statements are based upon the 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 forward-looking 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 for our Company, primarily because of the significant non-cash charges in our operating statement. There is a reconciliation of non-GAAP results in our earnings release on the Investor Relations section of our website.

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

Thanks, Dave. Good afternoon, everyone, and thanks for joining us on the call today. My remarks today will cover our consolidated operating results for our fiscal year ended June 30; and I will also comment on certain cash flow and balance sheet items. And then when I am done, I will turn the call over to Randy for his comments.

I'll begin my comments by discussing revenue. For this fiscal year, subscription revenue was in line with our internal expectations, and increased to $6.5 million or a 10% increase for the full year. For the fourth quarter, subscription revenue had increased 12%. The increase in subscription revenue growth came from both new customers as well as growth from existing customers. The split was roughly 60/40, with new customers accounting for the bulk of the growth.

Offsetting our growth rate during 2011 was the loss of a few customers due to acquisitions and bankruptcies. If not for this customer churn, our subscription revenue growth rate would have been approximately 6% higher for the full year. It's important to note that our subscription revenue does not directly correlate to customer acquisition activities inside a specific quarter. In fact, it may take several quarters for a contracted supplier or retailer to go live on our system, at which point we are able to recognize revenue. As such, while our pace of contracted connections grew 3-fold at the end of our fourth quarter, it may be a quarter or 2 for these to begin contributing to subscription revenue.

Conversely, we experienced 100% growth in our professional services revenue, which does directly correlate to the increased activity we saw during the fourth quarter, and it includes the sale to a new trade association hub. The growth in subscription revenue was offset by a decline in license and maintenance revenue, which resulted in total revenue being essentially flat on a year-over-year basis.

License revenue declined 31% for the year, which was principally the result of a $490,000 patent license sale, which occurred last year, and did not recur in this fiscal year. A likewise maintenance revenue decreased 12% year-over-year to $2.2 million. And I will emphasize again, our strategic initiative to focus on building our subscription-based recurring revenue, and deemphasize our 1-time license revenue model.

The impact of this strategic decision will be the steady acceleration of subscription revenue intermixed with the occasional lumpiness of 1-time license sales. The impact of 1-time license revenue will have less effect on overall revenue as the cumulative base of subscription revenue continues to grow into the future.

Moving on to operating expenses -- during the fiscal year, total operating expenses were $10.6 million versus $10 million during the prior year, reflecting a 6% increase. Of the $600,000 year-over-year increase, all but $150,000 was related to the previously announced, 1-time legal settlement from our first fiscal quarter.

For the fourth quarter, our totaling operating expenses grew approximately 5% to $2.7 million, which represented about half the pace of our topline growth during the same timeframe. Fourth-quarter expense growth was primarily related to increased cost of services and product support, which was partially offset by a decrease in G&A costs. Other expenses remained relatively unchanged during the fourth quarter.

Touching quickly on profitability -- for the fiscal year ended, the Company reported a GAAP net loss applicable to common shareholders of approximately $1 million compared to a net loss of $150,000 from the prior year. However, on a non-GAAP basis, for full year net income applicable to common shareholders was $786,000, and represented a 43% increase when compared to the same period a year ago. Our adjusted EBITDA for the fourth quarter was $705,000, which was up 17% at $2.3 million for the full year, representing an 11% increase.

Now I will address our cash flows and financial position. As of June 30, 2011, the Company had a cash balance of $2.6 million, and a total debt balance of $4.9 million. The result is a net debt balance of $2.3 million. On July 1, 2011, the Company paid approximately $1.5 million of 12% debt that was coming due in mid July. After this July 1 debt payment, the Company reduced its net debt balance over the past year by approximately 28%. And the result is going to be a reduction in our annual interest expense by about 50%, or $180,000 for the full year.

The Company generated about $1.4 million in net cash from operating activities during the year ended June 30. This represents a 52% increase when compared to the prior year. During the fourth quarter, we invested approximately $300,000 in next-generation hardware and components infrastructure, which was above our normal maintenance CapEx spending.

And the last point to touch on regarding our balance sheet is our Accounts Receivable balance. The AR balance increased at year end to a total of $2 million due to the invoicing of several large contracts in June, coupled with about a 2-week delay in billing as we transitioned to our new accounting platform. We have since returned to our normal billing cycle.

Overall, we expect our balance sheet to continue to improve over the course of the next fiscal year. We will continue to use our cash flow to pay down our debt balance, and selectively make capital investments in new technology similar to what we did in the most recent fourth quarter just ended.

And that concludes my review of the financials for the fiscal-year 2011, and at this point, I will turn the call over to Randy.

Thank you. I apologize, my voice this afternoon is a little creaky.

Obviously, we feel very good about the year in a whole variety of respects. The major goals that we set out to accomplish internally, we feel as if we did. The primary objective, as I'm sure those of you who have been following us understand, was to be able to scale the business. We spent a substantial part of the year focused on what we called -- scaling initiatives. We've put them to the test through the year and into our new year, and we are all feeling very, very good about the effort, the design, and frankly, the strategy for how to grow the business and maintain the kinds of contribution margins that we want. In that respect, we feel as if we exceeded our own internal expectation.

Obviously, we feel very good about the number of connections that we made last year. We feel excellent about the year in general as it relates to the balance sheet. The truth of the matter is, given as you saw from our previous press release, that we have begun to attract attention in the supplier world from larger suppliers. We have begun to pay more attention to the optics of how we look to the rest of the world financially, so the balance sheet is important; and we'll continue to focus on it, as I mentioned, through the current fiscal year.

We brought on a number of new customers, new names, new hubs -- all of those kinds of goals were in fact achieved. So as we look back on fiscal 2011, we feel as if we did what we wanted to accomplish; and in many respects, we exceeded our internal expectations.

Most importantly, things we haven't talked about is that we have added significantly to our sales and account executive team. For those of you who have heard us talk before, it's critically important, given that that is the point of interface with our customers, that the caliber of individual that we attract be the sort of individual that can represent us well, that is knowledgeable about the business, and the business of its customers; and we made significant, absolutely, 18 kinds of additions in the course of the last 12 months.

In the current year, we will continue to add to that staff, and frankly, in my own personal view, A-players tend to attract A-players. So in a certain sense, the additions that we have made in the last year are making it possible over the course of the next year to add the same caliber of talent to our pool. They have done a great job with doing, in my view, an excellent job of taking care of our new customers. They are hearing from us more often than they ever have before. We are bringing to bear our tools and technology to help them improve their business, and I will give you a few anecdotes in a minute or 2, but from what I can see, it's going at least as well as 1 could reasonably expect.

From an anecdotal view of what we are seeing now that we have added a significant number of new customers, we're in the process of implementing our first Mega Hub, as we've called it. It goes about as well as 1 can expect. Customers are now for the first time seeing this kind of information. It is helping them with their out-of-stocks, their over-stocks, the kinds of things frankly they've never seen at least inside this retailer that is working with us on the Mega Hub concept.

As you know, a major aspect of our business strategy is not just to bring in more customers on both the retail side and supplier side, but at least as importantly, that those customers like what we do for them, see the success of what we do in a way that causes them to either expand their relationship by going to other suppliers or other retailers, or alternatively, by buying other additional services from us.

And there is some early indications of interest and questions that lead me to believe that that's going to be true on both the retailer side, where we are seeing an expression of interest in others of our services; and certainly a number of the suppliers that we've begun to work with in the current quarter are expressing the same sorts of questions. Things about -- how can you help me improve my ordering, how can you help me reduce my inventory issues, how do you help me increase my sales in other than just this retailer.

So, the preliminary anecdotal evidence is excellent. It says that we are doing our job. And as you all know, we believe that the major obstacle between us and our ultimate success is only our ability to execute flawlessly. So far, the execution is just what I would want.

The business reality is that we are hyper-focused this quarter on doing that. I think you saw in that last press release that we garnered a number of much larger supplier-type customers than I think we reasonably could have expected in the last quarter. And obviously, if you will, we're debuting our play on Broadway. We've had no chance to do an off-Broadway practice, so we are full-on in the middle of helping these people realize the economic benefits of a relationship at Park City Group.

For the year that we are in, I think we have a few goals that we would like to talk about. Last year, I think our total number of connections was something on the order of 119 or so. Our objective for this year in terms of connections is to almost double that number. So we're looking for something on the order of 200-plus connections in the current fiscal year.

I think reasonably, the scaling that we have done, the pipeline that we have, should enable us to roughly double, again, subject only to our ability to execute brilliantly, to make sure that our customers get the full value proposition that Park City Group has to offer. We would like to see at least, as I mentioned, a double in our number of connections.

Also as a goal this year, I would like to see us enter 1 additional vertical market of retailing. We obviously know that we are a terrific fit in the world of supermarkets, but we believe that there is an opportunity to explore what we do and execute, again, just as well for another vertical market of retailing as we do for supermarkets today. So we will be exploring that as an opportunity, and the goal would be to establish ourselves with at least 1 major customer in an adjacent or different vertical market than supermarket retailing. This year I think we have established enough of a foundation, and I am proud enough of our execution with the kinds of retailers we have been working with, that I want to add at least 1 other retailer north of 1,000 stores, a major retailer, to our fold.

I would like also this year, and I'd mentioned this earlier, by the end of this fiscal year I would like the Company to set as a goal to be in a net cash position. I think it's reasonable to assume that the nature of our balance sheet is such that, other than our Accounts Receivable line, which is likely going to be around forever, to flex our Accounts Receivable, and improve our liquidity. I think the fact of the matter is that virtually the rest of the debt of the Company should be gone by the end of our fiscal year next June.

And I think this will be the year where we will establish the viability of the Food Safety Initiative. I continue to feel good about that. But this should be the year where we either prove that it's an idea that has, if you will, legs, or it will be something that we don't pursue in the near-term future.

So I think that kind of lays out the year. I think it's reasonable to -- remember, we are not necessarily a sequential company. I think you'll see an acceleration of the revenue, top line revenue growth this year compared to last year. Obviously, we expect an acceleration in cash flow. Obviously, we expect an acceleration in our EBITDA, et cetera.

We're not going to be giving guidance until we have more data points that enable us to do it. We are still in the position of wanting to see a variety of what we are going to call internal milestones, including the ability to sell our customers additional services based on our ability to demonstrate the efficacy of our technologies to them. We're definitely going to be focused on expanding into at least 1 additional vertical market of retailing, and it's also I think important to us to add to our customer list a substantial number of new named suppliers over the course of this year.

We will continue to add hubs, we will try to get into another vertical market, as I mentioned. We are exploring that aggressively right now, and I think we are set for another very, very, very good year.

That's the end of my prepared remarks, and I guess what we should do at this point is open it up for questions. Dave, if you would take it back.

Tyrone, if you want to queue the audience for questions.

(Operator Instructions) Michael Fox of Park City.

Congratulations on a good year. Can you talk about how many hubs you want to -- I might have missed it, but I didn't hear it -- but how many hubs you want to add this year?

Yes, I think we are still in the 8 to 10 additional hubs. I don't think that is going to change. The only thing that would cause that to be different is, again, it's the capacity issue, it's the execution issue. So if we got 1 or, maybe we'd be amazingly lucky and get, 2 really big ones, that might change the number. The revenue implications wouldn't change but the number might change. But basically, I think we are on the 8 to 10 per year forever.

Okay. And then, do you have any idea as far as the next Mega Hub, when that might start or when that's going to ramp-up?

I think the answer is, we have several people interested in doing it. We want to get further into the execution of the 1 that we are doing now. And if we move into another vertical market or get another very large hub, that could impact the timing of the next Mega Hub. But it's all going very, very well at this point.

In fact we just met with the retailer involved this morning, and they were a reference for another retailer for us. It's going very well. I am fascinated to see -- and actually it's interesting. Just anecdotally, the individual that is our key contact, if you will, the person we work most closely with at this retailer, used to be at Walmart. And actually said to us, he said, these are much better systems than we had at Walmart.

He is enthused by the idea. And 1 of the things I think we didn't anticipate, to add a little color, and it's interesting, there is a lot of changed management around what we do. Because when you put light on something that's never had light on it before, like overstocks, understocks, out-of-stocks, the initial reaction is, this can't possibly be true. It's really, really interesting.

So we are doing lots of work with both the suppliers and the retailers, demonstrating, kind of, now here is the actions that you need to take and that sort of thing. It's established as a very, very close connection to the retailer, and now my hope is that we get as close a connection with the suppliers as we are getting with the retailers from what we do. That of course takes time. We have only been working with them for a month.

Right.

At this point if you were to ask the question, is it going better or worse or what you expected? It's about what I expected from the supplier side, and it's much better than I expected from the retailer side.

Right. And on the spokes, you had talked about this quarter came in different than you thought from a larger size perspective?

Yes.

Can you talk about how that's playing out? And obviously, that has a lot of potential positives. It may be too early to conclude on that, but I was just wondering if you can give us some more color on how that is playing out.

When we went into this -- thanks for teeing that question up; It's a good 1. When we went into the idea of Mega Hub and that sort of thing, and we took a look at the pipeline of potential suppliers to talk to. Frankly, the way we expected it to go was -- you would start with the very smallest ones; crawl, walk, run. You'd learn the ropes with them, show them the value. They would become referential, the next size up, and then that group would eventually become referential to the largest suppliers. At least that was what we were thinking about it.

As it turns out, and we just hadn't considered it, the retailer's approach was -- the guys who will make the most difference in my business are some of these bigger people. So I want to talk to them, I want to get them onboard, and have you get going with them. And it's interesting. It's not what we expected.

We did get 4 or 5. We picked up another 1 or 2 this quarter where we have tried to slow down the onboarding rate while we absorb the ones that we got last quarter. They're definitely much bigger. They're far more demanding. It's causing us to stay hyper focused on the execution aspect of it, but that's the downside.

The upside is that these are companies that are national in scope, and if we execute for them, it won't be next quarter or that quarter, because they move slowly. But it means that we will have over the course of the next year or 18 months, a demonstrated ability with very large suppliers to show them economic value and gain a foothold and go national with them. We are certainly excited about the possibilities of the customer set that we have.

How is the current quarter shaping up from a spoke perspective?

Well, remember we are going to slow down the acquisition of spokes and focus on the execution of spokes, if you will. And then we are probably going to do the same thing next quarter and then start up again aggressively in January. So in that vein, we are pretty much where we would like to be. And as I say, I think all of us are going to be very pleased with the numbers for the year.

When you say that, you mean you're going to add fewer, but they're still going increase every quarter, right?

Oh, yes, absolutely. We'll add fewer new ones. It's just essential that -- we are on trial; that's how you have to put it. Even in my own view, I want to see a demonstration from our people that we can take as good of care of our customers as I think we should. I may be overly protective of our market reputation, but that's what's going to do it for us.

The fact that today this retailer was willing to be a reference for us and take his time to talk to -- in fact he was a reference twice today. He talked to another retailer and to a major supplier. And when they are willing to do that for you, it means you have paid a lot of attention for them, you're producing economic value, and now we have to learn to do it not with a dozen retailers or 2 dozen retailers. Now we have to do it with many, many, many suppliers.

It's all about execution and, frankly, right now I think we are doing great. We're doing better than I would have expected, but on the other hand, the team is really -- it's a top drawer team, top drawer. I've had 2 compliments; 2 written emails from customers in the last few days about the caliber of our people. And as a CEO I can tell you, there ain't nothing better than that.

Right. Do want to talk about any revenue expectations for any of -- whether this quarter or this year?

No, I know I have been vague, but what I've said is you'll see an acceleration of the subscription revenue, you'll see an acceleration of total top line, you'll see an acceleration of every number compared to last year's numbers and last year's growth rate. So, I think if you were an airplane, you're at V2.

Okay. I'll let some other people ask some questions. Thanks a lot.

Thanks, Mike.

(Operator Instructions) Robert Kecseg of Las Colinas Capital.

I was going to ask for the backlog. In the past I think you guys gave a backlog of connections. Did I miss that?

No, the number keeps going up and we think the right number is the number of connections, because that's where the revenue is. We are now getting more comfortable, and you'll see this on this. As we get more comfortable with pinning something down that ties to revenue, we will make that more into a milestone.

Our pipeline, as we call it, continues to grow. But the meaningful thing is the goal for connections, and as I said, nearly a double this year to something north of 200 is a very ambitious target.

In terms of the beginning off on the direct store delivery connections versus, now, the Mega Hub idea -- is the Mega Hub automatically getting the Company involved in suppliers that are well beyond the little layout that you guys made about the ice cream and the dairy and that kind of thing? Is it spreading around through the store?

Yes, that's a very good question, yes. Historically, we really have been best known for our work in just a few categories of business, like you mentioned, dairy, bakery, ice cream, and some others. But this takes us everywhere in the store.

We are now doing everything from pet food to laundry soap and bleach and candy, and all the candy guys have signed up. And so on and so forth. We are ubiquitous now. And it's a terrific challenge for us. We are on stage with an opportunity to do some just wonderful things. It doesn't happen in a month. It doesn't happen in the quarter, because people have to learn to trust what we are saying, have to be able to take action on what we are saying to produce an economic result. But we know that when we do that, the results will be the same as it is with our retail customers, where they go, wow, this is great, I want more.

It's a pretty simple internal mantra. It's demonstrate value, get them so they understand what we are doing; see economic value from it, and they will ask for more.

And then as far as getting with these large, big brand-name suppliers, is the pricing working out okay with them like you were doing before as far as pricing your service?

Yes, we live in a world where if you charged a penny, people would say it's too much. So the fact is that we think what we charge is very reasonable. On this first Mega Hub, we charged less than we anticipate charging on the second and third and fourth and fifth, just as you would when you introduce a new service. But we have no reason to believe that there is anything other than upward pricing potential.

But our business objective isn't to do that with customers, per se. It's really to give our customers an incredible rate of return on their investment with us. I want our customers saying at the end of the day -- wink, wink, they are cheap. They may not say it publicly. They may not say it to us, but internally I want them thinking that we undercharge for what we do for them, and that therefore, our relationship with them is one of economic gain and that's how they ought to see it. I think that is critical in the kind of economy we are in and likely to be in for some time. I want people to think of us as a tremendous value proposition.

And then also back to the connections and the challenge there. As far as what you had anticipated, I knew it was building up to being a big challenge to deal with. How is that going now that you have been at it for, what, it's been a few months that you been working on the larger scale Mega Hub operation? As far as getting them signed up and going through the process?

I've always referred to it as sort of a paper chase, which is you've got to call this guy and then he is not there and so on and so forth. And he returns the call and you miss him and whatnot. Interestingly, I think over time, as we add more retailers and we are rolling out more of these at once, what you really bump in to is the suppliers have to budget within the fiscal year. So you'll see more work related to, yes, I am going to do this, but I can't do it until the next fiscal year because I don't have any budget for it.

So that tends to smooth itself out as we get more retailers trying to onboard at any given moment, it tends to smooth itself out. But I would say that it's gone just about like we expected. I know it frustrates our people internally when they send emails and phone calls, and they don't get returned. It's that paper chase that you and I have talked about.

And aside from the frustration factor, at the end, we are getting signed what we would like to get signed. And the most important thing is that we demonstrate the efficacy of what we do, because that will make getting more people on board easier. We now have representatives in so many different categories of business. If you were a competitor in the category and not seeing the information, you would start to feel left out in the cold. So over time, it should get easier as long as we execute well.

I will let somebody else get in there.

Okay, thanks, Bob.

Michael Fox of Park City Capital.

Randy, with regard to the additional vertical, have you guys identified what you want to do? You don't have to disclose what it is. I'm just curious where you are in that process and how you came to that idea.

We have done some peripheral work, low-level work around the industry that we're going after before. And we think the timing is right in this particular industry to insert ourselves, if you will. So we've been doing our homework there for about 6 months, and now we are in the hunt.

And when do expect revenue from that vertical? Or do you have any ideas yet?

Tomorrow morning.

All right.

I am only kidding. (laughter) We just don't know, Mike.

Okay.

We are comfortable with the feasibility. We know we can help people who are players in the industry, and so now it's just a matter of getting 1 in execution.

Okay, great.

Thank you. I'm showing no further questions at this time. I would like to turn the call over to Management for any closing remarks.

Thanks, Tyrone, thanks, everyone, for joining us on the call. My number is in the press release. If you have any questions, free to give us a call and we will try to get the answers for you.

Thank you, guys, thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.