Park City Group Inc (PCYG) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Park City Group's first-quarter 2011 earnings conference call. 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 conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Dave Mossberg, Investor Relations rep. You may begin.

Thank you, Mimi. 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 facts. 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 forward-looking statements.

Such results 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 and on the Investor Relations section of our website.

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

Thanks, Dave. Good afternoon everyone and thanks for joining us today on the call. My remarks today will cover our operating results for the fiscal first quarter, which ended September 30. I will also comment on certain cash flow and balance sheet related items and then turn the call over to Randy for his comments.

I will begin my comments by discussing revenue. For the quarter subscription revenue was in-line with our internal expectations and increased 12% to $1.7 million. The increase in subscription growth came from both new customers as well as growth within existing customers. The split was roughly 80/20, with new customers accounting for the bulk of the growth.

We continued to experience some modest churn within the customer base, which offset growth by approximately 4% to 5%. Also, I would like to point out 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 retailer or supplier to go live on our system at which point we are then able to recognize the revenue.

Growth in subscription revenue was offset by decreases in both license and maintenance revenue. I will emphasize our focus on building our subscription-based recurring revenue and deemphasize our one-time license revenue model. The impact of this strategic decision will be the steady acceleration of subscription revenue, intermixed with the occasional lumpiness of one-time license sales.

The impact of these one-time license revenue will have less affect on overall revenue as the cumulative base of our subscription revenue continues to grow into the future.

Moving onto operating expenses, total operating expenses were $2.8 million, which was relatively flat in comparison with the same period last year. On a sequential basis first-quarter operating expenses increased by $70,000 versus the quarter just ended in June. Excluding a one-time legal settlement charge that occurred during the first quarter of last year, operating expenses increased by 16% year-over-year.

Almost one-quarter of the increase or about $90,000 was related to capitalizing software development costs during the prior year. The remainder was primarily related to our business scaling efforts, and the associated costs relating to the scaling efforts are not yet reflected in the prior-year expenses.

Expense levels during the first quarter were consistent with spending levels we have experienced during our last several quarters, our third- and fourth-quarters of the last fiscal year.

Touching on profitability, for the first quarter the Company reported a GAAP net loss applicable to common shareholders of $488,000 compared to a net loss of $509,000 during the prior year.

Our adjusted EBITDA for the first quarter was $373,000 versus $571,000 during the same period a year ago. While our spending was relatively consistent with recent quarters, obviously, our profitability was affected by flat revenue comparisons. I would like to reiterate that due to a shift from a license to a subscription model our quarterly results will fluctuate, and therefore it is better to assess financial performance trends based on longer periods of time.

Now I will address our cash flows and financial position. As of September 30, 2011 the Company had a cash balance of approximately $1 million and a total debt balance of $3.4 million. During the first quarter we paid approximately $1.5 million of 12% debt and reduced our total debt balance by approximately 20% since June of 2010.

Overall, our balance sheet should continue to improve over the course of the next fiscal year. We will use our cash flow to continue paying down debt and selectively make capital investments in new technologies.

That concludes my review of the financials. At this point I will turn the call over to Randy. Randy.

Dave, thank you. Dave, thanks for being here with us. I think as you all know, we set out in fiscal year 2012 with some very important objectives and goals. Let me give you the six that I think were most important for us.

First was continue to grow the number of connections by about 200 this year. It was to continue to add new hubs with the objective of having at least one very large hub in that mix. It was to extend what we are doing from the vertical market of retailing that we currently serve and add at least one additional vertical market.

It was to continue to explore our food safety initiative. And that we wanted to demonstrate that our business relationships could be both widened and deepened, meaning that we would be able to demonstrate through our financial success with our customers that they would want to do more with us, both in additional new products and same products extended to other relationships.

And, equally significantly, we wanted to demonstrate that we could significantly improve our balance sheet with the objective of having only our AR and CapEx lines still outstanding by the end of our fiscal year.

So let me review the first quarter and see how, at least internally, it is stacking up with those goals. Our connections continued, although as we said in our last conference call, the first half of this year would have a slower rate of growth of connections than the second half of the year, largely so that we can absorb the more than 100 that we did in our last fiscal year.

Our pipeline of new hubs is deepening, and we are definitely seeing larger opportunities than we have in the last two years. So we are increasingly confident of at least one additional very large hub addition to our portfolio here in the course of the current fiscal year.

We did have the objective of moving into one more vertical market beyond what we are currently doing. And I suspect that we will be able to achieve that in the next few months, well ahead of the original view that we took at the beginning of the fiscal year.

Interestingly, we have an increasing level of interest in our food safety initiative, and we hope to have good news about that in the course of the next few months.

Also, I think internally we are a bit surprised that we're getting as much feedback and desire to both widen and deepen relationships with our customers at this point in time of the cycle of working with them, which certainly is exceeding our internal expectations. Let me give you a little color around that.

An example, we are doing a Mega Hub implementation, and in the midst of doing that our analytics uncovered some interesting, let's call them opportunities, that this particular retailer had that is causing that retailer to examine a very substantial and difference service offering from us. And we are in the process of scoping that now. And that would not have happened had we not been successful in the initial relationship.

In addition to that, that same group has now expanded our purview to some very interesting additional categories and growing the business relationship. In that case, we call it widening or horizontal. So we have both a deepening and a widening of the relationship in this particular case.

We have been working with some associations, as you know, and the associations we are working with are now expanding to a large number of additional relationships, if you will, through their contacts. So that is certainly widening beyond what the initial expectations that we had were.

Many of our older and newer supplier relationships are finding via our analytics that there are issues within their supply chain that need addressing. So we are in the process of scoping and proposing solutions to helping our supplier customers to improve their supply chain delivery capabilities. That, again, is happening earlier in the cycle than we would have expected.

I think that we have also -- we mentioned that we wanted to make sure that we continued to grow the organization's ability to deal with our customers. So in the last several months we have committed to three additional account executives, senior account executives, to help us take care of our growing book of business.

So all in we feel very good about the quarter. Our pipeline is excellent at the moment. The people are performing well. The fact is that we are all focused on this concept of subscription growth. We feel very comfortable that the year is going to prove to be an excellent one for us. Our outlook is just about what we would hope for.

Remembering that naturally there is attrition to be expected, we have always anticipated the 3% to 5% attrition rate in the subscription base, but in spite of any headwinds that we have there both the pipeline and the commitments that we have will continue to grow us throughout the year.

So if we can, in fact, continue on the trends that we have established in the first quarter, the example of which is paying down $1.7 million of our indebtedness, the year from both a balance sheet, income statement, topline, and most importantly, quality of what we are delivering to our customers looks very, very good to us internally.

As a Company I know you've heard me, if you have listened before, heard me say it a million times, but I will say it a million and one. The most important thing we can do is to continue to deliver a superb experience and economic result to our customers.

That means not just focused on new technology, but the service level we provide and doing it with integrity, because we represent both parties. We represent retailers, we represent suppliers, and it requires that we be that independent third party in the middle and providing a relationship with great integrity and great capability.

So we will not be a sequential company. We will continue, obviously, because of the licensing. And licensing and services this year are still anticipated to grow, although as we know they will be lumpy quarter to quarter.

So all of us internally are feeling very good. And hopefully at year-end we have demonstrated a variety of these new initiatives and feel as if we are certainly on track to do all of that. So we feel very good. And at this point I will stop and let us ask a few questions. And I appreciate everybody taking the time this afternoon.

Mimi, can you open the call for questions.

(Operator Instructions). Michael Taglich, Taglich Brothers.

Randy, you want to give some guidance on the subscription revenues? They were on the December quarter about $1.6 million, about $1.7 million in the March quarter. The June quarter is a little bit over $1.7 million. They were up about $40,000 in the first quarter. How do you see that legging out with the hubs you have added, and how should we model it sequentially?

Well, I think as we are fond of saying, sequential is probably the wrong word, but by the end of the year of the outgoing quarter, we should see substantial growth over that same quarter prior year, and that should tee up everything that we want to do in the following year.

So last year, I think, our growth of subscriptions was in the 9% to 10% range. This year we think we will be a nice improvement over that, and by next year once again another acceleration. So the next two or three years should see, based on how we are doing today and how we see it from a pipeline, each of the next several years we will see an acceleration of the growth of that subscription base.

So if you were looking for a pinpoint number, obviously, I'm not going to give that. But I'm trying to say that I think all of us will be pleased with the acceleration that we see in that line item.

Alright, good. Thanks. I am done.

(Operator Instructions). I am showing no further questions in queue at this time.

Thanks everyone for participating, and -- oh, we do have one, it looks like.

Michael Fox, Park City Capital.

Randy, I was wondering if you could go into a little more detail on the non-subscription revenue and how that might look going forward and during the quarter -- can you explain a little bit and then going forward? Thanks.

I am going to have a little bit of uncertainty about it. Historically we have had supply-chain licensing opportunities come to us independent of what I'm going to call our core connection business. And those have tended to be relatively large licensing situations and, therefore, lumpy quarter-to-quarter.

We are increasingly focused on the supply-chain opportunities that exist between our retailers and their suppliers; and therefore, we believe that going forward most of those should show up as subscription revenue. However, it is also the case that as we are now addressing those opportunities by finding the problems, some of those customers are still insisting on licensing. So we have always said we can't abandon licensing because some customers want to do it, but it is just not very predictable. It will continue to be lumpy.

If I were a guessing person, and this is just a guess, the level of licensing in dollars and attendant professional services is bottoming out. So the number in aggregate should continue to grow, but it will still remain lumpy quarter-to-quarter.

So in subsequent quarters we will have more and in some quarters we will have less, but year-on-year both those numbers actually should begin to grow. Although I would love over the next say 4 to 5 years, I would love to have almost all of those ultimately become subscription base. I just don't think that is realistic because we have competitors in the market that sell licenses, and some suppliers and some businesses think that licensing is less expensive in the total cost of ownership place.

So where we have to sell a license, we do. Our preference is to take better care of our customers on a subscription, call it, SaaS basis and we do that. So it is just an unknown, Mike. (multiple speakers).

Right. And then can you give us an idea when you compare the -- if you talk about let's say a same client or similar client wanting you to license versus a subscription, whatever dollar amount it is can you give us -- obviously his licenses would be up front and then if it was SaaS it would be over time. Can you give us an idea of how long it would take to get the same amount of revenue from a SaaS client as it would from a license client, Whatever dollar amount that might be?

It is about three years. We would argue that it is apples and oranges. There are simply some people that still in today's world believe that they can manage a piece of technology, we call it behind their firewall, meaning it is their place of business and their data center.

But to give you an idea how strongly we believe in the SaaS model, when we did our scaling initiatives this last year we did a SaaS -- we purchased or are subscribing, if you will, to a SaaS accounting system. So we're big believers that -- you know, our core competency isn't running an accounting system, and, obviously, we are very good at writing software.

So we think that the world is moving in this direction, but some people are moving at a more measured pace. And CIOs may feel like they have more control of it when it is in their house and that sort of thing. But it is about three years until you get to the revenue.

The other thing is, there is a delay when there is a SaaS offering. In other words, when you look at how revenue recognition works, if you sign a license today and you ship them a license and it is done, if they don't install it for six months, if they don't start using it for six months, when it is a license you have recognized the revenue now. That is how it is, assuming you have no future obligation.

Where with a SaaS model, even if they agreed today to get going, if it takes them six months -- and we often now are seeing that where people have other projects or we have to connect to something or whatever -- that you know that you've got the revenue coming, but you just may not know the month that it is going to start.

So there is potentially the revenue delay associated with the SaaS offering, but over three years it is about the same number of dollars. Did that help?

Yes. Thanks.

You bet, thanks. It wouldn't have been a call without your question from you.

Steve Bell, Wells Fargo Advisors.

Randy, you mentioned the food safety and the interest is increasing on it, over the next few months that we might see something. How would that look, and what type of connections or things of that nature would we be looking at?

Thanks for the question. I think what we originally said was that either this would -- because of the law -- the Food Safety Act that goes into effect with some level of teeth starting in June of 2012, we thought this would be the year by which either people would say -- we love your idea and how to do it or we would have no interest.

So I would say at this point we have -- we are in conversations with some very, very large, very well-known retailers about the idea. One has at least expressed verbally that their intention is to test it with us. I would imagine that this year would be, best case, a year of testing with several retailers and next year would be the -- oh my gosh, we have to really do something.

So I will be about as happy as a human can be if we get to the testing phase with some people this year. We know it works. We know it is compelling. And every time you read about salmonella or listeria or any kind of a problem in the food chain, it causes people to think about -- wow, this is a real problem and, boy, is Park City Group beautifully positioned to provide a mechanism for tracking and tracing the issues around food safety.

So no revenues at this time, but what would it do on the expense side?

On the expense side there is not (multiple speakers).

(multiple speakers) testing.

It is neither. It is neither expense nor revenue in the current fiscal year. And it would be next year before there would be either. But remember, the nature of our business model is pretty much a fixed cost, low variable cost business. So that means as we take it on our variable costs would be negligible from what we can see. So it would only -- it would be a very, very attractive business for us as an opportunity.

Thank you.

I am showing no further questions in the queue at this time. I will hand the call back to management for closing remarks.

Great, thanks a lot, you all, and feel free to give us a call if you have any follow-up questions.

Thank you.

Ladies and gentlemen, this concludes the conference for today. You may all disconnect. And have a wonderful day.