Park City Group Inc (PCYG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Park City Group's second-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. David Mossberg, Park City Group's Investor Relations representative. Sir, you may begin.

Thank you, Mary. 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 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 beliefs 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 that non-GAAP terms are a useful financial measure for the Company primarily because of the significant noncash charges in our operating statement. There is a reconciliation of the 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 on the call today.

My remarks today will cover our operating results for our fiscal second quarter, which ended December 31st. I'll also comment on certain cash flow and balance sheet related items and then I'll turn the call over to Randy for his comments.

I'll begin my comments by discussing revenue. In what is seasonally our slowest quarter, the pace of subscription revenue growth slowed somewhat to 5.4% year over year. The increase in subscription growth came from both new customers as well as growth from existing customers, and was offset by a slight increase in customer churn, which affected the growth rate by approximately 5 percentage points.

We had one retailer relationship that we chose not to renew, as the terms of the renewal were not economically viable for us or for their suppliers. Our customer-first philosophy continues and we do continue to support those suppliers connected to this retailer upon those suppliers' requests. Also during the quarter we had another retailer delay implementation of our service until they've completed an installation of a new ERP system. We expect this project to restart prior to the end of the June quarter.

As we said in the press release, we've had a lot of success in upgrading the value of our customer relationships and these activities are expected to show up in the form of accelerated subscription growth during the June quarter. I'd like to remind everyone 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 able to recognize the revenue.

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

Moving on to operating expenses, total operating expenses were $2.7 million, which increased approximately $200,000 in comparison with the same period last year. Approximately $100,000 of this increase was related to the accounting treatment of development costs which were capitalized during the prior year and expensed during the most recent quarter. On a sequential basis, second-quarter operating expenses decreased by $90,000 versus the quarter ended in September and were in line with our expectations.

Touching on profitability, for the second quarter the Company reported a GAAP net loss applicable to common shareholders of $384,000 compared to a net loss of $22,000 during the prior year. Our adjusted EBITDA for the second quarter was $429,000 versus $680,000 during the same period prior year.

Now I'll comment on our cash flows and financial position. As of December 31, the Company had a cash balance of approximately $1 million and a total debt balance of $3.2 million. The year-over-year total debt balance decreased by $817,000, or 20%. During the second quarter our interest expense declined 45% on a year-over-year basis due to the elimination of notes at a 12% interest rate.

Overall, our balance sheet should continue to improve over the course of the next year. To align expectations we will focus on reducing our unsecured debt balance, which as of December 31 was $1.7 million. This will leave us with debt secured by our account receivables and capital equipment. As of December 31 our secured debt totaled approximately $1.5 million. Overall, we've made great progress on reducing our debt balance, and expect to continue strengthening our balance sheet.

Well, that concludes my review of the financials. At this point I'll turn the call over to Randy.

Thank you, Dave and Dave.

Okay. Just a couple of summary points -- it seems like we need continual reminders of this but, again, we're not a quarterly sequential company. It will be some time before that's a possibility for us, because of the nature of our business, which has both seasonality associated with it and the change from a licensing to a subscription revenue base. Critically important that all of us understand that the objective here is to build the highest enterprise value that we can for the long term.

In addition, as we know, the most important thing we can do is to maintain our reputation. So for those of you who were on the conference call at the end of our last fiscal year, we mentioned that this first half of fiscal '12 would reflect the need, if you will, to make sure that all of the scaling that we have done, all of the new connections we made were producing the kinds of economic activity that we wanted.

When we set out objectives for this year to those of you who were on the previous call, there were three primary objectives and one that we've implied. They were these. One, we said that during the course of this fiscal year we would reach the, as I think I called, fish-or-cut-bait with the food safety initiative. The second thing we said was that we wanted to have an opportunity that we could close that would take us into at least one additional vertical market.

And the third objective, which in the long run is the most important, was the ability to demonstrate that we could be an end-to-end supply chain provider for our customers, that is to say that in our connection model, if you will, that we could show our customers economic value and therefore achieve better revenues and sell additional services once we had made a connection with one of our subscription-based clients. And the objective there is, as you know, the business, although it depends to a certain degree on the number of connections, equally if not more depends on what sort of revenue do you derive from doing business through that connection. And that's where the whole supply chain opportunity presents itself and it's been the extreme focus of the business this year.

Okay, so the question is -- how have we done? I want to leave food safety for the moment and come back to it, because it, I believe, is the most significant milestone that we've achieved this year and deserves separate comments from me as I wrap up.

Let's go to the third point, which I think in the long run for the business's enterprise value is most important. As you know, we took on about 100 new connections, mostly in the fourth quarter of last year. If you remember, that again is typically the biggest quarter for connections. The first few quarters are not that high. Last quarter tends to be much higher. You can expect the same this year, obviously. What we found was that once they got connected the question was -- could we diagnose the kinds of problems that people would experience as a function of seeing information that perhaps that hadn't seen before, likely hadn't seen before? And would we be able to help them identify the root causes of those problems? And would we be able to sell them additional services?

And I am extremely proud of the organization, that considering that we brought in, in round numbers, slightly more than 100 new connections, we're in the process in several dozen of those today of either having already helped them identify problems that we can solve, upgrading the value of the connections, or somewhere in the pipeline of accomplishing that. And, frankly, that's well ahead of the plan that I would expect.

We're seeing some pretty interesting examples. We had one example of someone who had a set of services from us for which they were paying on the order of about $2,000 a month. Those services uncovered a whole variety of fundamental problems that related to their assortment planning to their ordering to excess inventory and whatnot. And the scope of that project has gone from about $2,000 a month to nearly $20,000 a month. There are several other cases where some of our supplier vendors to retailers have found that they are having returns [in stales] that exceed what they had planned on or hoped for and from us are now in the process of negotiating the addition of our store-level ordering and forecasting and so on and so forth.

So there are more of these upgrades in the process than I had any reason optimistically to believe at this point in time. And as a percentage of our new total number of connections, it's a truly extraordinary number, in my estimation. And I think you'll see the impact of that as we'll see in the fourth quarter of this year.

Equally importantly, we're also having a high degree of success in getting people who would normally buy licenses to convert to software-as-a-service, where we actually manage it and provide it on our own hosted computers on their behalf. As you know, the idea of cloud computing, if you will, is a relatively new idea. But the talk of cloud computing in the universe is helping us a lot make it easier for our customers to switch. So we're having a very reasonable degree of success in accomplishing that and I'm very pleased. And I think we'll see the financial impact during the course of the fourth quarter of this fiscal year.

The second objective of the year that we mentioned was to bring on an additional vertical market into our domain. And we are hot on the trail. At this point I'm quite optimistic that we'll have a significant edition to our portfolio of customers, or the list that makes us proud, our key list, in the course of this fiscal year. So my confidence level of having an incredibly important win outside of the supermarket industry is much higher than it was before. It's reasonable to say that they're at the end of that pipeline funnel and hopefully we'll see them fall out here in the course of the next few months. But I think we'll have some very good news on that front.

And third, and perhaps most importantly, as you probably saw in the separate press release this morning, we've announced that we are going to create a new venture. The partners in that venture will be Park City Group as well as Leavitt Partners. A little bit about who Leavitt Partners is -- Mike Leavitt, which oddly enough is also the name of the firm, Mike Leavitt has an amazing background. He was governor of Utah for three terms, then became part of Bush's cabinet. He ran the EPA for a while and then ran Health and Human Services for a number of years.

In that capacity, the FDA was part of Health and Human Services, and I'm sure you know, and they helped establish a framework for the improvement of food safety. So when Mike left the political realm he set up Leavitt Partners. I'd strongly encourage you to go to their website and see the CVs and their background. But they are a world authority on two areas, food safety and where the health industry and drugs, pharma, et cetera are headed. He has a customer list that is literally a who's who in those domains and his staff is amongst the very best respected people on the planet in terms of both food safety and, equally importantly, everything that's pharmacological.

So what's important is that in this partnership we now bring together a technology that exists that will enable tracking and tracing of either drugs -- and important to note that we're now talking about not just food safety, but drug safety -- but food and drug tracking and traceability. With a partner who has a worldwide reputation, which obviously provides both a validation for our technology, but equally, increases the status of our effort to become the industry standard in tracking and tracing around both the pharmacological industry, pharma industry, and the US food safety arena.

It's an extremely exciting venture. I think it brings both better focus to the venture itself and the negotiations that we're having with participants and users of the system, and Mike's organization, Leavitt Partners, brings an enormous amount to the table. We're proud to have them as a partner, for certain.

And, interestingly, if all goes according to our plan it will begin to have the financial impact in the June quarter. So this gives us a tremendous acceleration of the entity and I think at the end of day creates enormous potential value for Park City Group shareholders.

So I think the -- we feel very good about the direction we're on. I think we'll achieve all three of the objectives. Two of the three objectives for the year we're very comfortable. I think we've got them well on their way, both the upgrading of our customer relationships and providing high economic value and therefore deriving more revenue from those relationships. Two, the food safety thing is a tremendous win for both us and Leavitt partners and, frankly, the industry.

And then last but not least, as I mentioned, I'm feeling increasingly confident that we will add another vertical market to our portfolio. And I think all of us will be pleased with the scale of that initiative and its ultimate impact on our business.

So that pretty much wraps up how we did. Obviously, what we're suggesting is that we'll see an acceleration as all three of these things come to a culmination in the fourth quarter of this year. Because we're not sequential, as you know, last year our connections were heavily to the back end of the year. That will be the same this year. They'll be a lot more connections here in the course of the next number of months. On the other hand, next year could likely be the reverse; we might have more connections in the first half of the year than the second. So it's not something that's either controllable by us or highly predictable. It really depends a lot on the seasonality of the business and the vertical market that we're in.

So things look excellent to us now. I think the fourth objective that I mentioned that Dave has already commented on, and it wasn't quite a full bullet point, but it's a 3.5 bullet point, was that our intention is to continue to improve our balance sheet. So, again, we have as an objective very close in to see continued improvement in that so that our debt is eliminated down to the secured debt for our accounts receivable and our CapEx.

So all of those things seem to be on track and I think we will have accomplished all the objectives for the year. Certainly from a management perspective we're feeling quite good about where we are. We wish it were smoother and every quarter was some sequential something, but as I've said whenever anybody's met with me or talked with me or have ever had a chance to speak, that isn't us yet, but one day it will be. And I promise when we think we're there we'll tell everybody you can start seeing the sequential quarter-to-quarter growth.

Okey-doke. Back to David Mossberg.

Mary, can you go ahead and open up the call for questions?

(Operator Instructions) Mark Stafford; Stafford Capital.

I dialed in late, so you might have already commented on this. But prior to this press release was the one about the C stores.

It wasn't about C stores. It was about Nexxus, our partnership with Nexxus.

Oh, okay. Did you comment on that at the very --

Yes. The Nexxus partnership will give us a couple of opportunities. It helps us add an additional service to our existing customers. And it also will enable us to be more attractive in what we do to the convenience store community, where they are market dominant. So as the partnership evolves and we take them into our customers to perform their services, the reverse will also happen where they take us into their customers, who are primarily convenience stores. And I think that gives us an excellent opportunity to develop convenience stores as a possible, if not likely, channel for our kind of service offerings.

And with the new Leavitt partnership, I saw that there was going to be maybe a second company set up that's going to be funded by private investors. Did I read that right in the press release?

Yes, I think sort of. In other words, what's going to happen is -- the framework is in the process of being decided. But it will be a separate venture. In other words, the food safety capability will be put into a new company. Park City Group will have a very significant ownership in that company. That company will also have an ownership interest by Leavitt Partners. And it's anticipated that it will be capitalized by a group of outside investors, independent of Park City Group. So the net result is that it will be a stand-on-its-own company with its own financing, not dependent on us for financing. And it has a [salutory] impact on everything that we're doing.

So, yes, it will be a new company in that sense. So it is truly a separate venture, where in the case of the Nexxus, to differentiate, it's not a new company. It's just a marketing agreement between us. So this is a bigger deal than that in the sense of the structure as well.

So it does two things. It keeps Park City Group highly focused on what we do. And it keeps the new company in food safety highly focused on what it does, which should let both go faster. So the all-in impact of this is, if we achieve the objectives that we both agree seem quite reasonable, I think all of us as shareholders will be very pleased with the outcome.

Well, it looks like everything is going well. Thank you.

Michael Fox; Park City Capital.

Can you discuss the churn a little bit more and the impact that will have on the next few quarters as that anniversaries?

We prefer not to talk about it in too much more detail. Let's just say, as Dave said, it was -- at the end of the day there's -- we have to be trusted by both the supplier and the retailer. And our strength, our market reputation, is based on the fact that both parties know that we will not disadvantage one over the other. And in this particular case a retailer decided to change the rules of engagement and not in a tweaking kind of way, but a game-changer kind of way. And our conclusion was that the consequence of that in the long term for our business would be extremely detrimental, that the goal of this particular retailer was to shift an enormous burden -- and they don't even know the full burden yet -- to the suppliers. And pretty soon you'd get blamed for it. So this is a case where we're afraid there was going to be a food fight and we didn't want to be in the middle of it.

So they'll be some impact in the current quarter, most of which we're overcoming with the addition of new stuff. So I (inaudible) by the fourth quarter it -- we will fully overcome it.

Can you -- I know you typically don't give guidance, but you talked a lot about the ramp-up, or the acceleration and revenue growth in the back half, or the June quarter. Can you give us an expectation for subscription revenue over the next couple of quarters?

You mean without giving you guidance?

Well, you can call it whatever you want.

Thanks, Mike. The answer is we're in those places -- the next major piece that has to fall into place is going to be this piece with the additional vertical. And that should allow an acceleration. Last year we did call it 10%. So we think that's kind of a base-level minimum. So you could expect that we're going to be happier. And I think in the next couple of quarters you should expect it to be between 10% and 20% -- and how's that for a bracket -- but over time it will keep moving up.

So if it's 10% to 20% -- pick a midpoint if you want; I'm not giving that as guidance, but if you want -- over time that number should continue to accelerate so long as our program of upgrading the relationship that we have with our customers so that they buy additional services from us because we can demonstrate tremendous economic value, we should continue to see a very reasonable level of acceleration. So we're focused not on just the addition of new connections, but the upgrading.

I think -- let's put it this way. Internally we're certainly going to be pleased. Those three basis business objectives were the most important for us. They'll show up in the top line in the fourth quarter. But just, as I say, we've got -- a lot of the things that we've really labored with to get done we've now given birth to. So it feels pretty good at the moment.

Right. Okay. Can you give us an update on the progress with the Mega Hub that you guys signed and then the prospect for additional Mega Hubs?

Yes. The Mega Hub that we've signed is going pretty well. I wouldn't say it's incredibly good and it's not incredibly bad. It's only at the pretty well stage, because it's new to us and we're still trying to learn how to get to higher levels of value for the customers. Some customers will look at the data and they say to us, "God, this is unbelievable, best thing we've ever seen." And others go, "Well, I don't know what to do with this."

So we still have to get that sorted out before we grow the Mega Hub opportunity. But it's still front and center and we're feeling pretty good about it. I think if we do -- we've been doing a lot of internal preparation work around this additional vertical market. And I think if we're successful and we would be making that announcement before too long, you'll see why it's moving up into first place. Food safety and this additional other opportunity is front and center in our activity.

And you know me, I'm very literal. So the Mega Hub is only doing pretty well, but it's not doing badly. It's doing pretty well and we just have to figure out more about what we can do to demonstrate a higher level of value to the participants. That's always our sensitivity, is the level of value. It's not obvious to us why, when people see that they're out of stock or overstocked, they can't see the opportunity to take action. But in some cases some companies just don't seem to care. It's kind of interesting, actually.

Right. And then, as you guys become closer to a net cash position what are your plans to do with the cash as it piles up? I mean, if the stock stays down where it is today, I mean, would you guys [do] a stock buyback?

Oh, yes. I think something that the Board would consider is whether or not we -- once we've got our debt to a level that optically feels right, and I personally believe that optics for us relates to larger and larger customers looking at our financials. I want them to see enough cash on the balance sheet so that debt is less than net cash, whether it's secured or not secured. And that the impact of that, then, is for us to be able to say -- now, with the excess cash what do we do? Our CapEx, as you know, remains quite low. It's just a few hundred thousand dollars a year. In fact, I think we anticipate this year's CapEx will be lower than last year.

Yes.

So I think from a reality perspective if we think that the stock represents value and we have excess cash, I'm sure the Board would be open to that.

Okay. Thanks a lot.

(Operator Instructions) Walter Schenker; MAZ Partners.

Randy -- and I've only been involved in the Company for about, I think, 15 months. And the initial thesis, which is only partially changed, was that we have a demonstrable service which, at least for parts of the supermarket industry, has proven to add value, that [we've gotten] to this point. We can then move this forward in not necessarily a straight line, but by adding both spokes and hubs --and you somewhere addressed hubs -- and that at this point we thought there was a fairly -- not straight line by quarter by quarter, but year by year -- straight line progression to grow within the vertical, which is an extraordinarily large vertical.

If one looks at today the progress in that vertical, which again, is a very large vertical, is maybe a little disappointing. And we're talking about both having to, or wanting to, add another vertical as well as moving ahead with Leavitt on another area. You're a small company, got that nice little headquarters building. I'm still trying to understand if the expansion to other areas does not, in fact, indicate some frustration, disappointment with where you thought you might be in the original vertical, and if that also may not be having some effect on the slow rate -- and some might have hoped for growth in that vertical -- as you people have worked on looking for another vertical and the deal with Leavitt.

That's a good question, Walter. And it's interesting, because it's the first time I've been asked that question. Usually the question is -- when are you going to demonstrate that you can do something outside of the supermarket industry? But part of this is that if we don't do what we can do in one or more verticals, somebody else will, which means that the ultimate value of the business is diminished when someone evaluates us at the end of this journey and simply says -- well, the only thing it seems like you could do would be the supermarket industry. So even though it's large, it's an industry.

So we think it's very important to demonstrate the efficacy of what we do in other verticals. And we've always thought that. There's never been a doubt. And when people have asked whether or not we can, the answer is -- we have all of the technical capability that we need. The question is -- when is the right time to do it? And we felt as if this year was the right time to begin that journey.

So, no, it has nothing to do with what we think the sustainable growth rate is in the supermarket industry. And as I say, it would be nice, from Randy's perspective, if people would take a step back, don't worry about the quarters. Take a look at the year. And you're going to see a continued contraction of the licensing revenue and a continued expansion of the subscription revenue, which is exactly the plan. In addition, that contraction of the licensing revenue should trough probably this year. So interestingly, it's reasonable to assume that now as we see the acceleration in subscription revenue, that now the total top line will begin to move north more aggressively than we've seen. And everybody will go -- oh, I see how it works.

So to a certain extent we're undoing the fact that the Company was a primarily license company some number of years ago. In fact, four years ago -- keep me honest here, Dave -- licensing was probably 70% of the business.

Yes.

About 70% of the business was licensing. And today 70% of the business is recurring revenue. And I'm not ashamed of that at all. During that same period of time, we generated positive cash flow, paid down debt, added customers. I mean, I know that everybody in the market would like revenues to go up, like, 61.7% per quarter. But the truth of the matter is it's -- and I'm not patting ourselves on the back because we can always do better -- but it's a pretty interesting achievement.

Now, having said that, I think it's reasonable to ask the question that you asked about food safety. I think that's a different beast. And the truth of the matter is that the food safety initiative was one that we said was important because of the timing and the increased focus on the law. And to the best of our knowledge we're the only technological platform in existence that can allow people to easily, inexpensively, without barrier, exchange information up and down the supply chain to enable them to track and trace any kind of product -- doesn't matter whether it was a toy or a cantaloupe. It's an extraordinary capability.

We got into the opportunity by virtue of conversations originally with Mike Leavitt and I at a breakfast. And now I think it's come to fruition. By putting it into the separate venture, I think it does just what you're suggesting, Walter. It gives it more focus and at the same time lets Park City focus on what it does best, which is the maintenance of this platform and the growth of the business in the current vertical market, where we play such a big part, and at least one additional vertical market -- you'll see they're pretty closely allied -- to demonstrate the ultimate market potential of the business.

So I think half of what you're saying is valid and I think we've taken the step to give it its independent identity, independent capitalization, and independent focus. So I think that's true. But to pass on the opportunity would be really crazy, Walter. It's a huge, huge, huge opportunity.

The level of interest in food safety is a growing issue. I was just a presenter and wrote a paper. In fact, it's on the website for those of you that don't mind turgid reading. But we wrote a paper about food safety and the problem. The number of incidents -- a few years ago food safety in the US was a few hundred; I think in the last couple of years 1,600 to 1,800 and growing. More and more of our food comes from outside the US. It's a big problem. And since we have a technology platform that can assist and take time out of the process of identifying the source and then finding out every place that it went, I think there's an obligation to make that available to the public. And that's precisely what we're doing.

But it won't drain our resource. It really, I think, is in addition to what we're doing. But that's a good question. Half right; half I would disagree with.

To get my sort of last word in, which probably won't be the last word, over many decades, investing in many companies, I have found that investing in technology or requirements which are part of a government edict, which are supposed to be achieved, especially when it's very difficult to do that due to the lack of infrastructure and systems, has almost universally taken longer, and sometimes many, many years longer, than anyone expected, despite the original legislation. So --

By the way, let me --

(Multiple speakers) --

I'm in violent agreement with you. We absolutely agree it will take longer. And in a sense, remember, what we're doing isn't just enabling people to comply with the law. It's a very different idea. The law is going to cause people to think about this, not as a secondary concern but increasingly as a primary concern. In other words, can't tell you who it is, but let's just say it's one of the largest retailers on the entire planet, made a very dramatic statement when we were talking with them about this. They said -- we're interested in your technology not because we would want something that was proprietary, because we don't think we should try and gain competitive advantage in food safety. It's an industry problem; it needs to be solved industry-wide.

So we agree with you that it will go slower, but as people think about it, that helps us. It puts cus- -- we're not really -- we're not legally compliant. In other words it's not just a way to comply with FSMA. It is much broader than that. But your comment's absolutely right, go slower.

Okay, thanks a lot.

Robert Kecseg; Las Colinas.

My question is kind of going back to the early days of learning about the Company, when we talked about the direct store delivery and entering into so many companies' hubs to provide that service. When I picture the schematic that you tried to do on your slides when you presented it to people, it seemed like there was going to be a building of business, of revenue, as those hubs were longer in the system.

So if I just go back to, say, 2009 and we just lay it out in, say, 2009, '10, '11 and now we're in fiscal 2012, half way through. So those that were in the pie, or pot, so to speak, the hubs that were there in 2009, they would now be into their fourth year. And those that came in 2010 would be into their third year and et cetera. 2011 would now be into their second year. So help me get a better picture of where the revenue is growing as those hubs are longer in the system.

Got it. Couple of things -- if you took a look at our base revenue of two or three years ago, remember some of that has gone away because we stopped those services. So there is synchronization services -- I don't want to go into detail, but a number of legacy services -- that we have had to discontinue just by virtue of the fact that it was too much to support, too little focus on those activities. So that contracts over time our recurring revenue base.

At the same time we've been adding those hubs and spokes to the system. So most of them are in their second year. What we said was that they typically take, we think, 3 to 5 years, call it 4 years to mature. And they all seem to be maturing. In fact, interestingly, our two largest hubs are continuing to add to their relationship with us. Our very biggest is in the process of adding and our second largest is in the process of adding.

So, so far we have no reason to think that kind of the 4-year build-out [is] about right. I think the only things that we've seen the delay are the issues of when their start date is, because when they contract with us versus when they actually start can be some period of time. And certainly it's not necessarily the next quarter, because we're often behind other projects of data extraction and merchandising systems and whatnot. We've had one that's delayed almost a year while they installed new systems.

So, so far we don't have any reason to change how we think the build-out of a hub should affect itself. And this is the year when I've said that we should have contracted out, squeezed out any of the services that we're discontinuing. And now it should just be net addition, which is why we're feeling good about how the subscription revenue growth should grow.

Does that answer the question?

Yes. And to kind of follow along with that, as far as your staff being relatively small and trying to keep your company really under control, because I know you're always really emphasizing the integrity of the business and quality of the business that you're providing, the service that you're providing. Is it fruitful to think that there should be a more aggressive stance on trying to put more potential customers on line from the start to where we try to grow a larger number of hubs?

No. Let me tell you why. With the kind of offering that we have, which, remember, runs from shelf-level diagnostics, looking at scanned data, all the way back through the supply chain to the factory floor. As far as we know, nobody else does this kind of broad supply chain sort of service. It's very, very difficult to grasp.

If you were a supply chain specialist and you came to work for Park City Group -- and we have several of those people -- you don't understand the shelf-level activity. Because remember, supply chain is built historically on the basis of what's shipped, not what's sold. So the whole supply chain looks backwards to you compared to how Park City Group sees it. Conversely, if you're good analytically and understand retail, the rest of the supply chain offering might seem like a foreign language.

So we've had to do an extensive amount of internal training to get our account executives so they understand the end-to-end supply chain. So if the question is -- are you satisfied with where the sales and account management organization is in terms of their knowledge and productivity, the answer is no. But, given the number of these upgrades and increments that are currently being negotiated, that says to me that they're getting better and better at helping their customers to identify the supply chain opportunities and the Park City Group module, the services, that provide resolution and solution to the problems.

So we're making progress. It's probably not as much as I would like. But I think it's pretty good. And it's more important to do the quality of this work -- we're building some case studies that are really just stunning. And they're going to help us in the long term. So there's nothing I would like better than for it to go faster, flawlessly. But it's really important that we execute well, as you've heard me say a million times. And the people are just getting better and better. So I'm feeling better about the group now than I did nine months ago, because they were all new. And now they're seasoned and doing a better job and, frankly, that's all good for us.

Just kind of giving an order of magnitude as far as the account exec type people that we're talking about, about how many people does that comprise?

We have 13 in the sales organization right now.

Yes, about 13 people. And, remember, some of them came from retail; some of them came from CPG. So they each have to learn the other's business. Some of them understood the analytics; some of them didn't. So it's a training mission. But once they see the supply chain, there's none of us have been anything but amazed at the economic opportunity that we uncover.

Here's an example. We're working with a retailer, very small retailer, and I'm very close to this account for learning purposes for me. And this retailer originally called, and they were bought by private equity, and said -- we have got to find a way to get our inventory levels down. Can you help us? We said -- yes. But our suspicion is that your inventories are, in some cases, too high, but we also think you've got huge out-of-stocks. So your out-of-stocks are equal to your overstocks. And he violently disagreed. It was like -- no way; it's just overstock.

Well, what our analytics uncovered was that out-of-stocks are horrific, maybe the worst we've ever seen in a retailer. And their overstocks are horrific, both. But this is what you'd expect, because the same person who does one kind of ordering incorrectly is likely to do the other kind of ordering incorrectly. So the net of that is, their need for what we do has gone up dramatically. Our ability to help them has gone up dramatically and I think is going to be a kind of case study I'd like to see Harvard take on. But it shows that our economic value proposition is as good as we ever imagined. And the more data we get and the deeper we look in the supply chain, the bigger the opportunities that we see.

So the people are good; they're coming along. Is everybody perfect? Nope. Nope. But we're training people to the standard that we need to be successful. We're certainly focused on them.

I also got on there a little bit late in the beginning, so I missed the very beginning and I haven't had a chance even to read the narrative here yet. But do you still have this goal of so many hubs per period that you're trying to add?

The answer is, yes. If you remember, the goal was to add 8 to 10 hubs per year, average store size about 100. So add about 800 to 1,000 stores, if you will, to the network each year. That is still our plan.

Sorry; I jumped off. I didn't have any help here.

Oh, okay. The answer is, that equates to about 800 to 1,000 stores a year to be added to our network and we're still on plan to do that, absolutely.

Okay, great. Thanks.

Michael Fox; Park City Capital.

I just wanted to go back to a couple of things earlier in the call. On one of my questions you talked about potential subscription growth of 10% to 20%. And then you also said later that the license revenue should likely trough this year.

Correct.

So that would indicate that beginning in 2013 we should probably see overall revenue growth double digits at least. Not to hold you to that or guidance, but just so I'm thinking about things correctly, that's kind of conceptually how we should think about it?

Mike, you've got a career ahead of you in investor relations.

I hope not.

Yes. But let me explain why that -- and, look, I don't know enough now to understand the licensing thing. Let me tell you what I think is going to happen. Now that we have more customers, more spokes that we're talking to -- and, you know, it takes time to develop -- let me give you a stunning statistic, the one that just knocks me on the floor.

As you know, most of the 100 connections that we did last year occurred in the month of June. That's when the contracts were signed. Right?

Right.

Well, it took July, August to get them up and running so they looked at data. Right? So realistically, from September to December, three months of looking at data across, let's say, 100 customers, we've uncovered several dozen opportunities that we are in the process of working where the data has, in essence, said to the customer and our account executive has pointed out -- wow, there are issues here and we can help you with these.

That's a huge percentage. That's much bigger as a percentage than I would have guessed. So the idea of getting into the account, demonstrating economic value to the customer, showing them the problems that they're having and, most importantly, doing whatever we can to help them become more profitable. I know I sound like the E.F. Hutton guy, but the more -- the better our customers do, the better we will do. But if our AEs get into these accounts and help our customers -- and sometimes our customers don't even look at the numbers. It's a heartbreak. So what happens is we'll send them an email and say -- you need to look at this. You've got a problem.

But inevitably what we're finding, with much higher percentage at this point -- I don't know if this will continue -- but at this point a much higher percentage of the people that are looking at the data are seeing their problems. And we are talking to them about how to solve the problems with our other products. That is a huge, gigantic thing to Randy and in the long run is, frankly, more important than whether we do 200 or 100 or 300 new connections this year. It's showing our economic value to the customer. They only do more business with us when they see the economic value. So that's why that's a terrific validation for us.

And it's not just universally, too. As I say, we've had some customers that say -- no, I don't care if I'm out of stock. I don't care if I'm overstocked. Not my problem; I don't care. And I've seen that and, frankly, that surprises me. But many more instances where we're seeing that.

Now, having said that, what I don't know is -- will all of those be convertible into opportunities as a software-as-a-service, or will some of them insist on buying those solutions that they're now seeing the need for on the licensed basis. And that's why, Mike, I think you're going to see a trough this year, because our exposure to a larger number of customers is growing dramatically. And that means that the number of licenses that get sold is now likely to go up. And therefore I think it will trough this year.

Now, we have been more successful than I'd guessed so far at getting people who were license-centric to become software-as-a-service customers. That part is going better than planned. But I don't know if that will continue, and if it doesn't continue then it means that licensing will start back up in absolute dollars again next year.

Longwinded answer, but I think it was pretty complete.

Right. And you think it continues to be valuable to sell on a license basis instead of a software-as-a-service?

I would rather not. If I were a customer, I honestly would buy it as a service from us. I don't have to do the administration. I don't have to have the hardware. I don't have to have the people dedicated to it. It's somebody else's problem.

On the other hand, there's simply some CIOs that want to have it for whatever reason, as they say, behind their firewall. And we either have to walk away from the business, or do it the way they want. And so at this point, I want to control the end-to-end solution so much, because it works so well when we do it. And we're going to have a case study or two this year, I'm quite convinced, where we are every single service from the shelf back to the factory floor, up to the factory floor. I think we're going to have at least one or two or three of those in the next few months, where we are the end-to-end solution. And that is a game changer for us. It's something that we can then build our marketing around. It's a breakthrough. It's a big, big deal. So we're moving heaven and earth to make that happen and so far the market seems receptive to it.

But we can't keep them from buying licenses if they say that's the only way they'll do business.

The companies that you're going to do end-to-end solutions for, how long have you been doing business? I assume that they're existing customers?

Yes. Yes.

And how long has that taken from the relationship's commencement to you have potentially doing end-to-end?

I'm guessing here. Let me look at my list. Oh, anywhere from six months to several years. But the thing is, remember, in the old way this company did business before we acquired it, they were never offered end-to-end solutions. If you did business at one end of the Company, that's all you knew about. If you did business in the supply chain part of the Company, that's all you knew about and never the twain shall meet. So this idea of creating an integrated offering from the shelf to the factory floor, connected from the shelf to the factory floor, was why we bought the business and why we've broken it down the way we have and why we're remarketing to those customers.

So we've only been talking to people about this concept as customers since about September of 2011. So we've been in this now three or four months and, frankly, that's why I'm sort of surprised at the number of people with whom we're engaged in conversation.

Right. And as you do more services for those clients, do you still have that I think it's 90% internal margin on that? Or does it take more resources to do that?

No, the margins are really the same -- from what we can tell, margins are basically the same across the business.

Great.

And it's just helpful to us to be ab- -- the more we do for a customer -- it sounds peculiar, but I've been an account executive. I'm one of these people, it's hard for me to lead something that I haven't done. So internally I've been actually an account executive for the last four or five months on a particular account, two accounts. And in this case, what I've found is, the more that we do for them, the more they want us to do.

Right.

And it's just exactly what I'd hoped. I now know better how it goes, what the customer's absorption capability is, and how we should gait that. But that's why I think this is the right answer, it's the right direction. Our people are getting better at it. Are they expert at it? No. Will they be expert at it? Yes. But it takes time; it takes experience.

In some cases we're talking to the wrong people in the company. In some cases we've done business only with the logistics part of a company. Well, they don't make decisions about other areas. So we've got to go from the logistics people to other people in that organization, to the sales organization, for example, the marketing organization and so on and so forth. So it takes time. But relationships of trust end up with more benefit to the customer and therefore more benefit to us. I'm sorry; I don't mean to evangelize here.

No, sure. Okay. Thanks for all the color and detail.

Thank you. I show no further questions in the queue and would like to turn the conference back to the speakers for closing remarks.

Thank you all for taking this much time this afternoon.

Thanks a lot you all. If you have any questions, feel free to give us a call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.