Park City Group Inc (PCYG) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Park City Group's fourth-quarter 2012 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, today's conference may be recorded.

It is now my pleasure to turn the program over to David Mossberg, Investor Relations representative. Please go ahead.

Thank you. Before we begin we will be referring to today's earnings release, which can be downloaded from the Investor Relations page at the Company's website at ParkCityGroup.com. The conference call could contain forward-looking statements about Park City Group within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based on current beliefs and expectations 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 disclosed in the Company's filings with the Securities and Exchange Commission. Information set forth herein should be considered in the 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 debt and income loss and earnings per share which are non-GAAP terms. We believe these non-GAAP terms are a useful financial measure for our Company, primarily because of the significant non-cash charges in our operating statement.

There is a reconciliation of non-GAAP results in the earnings release and on the Investor Relations section of our website.

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

Thank you. It is going to be a pleasure today to introduce our new CFO, Ed Clissold. But first I want to apologize for the timing of the call. Given our filing deadline and recognizing today was a holiday, mea culpa. It was bad timing and I certainly apologize to people for that.

But having said that, I am going to do a brief introduction and turn it over to Ed and then I will wrap it up with some additional summary.

A little bit more than three years ago, we decided that the Company -- to maximize its value to shareholders -- would ultimately have to go from a licensing business that at the time was quite small in scale to a business that had a higher recurring revenue stream. In other words, a subscription model or Software-as-a-Service or cloud type business. And in doing that, we knew that there were certainly a series of difficult maneuvers that would have to be accomplished from a strategy perspective, from a product offering perspective, customer perspective, et cetera. And we said it would take a while to get it done and that we would do it in a way that absolutely provided the highest imaginable level of customer service and quality of result to our customers.

And I could not be more excited to say that we are there. We did it.

Let me give you some of the interesting highlights and numbers. When we started the journey to convert from a licensing to a subscription business, we had a very small subscription revenue stream. As I remember, it was just a few hundred thousand dollars a year with less than 10% of our revenue at that time.

We have gone over that three-year period from about 10% of our business being subscription-based to now something in excess of 70%. At the same time we organically have grown our subscription revenue base without regard to the acquisition by about 40% in the last several years. So it is a little bit like changing tires on a moving car. But we are very pleased with the results economically.

At the same time we knew that we had to scale the business, build the infrastructure so that we would be able ultimately to deal not with just hundreds but potentially thousands of connections with our customer base. So we certainly feel as if we had done that.

And at the same time we took on debt in order to accomplish the acquisition that we did a few years ago. And I am pleased to say that since that point in time we have paid off nearly 70% of that debt to the point that today we feel as if we are in exactly the right position with our balance sheet. I will speak a little bit about that later.

So, mission accomplished. I am a little leery of saying that, in view of the political ramification. But we have certainly repositioned the business from licensing to Software-as-a-Service.

Just a little footnote. Others are trying to do this and frankly not nearly as successful as we have been able to do to transform it from one type of business model to another. So, we are proud of the result. The team has done an outstanding job. I am very, very proud of them.

Last year, fiscal 2012, we had three major initiatives that we undertook. And let me repeat dose because we are going to come back and comment on them later.

In the long run, the most important objective last year was to demonstrate that, in addition to just being a diagnostic tool, what we would be able to do for our customers is to help them solve their problems. And if we improved their economic standing, we would get more revenue by selling more services to them. But the first and most important position was that we had to go from being just a diagnostic tool, if you will, to a solution provider. Wow. We did it.

Great examples. I won't bore you with them. But great examples of how we have been able to take our customers to improve their economic results and they have shared that economic reward with us by buying more services from Park City Group.

The second objective was to extend our reach from grocery to another vertical market. And in fact, as you know, we made an announcement we added an additional substantial vertical market, the drug chain drug business. And I am proud to say we also were able to move our technology into the club warehouse business. And we will talk more about that in our next call. But we actually got into two new vertical markets.

And the third objective for the year was to -- I will use the term fish or cut bait with the food safety initiative. And as we said last time, we are definitely fishing. In fact it would appear and I will speak more about this in a little bit, it really was more like big game fishing. I think we've hit a bull's-eye with that opportunity from a business perspective.

So at this point, I am going to turn it over to Ed who will give you the details of 2012 and then if he will give it back to me I am going to talk a little bit more about what we have done, but more importantly, what our initiatives are now and why, frankly, as we look back to this three-year transition point we will consider the fourth quarter in 2012 to have been that wonderful stage where the growth rate begins now to accelerate. The infrastructure work is done. All of the heavy lifting is done and now we can carefully, consistent with providing an incredible quality of result to our customers, accelerate the subscription growth rate of the business.

So with that good news in hand, I am going to turn it over to Ed Clissold, our CFO.

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

I will begin my comments by discussing topline revenue. For the first -- for the fiscal year, subscription revenue increased to $7 million, a 7% increase for the full year. For the fourth quarter, subscription revenue increased 11% and we added almost $1.2 million in new subscription business during the year, which was split roughly 60/40 with existing customers accounting for most of the growth. Offsetting this was higher than usual customer attrition of approximately $700,000. And as we have discussed on previous calls, this attrition is primarily related to one retailer relationship that we chose not to renew as the terms of the renewal were not in the best interest of the Company nor were they economically viable for that retailer's suppliers.

Our customer first philosophy continues and we will continue to support those suppliers connected to this retailer upon those suppliers' request.

Excluding this, our subscription revenue growth for the year and the quarter would be in the mid- to high teens. Growth in subscription revenue was also offset by a decline in our other revenue categories. Comparisons in these categories are made difficult due to their relative size and our decision to transition to a subscription-based recurring revenue model. As a result, we expect to see a steady acceleration of subscription revenue, a modest decline in our maintenance revenue intermixed with the occasional lumpiness of one-time license sales and consulting agreements.

Now with regard to operating expenses, during the fiscal year total operating expenses were $11.1 million versus $10.6 million during the prior year, reflecting a 5% increase. The $500,000 increase was primarily related to an increase in cost of revenue and product support. Approximately 40% of the increase was related to software development costs that were expensed in 2012 but had been capitalized in the previous year. The remaining increase was related to headcount expenses.

For the fourth quarter, total operating expense was flat year over year. Below the operating line, we have reduced our interest expense and we had one-time gain related to the elimination of liabilities associated with the Company's acquisition of Prescient Applied Intelligence in January of 2009.

At the beginning of the fiscal year 2012, we paid back $1.75 million of a 12% note and cut our quarterly interest expense in half. During the fourth quarter, our interest expense declined 55% on a year-over-year basis.

Now, [testing] on profitability. For the fiscal year just ended, the Company reported a GAAP net loss applicable to common shareholders of approximately $1.7 million compared to a net loss of $1 million from the prior year. We had considerable non-cash charges in our P&L. So we also report earnings on a non-GAAP basis. On that basis, we were approximately breakeven for the year versus a non-GAAP income of $786,000 last year.

Now I will address our cash flows and financial position. The Company generated $769,000 in free cash flow during fiscal 2012, which declined from $1.2 million last year primarily due to differences in working capital. We expensed $239,000 on CAPEX during the year and expect that, going forward, our CAPEX needs will range from $250,000 to about $300,000 per year.

As of June 30, 2012, the Company had a cash balance of approximately $1.1 million and a total debt balance of $2.7 million. The year-over-year net debt balance decreased by $664,000 or 29%.

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 technologies.

That concludes my review of the financials for the fiscal year 2012. So, Randy, I will turn it back over to you.

Thank you. Okay, so let me go back and repeat a little bit about what I said and then we will give you the look forward.

Over the last three years or so as we have transitioned the businesses as you understand, our first objective was to make sure that we provided extraordinary value to our retailer and supplier customers. We certainly are doing that and feel very good about that.

We needed to scale the business from a technological and administrative capability perspective and wow, we have done that.

We did want to get into at least one additional market. And as you know, we have filed an 8-K on that and we are feeling very good about that opportunity. I will speak to it a little bit more in a moment. And validated the Food & Drug Safety opportunity and I am going to spend a lot of time on that in a moment.

From a financial perspective, we have obviously, given what has happened to the debt, generated significant free cash flow. We improved the balance sheet significantly and we transitioned to a much more predictable non-lumpy business model of subscription base. But we have reached that point now where, going forward, we anticipate that the percentage of our business that is, if you will, licensing-related will now flatten which means that as we grow our subscription base the total topline of the business will now begin to expand, much more closely aligned to help the growth rate of subscription growth revenue moves. And as I mentioned that we anticipate that the growth rate of subscription revenue will now begin its long-awaited acceleration in the next several years.

So we are in the business, as you know, and for those of you who have had conversations with me, this is a venture if you will that is predicated on the long-term shareholder value that has to do with how we, in fact, accomplished what we did for the last three years and now nailed down position in the marketplace to make us as a company very, very attractive to investors. So it is time I would say to start harvesting the hard work that we have done, give the car a little bit more gas and start the acceleration program.

Now in doing that, there are several pieces of this that, I think, will be important for investors to keep their eye on. And it represents in my mind a slight change from what we have seen historically. But I think everybody will enjoy the economic results.

We are going to continue to focus on increasing our economic value to our customers and we have gotten to be much better at that over the last year. Because as we do that, the value of each connection will go up monetarily and that will produce higher revenue and higher earnings for us. That means that the service offering that we have in place will be one that will be more readily adopted across the customer base than we have seen.

But we are going to, as you all know that have been around for a couple of years, we said that crawl, walk, run was our strategy. And initially we have focused on hubs of a particular size, typically regional firms, regional supermarkets that were anywhere from a few dozen to a couple of hundred retail stores. And we said that once we were comfortable with how well we could execute on behalf of our customer base that we would begin to look to the larger customers in the world of supermarket and other industries where there was a larger store account and, frankly, the dollar opportunity for us and for the customer was greater.

We now would expect to see, therefore, that we are going to be adding more hubs and the future of a much larger size. Let me quantify that for you. I think you have heard us say historically the goal was to add 8 to 10 hubs per year with an average size of 100 to 150 stores. So we can just multiply that out and max and say we intended to add about 1,500 store doors to our network per year. If you saw the 8-K announcement about the participant and the chain drug business, they have nearly 8,000 stores.

That makes a very big difference in terms of the value per connection that we will begin to realize. We have because of our reputation found ourselves now in a delightful position of talking to larger prospective hubs. So, I think it is reasonable to assume that going forward we will add hubs each year that have much greater economic potential at maturity than the hubs we have historically added. That in and of itself will accelerate our growth rate.

As we have moved into the new industry and, candidly, you'll see that we are exploring one or two other vertical markets as well, I think you'll see as we gain those footholds that will add a little bit more accelerant to the growth rate. In other words, we are moving -- no pun intended -- up the food chain which drives our revenue per connection north, which causes us to automatically get an acceleration in our subscription revenue and our total revenue base.

In addition, the Food Safety initiative has proven to be a much more valuable business proposition, I think, than even we optimistically imagined. I need to spend a few minutes if it is okay on that topic.

It is important to realize that there -- the piece of legislation that underlies food safety is called the Food Safety Modernization Act and was signed into law by President Obama in January of 2011. There is approximately 800 pages of regulations we believe that have been written, not promulgated. They are stuck in the Office of Management and Budget likely until after the election.

Once those are in place, and there is a period of time, that increases the liability and paperwork and process of bureaucracy up and down the global food supply chain. That plays exactly to our sweet spot. But in the meantime, what has happened is the litigation that takes place around the area of food safety has created an interesting and exciting window of opportunity for us.

We have done presentations now to a number of retailers and wholesalers. I believe you should have seen an 8-K that said we are already beginning to implementations. We are quite optimistic that between now and next June that we will have actually penetrated a surprisingly large percentage of the supermarket industry with the Food Safety Initiative. That initiative provides a base level of revenue to Park City Group from the subscription agreement that we have with the company, its name is ReposiTrak and the name of the product is also ReposiTrak. So we know that our revenue will increase over the next several years as a function of the Food Safety Initiative. But it will increase in several ways.

It will not only increase from the subscription revenue that we received from the business itself, it will also provide an interesting and, frankly, quite different customer base than we have been able to penetrate with our standard Park City Group offerings. We are engaged today in conversations with people about food safety. People meaning supermarket retailers and wholesalers that we otherwise would not be able to approach. Once we are ensconced, we believe that the visibility that they will have to the various Park City Group product offerings increases Park City Group's ability to prosper from those food safety relationships.

Equally importantly, aside from the newer larger retail hubs that we are doing on our own as well as part of the Food Safety Initiative, the food safety business will create not hundreds but we are quite confident now it will produce thousands of connections over the next several years, each of which becomes a candidate for Park City Group's product offerings and additional revenue opportunities.

So, if you think about what it takes for Park City Group to grow, it is really several factors together. We have demonstrated that we can bring in new hubs. Now we are going to -- and we have demonstrated we can bring in larger hubs. So we are now going to focus on the execution against the existing hubs that we have and those in=place hubs will not quite automatically, nothing in business is automatically, but as we roll out those hubs, our revenue growth over the next three years will accelerate well beyond -- in our view and it is the goal -- well beyond what we have seen in the last several years and that was about 40% or so over the last three years. And we are obviously expecting it now to grow faster.

But in addition to that, we believe that the business support given the additional thousands of connections we anticipate making through food safety, the opportunity to upgrade those connections to our Park City Group offerings, that represents a really interesting opportunity for us. On top of that is another initiative that will begin this year, for yet one more new product that we are introducing. And we think this product will have and I am not going to talk any more about it than what I say in this sentence, this product also has the potential to be used by literally thousands and thousands of businesses in terms of how they communicate with one another.

It is a core piece of our existing business. There is no development necessary, we are just pulling it out of the existing offerings and offering it separately to people. We think it has very substantial market potential.

So, I think the last thing is from a financial perspective, not only do we expect an acceleration and we are experiencing that internally and seeing it of our subscription revenue, but we are also now confident enough to of our balance sheet to achieve the goal -- remember we said that we wanted to be in what we consider to be our definition of a net cash position this year, this summer. And we feel as if we are there. If you remember we considered the CAPEX line and our AR flex line to be kind of a base level of borrowing. So we are pretty much at the point that we wanted to be from a balance sheet perspective. So as we generate additional cash, we filed an 8-K with regard to how we would anticipate using that cash.

So I guess I have ever been more excited about how we see the next several years. It is all about execution, the opportunities are enormous for us. And I think it is a matter of what I believe to be honestly -- and I use this lightly -- it is a world-class team of people that care to execute against our customers, continue to demonstrate our value and from there lead to what we hope is a much more rapid revenue growth than we had experienced over the last several years.

So we are very optimistic and with that we will open it up for a few questions. And again, we apologize for doing this on a holiday.

(multiple speakers) questions.

(Operator Instructions). Michael Fox, Park City Capital.

Good afternoon. Can you give us some more color or detail on the revenue ramp? I know the customer that you guys disclosed in the 8-K in the past you guys have hinted at magnitude, that it could be fairly large, relative to the current business. So can you give us any type of indication how that business particularly might ramp and impact the overall growth rate of either the subscription revenue or the total revenue?

Yes and let me comment on a couple of things around. It is a new vertical. So we have done a great deal of handholding with this account over the last six months working with them from a analogical perspective from a -- I am going to college business process perspective and so on and so forth. We have done yeoman's work to get them ready and we are literally now at the point where this coming quarter will onboard a few of their spokes if we call them again a hub and they certainly are, a few spokes. And then as the year progresses we will gain pace and speed.

I think it is important to recognize that each of those spokes will generate revenue ultimately that much larger than typical spokes pay at 100 unit. I think without disclosing too much about our pricing it is fair to say that the most important determinant of our price for a connection between the hub and spoke is how many stores are you connected to. So it is not quite linear, but it is fair to say that if you are connected to 5,000 stores you are going to be paying us significantly more than if you are connected to 100 stores. So it is not linear but it is a lot more in dollars to them. In percentages it is still a very small, very tiny amount of money to a customer for the kind of service and sales bump that they should get with us.

So we don't need many of those to begin to grow the top line. And it is fair to say, I think we've said publicly that accounts of this scale, of this size are larger than anything that we have done to date by 100% to 200%. So they will be larger hubs by in -- they will be ginormous, how is that? I will make up a word.

Can you give us an idea of how long it will take to get the full penetration with them?

I think there's -- I don't think there's -- because we are now dealing -- we used to deal with an account and do 30 or 40 spoke connections. And we are now doing hundreds, it is fair to say. So as we move into the hundreds it will still take three to four years to get to maturity. I don't think there is any doubt about that. It just takes a while.

You have to gain pace and speed and we are now committed to it as are they, and I think you are point to see some other announcements here before too long of comparable size and scale.

So if you say it takes four years and it sounds like it will be ramped up in the second half of that. So can you give us an idea? Is it like 10, 20, 35, 35 or is it can you give us an idea of how you might think it'd ramp or is it just too early to tell?

It is too early to tell because it becomes a moving target. In other words, the retailer as they gain experience may change the order in which and the quantity of the suppliers they want on board. We experience that a lot. They say, well, let's get this category done and then something pops up, a problem in a different category and they stop what they are doing in that and move to another.

But all of these are large annual commitments, much larger than we have seen historically. Even the small ones are bigger if that makes sense. That sounds (technical difficulty) funny in English. The small ones are big.

But even in the first 12 months will it have a big impact on your growth rate in subscription?

It will definitely have an impact in the year that will finish next June. It is mostly in the second half obviously because we are just getting started with it. But it will desolate have an impact. And then an accelerating impact over the next couple of years.

Right. Okay. Great. Thanks.

(Operator Instructions). Bob [Mueller], UBS.

Few questions if you will. At one point in time you talked about how many connections you hope to do, and a year ago this quarter you had reached some milestone of like 80 connections or something of that sort, and you thought you had proven scalability and that it wasn't going to grow sequentially from there, but it was going to grow significantly. Where are you with that plan and what changed if anything and how many connections did you make this last quarter? Can you give me some color on what is going on there, what has changed there?

The only thing that's changed is we are less focused on the numbers. We didn't anticipate the scale of this new vertical market and the size of this customer and the requirements. So some of what we wanted to do and I have to be vague about this for a variety of reasons. We moved to the side to focus on this much larger dollar opportunity. So it will be less going forward about how many connections we do and it will be more about the total revenue associated with it.

Because as I just tried to indicate a minute ago, the revenue potential of each connection is now -- let me frame it differently. We can do 30 connections of the scale that I am now talking about and it will exceed the revenue implications to the Company that 200 of our old connections equaled. So the metric and -- I don't think we anticipated that six months ago. We really didn't. We weren't inside the business enough from the wind to know what that revenue opportunity would look like. And the good news is the deeper we dig the better it gets.

In addition that is why we are also now focused on some of the larger prospects that are in that pipeline which feeds nicely to the Food Safety Initiative. Because the appeal there is generally to larger hubs. So it just changes the scale. There is going to be -- now we are going to have this raft of connections this year. There will be a lot. But the most important thing is that there will be a nice number of relatively large ones that have more of an impact than many of the small ones.

A year ago you had, whatever, 20 or 30 hubs. I don't remember the number. And where do they stand? I mean I assume that they are waiting for you to connect all these spokes to them so that they could get this data from you and --

They are all moving along at the pace that the retailer is setting. We have one customer that is actually kind of medium size that in two years they have only done -- they have done less than 10 and they are so happy they don't know what to do. They think they are going at warp seven. So sometimes it is a retailer perception perspective and how they would like to do business. But we are very resource-intensive on these new larger hubs and that is a constraint on our part.

What kind of value can a hub get from 10 connections, a medium-sized hub? I mean it seems like it's hardly worth the trouble.

Wouldn't you think. And the reality is the payback on what we do is so good. In fact it is interesting. I can tell you exactly what it is. Since they became a customer I have to use the technical term here, shrink. Shrink is product that really can't be accounted for. It doesn't mean necessarily that it was stolen. It just means it disappeared somewhere. It is unaccounted for.

The -- this particular customer that's done less than 10 connections is experiencing shrink of less than half of 1%. And we measured the same number with other retailers who are not Park City Group customers because this is industry standard. And they are paying -- they are experiencing paying at a level of almost 6% in the same category. So by virtue of our technology, these guys have been able to reduce their shrink and they are very good managers, by the way, to a tune of about 5.5% of the total sale of these few vendors. But they have picked big vendors.

So it is many millions of dollars of sales to them and the shrink has had a significant impact on their business at the P&L level. That is why they are excited. Frankly I would rather it was 50 because of how we are compensated and they would make more money. But they are as happy as a clam.

So our job is to work with a customer, go at their pace, let them do it how they are used to doing business. Some have gone very fast. We have one customer that is going to probably bring on 30 or 40 spokes in the next two or three months. They are out like crazy getting them wrapped up where this other was less than 10 in over a two-year period. So there is no accounting for how fast the retailer will go. We don't control that in any way at all.

How has your other than food safety how has your product solution changed or increased today versus a year ago?

Well, if you think of how we have sold these other products, how that works, we have historically sold these other product as license. Think of them as supply chain. Our boarding systems are VMI. All of our supply-chain stuff has been sold historically as license. So we have just, in the last year, begun selling this as a service. And frankly a market that doesn't sell it as a service, it is sold by others in that space as license, not service.

And I am pretty pleased with the results meaning that, virtually, all of our sales people have been able to get one, two, or three of these improvements in revenue per spoke by providing these services. So we are seeing -- I am happy with the uptake of the additional services. We continue to have to push to sell it as a service not as a license.

I was getting more at the value added by the customer was to avoid stock out and spoilage and that kind of thing. Other than food safety is that primarily an inventory management diagnostic type tool or are you doing other things as well?

Yes. Well, let me give you an example. We have one company that started out just getting some data, basic data information from us that was paying us a couple thousand a month. Then we went to category management services where we began to analyze and point out out of stocks and overstocks. And then we moved to Scan Based Trading.

So it went from a couple thousand a month to $20,000 a month of revenue. So we for us, but for them it had a terrific impact on their business. We are actually undertaking a couple more projects with that same account in a couple of other new and very interesting directions for them and equally so for us. That is an example just to be apocryphal.

We have many examples where we have worked with a supplier, shown them that the amount of product they are delivering to a store is incorrect and that as a result the inventory is wrong, out of stocks are high or overstocks are high and returns therefore are high. And then, we go back to them and show them how our ordering system could improve that part of their business. So we have a number now that have moved to our ordering system on a service basis.

So we have enough examples that we are learning how to sell it better. The better part of it really relates to competing in a market where other people sell it as a license and we are selling it as a service.

As far as adoption then goes it seems like there is enough moving parts here where [in the] slow to get these customers to adopt enough connection that seems to be in their own best interest. So is that why it makes so much more sense to go after a mega-hub because one adoption is several thousand doors because the adoption process does seem to be slow?

Well, not exactly. I mean, I think -- this is consistent with our strategy. What we want is at the end of the day to dominate the marketplace, to have some penetration in enough retailers that we present to the world a company that is the dominant force. And that I can't tell you, I mean -- that's just a religious principle with me.

I think the value of our Company is enhanced by having a small footprint in a big piece of the industry as a whole, where the same revenue level having a smaller footprint but more penetration within a smaller number of accounts. So we are really now in the business of moving upstream to more of the thought leaders in the industry to create a higher market penetration of the customer list. And that is the value that we think the business has, is in that customer list and what we do. And at the same time that's the part of the value add that food safety brings.

Because it takes us to a piece of the market we might not otherwise be able to approach.

So I think the mosaic that you will see of these moving parts is over the next three years. You'll see suddenly a list of names of larger retailers than you have seen before, more industries than you have seen before, and a more rapid expansion of the revenue base just largely because as they add their spokes at whatever rate, the value of those spokes is higher. The connection cost is higher. And that will drive our revenue faster. So I think the nice way of saying we will be able to do what we have been doing, but get a lot more money for doing it. So it reduces risk -- reduces our risk of execution failure which would be unacceptable to all of us and increases the desirability of the Company, I think.

Robert Kecseg, Las Colinas Capital.

Hello. I just sense that there is a bit of frustration about the connections because that is the kind of metric that people are looking for. And if you go back historically, you reported the hubs and I know a lot of them were relatively small as far as the number of stores because you were getting started and you wanted to be successful with who you serviced.

But all of us are looking for at least the quarterly connection information to know what kind of revenues are going to be coming in. And now we really don't even have that.

Bob, I think that we are happy to provide that. That is a good point. I think people will be -- the metric internally when you have a sea change, remember what we said before was that an average connection depending on the size of the retailer would go from a few hundred a month up to as high as $1,000 a month. And now we are talking about connections that begin at $4,000 a month and go up. That is really all I am going to say about this.

Yes, okay, but --

So in other words, I promise that as a shareholder you want us focused on the maximum revenue and impact that we can have and that is exactly where we are focused.

Well this is how I am looking at it and I am looking at it this way, is that if there aren't very many connections being added, it doesn't matter how much dollars of revenue each one produces. It doesn't matter if it is $1,000 or $4,000 or $500, because if there aren't connections. So what I am getting at is if we are not getting that many connections in the grocery store business that are relatively, perhaps, smaller accounts that don't have that many stores, then what's the --? How can one be expecting more connections from somebody that has lots of stores on a nationwide scale? In other words you still have to get the connections.

Let me help with that. This year we will see a record number of connections, but it will have a different revenue impact on us than otherwise would have been the case. So the number of connections will go up, but the economic impact of those connections will be quite different than we have seen before. And next June you will, I think, it will be (multiple speakers).

Well then let me put the question this way then. It seems like there is a lack of connections with our first vertical with the grocers. So can you tell us why that is and because I don't see how you -- how I can have an inkling of an expectation that a new vertical, another industry -- in this case the drug people -- are going to produce any kind of quantity of connection. Because we have been dealing with it in the grocery side now for a while and there seems to be something holding us back.

Is this only direct store? Are we kind of only still doing direct store with the grocers?

Yes, I think -- let me clarify. I say let me try and -- this year the number of the year that we are in the number of grocery connections not the new vertical will be at or near a record high for us.

Which year?

The year that we are currently in.

Okay. The 2013 year.

Correct.

And what do you attribute the difference then to? What's the difference?

The difference is a timing difference. It is just the timing difference. So --.

It is not the composition of who those grocers are?

No. It is just how, it just -- we have several retailers who were getting ready and now they are in execution mode. So, now you are going -- now you will see a spike in connections. But that doesn't mean that --. I don't want you to over interpret it in either direction. You are going to see an increase now in the number of connections to the grocery industry. I would tell you just because this year is the same as last year, but last year they didn't press as hard. And this year they are pressing harder and next year I can't tell you what they will do.

But what I can tell you is that our revenue, it will be going north. But there is such a substantial difference in the connection value that -- and we just can't talk a lot about it. I wish I could.

Yes, okay, but I want to also make sure I get this right. What we really are doing just DSD with the grocers really, right as far as connections? It's direct -- it is just the Direct Store Delivery, right?

We are doing that and we are now doing an accelerated amount of what is called vendor managed inventory to the warehouse. So we are doing warehouse stuff as well. Yes.

Yes because what I am getting at, I remember during this last year I think it was where you had -- you were trying to do the what do you call them? The D.O., right?

Yes.

And there was some hiccup there because of the -- because of the relationship between the vendor and the customer, the grocer.

Correct.

And you said you needed to work that out. Could you talk to that a little bit?

We -- the answer is that we can't find enough value yet, but we are focused on it. The same technologies that we are bringing to bear now in analytics, we think, will help more with that issue between supplier and the disconnect that they got with the retailer when they go through the warehouse. Of if they are supplied by a wholesaler. So we are approaching it a little bit differently, and it will at some point be, I think, a significant contributor. But it is further out and --

Further out. Okay. So then it is fair to say then --

It is not a focus. Let's put it this way. It is not a focus for this year. This year our plate is full, the table is set.

So, I just want to -- I am not trying to be difficult. I am just trying to understand.

Oh no, I understand.

So then I get a better idea then if it is direct store with the grocer and we are having to work out that other issue with the Distribution Center, DC. That's what I was trying to think of, DC.

Yes, the reason -- right now the point of pain that we -- we can only respond to the pain that our customer has. So if you follow that logic, we can say to the customer we think it hurts right here. And if it doesn't hurt right there, if he doesn't feel that pain, it doesn't matter that we tell him he should feel the pain. He knows where he feels the pain.

There has been an interesting shift in the Direct Store Delivery business. It is driving that part of what we are doing. It is now a point of pain with lots more retailers and suppliers than it was before. For whatever reason, can't tell you why, because the pain should have always been there. That is what our customers are telling us hurts. That is the problem that we are solving for them and we are doing it in spades. And it is uncovering some very interesting and economically valuable stuff. And, again, we let our customers lead us rather than try and we lead them. Because my experience with that is you don't win when you try and tell your customer where it hurts. Let them tell you where it hurts. Show them the information as to where the pain is.

They prioritize how they want to deal with the pain. And as I indicated earlier, sometimes they are thrilled with our result when I think they should be disappointed. That is a huge surprise to me. I tell you it is a big surprise.

But what is important is that the economics for the customer are good. And if you are asking why the customer doesn't do more, you would have to understand the supermarket industry to appreciate that.

But it is all moving the right way. We will see a substantial expansion of the number of spokes this year. But that won't be a good indicator. Because what is really going to be driving the business is the value of what we are doing in our new vertical market, the stuff that we are getting from food safety this year.

Next year it will be more about how spokes get reconnected. I mean, I have the luxury of more than a two-year view than Wall Street has. And I can see how the numbers are likely to shake out and I am just trying to look to where I think it would be valuable to look. So it is really that they aren't focused on their DCs.

We took one DC this year. It has been a project over the last 2 1/2 years. One of the best-known retailers on the planet literally on the planet. It is -- if you said to somebody who is the best supermarket chain in America, I promise that anybody who knows the industry would put this company in the first three chains they would name.

We reduced the inventory in their warehouse in their DC by 34% at the same time service levels went up. $125 million of working capital was freed up. That is a stunning result.

So we know it works. And it is interesting. That company is totally focused, strangely enough, on that problem. That is where they thought their pain was. And when we talk to them about Direct Store Delivery, guess what they say? Oh, we don't have any pain there.

Well, we know better. We have seen the numbers everywhere else. We know how they are doing business. We know they have pain. I can't -- I am not in a position to yell at them and say you don't understand you have pain there. It's just people don't want to be told they have pain if they don't feel it.

So that is really more the problem. Customers are leading us. I have to, I believe because I can look at what we are doing, they are leading us in the right direction. It is just not the way I might have peaked. They are in charge. We are serving them well. They like what we are doing and they are expanding their relationships with us.

And that is what will matter and that is why we are so confident of what the year end will look like.

Do you have to make any change in the number of people that are servicing all of this to get connections in your shop with the national company?

No, but the food safety thing will drive -- as I said, because it is going to drive many thousands of connections that will -- it is going to have a different business model than Park City Group will. And our headcount will ultimately go up on the service side meaning the account executive side of the business problem. You are exactly right.

Is there any date certain that we should look for about the government and these customers having to comply with it?

I was wrong when I said it is being driven by the legislation. It is being driven by the liability. There is one attorney named Bill [Marler] who has successfully sued for in excess of $600 million of settlement in food safety. That is what causes people concern. In the regulatory environment although it causes compliance issues, creates more tort liability, in other words when the law says you must maintain documents of this sort for this long, well, the fine is $0.37 if the government finds out you haven't.

But a tort attorney will sue you for $100 million if you didn't have the documents you should have and a food safety problem emerged as a result, right. That is what is driving, it's the liability. So we were incorrect in assuming that it was being driven by the regulatory environment. It is being driven because people are being sued. And they care about safety. They generally care about safety as well as being sued. So, that is what is driving the business and the adoption rate there is going to be much quicker than as sure as hell as I would have guessed a year ago.

Great. Thank you very much.

You bet.

Thank you, sir. That does conclude our time for questions. I would like to turn the program back over to management for any additional or closing remarks.

Well, we appreciate again, last apology for the timing today. We are very sorry about that. So, we will wrap the call up, but I think people will see in the next several quarters and for the year as a whole, most importantly, that this will be a very good year indeed. Thank you all.

Thank you, gentlemen. Again, ladies and gentlemen, this does conclude today's conference.