Park City Group Inc (PCYG) 2013 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 fourth-quarter and year-end earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, today's conference is being recorded. It's now my pleasure to turn the floor over to David Mossberg, Park City Group investor relations representative. Sir, the floor is yours.

Thank you, Huey. Before we begin, we will be referring to today's earnings release which can be downloaded from the investor relations section of the Company's website at Park City Group.com.

This conference call could contain forward-looking statements about Park City Group within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact. Such forward-looking statements are based upon the current belief and expectation of our 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 all of 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, net income and earnings per share, which are non-GAAP terms. We believe these non-GAAP terms are useful financial measures for our Company primarily because of the significant non-cash charges in our operating statement. There is a reconciliation of non-GAAP results in the earnings release on the investor relations section of our website.

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

Thanks, Dave. 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, 2013. I will also comment on certain cash flow and balance sheet items, and then I will turn the call over to Randy for his comments.

Let's start with top-line revenue. For the fiscal year ended June 30, 2013, subscription revenue increased 15% to $8 million, which was a record for the Company. Other revenue increased by $189,000 to $3.3 million during 2013. We have some legacy customers that still produce -- still purchase licenses on a one-off basis which makes comparisons in the other revenue category difficult due to its relative size and our decision to transition to a subscription-based recurring revenue model. We expect contribution from other revenue will remain at approximately 25% to 30% of our overall revenue.

As a result, going forward total revenue comparisons should more closely mirror that of subscription revenue intermixed with the occasional lumpiness of one-time license sales and consulting agreements. Total revenue increased 12% to $11.3 million, which was also a record.

Moving onto operating expenses, during the year, total operating expenses were $10.9 million, which was down slightly from the prior year. Most our costs are fixed, with the exception of sales and marketing and account management staff. Throughout the year, we have increased our sales and account management staff to meet the anticipated increase in demand. Going forward, the majority of our cost structure is fairly fixed, with the exception of sales and account management staff.

While will be investing more aggressively in these areas to support anticipated growth, we still expect to see a significant portion of our incremental revenue fall to the bottom line. And earnings and cash flow should continue to outpace top-line growth. Below the operating line, we have reduced our interest expense by 31%, which was the result of the reduction in debt levels.

Touching on profitability, net loss applicable to common shareholders was approximately $654,000 for this year compared to a net loss of $1.7 million last year. We have considerable non-cash charges on our P&L, so we also report earnings on a non-GAAP basis. On that basis, we recorded net income of $845,000 or $0.06 per share versus a net loss of $56,000 or essentially breakeven on a per-share basis last year.

Our balance sheet continues to improve. As of June 30, 2013, the Company had a cash balance of approximately $3.6 million compared to $1.1 million at the same time last year. During the year, we completed private placements and raised approximately $4.3 million in order to provide enough capital to meet the potential cash requirement for the redemption of our Series A preferred stock. In the private placements, we issued approximately 1.2 million shares at an average price of about $3.50 a share. All but one of the Series A holders converted to common stock, which further increased our outstanding share count by approximately 2.3 million shares.

In summary, as of June 30, our total outstanding share count was 16.1 million. Our diluted share count increased approximately 12% to approximately $17.6 million from 15.7 million previously.

Our total debt balance of $2.1 million decreased 25% from the same period last year. 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 buy back shares under our share repurchase authorization.

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

Thank you, Ed; thank you, Dave. I apologize; I'm a little hoarse today. So if I sound horsey, just bear with me.

Last year at this time, I had the privilege of explaining to you as shareholders that we were about to enter a year in which every single thing that we could imagine would turn out to be a record. Thankfully, that's exactly how it turned out. If you'd like to know how the current year is going to look, which would be the end of my presentation today, you could actually say ditto. This also will be once again a record year in almost every respect.

So we have achieved in the last several years a pretty interesting transformation of our business from one that was licensing-based to one that's recurring revenue. I would like to summarize if I can a few of the other initiatives that we have undertaken in moving to the software as a service model.

We have broadened our product offering very significantly to our customers; we've added a significant number of customers. Equally importantly, and I'm going to dwell on this in a few minutes, we have established a cooperation between us and a specialty firm in the area of food safety to establish what we call ReposiTrak, which we believe will have a very significant impact on our future. I'll come to that a little bit later and explain more.

Let's go backwards in time, though, look back last year and see what we anticipated and where we really ended up. From an opportunity perspective, if you remember, we suggested that at the beginning of the fiscal year we've now closed, fiscal 2013, that we would indeed begin to move from small and medium-sized supermarket chains in terms of our customer set and focus on the concept of taking our offerings to larger national footprint retailers. I think we explained at that time that we anticipated that we would likely add about one of those per year, but that that would make ultimately a significant difference in both our top and bottom lines. As it turns out, as luck would have it, in the year that we've experienced since we talked to you last from a year-end perspective, we actually now have three of the world's largest retailers doing some work with us. And in fact, in total, we actually now have a total of four of these national footprint retailers with whom we are doing some business.

Obviously, I think the expression would be the dog caught the bus here. We've done better in terms of what we could have anticipated from these large national retailers that I think we anticipated a year ago.

Let me give you a little more color about it without naming them. We mentioned that we had a test going with one of the world's largest retailers. I believe we mentioned that last January. That test, if you will, is moving along very well. I think expectations on both sides are certainly being achieved. Interestingly, why this particular test is important to us is this retailer who is well known for their technological expertise has not only appreciated what we do in our basic form but has found a way to combine several of our services into an offering that they believe will be impactful in helping them manage their business better. And so far in fact, the test indicates that that indeed is the case. In fact, in one category of business that we are working with them on, the first user of this combined set of technology's have been able to move sales that had been flat to declining to up 4% or 5% in just a matter of a few weeks.

So, so far, it's going very, very well. There's no way that I can tell you with certainty that indeed any of the tests that we've undertaken will ultimately become substantial contracts for us, but obviously we are optimistic given our background and our capabilities and our past successes that these should work out relatively well.

The total of these companies that we are working have more than 25,000 stores combined, so it obviously -- if all that happens, it will be very impactful to our business. Thankfully, because of the strength of our balance sheet and where we've come as a business, we are able to take these on currently in a position where they don't produce revenue for us but they do absorb -- they do take up our resource. But it's worth the time and attention to focus on these because in the long run, they could provide a very substantial driver for our core business.

Again, I think it's critical to remember that you have a management team and a Board of Directors that cares primarily about the quality of the service that we provide our customers, that in fact our brand promise and how we see the world is defined in terms of what you see from a Park City Group logo perspective, which is sell more, stock less, see everything. That is our brand promise; that's our mission, so it means we have to go carefully with our customers. They can gate our progress and we can gate theirs in terms of speed to be sure that what we do is exactly right.

So we are excited about how those opportunities could, in fact, impact both our top and bottom lines, and certainly we are optimistic at this point as to how that will ultimately turn out.

Let me go to the second focus over the last year. This one we believe also has long-term very important import for Park City Group, and that is the association we've created with Leavitt Partners around this food and drug safety.

A little bit of background for those of you that are not familiar -- in January 2011, President Obama signed into law what was then called the Food Safety Modernization Act, FSMA for short. That law, once it was established, assigned the responsibility to the FDA to establish new regulations around how the safety of our global food supply chain could be improved. The beginnings of those regulations are beginning to be shown to the public for comment, and over the next several years they will go from plot written to implementation. And as that occurs, obviously that creates more and more constraint in the global food supply chain from a safety perspective.

The fact is, as those regulations roll out, we are finding that there is very interesting need to be filled, and we believe we have the opportunity to do that on an industry standard basis. I'll come back to them in a moment. Wherein ReposiTrak can be the platform by which many of the concerns that arise as a function of that regulatory change can be controlled, risk reduced, etc., for those people who participate in the global food supply chain.

It is a very exciting potential for us. There are literally millions of connections, as we call them; that is to say, relationships between suppliers and retailers and food supplements and drugs from around the world that ultimately connect in that supply chain and become part of the process by which everything that we take from ethical drugs to vegetables can be seen as at-risk, and in need of something like ReposiTrak.

What's interesting is that the industry seems to be concerned with establishing a standard so that there are not lots and lots of cost demands on the supply chain to participate in multiple sorts of platforms. The fact is, so far the industry seems to be recognizing ReposiTrak, this venture between Leavitt Partners and Park City Group, as potentially the most interesting of the alternatives. We are certainly excited about that.

As you've seen from press releases likely, we've begun to -- we call it on board and bring suppliers and retailers and wholesalers into the system, and we literally at this point in time have thousands of suppliers in our pipeline to be on-boarded over the course of the next several years.

In view of that, in the course of the last year as we've gotten more comfortable with ReposiTrak, come to understand what its needs are and its enormous opportunity, we have used our newly-found financial capability to enable us to indeed increase our potential ownership in ReposiTrak from the original intent of about 49% to potentially up to 75%. So, obviously, our belief in its upside and its potential have put us in a place where the Board is determined we would like to own more of ReposiTrak, and we've made that now part of the agreement between us and ReposiTrak as an organization.

So I suspect you'll see over the course of the next few months an additional announcement about the industry recognition in this area, and I believe we are very rapidly becoming the industry standard platform for track and trace in food safety. We've had conversations with numerous people around the industry, and I think that so far, the recognition of what this can do and how it works has received nothing but applause.

So our outlook for the year is wonderful. Once again, I think I can say with a fair degree of servitude that we believe this will be a record year in net income and top line and in growth of subscriptions, etc. We really are on a wonderful track. It's now up to us to execute the way that makes both the Board and you as shareholders proud of us as a management team. We are certainly committed to that.

We will continue to go after these larger opportunities. You will see over the next several years a marked acceleration gradually increasing, but a marked acceleration cumulatively of our top-line growth as our subscription revenue grows from the various services we provide. We are in the process in order to accommodate the growth of hiring a substantial number of highly capable account executives to take care of our accounts, and those new hires will be important for us to take care of the backlog of business that we currently have on hand.

You know, it's difficult. Somebody once said what do you think you could be in the next few years, 3 to 5-year time line? People usually only ask me the question as CEO. I hesitate to ever give guidance and forward-looking things, but I think this is an appropriate time to at least give you a sense of the scale. And, clearly, there are many, many variables that make it very difficult to determine with any level of certainty what we could achieve.

But having said all of that, it is certainly conceptually possible in the next 3 to 5 years that we will be doing well in excess of $50 million a year of revenue. That's an enormous growth from where we are today. And it would still be, frankly, a small percentage of the market that we think of as the potential market that we are serving.

The gating mechanisms there, of course, are our customers. It's our own belief in determining the quality of the kind of service that we provide. Going too fast obviously could impair that, so we are very cautious about making sure that every customer is well cared for. But that number is based on a very conservative rollout of the kinds of technologies that we have to address not just our core business, but those things in food safety.

I think a year from now in our next annual call, we will certainly have more data points, and I would hope at that point to update that number from the one that I just gave to potentially another number based on what we experience over the course of the next year.

So at this point, I think I'll turn it over to questions and Dave, and we'll certainly answer a few questions at this point.

(Operator Instructions). Walter Schenker, MAZ Partners.

Thank you. Hi, Randy. On the food safety side, always subject to change because it's a government regulation, although I realize people are moving on their own. Within what time frame to people, at least under the current regulations, have to implement? And as you look at that area -- and I realize other people may have other pricing formulas -- how big does that become when fully implemented? As an industry, we don't know how much of it you're going to have, and I realize that creates a number of speculations on what other people are going to charge.

I think, when you look at the whole arena called food safety, certainly a piece of it is being driven by regulation in the Food Safety Modernization Act here in the state. And they haven't finished promulgating the proposed regulations yet. I think -- I can't remember, I think -- don't hold me to this -- I think it's 1500 to 2000 pages so far. There's more to go. So there's a lot of digestion that has to take place.

And to answer the first part of the question, it takes effect over a rolling period of time and as a function of the size of the participant in the supply chain. So very small companies are to a large extent exempt for a prolonged period of time, and the larger ones will have to be adopted in a shorter period of time. What we're finding is that people simply want to be safer, reduce their financial risk, their brand risk as well as this regulatory risk. So there's pressure from a variety of perspectives.

In terms of market size, Walter, it is a large market because there's a whole variety. There's hundreds of players in this arena of food safety. There's companies that help determine where a cow or a steer came from and so on and so forth. We are very different. We are kind of the backbone of all of these other systems, if you will. We are a cross-functional platform that would enable others who consider themselves to be in the food safety arena to use our platform to be more effective.

So we certainly think that the entire food safety market here in the US is in the billions of dollars a year for sure. But remember, this isn't just a US problem. In fact, it's fair to say that we are exploring opportunities outside the US. And if you are curious as to where, you could be thinking South America, China. The Chinese government has identified as one of its component risks of political instability food safety.

So if you were to go Google food safety in China, you would find literally weekly horror stories about the safety of their food supply.

So this is an international problem; it's not just a US problem, and we are approaching it on a global basis. But it's a very, very, very big market. That $50 million number that we mentioned is a teeny tiny percentage of what we think that market could be.

And just one other related question, sort of. To increase your potential exposure to the joint venture, did you pay Leavitt? Did you commit more resources? What -- why did they give up, or what did you pay to get a bigger piece of that pie?

Essentially, we are providing financing to ReposiTrak that was going to be done by outside investors originally. The original ambition was that a big piece of it would be funded externally, and frankly we cut that way back in Park City Group because the financial position is going to be providing the finance that was needed. So we are just -- it just enabled us to increase our net investment potentially. Remember, it's an option for us. So if everything works well, we will exercise the option.

Okay, thank you, Randy.

(Operator Instructions). George [Karatz], Karatz Capital.

Afternoon, Randy. My basic question is this. On your basic business, what kind of a run rate are we at, at this point? I know you've got all these people testing and you've got some customers. And, obviously, you're going after people in between the very big ones and the ones you have. Are we going to see good revenue increases in the basic business over the next year?

Yes. (multiple speakers)

Okay, sequentially?

Over the next several years, you will see -- in spite of the fact that we are committed to these tests, we still anticipate excellent revenue from existing customers. And, obviously, as those tests, presuming that they bear the kind of fruition that we both we and the companies that we are working with, that just sets us up for the out years. So the core business will, as we've always thought, will grow. It will grow increasingly at an accelerated rate, and we've been paying a lot of attention, obviously, to the food safety arena. So both are going to do very well in our estimation.

I know you kind of specialized in the dairy area, so are we looking at just very with all these tests and the business we are doing? Are we looking -- (multiple speakers)

No; good question, a whole variety of areas. So --

Are we doing any other areas at the present time?

Yes, absolutely we are. We absolutely are. Although it is fair to say we know a lot about dairy.

Right. So let me ask you this, and this is kind of a nitpicking thing because we are looking at the big picture as we go out further. But as you increase your revenues over the next year, obviously you're doing a lot of hiring. When you look at SG&A, that's down, but sales and marketing is way up because that's the way you're going to get business. Are we going to get overwhelmed with new hires and expenses that will kind of mask the growth that you are having on the top line?

George, you know me pretty well. The answer to that clearly -- I'm sorry, I'm just teasing. We need a number of more people than we currently have. We are adding those. We clearly are doing that to make sure that our customers are well served, and we are just -- I would say it's fair to say that the board, the management team are, by nature, fiscally conservative.

So we will not -- in fact, Ross Perot once said something that I just loved. He said eagles don't flock; you find them one at a time. And I think if you look at the announcements we have made, the press releases about the caliber of people that we've been hiring, these are not flocking kinds of people. These are very, very carefully selected individual stars in their own right. And that's -- yes, we intend to keep doing that. That's a really good question. (multiple speakers) there will be more people, but we will not be overwhelmed with them.

And, obviously, that's what we want you to do. But it's nice when you can do that, but the revenues are increasing so much that we see the bottom line get bigger.

So -- one other question. So when you made the original deal with ReposiTrak, and your 49% interest, and the first three years I believe you get at X dollars. What is it, $1 million, or whatever it is? It was public the first three years.

You mean, the purchase price is just a few hundred thousand.

No, the (multiple speakers)

It's going to be fixed for a few years, and then if we exercise our option, then it's consolidated.

So at some point when it gets bigger, then -- when you exercise your option it's going to kick in, and that's when the real revenue comes in to Park City, right?

I think, at this point, let me tell you what's going on in the background that's not obvious. I mentioned, and maybe I said it too quickly or too subtly. The people who have currently said to us they're going to implement, and for whom we've begun implantation work, have thousands of suppliers to be brought on board. Those are big numbers. So we are learning to scale that business -- it's quite different than our core business of Park City Group. So we are learning to do that. We've built special capabilities and that sort of thing.

So there's a lot to be learned and we are ramping it up quite quickly. So -- I think the reality is that it is a different sort of business than what we do today, so there's -- I think it's fair to say a learning curve. I am pleased (multiple speakers)

You're live with some of that already, correct?

Oh, yes, absolutely. And we are learning -- you know us well. We are looking at what we are doing wrong and right and making sure we do more of the latter and less of the former. But at some point, that starts to accelerate very, very, very dramatically.

If one of the organizations that we've worked with completely rolls out, I'm not arguing that they will or won't. I think it's reasonable to assume that they will over the next, say, five years. There are potentially hundreds of thousands of connections that have to be made. That's a business that takes a lot of scaling, and you're absolutely right. There will be a moment in time in which -- before the option expires that we will make a decision that it belongs inside of Park City Group at that high ownership level or not. We'll have to make that decision.

Right. Congratulations on a job well done. And so you don't have to say, I'll say it. You proved the doubters wrong. And we are glad to be stockholders, thank you.

Thank you George.

(Operator Instructions). Neal Goldman, Goldman Capital Management.

Hi, Randy. Assuming this number out there, 3 to 5 year, $50 million, up from this current $12 million, what is the incremental margin that should come to the bottom line, even with the ramp of salespeople and additional overhead?

I think what we generally said is it will exceed 75%. And we are still quite comfortable with that number.

Okay. So an incremental -- for essentially cash flow positive, but take $12 million, assuming you're breakeven on a non-GAAP basis. You're dealing with an extra $30 million pre-tax, okay?

That's correct.

Okay, thank you.

(Operator Instructions). Presenters, at this time, I'm showing no additional questioners in the queue. I'd like to turn the program back over to management for any additional or closing remarks.

Let me summarize by saying, clearly, management is proud of the last year. We are excited about the one that we are in, and I would love to begin a long, long string of annual conference calls in which the refrain is this once again will be a record year. So we are certainly doing our best. There's lots to be learned, but thank you for the support, and we'll talk with you again about these milestones one year from today. Thank you.

Thank you gentlemen, and thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect.