Q2 2020 Earnings Call
[music].
Greetings and welcome to the Park City group fiscal second quarter 2020 earnings call.
At this time, all participants are in listen only mode.
Good question answer session will fall the formal presentation.
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It is now my pleasure to introduce your host Rabobank with that's NKR LLC. Thank you Mr. Frank you may begin.
Thank you operator, and good afternoon, everyone.
Thank you for joining us today for Park city groups fiscal second quarter 2020 earnings call.
Hosting the call today or Randy Fields Park City group, CEO, and Chairman and John Merrell Park City Group CFO.
Before we begin I'd like to remind everyone that this 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 or statements that are not subject to historical facts.
Such forward looking statements are based on current beliefs and expectations.
Park City group management are subject to risks and uncertainties, which could cause actual results to differ from those forward looking statements.
Such risks are fully discussing the company's filings with the Securities and Exchange Commission.
The information set forth yearend should be considered in light of such risk.
Park City group does not assume any obligation to update information contained in this conference call.
Shortly after the market close today the company issued a press release overview and the financial results that it will discuss on todays call.
Investors can visit the Investor Relations section of the company's website Park City group Dotcom access this press release.
With that said I'd now like to turn the call over to John Merrell, John The call is yours.
Thanks, Robin good afternoon, everyone.
As we've communicated on previous calls we began shifting our focus back in April 2019.
Our focus remains as follows one recurring revenue and reduce the historical reliance on four to 6 million per year and onetime revenue.
It's nearly impossible mathematically to overcome onetime revenue reductions all at one time, but longer term there are significant value to be captured.
To keep their annual operating expenses flat as I've said, it takes 17 billion a year to run this place absent marketplace costs.
Three increased profitability and cash and for rather network grow the network grow the network.
As we have mentioned the three initiatives Randy and I believe can accomplish these goals or the growth in tier two hubs cross selling and upselling and our supply chain offerings and expanding marketplace.
We spend a minute our progress.
Let's start with a growth in tier two hubs since June 32019. The company has added 42, new tier two clubs, bringing the total can 90 as of December 31, 2019, an increase of 88%.
For perspective, just a year ago. The company has less than 25 tier two hubs cumulatively.
The increase in tier two hubs was the result of one dedicated seller in order to accelerate our progress going forward and based on the success to date, we've had a three additional dedicated tier two sellers in January and February increasing the total dedicated tier two salesforce for one to four.
Growing the network.
Since June 2019, the company has grown from 23000 unique supplier participants to over 27000 at the end December 2019, an increase of 16%.
The increase in the supplier network grew largely through tier two additions keep in mind that every tier two hub brings with it approximately 80, new suppliers for the network.
As Randy will point out or out of stock offering semis endorsement of the application is anticipated to accelerate our cross selling opportunities you addressed at the moment.
Lastly, as marketplace, while marketplaces growing 13% year over year, it remains largely transactional difficult to predict but a very important piece store strategy, that's helping our customers source that and transact business.
Turning to the numbers.
We generated 2.7 million in cash from operations for the first six months of fiscal 2020.
This is 46% more than a 1.8 million we generated in the first six months or the prior year.
Total cash as of December 31, 2019 reached 19 million.
All right repurchasing 1.8 million in common stock the date under our stock buyback program.
Deferred revenue for the comparable period also increased by 20% or 544000, which reflects our growing subscription base and our ability to systematically backfill the onetime revenue.
In the second quarter fiscal year 2020.
Total revenue was 4.84 million down 13% from 5.56 million in the same quarter in 2019.
It should be noted that last year's fiscal second quarter included 1.1 million, a nonrecurring onetime revenue outside of marketplace, which did not occur in the quarter ending December 31 2019.
[noise] recurring revenue in Q2 of 2020 grew 3% to 4.24 million up from 3.89 million in the same quarter fiscal 2019.
Year over year recurring revenue as a percentage of total revenue increased from 70% JD three person.
Year to date fiscal year 2020, total revenue decreased from 11.51 million to 9.64 million for the first six months for fiscal 2020 down 16% from the same period in fiscal 2019.
It should be noted that last year six months revenue included two point Threemillion nonrecurring onetime revenue, which did not occur in the same six months ending December 31 2019.
In other words, all the revenue decline is in onetime revenue.
Recurring revenue for the first six months of fiscal 2020 grew 3% from 7.8 million in fiscal 2019 to 8.1 million in the same period of fiscal 2020.
Recurring revenue for the first six months of fiscal 2020 as a percentage of total revenue increased from 68% in fiscal 2019, 84% in fiscal 2020.
And second quarter fiscal year 2020, total operating expenses were 4.2 million, an increase of 327000 or 8% from 3.9 million in Q2 2019.
This 8% increase is largely the result of higher marketplace costs, an increase in sales personnel cost timing of expenditures and higher depreciation due to our headquarters relocation and data center expansion that was completed in June of 2019.
Year to date fiscal 2020 total operating expenses for the first six months of fiscal 2020 were relatively flat at 8.87 million versus 8.81 million up 0.7%.
As I've said before it takes 17 million to run this place absent marketplace costs.
As we have added three additional sales staff to accelerate our tier two initiative, we anticipate reductions in other areas to maintain net neutral increases and total operating expenses for fiscal 2020.
In the second quarter fiscal year 2020, net income to common shareholders for the second quarter fiscal 2020 was 517000 or three cents per diluted share compared to 1.5 million or eight cents per diluted share your go quarter.
The decrease in net income to common shareholders was largely the result of 1.1 million less onetime revenues and higher marketplace costs.
Year to date fiscal 2020.
Net income to common shareholders for the first six months of fiscal 2020 was 540000 or three cents per diluted share compared to 2.4 million or 12 cents per diluted share in the year ago period.
The decrease in net income to common shareholders year to date was largely result of 2.3 million less onetime revenues and higher than anticipated marketplace costs.
The common stock buyback plan.
Under the current stock buyback authorization, we repurchased 174615 shares of common stock at an average price of $4, an 80 cents per share in the December quarter for a total of 838000.
To date, we have repurchased a total of 342170 shares of common stock at an average price a $5.37 per share for a total of 1.8 million.
As previously stated the company holds no treasury stock the stock purchased under the buyback plan is retired from issuance and hence reduces the total amount of common stock outstanding.
Since May 2019, the company has reduced its total capitalization by 1.5% through it stock buyback program.
The total amount remaining under the buyback plan for purchase and retirement of common shares under the existing repurchase plan is approximately $2.2 million over the next five quarters.
Once again, we stated and maintain our goal is to drive recurring revenue as a percentage of total revenue to 80% or more.
We achieved this goal for the quarter and in fact, it was our third quarter in a row with recurring revenue over 80%.
However, keep in mind, we will always have customers that demand to buy meaning license versus rent, meaning subscription and we will consider these situations when the pricing and value makes sense.
In short we have a strong balance sheet the strongest in our history, we have a proven ability to generate cash 2.7 million to date, we're profitable we've been established at the end solution that addresses significant needs and one of the largest sectors of the global economy.
We're focused on a growing recurring revenue and Backfilling four to 6 million a onetime revenue with recurring subscription.
We are adding more feet on the street more cross sell opportunities and growing the network growing the network growing the network at this point I'll pass the call over to Randy Randy.
Thanks, John.
Well, we reach an interesting inflection point this quarter and I think that demonstrates that our transition to a revenue mix dominated by recurring revenue is definitely accelerating.
As most of you know transitions from onetime revenue to a SaaS recurring revenue model are challenging for most companies typically driving losses upsetting customers in crane debt et cetera until the transitions complete we're certainly the exception.
Through this process, we've continued to generate substantial cash.
And therefore are seeing an increasingly strong balance sheet. The strongest certainly in our history. We remained solidly profitable we continued to grow our network at top tier salespeople and drive shareholder value.
The revenue declined from focusing on recurring revenue is transient is already abating as the revenue growth from recurring revenue is accelerating.
We grew our recurring revenue 3% for the December quarter. Please remember new subscriptions do not begin on the first day of each quarter, but begin throughout the quarter.
But by the ended the quarter in December our monthly recurring revenue run rate increased to more than 8% what should this mean to us as investors given subscription revenue is recurring our run rate of 8% may provide line of sight to our recurring revenue for the subsequent quarter, assuming no incremental growth.
Our exit rate and the September quarter, meaning September 2019 versus September 2018 was 4% so our pace doubled in the three months clearly demonstrating into pieces in fact accelerating.
We expect the exit rate in March to be higher than in December and so on and so forth. We believe investors can do double digits is starting rate for our recurring revenue going into fiscal year 2021.
Since approximately 85% of our total revenue is recurring now that growth rate should be an approximate surrogate for our topline growth as we go forward.
The third quarter neuro over 80 plus percent of our total revenue was recurring.
Onetime revenue other than marketplace remains negligible and recurring revenues growing as John pointed out the proof is in the numbers.
I'm proud that we've achieved this important transition while both maintaining profitability ended the same time strengthening our balance sheet.
I continue to believe that profitable growth. It is still something that's largely overlooked these days.
Cash is certainly still king strong balance sheet is critical particularly in our case, a customer's demand it in our balance sheet gives them comfort in fact, our balance sheet and deep customer network will talk about that a bit more than in a moment serves as a really white moat around our business adorable barrier of entry for star.
To ups or outsiders, who might seek to displaces.
Our near term focus is on further penetrating our current customer base with Upsells and cross sells we're very excited about how would in fact progressing little bit more about that later.
Let me speak to the key performance indicators, which will contribute to financial performance in the future first network scale.
Going to scale of our network is of key importance because it's ultimately the indicator of our future growth and profitability.
We do have two metrics that we internally follow the number of participants in the network and the number of connections between them.
The connection perspective as of December 31, we had nearly 100000 facility level connections in our compliance system. Our total connections across all three segments of the business is multiples of that.
Just for perspective, four years ago, we had a couple of thousand compliance connections. Another metric. We follow is the number of participants or customers about five years ago. We had around 800 total customers and our system across all of our platforms today, we have 27000.
Scaling.
Size of our network in its growth numbers enables us to do what we call land and expand for example, take our focus on our tier two hub initiative every near to treat hub brings with it about 80, new suppliers to be added network.
Each of these suppliers in turn has suppliers are the road, representing both an upsell and an expansion opportunity.
Flawless execution with compliance is paramount and leads to additional opportunities such as our supply chain offerings marketplace et cetera.
As usual I know if you listen to me before our customers come first no always.
The opportunity is enormous and the pace of our network expansion is accelerating rapidly keep your eye on that as John mentioned, we have recently added substantially to our sales team based on the size of the opportunity and our initial success, we're focused on driving our growth in both numbers and the size of the connection stuff.
Im associated with those numbers of participants our growth in these two metrics drives the work we have to do much more closely than that drives our near term revenue in other words, we add customers, which may not immediately impact revenue that ultimately does the result is that when our network grows rapidly is it is now we need to doubled.
Down on their focus on execution to paved the way for the next round of additions the team is executing magnificently and seriously I mean magnificently.
During the second quarter, we made tangible operational progress in each of the through your revenue streams, let me start with compliance.
We added a significant tier one hub in the quarter and more importantly, we added nearly 42 or two hubs since the fiscal year began year ago. We had only 25 total tier two customers that we won cumulatively over the years. We ended the December quarter with a total of 92 or two hubs. This growth was generated by only one day.
Medicaid to tier two salesperson and as I mentioned, we've added additional resources dedicated to accelerating this growth our marketing initiatives are working that we're on track to reach probably just under 200 total tier twos by the end of the fiscal year that will be a nearly 400% increase.
However from a network perspective keep in mind that this year could add nearly 12000 more customers 12000, we began the year with 23000 customers. So this is nearly a 50% increase for the year.
In the next year, we're hopeful of crossing the 50000 participants.
Remember each new supplier becomes an up sell candidate, but then they're short run increases our need for our continued brilliant customer execution.
The size of the network interestingly become self fulfilling.
More companies want to join the largest network and the size of the network increases our effectiveness and the attractiveness of our other offerings such as marketplace.
It's important to note that not every customer sites up on the first day of the quarter and that Theres. Some work required to ramp up users. After a sale is made.
For this reason, we now see the exit rate and monthly recurring revenues is the best indicator of our progress ending Q2.
Our monthly recurring compliance as we mentioned revenue exit rate increased to 8% December compared to prior December double the rate of the September quarter end.
So double digit recurring revenue growth is ahead not very far ahead.
We have a good line of sight. So this view is based on agreements. We currently have in place we simply have to continue to provide flawless execution and deployment.
We are certainly executing with a clear mission to scale the network until we touch and connect everyone in the supply chain for U.S. food Incidentally, we're also making progress to replicate this model outside the United States.
During the fiscal first quarter, we signed our first repositrak compliance hub in the United Kingdom. It will commence implementation in the month of March our first account in the UK is one of the most prestigious wholesalers and retailers in the country and assuming we maintained our excellent.
Customer execution standards, it will give us a great lunch not just in UK, but potentially give us a springboard to Europe and in fact to Asia.
Little bit about supply chain.
In supply chain or out of stock management solution is a clear an overwhelming win as a result, we continue to believe supply chain will be a standout performer in fiscal 2020, while each new customer in compliance is relatively small financially each add in our supply chain business is typically much more meaningful subsequent to the end of this.
Second quarter.
Out of stock management solution was endorsed by the food Marketing Institute FMR.
It's a very significant milestone for us in an industry. That's always skeptical we're grateful for this accolade NFV mice endorsement reinforces how critical in significant the out of stock issue is and certainly validates our offering as an effective solution.
Out of stocks have been an age old issue for the grocery industry, but is online competitors like Amazon expand home delivery out of stocks have taken on a more critical importance for food retailers. They aren't just watching lost sales more importantly, the watching the loss of customers.
Many retailers are now just beginning to recognize the magnitude of the challenges customers come into their stores don't find what they need pull out their phone see it's in stock on Amazon and click to order it interesting statistic by the way 24% of Amazon's North American revenue comes from these.
Disappointed shoppers people, who started on Amazon because they couldn't find isn't a physical retail store.
Our results are impressive in terms of the efficacy of our solution.
70% of vendors using our out of stock solution produced out of stocks by an average of 46% and that's across 12000 stores where were working today are affected us at reducing out of stocks exceeds even my expectations to say that I'm proud to this part of our execution would be a grotesque understatement.
And our typical fashion nowhere carefully slowly growing the usage of our tool.
Now to marketplace during the first fiscal quarter, we added two new buyers in the marketplace network, we're starting to see their expansion and contribution to marketplace that showing in our financials, albeit as nonrecurring revenue we continue to push the boundaries of marketplace and it continues to move along very well.
It is nonrecurring revenue, but we still think that it's very important both ultimately to us into our customers in some.
It's wonderful to have all three of the areas of our platform growing and doing well wonderful indeed.
We remain uniquely positioned and our ability to help a buyer source that and transact efficiently with the new supplier and we have multiple modes around their business.
Our efforts to reduce onetime sales in favor of the idea of recurring revenue that drives predictability maximizes profitability is nearly complete well ahead of our original plan. The progress we've made to accelerate tier two growth will hit an inflection point later this year and our operational progress will be a continued to show.
Up in our topline results.
In the meantime to judge our progress through this transition I'd reiterate our key operational goals.
Under compliance we suggest watching our tier two adoption.
We have that we're on track and on pace. If you will increase the number of tier two hubs using repositrak by several hundred percent to just under 200 by the end of the year.
In supply chain, we intend to drive our out of stock program to more rapidly grow our supply chain recurring revenue business, focusing primarily on our existing customer base and finally marketplace simple continue to add new buyers new programs et cetera.
So with strategic and deliberate execution will continue to grow our bottom line, our cash generation and add additional strength to our balance sheet. So with that I'd like to now open the call for questions operator.
Thank you well now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is in the question Q.
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Our first question comes from the line of Tom Forte with D.A. Davidson. Please proceed with your question [noise].
Great. Thanks for taking my questions are radio wanted to ask a couple of questions about the current state a global that's in a implications for a park city group comprised the track and marketplace.
So when we think about Corona virus, so we think about.
The food supply chain, the global food supply chain in particular in China, how how does that.
Fit into both your business model and how does it bring attention to your business model and then when we think specifically about marketplaces and durability and the path to enable merchants to get a product from a verified supplier in short order.
How should we think about that as well.
Thanks, Tom Good questions, Let me, let me take the first one first.
Remember Corona virus started out as a food problem from what Weve currently no meaning it originated.
Something that somebody eight.
The interest in China is increasing and we even having conversations with potential partners in Asia to take our platform there.
So whenever there is a problem of risk safety et cetera. It just generally sensitize is the environment to.
What do we do to contain our problem how do we make sure that the suppliers were working with our good guys not bad actors. So overall almost every incident that relates to safety benefits us at least in terms of heightening awareness.
I think with regard to the second question.
There's a huge issue going on with the Chinese supply chain and we certainly had a number of inquiries around marketplace. How we can potentially fine products did revolver. The landed that are not stuck now in a port it isn't functioning in China. So.
At least over the short term it's neutral to positive obviously it this is.
Essentially it's a catastrophe to the people who are hill, we feel obviously awful about that but from an economic perspective at this point, it's neutral to positive Park City group Repositrak.
Then Randy My second question more structural so where do we think about your sales force as you fully implement the recurring revenue is it on a by customer base.
As it on a byproduct basis, meaning repositrak versus supply chain versus marketplaces or.
A large food retailer.
It one individual salesforce.
Yeah actually we technically have two different and sales organizations still.
We've added capacity added people to both of those organizations in the last several months.
One of those is if you will dedicated to the compliance aspect.
What we do.
In particular to what we've called this tier two initiatives.
Which is to get suppliers to use us for their supply chain, that's going exceptionally well, we feel very very good about it I think over the next several years will help us to an enormously scale the number of customers we have the network.
At the same time, we've added significantly to our general sales organization.
With the intention that we're now going after more top tier one kinds of both compliant frankly supply chain retailers and wholesalers. So between the two different sales organizations, we have more.
More people time over target than we've ever had his.
And obviously, that's an indicator of what we think both our ability to execute is a very importantly, but secondly.
Just our confidence in how we do it and how we scale it ought to be so at the moment at all feels very good to us and frankly, I think again, we just want to point out that any cosmetic or optical sales declines are only in the onetime revenue that the recurring revenue is accelerating from.
Were presented at the end of last quarter to 8% at the end of the most recent order that we finished and we obviously have line of sight.
Is this a lot of confidence it will be double digit on a monthly basis by year end, which Jesus up for double digit revenue growth next year. So the transition I'm kind of hitchhiking to make sure it's clear that transition to eliminate onetime revenue.
Which we originally thought could take up to two years, we think will be largely complete in the single year. So internally, we're feeling very good about how things are going.
Great. Thanks for taking my questions Randy.
Our next question comes from the line of Amanda Borough with Loop capital markets. Please proceed with your question.
Hi, good afternoon guys.
Appreciate you guys, taking the questions here you if I could for both Randy and job. He ran it just the just to follow up rate there.
So without getting like he says well on the timing of the return to I've, though is that is it possible.
Eric.
And then with the growth.
Recurring.
You could returns revenue growth this year.
Calendar 2008.
Well she really.
That being a calendar 21 that you guys are trending pretty good job schedule.
Yes.
Well, let me let me say this about that unlike Richard Nixon.
Clearly we are evidencing optimism that before the end of the year will be comping positively.
But again, we would argue that the onetime revenue, which should be heavily discounted anyway.
We are already Comping positive ended that great growth rate of revenue comp will accelerate so.
We will have a very likely a quarter in this fiscal year did is positive comp all in all in all in and clearly next year, what we're suggesting is that the growth rate of total revenue like for like will be double digit so the deal.
Termination of onetime revenue the replacement of that with recurring revenue is largely complete and it'll show up into total numbers.
We think prior to year end fiscal 2020, so but not enough that we will overcome for the full year positive sales, but for the quarter, we feel pretty good about that.
Fourth quarter that that that that's very helpful. There.
And is there anything they even tell us about how you're thinking about sort of recurring revenue I.
I don't know what the right what is tempo or or kind of slow growth rate that would be useful for us to think about.
What you're expecting what may be something that you get some in key levers are they get there.
We can you continue to get started developing your boss.
Hello.
Okay. So let me take your question then re frame it slightly.
And so if I'm out of line here feel free to say so obviously.
If I were trying to understand where we're going from a revenue at bottom line perspective.
And it's not like place, but here's what I would do.
I would take what we call our exit rate in any given quarter and I would roll that number forward in terms of growth rate of recurring revenue for the next quarter because it just tends to be a very stable number within a quarter.
So for example, if we just said our exit rate in the month of December is 8%.
Well, you can probably figure out that from that the growth rate of total recurring revenue in the quarter that we're currently in quarter three is going to be somewhere between six and Ken.
Oh, and we said that by year end it will be double digits for a monthly which means as you exit this year and look at next year.
Growth rate of revenue will be double digit now.
The modifier to that is that in fact onetime revenue will have been compressed to less than 15% of total revenue, which actually means and that's why I was saying.
In my remarks.
Growth rate of recurring revenue will become for all intents and purposes. The Sir I get that you need for growth rate of total revenues. The business. So we've tried to make this about is easy to forecast as possible. So you can make the assumption that the John would give you which is.
Our cost of being in businesses around $17 million year, more or less either with the people we've added.
And that our recurring revenue stream becomes really sub revenue stream and that next year, we're going to experienced double digit top line growth minus 7 million 17 million of expenses. So it will be a very good you indeed.
It is that helpful.
It is I appreciate it.
And then let me sneak one more in here.
Since you're at the started a year or you look you you know.
No certainly gone over a end of a camera market with you in a supply.
Some of which are your kid initiates the year, but I just wanted to ask the question widely did that we don't Miss in before how would you like at this point about what you guys are focused on this year. What you guys are up to Ah, Yes, anything you haven't mentioned, yet so that we're aware that I'd appreciate it.
And that's it for loan Yeah. That's a that's I love that question because that that's open ended enough I can talk about almost anything.
The tier two initiative really is a big part of our future has some very interesting impacts for the business and I'm trying to guide people to look at the growth of the size of the network because remember at the end of the day ultimately our revenue and our profitability depends on whether.
Network is growing plus a time lag.
So as I said five years ago, we had 800 customers. We currently have 27000, we'll finish the year.
In the 30, thousands of customers and I'm sort of guiding people to think that by the end up 2021.
We'll be very close to 50000 participants in this network.
Wow, I mean, even even I'm impressed with that scaling so in a way what we need to be doing is growing the revenue base from those customers. The cross selling activities the up selling activities. That's why we are adding sales people to the mix and we will continue to do that.
As we add to the size of the network.
But the net worth girth makes us more attractive to others to join in sort of like the cell phone business you wouldn't want to join a network that didnt connect very many people you'd want to join the network. They connected the most people and that is certainly us.
So.
As we look at what we're doing we're feeling very confident about the tier two initiative.
Important to note that virtually all of our growth now is coming from existing customers, that's really remarkable meaning people, we already do business with.
Which means as we grow the size of the network the cadence should increase and the revenue growth should increase the constraint continues to be the fact that when you add 50% is we are to our network that determines the amount of work that we have to do.
More than the revenue growth so 50% expansion of the network this year.
Tells us how much work we have to do that continued to take great care of our customers. That's the primary initiative now.
Having said that everything else, we're doing in our supply chain is going really well I'm of frankly.
Really impressed with how well we're doing on or out of stock work that will drive revenue growth in supply chain before this fiscal year ends in June and finally, we don't talk about did this much marketplace is definitely growing it's growing at double digits, and we're seeing more and more usage.
Which was the goal of existing customers, meaning people would try it they would come back and expand their footprint and come back again in expanded even more so I'm really impressed with how we're doing on the marketplace side of what we're doing.
All three we're we're hitting on all eight cylinders, if you will or all three cylinders and all of those initiatives are occurring on top of taking great care of 50% expanded customer base, which is what we're dealing with.
So if I were did if I were to be any more optimistic than I am today, I would be giggling I suppose.
That's that's really helpful. Randy I appreciate it I'll cede the floor. Thank you.
There are no further questions in the Q.
This does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.