Q3 2022 Park City Group Inc Earnings Call

Greetings and welcome to the Park City Group fiscal third quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation, if you'd like to ask a question you May press star one on your telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Geoff Stanley.

K I R. Thank you Mr. Stainless you may begin.

Thank you operator, and good afternoon, everyone and thank you for joining us today for Park City group's fiscal third quarter earnings call hosting the call today are Randy fields Park City groups, Chairman and CEO and John Merrill Park City group's CFO before we begin I would like to remind everyone that the call could contain forward looking statements about park city group within the meaning of the private secured.

He is litigation Reform Act of 1995 forward looking statements are statements that are not subject to historical facts such forward looking statements are based upon current beliefs and expectations of 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 dis.

And 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 information contained in this conference call. Shortly after the market close today the company issued a press release or overview of the financial results that we will discuss on today's call <unk>.

<unk> can visit the Investor Relations section of the company's website at Park City group Dot Com to access. This press release with all that said I would now like to turn the call over to John Merrill John The call is yours.

Thanks, Jeff and good afternoon, everyone.

Our transition to a SaaS company is complete.

100% of our revenue is recurring our.

Our strategy is very simple.

Grow recurring revenue control costs through a combination of increased productivity and cost management increased net income accelerate E. P. S buy back shares and drive cash.

Recurring revenue grew 7% year over year, and 8% year to date.

We ended the quarter with an exit rate of recurring revenue of $18 $6 million.

What does that mean that means sign contracts in hand at March 31, 2022 that are billing monthly multiplied times 12 will generate $18 $6 million in recurring revenue and the subsequent 12 months, if we just stand still.

Again, our revenue was 100% recurring today to put that in perspective last year recurring revenue was 71%.

This also included over $4 million in one time revenue like marketplace and recurring revenue products and services that had little upside or very low margin.

We've eliminated all of this noncore nonrecurring revenue.

By controlling costs and increasing productivity, we have reduced our overall annual cash spend to under $12 million.

What do I mean by productivity.

We've eliminated using outside third party vendors for CRM employee expense reporting and document compiling for both Sarbanes Oxley and Sox compliance.

We are a software company instead of utilizing third party software to facilitate these task we built it internally.

We have the development team to do things better cheaper and more efficiently tailored for specific needs.

This efficiency is reflected in the financial results.

Increasing net income is a derivative of growing recurring revenue managing expenses and productivity and it shows in the quarterly results.

Gross margin increased from 56% in Q3, 'twenty 'twenty, 1% to 83% in Q3 2022.

Income from operations increased from $720000 to $1, one $8 million up 64%.

Net income grew 41% to 1.09 million and EPS grew 55% to five cents a share.

I believe it is critically important that shareholders understand our strategy through the eyes of management.

Not only is it producing better results, but has and will provide better clarity and transparency to model our future what do I mean by this.

If you take our annual recurring revenue exit rate call it $19 million and at a certain growth rate, 10% to 20%. It is pretty easy to determine our likely revenue in the next 12 months since we are a 100% recurring revenue with very little customer churn.

It doesn't consider any future opportunities, including traceability or other initiatives.

On the expense side most of you've heard me say it takes $12 million in cash to run. This place that number is now closer to $11 million, yes, we have depreciation amortization bad debt expense and other noncash accounting cost. However, it is simple math to determine what our income from operations and cash generation might be.

As we have said before going forward on each incremental recurring revenue dollar 80 to 85 cents will fall to the bottom line.

You can already start to see this materialize with an 83% gross margin in the quarter.

In addition, we generated $4 million cash from operations in the first nine months of the fiscal year.

In other words, our systemic profitability continues to grow substantially faster than revenue.

The earnings power of the company is now clear and easy to model. It is also significant.

Turning to the quarterly numbers.

Fiscal year 2022 third quarter revenue was $4 $6 million down 24% from $6 million in the same quarter last year.

The decrease was due to the planned annual reduction and $4 $2 million in one time revenue like marketplace and other recurring revenue products and services that had little upside or very low margin.

This freed up resources to prepare for one of the largest opportunities at park city group's history, beating the Fda's food traceability standards.

Recurring revenue as a percentage of total revenue was 99, 9% for the quarter or $4 five $6 million. This is a seven 3% increase over the same period in fiscal 2021.

Total operating expenses decreased 36% from $5 $3 million in Q3, 2021 the $3 $4 million in Q3 2022.

The decrease was due to lower marketplace costs associated with lower marketplace revenue and continued expense discipline.

Sales and marketing expenses increased from $1, one $6 million in Q3, 2021 to $1 million to $3 million in Q3 2022.

This increase was the result of higher sales travel and trade shows as Covid travel restrictions abate, partially offset by cost reductions.

G&A costs were down 6% to $1 $2 million.

For the third quarter of fiscal 2020 to GAAP net income was $1 $1 billion or 24% of revenue versus $773000 or 12, 8% of revenue.

So for the third quarter in a row, we have essentially doubled our net margin.

Net income to common shareholders was $941000 or five cents per common share based on 19 4 million weighted average shares versus $627000 worth <unk> <unk> per common share based on $19 9 million weighted average shares.

You'll note, we have reduced our capitalization significantly through the repurchase and retirement of shares which I will touch on more in a minute.

Turning to the nine month numbers.

Fiscal year 2022 year to date revenue was $13 $5 million down 18% from $16 $4 million in the same period last year for the reasons I've already discussed.

Recurring revenue as a percentage of total revenue was 98, 4% for the nine months were $13 $3 million.

This is an eight 1% increase over the same period of fiscal 2021.

Total operating expenses decreased 31% from $14 $7 million for the first nine months to $10.2 million.

Sales and marketing expenses decreased from $3 six $4 million in 2000 $21 million to $357 million in fiscal 2022.

G&A costs were down 2% at $3 $5 million.

Income from operations was up 90% to $3 $3 million.

Year to date, GAAP net income was $2 $9 million or 22% of revenue versus $3 million inclusive of a $1 $1 million gain on the forgiveness for PPP loans.

Excluding this year to date net income last year was $1 9 million or 12% of revenue.

Net income to common shareholders was $2 $5 million or 13 cents per common share versus $2 5 million or 13 cents per common share in fiscal 2021.

Again, the prior year period includes the impact of the $1 1 million dollar P. P. P gain on loan forgiveness.

Turning now to cash flow and cash balances.

Year to date, we generated cash from operations of $4 million compared to $3 $4 million last year.

Total cash at March 31, 2022 was $21 3 million compared to $24 $1 million at the end of fiscal year 2021.

We continue to repurchase our shares with a combination of cash and Atlanta credit.

The company now carries approximately $3 $4 million on its revolving line of credit.

In the third quarter the company repurchased 538376 shares at an average price of $6 95 per share for a total of $3 $7 million.

To date, the company has repurchased 152 million shares at an average price of $6.09 a share for a total of $9 two $6 million.

The board has authorized an additional $9 million repurchase now the company has approximately $11 $7 million remaining on the $23 million total buyback authorization since inception.

We are a SaaS company, 100% recurring revenue, 80% gross margins, a fortress balance sheet, including $21 $3 million in cash and growing little debt and reducing our capitalization.

I'm very proud of what we've accomplished thus far more to come.

Thanks, everyone for your time today and at this point I will turn the call over to Randy Randy.

Thanks, John .

As John noted our recurring revenue is growing nicely. Our net income is growing faster than our earnings per share is growing faster yet that has and will be the plan.

Proof is in the pudding literally pretty simple we think so.

So how are we going to continue to do this well, we're expanding our relationships with our customers as part of our continued land and expand strategy.

In fact, our largest customers are growing quite rapidly by adding skus store count suppliers and in addition, taking on more of our value add modules, including our out of stock solution.

When your biggest customers add more it really a test of the success of our products, but equally we think it's to the customer service we provide.

Looking forward. We're currently seen a nice pick up in our revenue run rate in the current quarter and that's going to set us up for a strong close to this fiscal year.

As a SaaS company, we therefore have a pretty good line of sight to fiscal 'twenty, two 'twenty three and it looks really excellent from a revenue profit cash and EPS perspective.

The growth we are seeing is actually across the board all of our product lines are growing.

As John mentioned after the June quarter, the comps will change without nonrecurring revenue in the mix. We will finally have optics to match our recurring revenue performance again, our bottom line will grow faster than our EPS will grow faster yet we continued to reduce the shares outstanding.

John mentioned that our costs are also in excellent shape why is that please.

Please note that our business is extremely efficient.

Our results now provide much more transparency and clarity than ever before to that fact, our internal productivity has and will continue to be a critical focus for us as we grow so what does that mean it means internal automation relentless process improvement in order to keep improving the <unk>.

Or experience.

As we say internally people should take care of people machines should take care of stuff. This.

This yields a lower cost great customer retention and increasing expansion of customer accounts and all of that shows in our numbers.

Furthermore, we continued to generate revenue per employee metric that far exceeds industry peer averages for 64 employees. In fact, we're nearly double the industry average for companies of our size.

I'm proud of what we've accomplished so far but we have much more to deliver.

Today, we're essentially 100% SaaS. We believe we will continue to scale revenue significantly with very little added cost even considering the traceability initiative on the horizon.

Our numbers are proving that the strategy works operating margins of 83% and net margins of 21% and were continuing to expand profitability significantly.

This profitability results in bolstering, our cash generation, and therefore, enabling us to aggressively buyback and retire shares.

How do we continue to drive more productivity you might ask the fact is that nearly half of our annual development effort is directed towards our own internal projects, what's that mean.

We have developed a unique and proprietary tools that we use to enable us to keep our people focused on our customers rather than the admin distributor.

We also use what we sell and sell what we use a couple of examples we've replaced third party CRM software with our own internally developed <unk> platform as we call. It we have automated employee expense reporting use our own internally developed document retention platform for regulatory reporting for bolt socgen.

Sox compliance as examples.

These are tools that not only help us become more efficient.

But continued to be more profitable.

Tools, we can and do sell to our customers in a sense. We are our own test labs are changing how people can and should work in the current environment.

Going forward, what will the strategy be for the company first continued to take great care of our customers duck.

That's a primary with us when our customers are successful we deeply believe that they will buy more.

Second grow our recurring revenue at a pace consistent with that customer centric mantra, 10% to 20% per year as I mentioned, our topline is accelerating heading into the end of this fiscal year and into next we will end the fix fiscal year next month on a strong note.

Third drive our productivity, so that 80% to 90% of that incremental revenue becomes real GAAP earnings think expense control and productivity enhancements. Finally, we will continue to shrink the number of shares outstanding and returned capital to the shareholders.

Hope for result rapidly growing EPS, it's worth, noting incidentally that our recurring revenue represents more than 150% of our cash operating expenses. This.

This means we're systematically profitable if we sell nothing new and just maintain our recurring base, we will continue to be profitable.

In the World, we see evolving we believe companies with growing EPS and robust balance sheets will be rewarded we certainly hope will be considered by investors in that kind of a light. So in short our focus is one grow recurring revenue to more rapidly grow nut net income three even.

More rapidly grow earnings per share through share buybacks.

It's important to note that we're achieving this expanding profitability all the while we're investing in our traceability offering as.

As we stated traceability is not yet contributing to our topline as the industry continues to wait for the formal FDA rules in November .

The FDA has been clear that this mandate is coming there was a lawsuit that required the F. D. A in fact to put track and trace mandates in place by November of this year.

But perhaps even more importantly, the industry now once it track and trace will alleviate a significant vulnerability for retailers and give them more control over their supply chain. So it's gonna happen sooner or later and park City group as the obvious partner to address it we.

We already do track and trace that scale affordably and were already connected to many many thousands of suppliers.

[noise] traceability requires massive micro execution the ability of process literally billions of transactions a year and do it accurately quickly electronically and in a fully automated fashion, we do that now and we do it extremely well we have more than a decade of addressing compliance and supply chain challenges.

And in our view traceability is basically a marriage of those two.

Once this becomes a reality for the industry and it will we believe the F. D. A mandates will effectively do much of the marketing for US our business model for traceability is incredibly simple make it extremely low cost and exceptionally easy to adopt we already have the systems in place. So major development is not needed.

More head count is not needed more overhead cost is not needed.

He knew would be competitors can't match, our existing advantages, including a proven already scaled solution and then already connected vast network of suppliers and retailers and also the deep deep long term relationships that we have with the suppliers and retailers They trust us.

We've learned that in fact, they're actually working with us hand in glove to move to traceability solution alone.

To put this in context, we've identified more or less 6000 customers suppliers with whom we already have a connection whose products may be initially affected by this so called rule tool for.

Even at a modest monthly subscription rate this opportunity would be a substantial add on to our current current nearly $20 million of SaaS revenue and adding minimal additional cost over.

Over the years, we fully expect that the FDA mandated list will grow expanding our opportunity in fact, even more.

As we position park city to be the obvious track and trace solution partner with continuing to add modules to our existing applications.

Which in turn expands our total addressable market.

Revenue from traceability is still out in the second half of 2023 fiscal year, and we baked none of it into our internal forecast, we will however be thoroughly prepared.

As we move these initiatives forward, we do so from a position of strength.

We're maintaining a fortress balance sheet that gives our customers significant comfort.

Our current ratio was about four to one we're structurally profitable growing recurring revenue to significantly exceed our cash operating expenses, we're continuing to invest in our internal technology and systems to better serve our customers and obviously the implication of this continued investment is there a customer service will get.

Even better and costs over the next few years will grow much slower than revenue all of this revenue growth productivity growth and shrinking our shares outstanding will help us achieve our goal of growing GAAP earnings per share at a rapid rate. We are optimistic that the acceleration we're seeing in our revenue right now will carry us into a strong finish.

For the year in a very exciting 2023, so with that I'd now like to open the call for questions operator.

Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.

Total indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It maybe.

Be necessary to pick up your handset before pressing the star keys.

Once again Thats Star one to register a question at this time.

The first question is coming from Tom Forte of D. A Davidson. Please go ahead.

Great Randy and John Congrats on the quarter.

I have only Randy five questions I'll go one at a time.

Yeah, John you did a great job of discussing how youre managing costs at the company level. The question I had for you was how how are you managing labor right now it seems like there's very tight tight.

Tight labor market for Tech talent.

How are you managing labor.

Well.

Tourists.

How do we both do it.

You go ahead go ahead, okay. Thank you.

Alfonse gusto.

So there's a number of things about us that are that make working here attractive.

We are geographically.

Free meaning you can work from home most all of our employees do that we've done that for 15 years. So we're used to a remote culture.

We pay very competitively.

And all of our employees participated in a stock purchase plan. So at the end of the day I think we find ourselves not struggling to get people. Although it's always a struggle to find great people and make sure that they stay with you our tenure with.

Our with our staff is actually really really long so I'm not sure all of the things we're doing right, but I think on balance we are doing it right John .

Okay.

Yeah, I think that as Randy said, I mean Park City group, it's not a job it's a lifestyle. So.

For us we're not we're not we have developers in India, Slovakia, our salespeople or across the company our country, where our customers are where very few folks that come into the office and Murray.

We have great work life balance with our CSM and sales folks we've reduced our office size just to be to go hand in glove with the.

The company's mantra now remote work, so I don't see it being challenging to keep.

Keep talent or attract talent in and again as Randy pointed out many of our our talent is the tenure is between seven to 10 years over 10 years.

Great and then Randy I know you've talked about the impact their core customer a food retailer with Covid and work disruptions as far as you know the employees getting sick things of that nature. I was wondering if you could answer the same question on the great resignation. So how's the great resignation impacting your core customer food retailers.

And is it having any indirect impact on your business.

Well you know for us the the obstacle to moving forward with new products. If you will the new services with our existing customers is getting and keeping their attention.

So to the extent that inside their business. They are focused on in this case, keeping labor in the stores taking care of their customers.

It's sometimes hard to get their intention.

So the attention span that we need to sell.

Implement and manage a relationship.

<unk> requires that there'd be somebody on the other side to work with.

So over the last year, it's certainly fair to say that it's been more difficult than historically, it's still not as easy as we would like it or it could be but we think over the next several months that supply chain issues in the supermarket will get a little bit better.

We suspect that as the economy cools and we're anticipating that as the economy cools, perhaps slips into a recession. The labor participation rate will go back up it'll be easier for our customers to hire people keep their stores stocked et cetera. So we would envision in the next six months it'll get.

These year rather than harder.

Great and the next one hopefully is an easy one.

With consumers trading down.

Are you at all impacted by the mix of sales that are private label for your food retail customers.

Well, it's it's an ongoing battle and the tragedy of inflation that affects everyone is that.

You save money, where you can add.

And people are definitely we see a trading out of brand names C. P. G products, where where there is a good substitute as a private label alternative we're definitely seeing that.

That impacts our customers, although in a way that isn't perhaps obvious there's typically more margin for a retailer in a private label product than the comparable CPG brand name product. So it's slightly impacts the revenue side, meaning.

Those products often sell for a little bit less on a unit basis private label products, but theres better margin.

So in between all of that it's it's working in the long run to the advantage of the supermarkets, maybe the most important thing that's going to happen in the next year is that I suspect we've seen.

Peak online this shift.

Shifting to Amazon, So that's likely to help our customers physical retailers as people realize that they are better off going into the stores finding their bargains on their own and not having to deal with the substitution mess.

From delivery services, so we're seeing an uptick in in person shopping and the ability to substitute.

More rapidly than otherwise would be the case.

Alright. So you you actually answered question number four if your answer on that one okay. So my last question and then Randy can you give an updated.

M&A strategy what are your current thoughts on your M&A strategy.

Remains the same we think that are you are you in a business like ours you have to have a forward view our forward view is that.

Hum.

There's.

Definitely difficult times ahead for startups, there is definitely difficult times ahead for companies that assume that the only thing that mattered was topline growth and didn't have business models that lead to profitability and cash flow. So we suspect and we're preparing ourselves for.

Opportunities that could present themselves.

Future date Theres nothing were actively looking at at the moment.

But we've.

We've got a balance sheet and banking relationships such that if the right opportunity or two were to present themselves.

We can both move quickly and effectively to take advantage of those.

Hope that wasn't too ambiguous.

No.

Thank you Randy Thank you John .

Thank you.

Thanks, Tom.

Thank you at this time I'd like to turn the floor back over to Mr. Phil for any additional or closing comments.

No. We don't have anything we feel really good about where we are I think mercifully where were.

I'm noticing that the environment is becoming more favorable to us.

US and to our customers. So we're hopeful that everything is as are.

We would want it over the course of the next year, but.

We appreciate everybody taking their time to listen in.

Obviously, we will answer any questions we can.

Thanks Al.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may do.

Disconnect your lines at this time and enjoy the rest of your day.

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Uh huh.

Yeah.

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