Q4 2022 Park City Group Inc Earnings Call
Greetings and welcome to Park City group fiscal fourth quarter, 2022 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
And please note that this conference is being recorded it is now my pleasure to introduce your host Rob Fink with F. N K I R. Thank you Mr. Fink you may begin.
Thank you operator, and good afternoon, everyone. Thank you for joining us today for Park City group's fiscal fourth quarter earnings call.
Hosting the call today are Randy fields Park City groups, Chairman and Chief Executive Officer, and John Merrill Park City group's Chief Financial Officer.
Before we begin I would 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 that 1995.
Forward looking statements are statements that are not subject to historical facts.
Forward looking statements are based on current beliefs and expectations.
Park City group remarks are subject to risks.
And uncertainties actual results may differ materially.
Such risks are fully discussed in the company's filings with Securities and Exchange Commission.
The information set forth you're in that would 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 closed today Park City group issued a press release over beyond the financial results that will be discussed on today's call.
Investors can visit the Investor Relations section of the company's website at Park City group Dot Com to access this press release.
But all that said I'd now like to turn the call over to John Merrill John The call is yours.
Thanks, Rob and good afternoon, everyone.
We are a SaaS company the success of our transition to a SaaS company is clearly evident in our profitability.
We increased our income from operations by 52%, even as our consolidated revenue decreased due to the planned elimination of essentially all nonrecurring revenue.
This resulted in a significant increase in net income excluding the forgiveness of our PPP loan last year.
We are systemically profitable with now 20, plus consecutive quarters of GAAP profitability, Despite a market cycle, a global pandemic and a looming recession.
Our strategy remains very simple grow recurring revenue control costs increased net income accelerate E. P. S buy back shares and drive cash.
Recurring revenue grew 6% for the year and 8% for the quarter.
We ended the quarter with an exit rate of annual recurring revenue of $19 million.
That means sign contracts in hand at June 32022 that are billed monthly multiplied times 12 will generate $19 million in recurring revenue and the subsequent 12 months, if we just stand still.
Simultaneously, we have controlled costs and increase productivity, reducing our annualized cash spend to approximately $11 $8 million were 66% of our annual recurring revenue.
What do I mean by productivity.
Instead of using someone else's software, we built our own tools, including artificial intelligence capabilities to facilitate these tasks efficiently and tailored for our specific needs.
The result is expansion of our ability to focus on customers reduction in third party software costs and continued improvement in internal productivity.
As a result, our business is now quite easy to model.
If you take our annual recurring revenue exit rate call it $19 million and at our target growth rate of 10% to 20% it is pretty easy to determine or likely revenue in the next 12 months since we are effectively 100% recurring revenue with little customer churn.
This does not consider any future opportunities, including traceability or other initiatives.
As I have said before it takes approximately $12 million in cash to run this place.
And my view cash spend and cash generation is more meaningful in determining the health and sustainability of the business.
Cash spend excludes noncash accounting costs, such as depreciation amortization bad debt expense stock compensation expense and other noncash accounting costs as.
As we have said before going forward on each incremental recurring revenue dollar over and above our fixed cash cost of roughly $12 million per year 80 to 85 cents will fall to the bottom line.
You can already start to see this materialize with an 84% gross margin in the quarter and $6 $1 million generated from cash from operations during the fiscal year.
In other words, our 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 fourth quarter revenue was $4 $6 million down 21% from $5 8 million in the same quarter last year.
The decrease was due to the planned reduction of $1 5 million in one time revenue like marketplace products that surge during COVID-19 and other recurring revenue products and services that were noncore and eliminated.
This frees up resources to prepare for one of the largest opportunity in park City group's history meeting the F B as food traceability standards.
Recurring revenue as a percentage of total revenue was 99, 9% for the quarter.
As I have mentioned recurring revenue in the quarter grew 8% over the same period of fiscal 2021.
Total operating expenses decreased 35% from $5 3 million in Q4, 2021 to $3 5 million in Q4 2022.
The decrease is due to lower marketplace costs associated with lower marketplace revenue elimination of noncore revenue and its related costs and continued expense discipline.
Sales and marketing expenses increased slightly to $1.3 million of Q4 2022, as a result of higher sales travel for trade shows as Covid travel restrictions abate and customers are re engaging with in person meetings. This was partially offset by other cost reductions.
G&A costs were down 14% to $1 $2 million due largely to the elimination of third party vendor software and lower overall general overhead.
For the fourth quarter of fiscal 2020 to GAAP net income was $1 $1 million or 24% of revenue versus $480000 or 8% of revenue.
For the fourth quarter in a row, we have essentially doubled our net margin nearly tripled this quarter.
Net income to common shareholders was $950000 or five cents per common share based on 19 million weighted average shares versus $333000 or two cents per common share based on $19 8 million weighted average shares.
As of September 'twenty, eight 'twenty 'twenty 218.46 million shares of the company's common stock was outstanding.
You'll note, we have reduced our capitalization by over 8% for the repurchase and retirement of shares which I'll touch on in a minute.
Turning to the full year numbers.
Fiscal year 2022 revenue was $18 million down 14% from $21 million in the same period last year for the reasons I already discussed.
Recurring revenue as a percentage of total revenue was 97% for the year or $17 $9 million.
This is a 6% increase over the same period in fiscal 2021.
Total operating expenses decreased 25% from $18 $1 million for the year to $13 6 million.
Lower overall operating expense was the result of primarily lower marketplace costs and elimination of noncore spending and across the board reduction in total SG&A expenses.
Sales and marketing expenses decreased from $5 million in 2021 to $4 $9 million in fiscal 2022.
The reduction in sales and marketing expense was largely the result of lower commissions due to lower revenue.
G&A costs were down 10% to $4 7 million lower G&A costs were the result of lower rent expense due to cutting our office space and half from 10000 square feet to 5000 square feet lower bad debt expense elimination of third party vendors and lower overall general overhead.
Income from operations was up 53% to $4 $4 million.
Full year GAAP net income was $4 million or 22% of revenue versus $4 $1 million inclusive of a $1 $1 million gain on the forgiveness of our PPP loan in 2021.
Excluding the gain our year to date net income last year was $3 million or 14% of revenue.
Net income to common shareholders was $3 $4 million or <unk> 18 cents per common share versus $3 $5 million or <unk> 18 per common share.
Again, the prior year period includes the impact of the $1 1 million P. P. P gain on loan forgiveness.
Turning now to cash flow and cash balances.
For the year, we generated cash from operations of $6 $1 million compared to $5 $4 million last year, an increase of 13%.
Total cash at June 32022 was $21 $5 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 our line of credit.
The company now carries approximately $2.6 million on its revolving line of credit last year that balance was $6 million.
In the fourth quarter the company repurchased 192007 hundred 47 shares at an average price of $4 78 per share for a total of $920000.
During the fiscal year, we repurchased $6 $2 million in common stock.
Since inception of the buyback program. The company has repurchased a total of $10.2 million worth of stock retiring 171 million shares, hence reducing capitalization over eight 3% since 2019.
During its fiscal 2022 board meeting members increased the buyback by an additional $9 million.
The company has approximately $10 $2 million remaining on the $21 million total buyback authorization since inception.
We are a SaaS company with over 28000 customers little churn, 100% recurring revenue and 80 plus percent gross margins, we have a fortress balance sheet, including $21 million in cash little debt and a shrinking capitalization.
Because of our systemic profitability cash generation and strong balance sheet and line of sight into recurring revenue and cash then the company is in a position to expand on this capital allocation plan to facilitate returning capital to shareholders. What do I mean by this simply put we have what I call levers number one concern.
To grow cash in the bank a strong balance sheet gives peace of mind to our customers and rising interest rates yields higher interest income enhanced higher EPS to continue to opportunistically buy back common stock.
Yes shares outstanding means higher EPS, all things being equal number.
Number three pay down debt as interest rates rise so does interest expense on debt.
We may choose to continue to pay down debt you have already seen a reduction from $6 million in 2021, the $2 $6 million in fiscal 2022.
Number four pursue M&A activities the company as acquisitive as the economy compresses valuations may become more reasonable for a bolt on or as an entrance into a new vertical or add additional customers number five retire the preferred.
Number six finally issue of cash dividend.
In September the board of directors determined that it is appropriate time to return capital to shareholders via a quarterly cash dividend.
Accordingly, the board of directors declared a quarterly cash dividend of one and a half cents per share or six cents per year payable to shareholders of record on October 17th and to be paid on or about November 15th.
Based on the closing price on September 26, 2022. This represents an annual dividend yield of approximately 1.06%.
Subsequent quarterly dividends will be paid within 45 days of the shareholders of record date of December 31st March 31 June 30, and September 30.
From time to time, the board may increase the dividend, depending on what levers more favorable to shareholders at that time.
Therefore, we intend to allocate a meaningful portion of our free cash flow to returning capital to shareholders through an ongoing dividend opportunistic share repurchases and the other levers I have outlined in our capital allocation plan.
That's all I have today, thanks, everyone for joining at this point I will pass the call over to Randy Randy.
Thanks, John .
As John noted our net income is accelerating and our earnings per share it's accelerating even faster.
We have built a consistent cash generation machine with now more than 20 consecutive quarters of GAAP profitability.
This has been and will continue to be our plan. The progress has created interestingly some additional value creation opportunities for us as John mentioned and this is in addition to our largest opportunity to date traceability, which by the way is right around the corner.
I'm happy with where we are strategically and operationally. However, we have much more to do and much more to deliver.
Each part of our core business is growing in particular, our compliance business is growing and this is the part of our business that ties perfectly into traceability, our forecasts don't anticipate track and trace revenue until fiscal 2024 due to the fact that there is currently a proposed two year implementation window the D.
S T E. As initially suggested.
However.
In interest earlier than we expect to be clear. This is only from early adopters since frankly industry.
Means painfully low the.
The industry actually doesn't recognize what is coming to this point and over the next couple of quarters early adopter revenue is unlikely to move our needle, but the fact that we're seeing potential revenues. This soon.
Which is nearly a full year early is certainly encouraging.
This ability has been a longtime coming 11 years in fact, FDA started stopped and it finally took a lawsuit to push them to accelerate this initiative.
But as a result of the lawsuit the rules will be published in November .
We then expect litigation to change the requirements, especially the short timelines, but the likely outcome is that ultimately rule tool for will become effective in phases over the next few years.
When the food safety Modernization Act <unk> as we call. It was rolled out and rule two O four by the way as part of his book the largest firms were given this shortest timeline smaller firms a little bit longer.
And that worked out well in our view and I want to be clear, it's better for us and much better for the food industry. If this extremely complicated rule is phased in.
For example, more than half the grocery stores in this country are individually owned independent grocers are actually still more than half the total market.
So just imagine if over two years 18000 independently owned supermarkets need to adopt a complex solution and simultaneously have no technical resource in house, it'll be chaos in the industry, including us.
The larger changes want this capability irrespective of the requirements.
First driving compliance through their supply chains.
This will make it easier for the smaller call them independent supermarket to comply as many of their wholesalers and distributors will already be using our system.
If the F D a phases in a rollout with larger retailers facing a shorter compliance timeline and smaller retailers given more time that will work wonderfully for us the larger wholesalers, we expect will push the solution for us their suppliers will sign up and that will affect me to provide a poll for smaller retailers to use.
Our solution.
Even more encouraging is our recently announced partnership with the National Grocers Association, which represents most of the independent grocers in more than 20000 stores nationwide.
The N G E recognizes the impact that the Fda's new rules will have on the industry and certainly appreciate how challenging the requirements will likely be for their members.
<unk> has always enjoyed industry endorsements, but those have been usually pretty passive but for track and trace the N. G is actively helping us in marketing to increase awareness of this particular situation and certainly none of our capabilities to effectively deal with it.
In fact, Webinars, we NGA are starting this quarter.
In addition, we're working with the NGA to develop some mechanisms that will allow an easier rollout of traceability to the industry and to their members.
By the way and I think most people are not thinking this way. This traceability rule will affect not only the grocery supply chain, which has 40000 stores but.
At least 185000 <unk> quick service restaurants are called <unk>.
500000, full service restaurants and foodservice locations.
And at least 150000 convenience stores. So let me add that up nearly a million places could be touched by rule tool for.
This undertaking is massive to say the least and most have absolutely no idea that its coming and in fact are naive in terms of the scope of the mandate.
Make no mistake about it this is a very big deal simply put this is the largest single imposed change on the global supply chain for food in history by a large margin period full stop.
Keep in mind initially rule tool for covers only 16 categories categories of food, but that means thousands of different products and the F. D. A has been explicit that this is just a start.
We're ready it's coming it's really not an if that'll wind and in my opinion, its not a who it's us.
Nobody's better equipped to deal with this new requirement in Park City group Repositrak to make sure we are well positioned for any deployment timeline and take full advantage of this rule, we're continuing to evaluate noncore revenue and resources associated with it.
Some of our customers, whose primary products are outside the food industry will not grow in the same way our food oriented customers will strictly due to the new traceability rules as a result, our revenue potential in these cases is capped and increasingly these customers are non core to our business in some cases, we may trim deal.
Non core services.
Not only are we now a SaaS only company, but that transition is fully behind us.
Each quarter, starting with our 2023 fiscal first quarter will compare to year over year quarters that are comparable we will finally have what we call like for like metrics to match, our recurring revenue performance again, our bottom line will grow faster and our E. P. S will go faster yet as we continue to reduce our shares outstanding.
We've invested significantly over the years and customized automation for our own operational efficiency, that's unique or tools are embedded in the very same platform that we deploy for our customers. We know of no one else who is in enterprise footprint in terms of applications that has done it what they saw.
Single fully integrated platform. The way, we have we're extraordinarily proud of our development team and their vision honestly, it's amazing seriously it's amazing.
This is why our revenue per employee metric far exceeds public industry peer averages in fact, it is nearly double the industry average for a business of our size.
Accordingly, we believe will continue to scale revenue significantly with very little added cost even considering the traceability initiative that we've undertaken.
Additionally, we are leveraging our technology and capabilities to expand our addressable market.
Clients and traceability and foodservice Q S. R et cetera are greenfield opportunities for us.
We're cautiously optimistic that we might see might see a winter too in this space from early adopters prior to the end of fiscal 2023, and if we do we can see demand accelerate in those areas. Also this is speculative, but we're certainly having some encouraging conversations at this point.
With gross margins of 80 plus percent net margins of 20 plus percent. This incremental revenue will disproportionately fall to the bottom line. This profitability results in bolstering, our cash generation and enabling us to aggressively buyback and retire shares.
And now it enables us to return capital to shareholders in the form of a cash dividend also.
We view the dividend as simply another tool in our capital allocation toolbox.
The dividend also allows a new group of investors to consider us for their portfolios. We will continue opportunistically to buy shares we will continue to invest in initiatives, including technology to enable organic growth and while to this point M&A has not been a very important area of focus for us largely.
Because most acquisition targets don't meet our standards of profitability potential.
Acquisitions do remain an option for us should we find the right one.
But with five consecutive years 20 consecutive quarters or more of GAAP profitability, a fortress balance sheet and an incremental top and bottom line growth in our future. We've reached the point where in fact it does it does make sense. So going forward our strategy will be let's take great care of our customers when a.
Customers are successful they buy more major component of our position in the traceability initiative is it any of our existing customers that will need our traceability help.
Second we're keeping our global goal of recurring revenue at a target pace of 10% to 20% a year over the long run third.
Continued to drive our internal productivity, so that 80% to 90% of that incremental revenue becomes real earnings think expense control cash earnings per share etc.
Finally, we will continue to shrink the number of shares outstanding and returned capital to the shareholders.
By buying back shares and by paying a cash dividend.
It's important to note that we're achieving this expanding profitability all the while investing in our traceability offering.
As we've stated traceability is not yet contributing to our top line and the industry continues to wait for the Fda's formal announcement in November of 'twenty, two and Wheats. We've mentioned, we fully expect there will be litigation to slow that down and any of that.
With that I'd now like to open the call or questions operator.
Operator.
Thank you Sir at this time, we will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before.
Pressing any star keys.
One moment, please when we poll for questions.
And our first question comes from the line of Thomas Forte with D. A Davidson. Thank you. Please proceed with your question.
Great So Randy and John Congrats on the quarter I have four questions. So I'll go one at a time. So question number one why is now the right time to initiate a quarterly dividend and why it's a 1% dividend yield the right target.
And then if you're riding the traceability catalyst would you consider a onetime dividend in the future.
John you want to take that Hum.
Yeah.
Well like I said, it's a it's part of our capital allocation strategy, 1% as you know it's not a meaningful number it was it's more about the different levers. So we're obviously focused on.
Increasing the cash on our balance sheet for our customers.
That gives them peace of mind as far as paying down the debt. We've done that it's just one as Randy puts it a particular tool in our toolbox. So you know our goal is to obviously use all of those levers M&A maybe another one.
But that's our focus at this time why is this the right time I think that.
I've said it before there is no magic number of what cash we need on the balance sheet for peace of mind, but with $6 1 million in cash from operations and growing and paying down debt I do believe that that is this is the right time in my view to pull that lever for our cash dividend.
As far as a one time in the future the future is the future, but I think that if you can model out sheet and you can see I think we've made it very simple that what our cash recurring revenue is and what that contribution is to cash from operations that we would utilize a part of that gross cash in the future to increase that dividend.
What or when or what else happens down the road.
May impact that but with our line of sight, we're very comfortable with where we're at right now.
Great. Thanks, Let me add one other let me add one other point to that from.
Kind of management perspective.
We can't precisely answer the question of how we're going to allocate that capital.
If the stock price is lower than what we think its intrinsic value is perhaps a larger share of the money would go to the of our free cash would go to stock buybacks. If the stock is well priced than a cash dividend remains that possibility I think if you look and compare us to.
Other tech companies that 1% yield.
<unk> is in fact, not too far off what other companies pay when they are paying dividends. So we feel pretty good about where we are.
Great. Thank you Tom.
Two four so and then carefully worded Randy.
Trying to trip you up here.
Right so yeah.
The traceability, so beyond basic ability.
What are the most important challenges your food retailers are facing today, and how is that creating an opportunity or challenges for you.
I was thinking of our inflation tight labor market.
You may have other things you want to highlight.
Well.
Because this industry is structurally low margin that is to say the industry, we serve retail food.
They are constantly concerned with their course in terms of purchases and your ability to pass those purchase costs onto their consumers.
So if anybody in the world is thinking about inflation I assure you. It is the supermarket industry.
At the same time their consumers are trying to figure out how they in turn cope with inflation.
That includes trading down going from branded CPG to private label et cetera.
Most everything that we do is geared to helping our customers the retail food sector.
With whatever the current economic environment is.
Slash regulatory environment, So our compliance business to a great extent is driven increasingly in the future with rural tool for bike regulatory matters, but it's driven today by litigation you are.
You can barely pick up a newspaper without reading about a.
Food issue of of safety, I mean recently wendy's others tens of billions of people per year get sick from food.
Several thousand per year actually ultimately die from food related illness.
So the truth is we've got both a litigation pressure regulatory pressure on the compliance side and economic pressures that the industry has to cope with day in and day out fueling both sides of our business. So we're pretty well positioned I mean I think another question.
It might be a corollary, Tom would be what if we end up in a deeper recession than most people are calling for I think that's problematic for the industry I think if people significantly cut back on their purchases.
It hurts the industry.
But at this point the beauty of food is even even when times are tough people eat.
So it's one of the reason to used to be called a defensive industry that we pick that place too.
Hoist our flag, if you will and as the regulatory environment changes with rule tool for over the next several years.
It just very logically takes us into the arenas of quick service restaurants full service restaurants, foodservice etcetera convenient stores. So we're on the March and we feel pretty good about where we're positioned.
Right excellent alright, three or four so.
Can you talk specifically about the competitive threat.
Do it yourself sort traceability.
So a lot of times your competitor is your potential customer and their desire to do something internally can you talk about if it's different for traceability for where you're talking about.
Well, that's a that's a really interesting question.
No.
To the extent that each retailer.
Develops their own way and method of doing supply chain activity related to traceability.
The more difficult the environment for traceability becomes for suppliers in other words imagine you are a supplier you have 50 retail customers. Each one of them wants you to do something different to conform to their traceability environment. It's catastrophic.
So it's our belief at the end of the day, although some retailers a few might in fact do there we call it roll your own because you're right that is our major competitor.
But for the most part businesses will be looking for a lower cost solution than doing it themselves that would be us a more robust way of doing it and doing it themselves that would be us and finally, a solution that's endorsed by the industry trade associations. So that they don't look like an outlier.
And once again that would be us.
So there will certainly be some who do it we think in this particular case, there's likely to be fewer rather than more.
Alright, Great and then last question and thanks for taking all my questions. So at a high level.
Oh, what a customer would be similar and different to a grocer.
Park city, including the economics.
Oh, that's a that's a little difficult to answer until we're deeper into the sales cycle.
They're different in this respect.
Supermarkets tend to have relatively few stores compared to the large <unk> guys, but far more suppliers.
So just to have a basic supermarket of 50000, Skus, which is pretty basic you're typically talking about the 1000 1500 suppliers.
If you are on the other hand, the large Q S or like a dominoes or a Mcdonald's et cetera, you have thousands and thousands of stores, but you might only have a couple of hundred suppliers. So they're really the mirror image of each other one has two suppliers lots of stores. The other has.
Exactly the reverse what we think therefore is that as we get deeper into the sales cycle with.
Our possible new customers I think what happens is.
That we develop a slightly different model, but the goal would be to make it fixed cost for the suppliers. So they can afford to do this and easy inexpensive for retailers Q S. Our franchise or is it et cetera, and their franchisees to join the network itself.
We're trying to take pricing off the table as a point of friction and I think we're going to get there I think we will get there.
Then follow up to that one so look at it differently.
Where do you need a new sales force or is it something your sales force can do and is there any reason to believe that your contribution margin on that dollar revenue wouldn't be the same 80 cents as it is and everything else.
Thanks, Bob.
Yeah. The margins will be the same I don't think we need a different sales organization every year, we're likely to add a little bit to our sales organization. That's embedded in what we see going forward and it will certainly not have a different contribution margin. It's just all in.
Minimal topline and incremental bottom line.
Yeah.
Excellent Randy and John Thanks for taking my questions.
Of course things I stopped.
Thank you at this point, we have reached the end of the question and answer session and I'll now turn the call back over to Randy for any closing remarks.
Yeah, Thanks, everybody for listening and hopefully if you have additional questions and John are Randy an email and we'll see if we can help get the questions answered meantime, we'll talk to you before too very long as we report our first quarter. Thank you.
Thank you everyone. This does conclude today's conference you may now disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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