Q1 2023 Park City Group Inc Earnings Call
Alright.
Greetings and welcome to Park City Group fiscal first quarter 2023 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded today.
The 14th of November 2022.
It is now my pleasure to introduce your host Geoff Stanley with F. N K IR Mr. Stanley you may begin.
Thank you operator, and good afternoon, everyone and thank you for joining us today for Park City group's fiscal first 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 this call could contain forward looking statements about park city group within the meaning of the private.
<unk> Litigation Reform Act of 1995.
Looking statements are statements that are not that are not subject to historical facts such forward looking statements are based on current beliefs and expectations.
Dark citigroup.
Remarks are subject to risks and uncertainties, which actual results could differ materially such risks are fully discussed in the company's filings with the securities and Exchange Commission.
Information set forth herein should not 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 overview of the company's financial results that we will discuss on today's call investors can visit the Investor Relations section of the company's website at park Citigroup Dot com to access. This press release with that said I would now like to turn the call over to John Merrill John The call is yours.
And good afternoon, everyone.
Our successful transition to a SaaS company continues to be evident in the numbers.
Our business is now easier than ever before to model and the results reflect our ongoing strategy, let's get right to it.
Recurring revenue increased 6% year over year for the September quarter.
Revenue was up 4%.
Even with significant investments in our Repositrak traceability network or our TN in advance of the office Federal Register a publication of says mature for ruling our SG&A costs were up just 3%.
GAAP net income increased 36% to $1 3 million.
Earnings per share increased 50% from <unk> to <unk>.
Cash from operations increased 62% to $1 8 million.
And we bought back 20000 common shares reduced our bank debt by half it has $21 6 million cash in the bank.
With the transition from onetime revenue to SaaS recurring subscription now fully behind us our comparative results have far less noise than in prior periods.
Hence, we expect to continue to deliver year over year revenue growth increased margins accelerated profitability and significant cash generation for the balance of fiscal 2023.
Investors should take note that we expect our profitability and cash flow to continue to grow faster than our revenue.
Do I mean by that.
Starting with revenue we ended the September quarter with an exit rate of annual recurring revenue of $19 5 million.
Meaning fiscal year to date revenue plus sign contracts in hand at September 32022 quarter that are billing monthly multiplied times nine will generate $19 $5 million in recurring revenue for the balance of fiscal year 2023, absent any new contracts or anticipated growth.
Keep in mind. This is organic revenue growth, meaning existing suppliers of retailers, expanding compliance and supply chain services, adding stores or locations and adding trading partners from existing business lines.
This does not include any revenue contribution from our projected customer or any new initiatives, including traceability due to phasing to afford.
Now cash spend as many of you have heard me say it before it takes approximately $12 million in cash to run this place.
Annual cash spend excludes noncash accounting costs, such as depreciation amortization bad debt expense stock compensation expense and other noncash accounting costs.
As we have said it before going forward on each incremental recurring revenue dollar over and above our fixed cash costs of roughly $12 million per year 80 to 85 will fall to the bottom line.
As you've seen in the current quarter there have been little increases in SG&A expense as a result of ongoing spending or investment in the Repositrak traceability network our RTL.
We accomplished this by automating as much as we can utilizing our own tools built in house.
This drives exceptional productivity across our entire business. The result is expansion of our ability to focus on customers keep operating costs in check and continue improvement and internal productivity.
So profit and cash will grow faster than revenue. It is reflected in the numbers a 4% increase in revenue for the September quarter translated to a 36% increase in GAAP earnings and $1 8 million in cash from operations.
To summarize we are systemically profitable with more than five consecutive years of GAAP profitability through strong cycles and week cycles as well as the global pandemic.
Our strategy remains very simple grow recurring revenue control costs increased net income accelerate EPS buy back shares and drive cash.
Turning to the quarterly numbers.
Fiscal year 2023 first quarter revenue was $4 7 million.
Up 4% from $4 6 million in the same quarter last year.
Recurring revenue as a percentage of total revenue was 99, 9% for the quarter.
As I mentioned recurring revenue in the quarter grew 6% over the same period in fiscal 2022.
We have continued to streamline our revenue eliminating smaller noncore revenue streams that mostly sit outside the food industry and have limited growth potential.
This frees up resources to prepare for meeting the Fda's food traceability standards, but it also serves as a modest headwind for revenue growth.
Total operating expenses increased 3% from $3 4 million in Q1, 2022 to $3 $5 million in Q1 2023.
Sequentially operating expenses were essentially flat sales and marketing expenses were flat year over year in G&A was up approximately 12%, reflecting the investments in the deposit direct traceability network, a tight labor market and its impact on salaries recruitment fees and benefits.
For the first fiscal quarter of 2023, GAAP net income was $1 3 million or 27% of revenue versus $947000 or 21% of revenue.
Net margins above 20% are now the norm.
Net income to common shareholders was $1 1 million or <unk> <unk> per common share based on $18 8 million weighted average shares versus $800000 or <unk> <unk> per common share based on $19 7 million weighted average shares.
As of November <unk>, 2020 to $18 4 million shares of the company's common stock outstanding.
You'll note, we have reduced our capitalization by over 8% for the repurchase and retirement of shares since our stock buyback plan.
Turning now to cash flow and cash balances.
For the quarter, we generated cash from operations of $1 8 million compared to $1 1 million last year, an increase of 62%.
Annualized our cash from operations for Q1 call. It $7 2 million reflects a five year compounded annual growth rate or CAGR of 27% since 2018.
Anyone who knows me knows I'm not a couch instead I believe it is important to highlight results of our strategy for shareholders.
I know some have found it hard to stomach when we've communicated that we have sunset at certain revenue products with little upside cease low margin revenue streams, and hence walked away from revenue even recurring revenue.
I assure you there is a method to the madness.
Total cash at September 32022 was $21 6 million compared to $21 5 million at the end of fiscal year 2021.
The $21 $6 million is inclusive of the paydown of $1 $3 million on our revolving line of credit during the quarter.
The company now carries approximately $1 $3 million on its revolving line of credit.
On June 32022 that balance was $2 6 million given.
Given the rising interest rates it only makes sense to reduce our debt.
In the first quarter, we repurchased 2800 59 shares at an average price of $4 97 per share for a total of $103667.
The company has approximately $10 $7 million remaining on the $21 million total buyback authorization since inception.
Since inception of the buyback program. The company has repurchased a total of $10 $3 million worth of stock retiring 173 million shares, hence reducing capitalization by almost 9% since 2019.
Our business model is sound and easy to model.
A growing recurring revenue no meaningful customer concentration very little churn in 80 plus percent gross margins.
We have a fortress balance sheet, including $21 million in cash little debt and a shrinking capitalization.
<unk> is in the numbers.
As I communicated on our last call. The board has added an additional lever to our capital allocation strategy in the form of quarterly dividend.
First of which will be paid to shareholders of record at October 15, and to be paid on or about November 15.
Subsequent quarterly dividends, we paid within 45 days of the shareholders of record date of December 31 March 31 June 30 and September 30.
Time to time, the board will evaluate its capital allocation strategy and may adjust the different levels, including the dividend buyback, considering M&A opportunities paying down debt and retiring the preferred shares based on whichever lever is more favorable to shareholders at that time.
Therefore, it is an ongoing goal to allocate a meaningful portion of our free cash flow to returning capital to shareholders and other levers I have outlined previously in our capital allocation plan.
So all I have today. Thanks, everyone for your time at this point I will pass the call over to Randy Randy.
Thanks, John we're continuing to grow recurring revenue and manage expenses growing our net income even faster and with our share repurchase program ongoing we're doing even better yet in terms of earnings per share.
Simultaneously, we've also grown our cash balance paid down half of our debt.
Begun paying the dividend.
As you can see we build a consistent cash generation machine with more than five consecutive years of GAAP profitability.
I believe an important metric that we have not historically talked about that warrants pointing out is our current ratio.
Current ratio is now five two to one let me say that again.
Five two to one.
Means the company can pay its current obligations five times over.
I've been in this business for a long time I've not seen a metric for a company of our size ever.
Another metric that should be noted as our annual revenue per employee.
With 64 employees the company generates almost $300000 per employee per year.
Based on independent comparisons that's over double compared to our peers that number in our belief will continue to grow over the next few years as our revenue grows substantially in our head count only increases marginally.
Furthermore, as we have said incremental revenue over our $12 million annual cash operating expenses is largely converted the incremental cash.
82% in the current quarter in fact, if.
If you annualize our first quarter cash from operations and assume no growth we've grown our annual cash flow operations by about 27% on a CAGR compounded annual growth rate basis since 2018.
Our business is efficient needless to say, it's easy to model, we think and we're certainly positioned to scale.
Our recent performance doesn't include any revenue.
At all in terms of the contribution for the largest opportunity we have to date.
Traceability.
So let's talk about that opportunity.
Just last week, the FDA announced the final rules that will govern how food businesses can safely trade with one another.
Called <unk> food safety modernization Act rule too old for otherwise known as track and trace.
The guidance has been expected for several years. The effective date now will be January 2023.
The FDA is obviously going to allow a period for companies as they generally do to get ready for this massive change in how the food supply chain is going to function.
From where we are now we think the earliest adopters of track and trace are likely larger retailers and wholesalers were already see and have for some time seen the benefits of greater visibility into their supply chains.
For retailers track and trace as an important risk mitigation initiatives, even without the FDA mandate.
Retailers restaurants, and virtually anyone who handles the foods covered by this rule tool for will be required to capture information as these products arrive at their back door.
Since this has been in the works for actually a decade, many suppliers have already installed labeling systems et cetera to create a traceability framework.
Many suppliers naively believed there are already compliant.
<unk> is going to be key to develop this misunderstanding.
Misunderstanding.
Don't or at least don't in a workable way actually comply with the regulation effects them and their supply chain seriously.
Sadly most of the installed systems are not adequate to what the market's going to in fact require.
What might work for an individual business in isolation doesn't work necessarily for the customers of that business will have to figure out what is on each label and if that covers their regulatory needs.
In terms of these millions of labeling systems to our new standards. So it's the wild wild west for who puts what where on any given label.
If each supplier puts the required information in a different place on the label or fails to provide all of the data required by the FDA. It is going to be a nightmare for the retailer trying to read these cases.
Not just the nightmare, but in truth completely unworkable.
Important to remember that the wholesalers and retailers and other customers of the suppliers their largest customers. So retailers will ultimately push their requirements downstream and certainly force all suppliers do use the solutions that they require rather than simply accepting this solution the supplier adopted.
We're hopeful that that solution will be us.
We're a very different kind of technology, and simply labeling system or a block chain or any of those sorts of things.
We write above any individual solution and make the data readable to any recipient without us having to do change or implement any other system or change in their current process, where a universal translator as a way of thinking about it for any system or process large medium or small retailers supplier intermediary.
Take the idea of a label that's been put on the box.
Many of the data elements that are required by rule tool for already been known when the label is created in contrast, we uniquely ride over and above all of the labeling systems and allow the FDA required data to be exchanged without scanning the label.
Ours is a no labor no touch and very cost effective system that enables the required exchange of data.
Both the suppliers and our customers need us.
So think of it this way if a supplier has 20 customers that each want the data to be in a different place form et cetera that becomes a monster problem for him.
Alternatively, maybe in the reverse if a retailer has 200 suppliers he hasn't even more dire need to solve that problem.
When viewed from a 100000 feet.
Is in part a network issue.
So we think it's best solved as a network issue.
So now imagine how well positioned we are with the already largest connected network of food companies on Earth.
We've said for years, what we're really building. This network now are there and the payoff is just about to begin.
The network scale, we've already have puts us we believe literally in the cat bird seat of traceability.
What we don't know yet, which retailers will move first how quickly they'll move and perhaps most challenging for us what the supplier level landscape looks like in terms of installed technology that will have to work with.
This won't be easy, but we are certainly up to the task remember our Repositrak traceability network RPM is really a repurposing of our robust supply chain technology, that's been in place for years.
We already work with countless different systems, allowing frictionless data exchange.
<unk>, we actually think that the FDA traceability requirements are much easier than the other things that we already do and do at scale in our platform.
But.
Traceability is going to mean substantial recurring revenue at great margins for us.
And at the moment, we've already begun to work with some suppliers retailers and wholesalers on a rollout strategy for them there.
There is also a growing number of tests in planning with our Repositrak Traceability network and we're excited about what that might lead to.
As you know this is much sooner than we had expected.
Beyond traceability, our core business and supply chain and compliance continues to grow and we're getting deeper into the trading relationships farming. The network and all of that will reflect itself and then even faster recurring growth rate in our second half.
Importantly, our growing compliance business is actually also a catalyst to traceability.
Under rule tool for as we call. It we now have nearly 10000 facilities.
Could be users of our Repositrak traceability network overtime.
That's a lot of work over the next few years and obviously, it's a lot of revenue.
Over time by the way the number of rule tool for covered products will expand the FDA has actually explicitly said that.
That in turn will grow our customer care.
Cam even more as time goes by and more products and suppliers need traceability of course, we certainly expect litigation to challenge the requirements and timelines for rule tool for that were just finalized Nevertheless in our view the likely outcome is that rule tool for becomes effective in phases over the next few years I want to be clear.
And I know that sounds counterintuitive.
A longer time for implementation is better for us and much better for the food industry.
Well, it's an extremely complicated rule and it has to be phased in.
Most people, probably don't know that more than half the grocery stores. In this country are individually owned independent grocers theres still more than half the total market.
The idea that 18000 independently owned supermarkets, and 1 million restaurants, and foodservice establishment touched by rule tool for can create.
Hayden and deploy our solutions simultaneously, bringing suppliers and wholesalers alone. It's laughable, it's going to take a while.
The scale is clearly enormous and we've been preparing for it.
Reasonable question to ask what are we doing about it first.
Marketing effort is set up and running we're holding webinars and running advertisements to boost awareness and education in the company requirements and Dr. TM solutions as we call it were.
We're leveraging our partnership with National Grocers Association, which represents most of the independent grocers and more than 20000 stores nationwide.
Youll have NGA will be to help us educate the market about traceability and what it means for them education.
Education will be key for retailers suppliers and wholesalers to effectively deal with tool for.
So in summary, we will continue to keep our customers first.
Focus on them since we know that when they are successful they buy more.
We will continue to grow our recurring revenue with a target of 10% to 20% CAGR over time, our bottom line is going to grow faster because of our efficiencies and our EPS will grow faster yet as we continue to do so our shares outstanding.
We are investing incidentally as I'm sure you know in our customized automation built in house to further our own operational efficiency by the way as an interesting side note. We're now selling this AI based CRM type system to some customers think of it this way so what we use use what we sell.
We will also continue to invest in initiatives, including technology to enable organic growth since rule tool forward covers foodservice restaurants et cetera, we're actively engaged in exploring opportunities in that space. We believe we may see even backed a winner too in this space from early adopters over the next year.
And if we do we should see demand accelerate within those verticals also it's speculative, but we're certainly having some encouraging conversations at this point.
So there you have it our plan is clearly working the proof is in the pudding, we feel very good about where we are and we will stay the course simple so with that I'd like to open the call for questions operator.
Thank you Sir late.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw it. Please press star followed by the number killed.
If you are using a speaker phone please lift the handset before pressing any keys.
Please standby for your first question.
Your first question comes from Thomas Forte of D. A Davidson. Please go ahead.
Great. So Randy John Congrats on the quarter. Thanks for taking my questions I have one question and one follow up.
So Randy at a high level, how should we think about the impact if any of Kroger albertsons merging and generally speaking can you remind me on your customer churn, which historically is very low.
Okay, Yes.
Sure.
This industry that we serve retail food.
As in a continual process of consolidation and spinoff Albertsons as the result of a spinoff other pieces of Albertsons.
With the result of the spinoff. So if this is approved and that's a big if what will happen is a substantial number of stores will be sold off and become either independents or parts of other change or another chain in and of itself. So there's no real impact on us.
From that kind of activity the industry is rife with it.
From a churn perspective.
It's typically in the area of less than 1% of our customers each year.
Typically of that about.
Half are a result of what we would call merger acquisition. So two customers become one, which obviously reduces our footprint and the other is more typically they cease doing business with a trading partner.
So rarely does it actually happened that someone says we don't like you are not successful with US go away that's really rare.
As John mentioned, we're still looking at some of the rationalization, we have to do in order to accommodate what we believe is going to happen with traceability.
Your follow up.
My second question.
So Randy this is a good job of explaining the traceability that youre willing to request.
I'm sorry go ahead I'm sorry.
We've initiated a dividend last year.
<unk> question now that you've initiated a dividend.
Are you going to think about once a year on annual basis potentially raising the dividend.
How should we think about your <unk>.
You're raising the dividend in the future.
Yes, you are probably going to hate this answer but it's truthful.
Each year, we're going to look at where we are and that by definition means.
How much cash have we generated what have we done over the last year and now how does the next year look.
And where is the stock price. So if the stock price at that point in time looks attractive to us meaning lower than we.
We think it ought to be we will probably allocate some percentage of our cash flow to more stock buyback.
If you said overall, what do you expect to do.
It looks about like this roughly half of our cash flow each year will end up on the balance sheet no form of cash.
Other half of the cash flow is likely be divided some ratio between dividend.
And of course, the stock buyback so that ratio is really a function of.
What's the stock price so if the stock prices too low in relation to what we think intrinsic value would be.
Likely.
Allocate a higher percentage of that half if you will to stock buyback.
So over time, if we continue to do as well as we're hoping.
Reasonable that both the dollars of stock buyback will go up and the dollars of dividend will go up.
John If you wouldn't mind with that did I speak out.
Just want to make sure John isn't going to slap me for saying, yes or no.
Spot on I mean, like we discussed before there are levers that we will utilize when it makes the most sense for our shareholders as.
As I described in this quarter I thought made the most sense to pay down $1 $3 million of a bank line debt as those interest rates are going up so as Randy said, we would definitely take.
Our goal is to take 50% of our cash from operations and return it to shareholders and the other half goes on the balance sheet, that's a goal but.
Conditions may change as we look out 12 months to 18 months that may change, but right now.
We're very confident in using that 50% marker.
Excellent alright, thanks for taking my questions and I look forward to seeing how the traceability plays out.
Thanks, Tom.
Thanks, Tom.
At this time there are no further questions. So I will turn the conference back to your hosts for any closing remarks.
Okay.
This is Randy Thank you all for taking your time this afternoon.
Just in summary, we feel really good about where we are.
We like new contracts that we have in hand, and certainly the traceability initiative is likely to be a big part of our future. So thanks for the support talk to you all soon bye bye.
Ladies and gentlemen, this does conclude your conference call for this afternoon.
I would like to thank everyone for participating and ask that you. Please disconnect your lines.
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