Park City Group Inc. Q3 2023 Earnings Call
Greetings and welcome to the Park City Group fiscal third 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.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jeff analyst with F. N K I R. Mr. Stainless you may begin.
Thank you operator, good afternoon, everyone. Thank you for joining us today for Park City group's fiscal third quarter earnings call.
On 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 Securities Litigation Reform Act of 1995 forward looking statements are based are statements that are not.
Subject to historical facts such forward looking statements are based on current beliefs and expectations.
Park City group remarks are subject to risks and uncertainties, which actual results may differ materially such risks are discussed fully in the company's filings with the securities and Exchange Commission for more information set forth herein should be considered in light of such risks Park City group does not assume any obligation to update the information contained in this.
Conference call shortly after the market close today the company issued a press release overview of the financial results. We will discuss 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 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.
We continue to deliver strong results in the quarter bring both total and recurring revenue growth net income and growing EPS even faster.
We generated significant cash flow returning capital to shareholders and once again strengthening our balance sheet even more.
We are achieving this performance despite necessary and strategic de emphasis on certain high touch noncore revenue, creating a modest headwind for revenues in the short term.
We're achieving this despite investments and traceability investments in expanding the depth of our Salesforce and automation with only minimal revenue contribution at this point.
Simply put our core business, our compliance and supply chain businesses are an efficient profitable and well run machine.
The proof is in the numbers.
While our core business is solid and growing a profitable we are positioning the company for the next major growth phase traceability.
And it's coming faster than we expected I'll, let randy speak to that in a few minutes.
Jumping right into the numbers.
Total revenue was up 6% year over year for the March quarter.
Recurring revenue increased 6%.
Even with significant investments in our deposit direct traceability network of Archie M. R. S G&A costs declined.
Put another way $260000 in incremental revenue against 252000 less in cost even as we invest our largest opportunity to date.
GAAP net income increased 53% to $1 $7 million.
GAAP net income to common shareholders increased 61% to $1 5 million.
Earnings per share increased 67% from five cents per share to eight.
Year to date cash from operations increased 75% to $7 million.
And we bought back 74000 common shares at an average share price of $5 79 per share paid off our bank debt entirely and have $22 $9 million cash in the bank.
As we've said our profitability and cash flow is and will continue to grow faster than revenue.
Consistent with our strategy our focus is on increasing operating leverage many times, making difficult decisions to drive high margin incremental revenue, while keeping costs in line and driving profitability and cash.
Companies that focus myopically on unsustainable short term revenue growth over long term profitability and cash generation are suffering.
We will not follow a shortsighted strategy for short term game.
Our customers demand flawless execution and financial strength from their partners long term.
Our compliance and supply chain business continued to gain momentum in the quarter. Despite overcoming the high touch noncore low margin revenue, we deemphasize that I previously mentioned.
We ended the March quarter with an exit rate of annual recurring revenue of $19 $4 million, meaning at the end of March 31, 2023, those contracts in hand billing monthly times 12 will generate $19 $4 million in annual recurring revenue and the subsequent 12 months.
This is absent any new contracts future expansion of existing contracts or anticipated growth and.
In other words with nearly 100% of our total revenue as recurring revenue with a much clearer line of sight to our topline revenue than ever before.
Keep in mind. This is generated by organic revenue growth, meaning existing suppliers of retailers that have expanded compliance and supply chain services, adding stores or locations and cross selling trading partners from existing business lines in the current fiscal year to date.
This does not include any revenue contribution from our projected new customer and no meaningful revenue from traceability, Yes, we have started to generate traceability revenue, but to date it is minimal.
I believe the momentum we are seeing initially with traceability customers faster than I anticipate it will only accelerate.
Despite our deep visibility into our compliance and supply chain services, how fast and the timing of how much of traceability is anyone's guess at this point because we are relatively early in the process.
Like what we did with my marketplace, we continue to deemphasize noncore revenue or revenue with high resource commitment and low upside let me know.
Be clear, we are not walking away from revenue, we're rationalizing it with a corresponding cost. It is part of our resource allocation strategy in preparation for traceability.
It is critically important to understand that we touch every customer every one every month.
A telephone call and email a follow up and up sell or just to check in where all of the above.
Customers large and small seasonal our year round all require a touch of some level of our CSM or support staff or both.
With over 28000 customers and that was a lot of touches on a monthly basis.
In some cases it was necessary to rationalize the touch points in one case, we chose to Sunset a service offering altogether like we did with vendor managed pricing back earlier in the fiscal year.
It was a high touch solution that had no application or long term opportunity for traceability.
This resulted in our capacity just shifting those human and application support resources to traceability.
Another service applications, we chose not to win new customers with very sporadic service, who still required high touch, but more importantly had little if any opportunity for traceability.
Again that frees up resources in virtually every part of the business from support to I T to back office.
While this may seem counterintuitive for a company our size that as part of our long term strategy for traceability rationalizing both revenue and costs.
As I said earlier, we may have to make difficult decisions in the short term, which may provide some headwinds. However, we were faced with the same choices. When we began this journey deemphasizing onetime license revenue and marketplace over the last two years.
Looking back I believe our results today prove that too was the right decision.
In conjunction with growing our core compliance and supply chain business. We are focused on traceability, we will not waiver.
It forces us to evaluate and make difficult short term decisions every day to deliver long term results across our suite of applications.
Expense management.
Many of you have heard me say before it takes approximately $12 million in cash to run this place.
Our annual cash spend excludes noncash accounting costs, such as depreciation amortization bad debt expense stock compensation expense and other noncash accounting costs.
Going forward on each incremental 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.
With a laser focus on operating leverage rationalizing their revenue generated with the cost expanded a 6% increase in recurring revenue generating a 61% increase in the bottom line. This quarter. Meanwhile, investing heavily in the Repositrak traceability network or our T N.
We accomplished this by automating as much as we can and utilizing our own proprietary tools.
This drives more productivity across our entire business automation enables us to take excellent care of our customers without adding significant head count or other overhead costs are.
Our customers are priority. One however, we have proven we can deliver superior customer service, while at the same time, increasing our profitability.
Once again, our strategy remains very simple.
Take care of the customer grow recurring revenue at the same time rationalizing cost with the opportunity of future revenues.
Troll costs across the board increased net income accelerate EPS buyback shares and drive cash.
Turning to the quarterly numbers.
Fiscal year 2023 third quarter revenue was $4 $8 million up 6% from $4 6 million in the same quarter last year.
Recurring revenue as a percentage of total revenue was 99, 7% for the quarter.
Recurring revenue in the quarter grew 6% over the same period in fiscal 2022, despite the revenue de emphasized during the fiscal year.
As I said this frees up resources to prepare for meeting the FDA food traceability standards.
Date, we have overcome the headwind of approximately $600000 of what I have referred to high touch low opportunity revenue, while still increasing both total revenue and recurring revenue by 6% for the period.
Total operating expenses decreased 2% to $3 $3 million in Q3 2023.
Sequentially operating expenses were also essentially flat.
Sales and marketing expenses were up approximately 1% and G&A declined 22%, even as we invested in our Repositrak traceability network for our T M.
This was partially offset by payroll tax refunds received from the employee retention tax credit <unk>.
Increases in allowance for doubtful accounts increases in tax reserves and reduction of capitalized software costs.
For the third fiscal quarter of 2023, GAAP net income was $1 $7 million or 34% of revenue versus $1 1 million or 24% of revenue.
GAAP net income increased year over year by 53%.
Net income to common shareholders was $1 $5 million or eight cents per common share based on $18 8 million weighted average shares versus $941000 or five cents per common share based on 19 4 million weighted average shares.
Although we have reduced our capitalization by over 10% through the repurchase and retirement of shares since we initiated our stock buyback plan.
Turning to the fiscal year to date numbers.
For the nine months ended March 31, 2023, total revenue increased 6% from $13 $5 million to $14 $3 million.
Recurring revenue for the same period grew 7% from $13 3 million to $14 2 million.
Total operating expenses increased 2% largely due to investment in our team.
This was partially offset with E. R. T C payroll tax refund and increases in bad debt and lower costs associated with software maintenance fees.
Income from operations increased from $3 $3 million to $3 $9 million, an increase of 19% when compared to the same period of fiscal 2022.
Net income was $4 2 million versus $2 9 million an increase of 45%.
Net income to common shareholders grew 53% to $3 8 million or <unk> 20 per weighted average share compared to $2 5 million or <unk> 13 per weighted average share.
Turning now to cash flow and cash balances.
Total cash at March 31, 2023 was $22 9 million compared to $21 5 million at the end of fiscal year 2021.
The $22 9 million is inclusive of the payoff of the remaining $448000 of our revolving line of credit.
As of March 31, 2023, the company has zero bank debt, given rising interest rates and our cash generation. It only made sense to pay it off completely.
Fiscal year to date, we generated cash from operations of $7 million compared to $4 million last year, an increase of 75%.
In the third quarter, we repurchased 74150 shares at an average price of $5 79 per share for a total of $429271.
Company has approximately $9 $8 million remaining on the 21 million total buyback authorization since inception.
We continued to gain momentum in the growth of recurring revenue delivering 80% gross margins and double digit EPS growth.
It was almost $23 million cash in the bank no debt and a shrinking capitalization.
As we announced back in September the company's add an additional lever to our capital allocation strategy in the form of a 6% annual dividend $1 five paid quarterly.
Our first dividend in our second fiscal quarter and again on May one.
Subsequent quarterly dividends will be paid within 45 days of the quarter end of March 31 June 30 September 30, and December 31.
We have said previously our goal is to take half the annual cash generated from operations and returned it to shareholders in the form of a dividend and buying back additional shares hence increasing EPS for all shareholders.
The other half goes in a bank or used to fund initiatives like traceability.
From time to time, the board will evaluate our capital allocation strategy and may adjust the different levers, including the dividends buybacks, considering M&A opportunities paying down debt or other liabilities based on whichever lever is more favorable to shareholders at that time.
It's our ongoing strategy to allocate a meaningful portion of our free cash flow to returning capital to shareholders.
That's all I have today, thanks, everyone for your time at this point I'll pass the call over to Randy Randy.
Thanks, John .
The results clearly show that our model is working in fact, that's pretty much an understatement, we're doing more with less increasing our investment in our use of in house developed AI automation tools and solutions to.
To improve our own operational efficiency.
We can't emphasize enough how this creates a long term structural advantage for us.
And that enables us to grow revenue, while continuing to shrink our fixed costs as a percentage of revenue we've been doing that now for a number of years and I think the next few years are going to even be more dramatic.
Theres actually from what we can see four main ways for a SaaS company to grow first we can develop new products like our Repositrak traceability network for our 10 as we call it and that's already gathering steam more on that in a minute.
And there's another potentially large new product suite, and our product roadmap and we're pretty excited about that as well so let's put a checkmark next to we have new products.
Second we can add new customers, our traceability is definitely going to be adding net new names to our book of business.
We've added one very large new wholesaler to our list this quarter, even better our expanded sales team has a pipeline that is deep and growing many of our prospects in fact, our new names. So let's put a checkmark next to growth by adding new customers third.
We can expand our penetration with existing customers with their existing or current services.
Let's say, adding new vendors for example to our compliance customer of ours or scan based trading new vendors for example.
This is actually the best and we're seeing some nice acceleration.
Right.
Each area of the business is seemed editions of more of the same service from our existing customers more scan based trading more out of stock work more compliance etcetera to us that represents a validation that the customer who is using the service like working with us, but the technology is doing what they expected that.
I feel like there is a relationship with us they want to do more so let's put a checkmark next to current customers buying more of the product that they use.
And fourth.
We can sell existing customers additional services based on our current success in relationship. So think Oh, I dunno, adding scan based trading or out of stock management or traceability to a customer using our compliance solution.
We have been gearing towards doing this for several years is now happening and being driven by our new sales organization weigh more of this to come so definitely let's put a checkmark next to satisfy customers buying new services.
So clearly we're beginning to execute on all four growth strategies, expanding a relationship that exists today with a customer you build through expansion of the current service or cross selling requires far less additional resource and can be sold in the normal course of just taking great care of the customer so some examples.
Our largest compliance customers in the process of nearly doubling the number of vendors to its book of business with us one.
One of our largest warehouse supply chain customers.
<unk> doubled their footprint with US both of these will show up as revenue in fiscal 'twenty four over.
Over the last several years, we've pointed to our need to develop this cross selling skills. We now have it maybe we even have it now in spades and it fundamentally changes how we view our short term and long term growth potential.
We are also adding net new names entirely new customers due in large part to our excellent reputation in the industry, but also due to the fact that major changes we've made in the sales organization are beginning to have an impact.
We've added new very senior salespeople with deep industry experience and this is helping us to expand our presence both with new and obviously with the existing customers.
Specifically, we have added staff was specific senior roles historically and experience in industries like wholesale and retail grocery consumer packaged goods supply chain and most recently quick service restaurants.
These professionals so the pain points of our customers. They live the problems that we solve they speak our customers' language. The net result is that they help us sell solutions to problems not software and these solutions increasingly use more than one of our offerings. As a result, our pipeline is in fact large and it's good.
Really.
Simultaneously, we continued to deemphasize noncore high touch revenue.
And shift resources to the rapidly emerging traceability initiative.
This initiative to deemphasize noncore relationships is creating a modest headwind on our short term revenue growth, but it's necessary, we're going to need every resource that we can muster for traceability, let's think of it as pruning the tree so to speak.
As we said last quarter the traceability opportunity now that the rules are defined is emerging at a much faster rate than we anticipated we expected to begin generating revenue in fiscal 'twenty four but we're already generating initial but frankly limited revenues today.
Significant but the underlying progress really is we still think the industry would be better off and we'd also be better off if the new rules were phased in and using a longer timeline to get it done it's simply too much too fast.
Forward thinking wholesalers and retailers, though are seeing this and are moving quickly now to get ahead of the curve as.
As we disclosed recently, we already have approximately 8% of the supermarket industry, representing about 3000 stores signed up and committed to the Repositrak traceability network keep in mind that the on boarding for a large traceability hub like these will take one to two years to get to full revenue.
Sure.
When fully deployed though just this starting group could represent nearly $6 million a year in annual recurring revenue to us not bad for a start.
Each new retailer or wholesaler joining Dr. T M as we call it.
Positive track Traceability network represents from $1 million to $2 million, a year more or they are or when the stores and its suppliers are fully brought in line over that one to two your implementation cycle.
So a key indicator for us and for you as an Investor is the addition of new retailers or wholesalers, some will be announced and frankly some will not.
Beyond the initial deposit tracked traceability network, the retailers and distributors that we already have as customers with one or another service represent an additional 20 plus million dollars a year of a R. R to hopefully bring on and get signed up for the network.
This would have signed and implemented basically double the size of our company.
Little doubt, we will become the industry standard dominant platform for traceability rest.
Restaurants convenient stores and many other businesses will be impacted by this rule and they ultimately will also need our service we've already begun to address those markets as well.
As we've noted rule tool for has been in the works for over a decade and many suppliers. For example believe their current labeling systems are adequate and compliant they art.
Labeling embarked codes don't actually contained all of the information needed under rule tool for.
And even worse the scale of what's going to be necessary as simply staggering. Let me give you an example.
We estimate that a medium size wholesaler and has thousands of customers will need to correctly correctly create about 50 million records each and every year.
Doing this internally would require humans no retailer a large wholesaler once stewart can hire dozens or hundreds of employees to chase down missing or inaccurate data.
I will insist on extreme end to end automation.
We already provide that kind of automation, including automated and very robust error correction we are.
Really well positioned.
And one more thing.
Our customers.
In general the industry will insist on reliability.
A poorly capitalized startup simply cannot be trusted by a major retailer in this environment.
Think about your entire business reputation based on food safety in the hands of the startup that as a cash burn that puts it at a business in a year.
Given that it's been difficult and now given the difficulty in today's capital constrained world securing capital is going to be a challenge for these.
Have you any nifty, new Whiz Bang technology, and no capital is not attractive to the industry.
Our fortress balance sheet with nearly $23 million of cash and no debt is a massive advantage for us with our customers. As you know we've talked about this for years, and it's becoming more and more important as they put their reputation of food safety their entire equity and brand at risk in terms of accomplishing the regulatory.
<unk> at the FDA has laid out.
Our approach is dried over and above all of the individual solutions and make data accessible to any recipient without an end user having to do change or implement any other system.
This really isn't universal repository in fact, many larger players will likely end up with at least two systems, one for labeling and coding products and our system detract at all in fact, if you hadn't thought of it before think about what our name says repositrak. So.
We're off and running to say the least we're very excited about where we're finding ourselves in terms of the process.
The onboarding process, though with many thousands of suppliers is going to take time several years for sure. This is very similar to the ramp we saw with compliance five or six years ago only much larger much more complex and in a much more compressed timeline. That's why we're freeing resources, we still expect that the ramp will be slow at first through <unk>.
Calendar 'twenty three accelerating in 'twenty, four and exploding by 2025.
Well, capturing this opportunity drive up our expenses significantly you might ask even with the senior additions to our sales organization and the need to onboard thousands of.
Positive drag traceability network suppliers, we expect only very modest increases in our expenses.
Our revenue will continue to grow much much faster than expenses and will continue to harness automation tools that we developed to maintain what we've seen historically and more importantly will also a player pretty typical expense control.
Simultaneously, our ongoing share repurchase program shrinks, our capitalization and accelerates earnings per share as you've seen we built a consistent cash generation machine with more than five consecutive years of real GAAP profitability. We will continue to build our cash continue to buy back stock and continue to pay a cash.
Dividend.
We maintain a fortress balance sheet with nearly $23 million of cash no debt and a current ratio now of nearly six our businesses efficient we hope it's easy to model and were definitely positioned to scale.
In fiscal 'twenty 'twenty four we're confident that we will deliver meaningfully faster growth in both revenue and profitability. So going forward our strategy will be simple actually one continued to take great care of our customers.
A major component of our position in the traceability initiative is that many of our existing customers happy customers will need our traceability help we will not jeopardize that for any reason second.
Continued to grow with crane revenue within the targeted bracket of 10% to 20% a year over the long run we're likely to end fiscal 'twenty four at the high end of that 10% to 20% top line growth range.
Third.
You need to drive our internal productivity with more development of our internal tools. So we continued to generate 80% to 85% of that incremental revenue and make it become real cash our needs. We are very very experienced in the development and use of AI tools.
Has been transformative for us already and we intend to press, even harder and further ahead over the next few years.
We will continue to see gains in our revenue per employee and that is huddled show up to you as an investor.
We are already more than double the industry revenue per employee for a company of our size and I wanted to see it go up significantly more and do that in relatively short order.
And finally, we will continue to shrink the number of shares outstanding to return capital to the shareholders both by buying back shares and paying the cash dividend. The results should be faster revenue growth, even faster than net income growth and faster yet earnings per share growth. So with that I'd like to open up the call now for questions.
Operator.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The 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 for participants using speaker equipment. It.
May be necessary to pick up your handset before pressing the star keys.
Our first question is coming from the line of Thomas Forte with D. A Davidson. Please proceed with your question.
Great. Thanks, Randy and John I have two questions.
I'll ask them both at the same time, so Randy you've kind of teased. This in your prepared remarks, but can.
Can you give a little more details on how you might leverage AI to operate the business more efficiently and then John you definitely talked about this in your prepared remarks. So I'm just gonna ask specifically for your current thoughts on capital allocation as it pertains to potential strategic M&A.
Okay. My first my first.
We've been using.
We call them productivity tools. It goes back five years, we had something called Tenex, which meant we wanted to increase the productivity of a particular group of our.
Staff by 10 times, we did that well.
We're really good in my view prejudice of course, and thinking about what's the appropriate sort of tool, including artificial intelligence.
To improve the productivity of people that we have.
You're going to read more and more about companies thinking about how do I get rid of middle management and things like that that's not the issue we're facing we're already.
On the management side, although we've beefed it up significantly in the last few months interestingly.
We're not heavy there where we're.
Able to find great productivity growth is in the kind of work that almost everyone. In the company does I call it administered via meaning.
People spend time, finding stuff is it that the is it easy to get to is it the right information do I have to open some other application defined it we are really good and we've developed some highly specialized tools in fact will be selling to our customers. We've already sold it to one.
In the very near future. The idea is let the system make decisions.
That enable people to spend more time with the customer. An example, and if you wanted a vision of what it looks like think GPS most of the world in a sense still runs their business should.
Paper maps, if you will and we're already into the early stages of what GPS can do our version of GPS is not how to get to a destination that is how do you take better care of the customer what what kinds of things should you be doing right now with which customer and in order to improve the customer relationship it'll be very impactful.
And I would personally be amazed look what I've said about as clearly as I can.
Our business is now seeing the earliest stages of acceleration from traceability.
We were at 8% if you said where could you be at the end of the year I think we could be north of 15% of the industry. The next several years are therefore by definition going to see much more rapid growth.
Growth on the topline as well, obviously as the bottom line, but in order to do that with current staff you have to change fundamentally their productivity what did they do day to day and the answer is we're going to develop internal technology beyond what we have to enable people to do more and spend more of their time with customers rather than less.
It's an ambitious vision our customers are interested in it and it's already as I said been highly impactful, but a lot of people talk about AI today, but my God, we've been doing it for.
A number of years seven or eight years at least of work in AI to improve how people do what they do.
John your term.
I forgot the question no I'm kidding.
As far as the capital [laughter] as far as the capital allocation strategy.
Your question was about M&A.
Think that's you know we saw that bank debt with interest rates rising and we paid off that.
I personally believe our stock is undervalued. So we're buying back the stock back so that helps EPS and all shareholders as far as M&A I mean, Randy will correct me, but I think that anyone who touches or prepares food across.
The globe.
Really is to some capacity.
<unk> has a mature for problem. So that's also quick service restaurants hospitals schools, so on and so forth and the supply chain along the way.
So if they if they have a service that we can bolt on or they have customers that we can buy.
More certainly have an appetite for M&A.
If you look back one to two years with the multiples we are see where 14 times sales, we're not going to chase that but I think that as capital becomes more constrained and the economy has more uncertainty that we're in a position that if that were one of the levers we wanted to pull at that time, we will definitely do so.
Thank you for taking my questions.
Thanks, Tom.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad.
One moment please poll for questions.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to Mr fields for any additional closing.
Mark's.
Thank you operator, thank you John Thanks, Jeff and.
And thank all of you who took time this afternoon to listen to our earnings report.
I think if I were to summarize it we feel very very good about where we are we will become the dominant player and traceability and we think that's just the beginning of a series of things that will enable.
Enable our business to look quite different over the next several years. So thanks for the support and if you have questions you guys know how to reach us. Thank you. Thanks, operator bye bye.
Thank you.
Yeah.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.
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