Q1 2024 Park City Group Inc Earnings Call
Greetings and welcome to the Repositrak fiscal first quarter 2023 earnings call.
Time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
To ask a question you May press Star then one on your telephone keypad to withdraw your question you May Press Star then two.
As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Geoff Stanley with F. N K I R. Mr. Stan Ross you may begin.
Thank you operator, and good afternoon, everyone. Thank you for joining us today for Park City group doing business hazard Reposit tracks for 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 we'd like to remind everyone that this call.
Could contain forward looking statements about park city group within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements are statements that are not subject to historical facts such forward looking statements are based upon our current beliefs and expectations.
Arc Citigroup remarks are subject to risks and uncertainties, which actual results may differ materially such risks are fully disclosed in 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 closed today.
The company issued a press release overview in the 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 all that said I would now like to turn the call over to John Merrill John call is yours.
Thanks, Jeff and good afternoon, everyone. The first fiscal quarter of 2024 again highlights the simplicity reliability and predictability of our business model grow revenue increase profits generate cash and return capital to shareholders.
In short in the September quarter, we grew both total revenue and recurring revenue invested heavily in sales and marketing promotion to increase awareness and traceability accelerating fit mature for education of the looming in 2026 deadline for both retailers and their suppliers.
We grew net income and EPS.
Bought back more common shares and continue to issue a quarterly cash dividend to common shareholders.
We achieved these results while navigating another period of global economic uncertainty rising interest rate political unrest inflation and at the same time overcoming the planned elimination of approximately $1 million of high touch low opportunity revenue since traceability started I believe it is extremely important to point out that while we are.
Been more vocal for the last year on Craig's ability, our compliance and supply chain offerings, particularly in this environment as experienced growth in every line of business scan based trading compliance and out of stocks only to name a few.
I believe we have developed our core business into a well structured cash generating engine. It was not easy and the next phase of our growth traceability is no different but advancing rapidly and will become even more complex.
Nonetheless, we are confident over time that we can add traceability to the same well oiled cash generating machine that our core compliance and supply chain offerings have become.
As you can imagine two oh Ford's requirements are complicated having a level of uniqueness based on our customers' supply chain the product and ways of doing business.
Requires us to invest in technical and customer facing roles as well as sales and marketing to position our RPM solution as the go to solution to achieve mature for complying with little change to how our customers do business.
We responded by adding several members to our commercial technical and leadership teams, including industry veterans with deep relationships and expertise.
You have seen we increased our spending in the quarter on sales and marketing in order to accelerate the reach and frequency to not only our existing customers, but to our prospects.
I want to reiterate we will automate wherever we can and we're very good at it.
However, with enormous traceability opportunity upon us sometimes good old fashion smiling DAU, reaching frequency through various messaging mediums makes the most sense.
Our responses balanced reallocate short term spending towards sales and marketing efforts and continued to eliminate high touch noncore activities to free up resources to make the most noise in the urgency of our customers to comply with FINMA tool for.
Remember we are early in the traceability race. It began in April of 2023. It is a marathon not a sprint well traceability only represents 1% to 2% of our current revenue. We believe our land grab efforts will develop traceability into the same cash generating machine, we have developed within our core compliance and supply chain solutions.
Let's get to the numbers.
Total revenue was up 7% for the September quarter.
Recurring revenue increased 8% for the quarter.
Selling and marketing costs increased 25% as we invested heavily in the short term and the awareness of Repositrak traceability of network or our T M.
G&A costs were up 5%.
Total expenses were up 11%.
GAAP net income increased 7% for the quarter.
GAAP net income to common shareholders increased 8%.
Earnings per share increased 7% year over year to <unk> <unk> per share.
Cash from operations was $1 $2 million.
And we bought back approximately 155000 common shares at an average share price of $8 53 per share at $24 million cash in the bank and no debt.
As we've said our profitability and cash flow will continue to grow.
System with our strategy our focus is on increasing operating leverage.
This requires us to continue to make difficult decisions to drive high margin incremental revenue, while keeping costs in line and driving profitability and cash.
As Randy will further comment on the customers. We have signed so far for traceability initiative or somewhere in the implementation queue should generate $3 million to $4 million additional annual dollars of recurring revenue once fully deployed.
That does not take into consideration any new customers or expansion of existing customers. This is only includes burst in the hand.
We ended the fiscal year with an exit rate of annual recurring revenue of $23 million, meaning as of June 32023, those contracts in hand billing month lead times 12 will generate $23 million in annual recurring revenue and the subsequent 12 months.
At the end of September that number increased to $28 million with modest ambitions as a result of traceability.
Keep in mind. This is organic revenue growth, meaning existing suppliers of retailers that have expanded compliance and supply chain services, adding stores or locations and traceability and the current fiscal year to date.
This does not include any revenue contribution from our projected new customer.
I believe the momentum we are seeing initially with traceability customers faster than I anticipated will only accelerate.
We are confident the traceability will begin to generate meaningful revenue in calendar 2024.
As I've said time and time again, it takes approximately $12 million in cash a year 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.
Our focus is on operating leverage rationalizing the revenue generated with costs expended.
Again, our strategy remains very simple take care of the customer I cannot emphasize this enough.
Recurring revenue rationalizing cost with the opportunity of future revenues.
Control costs increased net income accelerate EPS buy back shares, which now includes the preferred shares drive cash and return capital to shareholders in the form of cash dividend.
Turning to the quarterly numbers.
Fiscal year 2024, first quarter revenue was $5 $1 million up 7% from $4 $7 million in the same quarter last year.
Effectively all of our revenue was recurring 99, 7% to be exact.
Total operating expenses increased 11% to $3 $9 million in Q1, 2024, which I already commented on which was largely a nonrecurring increase in sales and marketing spend for traceability during the quarter.
And sales and marketing expenses increased 25% due to investments in awareness building for RPM.
G&A expenses increased 5% due largely to higher costs and employee benefits.
Depreciation and amortization increased 31%, reflecting investments in cyber security and other routine capex expenditures that took place in the prior fiscal year.
For the first fiscal quarter of 2024, GAAP net income was $1 $4 million or 27% of revenue versus $1 3 million or 27% of revenue.
GAAP net income increased year over year by 7%.
Net income to common shareholders was $1 2 million or seven per common share based on $18 2 million weighted average shares versus $1 1 million or six per common share based on $18 5 million weighted average shares.
Shareholders should also take note that we have reduced our capitalization of over 10% since we initiated our stock buyback plan some four years ago.
Turning now to cash flow and cash balances.
Total cash at September 32023 was $23 7 million compared to $24 million at the end of fiscal year 2023.
As of September 32023, the company had zero bank debt.
In the first fiscal quarter, we generated cash from operations of $1 $2 million.
First quarter, we repurchased approximately 155000 shares at an average price of $8 53 per share for a total of $1 $3 million.
The company has approximately $8 $5 million remaining on the $21 million total buyback authorization.
We paid our September 30 quarterly cash dividend on November one.
Subsequent quarterly dividends will be paid within 45 days of the quarter's end December 31 March 31, and June 30, as we are.
<unk> said previously our goal is to take half the annual cash generated from operations and return it to shareholders in the form of a dividend buying back additional shares that we announced recently redeeming the preferred.
The other half goes in the bank or will be strategically used to fund initiatives like traceability.
We also carefully evaluate other opportunities, including M&A, but we are selective.
We certainly have ample dry powder, if the right opportunity comes along.
As you have seen we transferred our lifting from NASDAQ and New York Stock exchange under the ticker track, it's where he belonged to quote Maverick from top gun.
We now have earned the prestige of sharing a big board with many of our customers and a strong advocate with powerful solutions to improve their business.
We are very honored to share the same stage of some of the most well respected names in the industry.
As I said before from time to time, the board will evaluate its capital allocation strategy and we adjust the different levers whichever is more favorable to shareholders at that time.
Part of the process the board of Directors recently announced our intent to redeem our preferred stock over the next three years.
Most recently, given our consistent cash flow generation and line of sight to future cash flows the board unanimously approved a 10% increase in the quarterly common stock dividend from <unk> <unk> per share annually to $6 six.
The increase in our quarterly cash dividend and we'll start with shareholders of record on December 29 2023.
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 as.
As we ended the first quarter of fiscal 2024, the sustainability and predictability of our recurring revenue based business model is now clear.
Our recurring rather who covers not only our fixed cost, but it fuels our ability to return capital to the shareholders.
The SaaS transition was completed a little bit more than a year ago. So we're now comparing our results to post transition quarters.
Despite our sun setting of certain high touch low opportunity rather than to the tune of about a million dollars a year. We've continued to grow recurring revenue with GAAP net income, even more and growing earnings per share even faster than that.
The flywheel of our business model is delivering as expected and we think we're creating lasting value that.
At the same time, though we are investing in our next major growth opportunity traceability and our positive track Traceability network, our T N as we call it.
These investments include marketing to expand industry awareness and systems to help us automate the onboarding process.
So where are we well.
So far we have more than 500 suppliers in the queue to use the R. T M.
Coming into the network based on the requirement of one or more of their customers, who have chosen to use us to comply with the FDA traceability mandate.
Just what we signed up in terms of retailers and wholesalers. So far should generate another thousand suppliers ultimately on top of the 500 that are actually in the process of enrolling now so once fully implemented and that will take certainly till the end of our fiscal year, maybe even a bit.
Longer our current hubs and spokes as we call them should generate three to 4 million per year in additional annual recurring revenue, perhaps even more.
He is a very very good start.
Uh huh.
Even better our.
Pipeline of new potential hubs is deep and we will be adding significantly to the network as the year goes on that certainly our belief from where we are so far we're running well ahead of what we expected to have at this point in time, and we see signs of an acceleration from our current pipeline.
We now believe interestingly that the Tam from our current line of sight that we have is potentially 20 million in annual recurring revenue, which is a significant increase from how we saw it a year ago.
This obviously isn't going to happen in a year, but certainly could happen in the next few years.
Some number of the suppliers will of course have an overlap across retailers and wholesalers. This makes our revenue forecasting honestly a little bit more difficult naturally why do why do I say that what do I mean by that well, obviously any one supplier they delivered the more than one of our retailers or wholesalers when their supplier joined isn't there.
Generally speaking that subscription membership covers all retailers and wholesalers that fee structure in fact, though as part of our attraction.
In fact, though suppliers are already beginning to refer us to more retailers and wholesalers think about that suppliers are referring us to their customers and why not once they've gone through the onboarding process gathered all the data entered into our easy to use system paid their membership fee why it wouldn't.
They want to use this with other retailers there'll be no incremental costs for a moment incremental efficiency and nobody wants to use many multiple systems that defeats the purpose of automation.
As we've said traceability awareness and interest seem to be increasing our network growth shows that for example in April of 'twenty. Three we had zero in July of 'twenty, three we had about 90 suppliers somewhere in the process.
I guess that number doubled to 200 in November we now have more than 500 in the queue and adding more.
You may have recently seen the cadence and content of our industry direct your press releases validating our progress these supplier customers span all parts of the industry produce seafood cheese just to name a few.
Interestingly several of the network members actually provide products that are not covered by the traceability rule.
Well why would they do this if they're not required to simply we believe they recognize the inherent value of traceability independent of the regulation I think about it for a moment.
A trucker produce arrives at your door your retailer, it's still with different kinds of proteins. How can you, possibly know if or efficiently offload the truck to identify only the physical tool for traceability case, it's a product. The short answer is you can't we believe retailers will.
Ultimately decide to include all forms of Proteus for example, separating out physically impacted boxes from nonphysical impacted box as well that's an impossible headache, the retailers don't want and we don't think they'll take on how do we know well keep in mind, we're actually doing traceability now.
Piloting not talking doing it we learn every day through the challenges, including challenge is that nobody else in fact could have anticipated including us.
Our expertise in actual experience is unmatched and it represents a durable competitive advantage for us going forward. This realized practical knowledge is an enormous competitive advantage and we believe that we're the only ones that understand it in total and it's an important moat around our traceability.
And that's in addition to our technology moat.
And this last quarter, we spent heavily on sales and marketing to support the RT or as we call. It <unk>.
Most of this involves awareness building and much of it was just one time.
You've heard me speak about the other proposed solutions, they're not going to work in my view that based on labels or bar codes alone.
Unlikely to work in theory, and sure as Hell won't work in practice or they're based on some complicated technology that would align with the simple business practices are retailers and wholesalers.
When traceability grows in terms of numbers of customers for us the.
The incremental variable cost as we add new users will be nominal we've automated much of the process. We're working on to even higher levels of automation as we speak and as you know, it's our way of doing business, meaning the revenue opportunity is significant but we don't expect a significant increase in our cost structure.
No.
To summarize we will continue to take great care of our customers.
Two we have a consistent cash generation machine with many consecutive years of GAAP profitability. Three we continued to deploy our capital allocation strategy buying back stock, both common and preferred paying the dividend and growing our cash our board just voted to increase the dividend by 10% as we have.
Said the board will periodically review the capital allocation strategy.
It will adjust the dividend and other levers that we have based on our cash generation overtime, we do expect to be able to continue to grow the dividend, even as we're adding cash to the balance sheet.
Four we're maintaining a fortress balance sheet with nearly 24 million in cash and no debt.
Five very importantly, our businesses efficient, it's easy to model and we're positioned to scale. The net result faster revenue growth, even faster net income growth and faster yet EPS gorilla.
As I'm sure you saw on November 2nd we up listed from NASDAQ to the New York Stock Exchange. This move to the Big Board puts us in the same company as Albertsons Kroger natural grocers wife's market Cisco U S foods, all NYSE listed companies and the grocery or food distribution space Fortune five.
The food industry is who we serve.
It's our world just makes sense for us to be on the NYSE because it gives comfort to our customers. This is also the first step in a broader rebranding from park City group to Repositrak the brand that our customers know we've changed our ticker as I'm sure you know that T. R. A K and then the coming months, we will fully.
Our corporate name.
So with that I'd like to now open the call for questions operator.
We will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
I would like to withdraw your question. Please press star two.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Thomas Forte.
With D. A Davidson. Please proceed.
Great So rainy and John Congrats on the quarter I have six questions. So I apologize to anyone else's in the Q1 at a time. So number one would appreciate your thoughts on capital allocation are your current thoughts on capital allocation. Jon mentioned this a little in his prepared remarks, including using free cash flow to buy back the preferred to buy back the common pay dividends and for.
Strategic M&A.
Well it sounds like the answer was inside the question right.
That's the menu now I need to know a priority.
[laughter], Okay. So here's how we it here's how we see it and admittedly it is a little vague, but that depends on market circumstances at the time so.
Clearly, we feel as if our cash flow over the next several years is going to be growing.
As a result, we are quite confident that the dividend increase that we put in place could be the first of other dividend increases so that part of it looks like it's going to continue on that track. We've also committed to redeeming the preferred over a three year period. So we'll begin to do.
Do that and so therefore, the loosey goosey part of it if you will would be the sum of those two numbers.
Minus 50% of our free cash flow each year.
So that's what we've decided to do have the cash we generate goes on the balance sheet to strengthen it and the other half will be divided round those three levers buying back stock the cash dividend and buying back or redeeming the preferred.
Now.
Those by definition.
We would be opportunistic in terms of the stock when we think the stock represents a better brought by and reducing the capitalization moves up we will spend more money on that that's probably the best way to put it but in general we see over the foreseeable future half of our cash flow going against those three left.
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Question two.
Hi. This is number two John last quarter. You indicated you ended the fiscal year with an exit rate of annual recurring revenue of $20 3 million can you update that number after one quarter.
Yeah. So in my remarks, it's 28, so if you were to take what the contracts. We have in hand as of September 30 times 12 that number now is $28 million that assumes no new customers that only assumes the customers that we have in the queue.
Excellent.
So.
Where are you today in your efforts to upgrade your existing customers or engage in I don't think you used the term, but intentional churn to focus your efforts on traceability.
The answer to that is actually pretty simple.
<unk> designated a group of customers that in our view are not long term fits meaning either that they are very very small.
They have no food business inherent in what they do so that they will not be doing traceability. For example, so you can think of them as high touch and limited upside.
And the run rate on what we've eliminated is just about $1 million a year. So it's for the most part gun theres a little bit more to go over the next quarter or two.
And.
We've done this before actually periodically we look at our product set and decide which of those products and services fit nicely into the future. We see for the business and we're not afraid of pruning many businesses keep remnants of their past.
We choose not to do that because number one if a product is not part of our future. It means almost by definition, we are in the I'm going to call. It an ethical bind with the customer and we we choose never to do that we always want our customers to be first and the best way to do that.
Just to make sure that the product set that they're using is the product set that we're taking into the future and investing with so it's mostly behind us there's a little bit more headwind in the next quarter or two and then we'll be done with it for now.
Great and then Randy I would appreciate your thoughts and how your company uses artificial intelligence to improve its efforts.
Well, we're somewhat skeptical about all of the hype around AI.
It's for US we've talked about it for many years I don't know if we've been a user of AI based tools for at least a decade.
And we see them as tools for us to do things that humans can do but a machine can do much faster.
And will continue to invest in that direction by and large our investments in tools like AI.
Are intended to help our people be better with their customers. It's internal productivity measures as the best way to think about it and it allows us to have better spans of control. It enables us to be much more effective in communicating with our customers.
You know it just maybe I'm old fashioned maybe just old but the reality for US is high touch is how we see ourselves.
And when people do work that we call. It in Australia. You May have heard me use that term a few times administered via gets in the way of customer relationships.
So our objective with our own technology is always to get rid of the admin distributors, so that people spend more and more of their time with their customers and less and less of their time with what I called the N outbox syndrome, and that sort of thing so AI for us has a very important.
Contribution, we think to the future and the reason if you were to quantify it.
We've suggested that the Pam.
For traceability as we see it today has the potential for doubling the size of our company in some number of years I won't be too specific about that.
But we think we could do that with the addition of no more than five to seven more people than we have today, that's pretty astounding and then if you think of one other current statistic, we generate about $300000 a year of recurring revenue for each and every employee, but if you were to compare us to the.
Industry.
John will keep me honest here, but I think the industry is less than half of that about 140, some odd thousand dollars a year.
So our investment in productivity DNA I in particular has enabled us to double the revenue per employee that we generate compared to anybody else in the business and honestly that shows up in our GAAP profitability.
Yeah.
Alright last two and I again apologize to anyone else in the queue Alright. So John you mentioned inflation in your prepared remarks. It seems like we're seeing signs of abatement or you're seeing that on your end and how if at all would you be impacted.
Even if there was a deflation as an example.
Well I think we've positioned ourselves as being the low cost leader, so I think that because of our efficiencies whether it be AI people removing administering here we're positioned as the.
I don't want to say the cheapest, but certainly for our cost structure. We can provide the lowest cost best solution to our customers. So inflation I don't think affects us as much as it may affect our customers that if they have higher prices, but that still doesn't change the need for them and our Hy Vee.
<unk> low margin business for them to one do compliance or there's no relationship to inflation, but also they need to get the most value out of the product that they are selling so we're kind of agnostic to it but I think the we've positioned our pricing structure to it.
It doesn't matter, whether there's inflation or not I think it's a matter of our customers. It's not a matter of the services that we provide of repositrak.
Actually if I could add to that John is explanation is exactly right, but as a matter of strategy, we want to be the low cost provider, we want to have strangely enough.
The best service simultaneously at the lowest comparable price so when it comes to traceability for example.
Hey supplier pays us one time unlimited use over the course of any given year.
So it's in a subscription model.
But it's an unlimited use model everyone else is trying to as they think about traceability doing it on a per click basis.
Almost by definition makes us the low cost provider, we think that's very competitive.
Okay, Great all right. So then I would appreciate your current thoughts on entering adjacent market such as restaurants or other highly regulated markets such as health care.
Yeah.
Well.
Traceability is pretty close to a universal problem for anyone that sells food. So obviously, our most experienced in the supermarket or mass merchant business, where they sell food is groceries.
But clearly convenient stores carry foods that would be covered under the traceability rules as they currently exist restaurants, absolutely quick service restaurants, <unk> foodservice like cafeterias and whatnot. So there's a whole variety of possibilities for us to expand in.
That area.
We're making efforts are today in doing that and hopefully in the next year, we'll begin to penetrate that market. Just as we are at the supermarket industry I think something that maybe didn't come through as clearly as we'd like our pipeline is extraordinary.
We are winning.
It's pretty remarkable I think over the next several quarters, we'll be announcing additional hubs, which are the primary users of our technology medium retailers and wholesalers and I'll be very surprised if we don't see.
Hum.
A move toward market dominance that we've always wanted to have and traceability over the next two years.
We weren't kidding, it's not a tagline it's true.
Everyone else is talking about traceability, we would do this we would do whatever it would be we're actually doing it. We we know have absolutely no one else that now at scale is doing traceability and the world of food.
We're pretty excited about it.
Profile's, a little bit lower than we'd like that's why we invested.
Hey, we did last quarter, but the truth of the matter is we are winning.
Great. Thank you Randy Thank you John.
Thank you thanks, Tom.
And at this time, we're showing no further questioners in the queue and this does conclude our question and answer session.
Now like to turn the conference back over to Randy fields for any closing remarks.
Well I think we've said it all we feel great obviously about where we are what to do and traceability as we mentioned for US It's day by day uncovering.
New obstacles, new solutions et cetera, so that we can dominate the traceability market to the extent that we desire. So appreciate your support and we'll talk to you in a few months. Thanks.
Thanks, everyone.
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