Q2 2024 ReposiTrak Inc Earnings Call
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Operator: Greetings. Welcome to the RepositRAC Fiscal Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode.
Greetings and welcome to the every paused the Czech ESCO second quarter 2023 earnings call. At this time all participants are no listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone.
Operator: 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Stanlis, from the FNK-IR. Mr. Stanlis, you may begin.
Keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Geoff Stanley with the ethane K I R. Mr. Sam unless you may begin.
Jeff Stanlis: Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for the Repositrak Fiscal Second Quarter Earnings Call. Hosting the call today are Randy Fields, Repositrak's Chairman and CEO, and John Merrill, Repositrak's CFO. Before we begin, we'd like to remind everyone that this call could contain forward-looking statements about Repositrak within the meaning of the Private Securities Litigation Reform Act of 1995. While we're looking at statements, these are statements that are not subject to historical fact.
Thank you operator, and good afternoon, everyone. Thank you for joining us today for the Repositrak fiscal second quarter earnings call hosting the call today are Randy fields, other tracks, Chairman and CEO and John Merrill Repositrak CFO before.
Before we begin we'd like to remind everyone that this call could contain forward looking statements about repositrak within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements are statements that are not subject to historical facts.
Jeff Stanlis: Such forward-looking statements are based on current beliefs and expectations. Repositrax's remarks are subject to risks and uncertainties from which actual results may differ materially. Such risks are fully discussed in the company's filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks. Repositrax does not assume any obligation to update information contained in this conference call.
Such forward looking statements are based on current beliefs and expectations.
Pause attraction remarks are subject to risks and uncertainties, which actual results may differ materially.
Six are fully discussed in the company's filings with the Securities and Exchange Commission.
The information set forth herein should be considered in light of such risks Repositrak does not assume any obligation to update information contained in this conference call shortly.
Jeff Stanlis: Shortly after the market closed today, the company issued a press release overviewing the financial results that we will discuss on today's call. Visitors can visit the Investor Relations section of the company's website at www.repositrax.com to access the 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.
Shortly after the market closed today the company issued a press release OPE reviewing the financial results. We will discuss on today's call investors can visit the Investor Relations section of the company's website at Repositrak Dot com to access the 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.
John Merrill: The December quarter of fiscal 24 marks another anniversary of our evolution to a simple, easy to model, and highly predictable business. This is what Repositrack is today. Looking back on our strategy, our goal was to reduce unpredictable and lumpy revenue in exchange for growth in annual recurring subscription revenue, a reduction in operating expenses, return capital to shareholders, pay off debt, drive cash, and make the business easy to model. I am confident that as we again embark on the execution of this new opportunity, traceability, our strategy will not change. In two to three years, as we look back, it will be more obvious that it was the right decision.
The December quarter fiscal 'twenty four marks another anniversary.
Evolution towards simple easy to model and highly predictable business. This.
And this is what repositrak is today.
Looking back on our strategy our goal was to reduce unpredictable and lumpy revenue in exchange for growth and annual recurring subscription revenue and reduction in operating expenses return capital to shareholders pay off debt drive cash and make the business easy to model.
I am confident as we again embark on execution of this new opportunity traceability, our strategy will not change.
Two to three years as we look back it will be more obvious that it was the right decision incremental recurring revenue careful focus on expenses maintain margin grow net income and grow EPS even faster.
John Merrill: Incremental recurring revenue, a careful focus on expenses, maintain margin, grow net income, and grow EPS even faster. As we did some years ago with compliance, our strategy again requires us to scale quickly for the largest opportunity in the company's history, traceability. We have done it before, and we are up to the task to do it again.
As we did some years ago with compliance our strategy again requires us to scale quickly for the largest opportunity in the company's history traceability, we've done it before and we are up to the task to do it again.
John Merrill: Before jumping into the quarterly numbers, in my view, it is important to point out to shareholders the path we forged over time and some remarkable achievements we have accomplished. Since 2017, we have grown recurring revenue 10% per year on a compounded annual growth basis. Simultaneously, we increased recurring revenue from just 53% of total revenue to roughly 100% at the end of fiscal 2023. Despite overcoming more than $1 million in high-touch, low-opportunity revenue, the results are quite remarkable. During the same period, we reduced our operating costs by 28% or $5 million, driving an 80-plus percent gross margin and more than a 25% net margin.
Before jumping into the quarterly numbers in my view it is important to point out to shareholders. The past we force over time and removed some remarkable achievements we accomplished.
Since 2017, we have grown recurring revenue, 10% per year on a compounded annual growth basis.
Simultaneously, we increased recurring revenue from just 53% of total revenue to roughly 100% at the end of fiscal 2023.
Despite overcoming more than $1 million and high touch low opportunity revenue the results are quite remarkable.
During the same period, we reduced our operating cost by 28% or $5 million driving an 80 plus percent gross margin in more than a 25% net margin.
Since 2017 net income has grown from less than 700000 to $5 $6 million at the end of fiscal 2023, 36% compounded annual growth rate.
John Merrill: Since 2017, net income has grown from less than $700,000 to $5.6 million at the end of fiscal 2023, a 36% compounded annual growth rate. Full year earnings per share were just a penny just a few years ago, and now it's 27 cents a share, a compounded annual growth rate of over 77%. Meanwhile, during the same period, annual cash from operations accelerated from just $500,000 to over $8.8 million at the end of fiscal 2023, a CAGR of 51%.
Full year earnings per share was just a penny just a few years ago and now has 27 cents a share a compounded annual growth rate of over 77%.
Meanwhile, during the same period annual cash from operations accelerated from just 500000 to over $8 $8 million at the end of fiscal 2023.
CAGR of 51%.
John Merrill: Meanwhile, our current ratios have grown from a mere 2x to over 6x, meaning our current assets more than cover our current liabilities over six times over. It is truly amazing to see what this little company has achieved in such a short period of time. Anyone who knows me knows that I'm not a tout.
Meanwhile, our current ratios has grown from a mere two X to over six X, meaning our current assets more than cover our current liabilities over six times over.
It is truly amazing to see what this little company has achieved in such a short period of time.
Anyone who knows me knows that I'm not a tout as I've said before the proof is in the numbers we.
John Merrill: As I've said before, the proof is in the numbers. We have an extraordinary opportunity in front of us, and I believe our ongoing strategy will continue to reflect well on shareholders. Again, we will continue to grow recurring revenue, not just traceability revenue, but we will continue to grow all lines of business. We will continue to increase profits, generate cash, and return capital to shareholders all while ramping up the traceability initiative, which has the potential to more than double our top-line revenue over the next several years. For several quarters, we have been discussing the FDA's FSMA-204 mandates and the impact this will have on the food industry. The FDA's mandate is right around the corner, scheduled currently for 2026, but we are now seeing an industry reaction far sooner than we anticipated.
We have an extraordinary opportunity in front of us and I believe our ongoing strategy will continue to reflect well on shareholders.
Again, we will continue to grow recurring revenue not just traceability revenue, but continuing to grow all lines of business.
We will continue to increase profits generate cash and return capital to shareholders, all while ramping the traceability initiative, which has the potential to more than double our topline revenue over the next several years.
For several quarters, we have been discussing the F D A's mature four mandates and the impact this will have on the food industry.
F D. As mandate is right around the corner scheduled currently for 2026. So we are now seeing an industry reaction far sooner than we anticipated.
The traceability mandate is increasingly being driven by the market from the top down rather than from government regulations.
As we've long said retailers want end to end traceability.
John Merrill: The traceability mandate is increasingly being driven by the market, from the top down rather than by government regulations. As we have long said, retailers want end-to-end traceability. Track and Trace is a risk mitigation initiative for retailers, making it easier to identify products in the event of a recall, reducing exposure to costly lawsuits, and improving overall compliance. Retailers have embraced this FDA requirement, and now you are seeing them drive adoption through their supply chain. Randy will add more color to this in a moment.
Track and traces of risk mitigation initiative for retailers, making it easier to identify products in the event of a recall reducing exposure to coffee lawsuits and improving overall compliance.
Retailers have embraced this FDA requirement and now you are seeing and drive adoption through their supply chain.
Randy will add more color on this in a moment.
For us the demand for traceability is rapidly accelerating as you have seen in our steady cadence of press releases announcing suppliers joining me Archie M.
There are many many more in the queue.
The revenue from these suppliers is currently 3% to 4% of our quarterly revenue up from just 1% to 2% six months ago.
As you've seen we are investing heavily in sales and marketing both head count and advertising awareness the process the pipeline.
John Merrill: For us, the demand for traceability is rapidly increasing, as you have seen in our steady cadence of press releases announcing suppliers joining the RTN. There are many, many more in the queue. The revenue from these suppliers is currently 3-4% of our quarterly revenue, up from just 1-2% six months ago. As you've seen, we are investing heavily in sales and marketing, both headcount and advertising awareness, to process the pipeline. The current queue will take us about a year to process, based on how quickly suppliers move, and more are being added to the pipeline every day.
At current Q will take us about a year to process based on how quickly suppliers move and more are being added to the pipeline every day.
It is important to note that once we have worked through this initial on boarding process incremental additions will generate very little added cost again, we've been through this process before with our compliance solution.
We have onboard hundreds of traceability suppliers. Since we began this journey in April of 2023, the current acceleration further validates our decision to clear the decks pulling resources off noncore high touch low opportunity business and reallocate them to much longer term lucrative and time sensitive traceability revenue.
John Merrill: It is important to note that once we have worked through this initial onboarding process, incremental additions will generate very little added cost. Again, we've been through this process before with our compliance solutions. We have onboarded hundreds of traceability suppliers since we began this journey in April of 2023. The current acceleration further validates our decision to clear the decks, pulling resources off non-core, high-touch, low-opportunity business and reallocating them to much longer-term, lucrative, and time-sensitive traceability revenue. This decision is enabling us to quickly capture market share, further reinforce the moats around our business, and make RTN the best low-cost and only choice.
This decision is enabling us to quickly capture market share further reinforced the moats around our business make the Archie and the best low cost and only choice.
Over the next year investors will see this decision once again manifest into accelerated revenue growth net margin expansion and much higher levels of cash generation.
Let's get to the quarterly numbers.
Total revenue was up 8% for the December quarter.
<unk> revenue was 99% of total revenue.
Recurring revenue increased 8% for the quarter.
Operating expenses increased 9% as we invested heavily in me Archie M.
G&A costs were up 8%.
GAAP net income increased 15% gap.
GAAP net income to common shareholders increased 17%.
Earnings per share increased 17% to seven cents per share.
Quarterly cash from operations was $1 $3 million and we continue to return capital to shareholders.
During the December quarter, we bought back approximately 22000 common shares at an average share price of $8 79 per share for approximately $194000.
John Merrill: Over the next year, investors will see this decision once again manifest in accelerated revenue growth, net margin expansion, and much higher levels of cash generation. Let's get to the quarterly numbers. Total revenue was up 8% for the December quarter, recurring revenue with 99% of total revenue. Recurring revenue increased 8% for the quarter. Operating expenses increased 9% as we invested heavily in the R&D. G&A costs were up 8 percent. Gap net income increased 15 percent. Gap net income to common shareholders increased 17 percent. Earnings per share increased 17% to $0.07 per share.
We also bought back 70000 preferred shares for stated redemption price of $10 70 per share for a total of $750000.
We have over $23 million cash in the bank and no debt.
And we continue to pay a quarterly cash dividend boosting at 10% as you saw the board approved in November of 2023.
As we said our profitability and cash will continue to grow consistent with our strategy our focus on increasing operating leverage.
This requires us to continue to make strategic decisions to drive high margin incremental revenue, while keeping costs in line and driving profitability and cash.
John Merrill: Quarterly cash from operations is $1.3 million, and we continue to return capital to shareholders. During the December quarter, we bought back approximately 22,000 common shares at an average share price of $8.79 per share for approximately $194,000. We also bought back 70,000 preferred shares for a stated redemption price of $10.70 per share for a total of $750,000.
As I previously announced we ended our June 32023 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 a subsequent <unk>.
<unk> months.
At the end of September that number increased to $28 million.
And at the end of the December quarter, our exit rate of annual recurring revenue increased to $21 $4 million.
John Merrill: We have over $23 million cash in the bank and no debt, and we continue to pay a quarterly cash dividend boosted at 10%, as you saw the board approved in November of 2023. As we've said, our profitability and cash will continue to grow. Consistent with our strategy, our focus is on increasing operating leverage. This requires us to continue to make strategic decisions to drive high-margin incremental revenue while keeping costs in line and driving profitability and cash. As I previously announced, we ended our June 30, 2023 fiscal year with an exit rate of annual recurring revenue of $20.3 million, meaning as of June 30, 2023, those contracts in hand, billing monthly times 12, will generate $20.3 million in annual recurring revenue in the subsequent 12 months. At the end of September, that number increased to $20.8 million.
Once again this means barring any unforeseen changes as of December 31, 2023 contracts in hand billing monthly times 12 will generate $21 $4 million in annual recurring revenue and the subsequent 12 months keep in mind. This is the subsequent 12 months and not a forecast for the quarter ending June.
32024.
I believe the momentum we are seeing with traceability customers faster than I anticipated will only accelerate further.
We're confident that traceability will generate even more meaningful revenue in the next 12 months.
We have said time and time again, it takes approximately $12 million in cash to run this place.
Even with our investment our tea and during the six months ended December 31, 2023, our gross margin and net margin still remains above 80% and 25% respectively.
Again, our strategy remains very simple.
Take great care of the customer grow recurring revenue rationalizing cost with the opportunity of future revenues.
Control costs.
Increased net income accelerate EPS buyback shares both common and preferred drive cash and return capital to shareholders in the form of a cash dividend.
Turning to the quarterly numbers.
Fiscal year 2024, second quarter revenue was $5 $1 million up 8% from $4 $8 million from the same quarter last year.
John Merrill: And at the end of the December quarter, our exit rate of annual recurring revenue increased to $21.4 million. Once again, this means, barring any unforeseen changes, as of December 31, 2023, contracts in hand, billing monthly, times 12, will generate $21.4 million in annual recurring revenue in the subsequent 12 months. Keep in mind, this is the subsequent 12 months and not a forecast for the quarter ending June 30, 2024.
Effectively all of our revenue was recurring more than 99%.
Recurring revenue contribution from traceability customers increase from 1% to 2% of total revenue in the June quarter to 3% to 4% of total revenue in the December quarter.
Total operating expenses increased 9% to $3 $9 million in Q2, 2024, which I already commented on.
G&A expense increased 8% due largely to higher costs and employee benefits liability insurance and compliance costs associated with security confidentiality and other requirements to protect customer data.
John Merrill: I believe the momentum we are seeing with traceability customers faster than I anticipated will only accelerate further. We're confident that traceability will generate even more meaningful revenue in the next 12 months. They've said time and time again that it takes approximately $12 million in cash to run this place. Even with our investment in RTN during the six months ended December 31, 2023, our gross margin and net margin still remain above 80% and 25%, respectively. Again, our strategy remains very simple.
For the second fiscal quarter of 2024, GAAP net income was $1 5 million or 28% of revenue versus $1 3 million or 27% of revenue.
GAAP net income increased year over year by 14%.
Net income to common shareholders was $1 3 million or seven cents per common share based on $18 2 million weighted average shares versus $1 1 million or six per common share based on $18 4 million weighted average shares.
Shareholders should also take note that we have reduced our capitalization by over 10% since we initiated our stock buyback plan some four years ago.
Turning to the six month numbers.
Revenue for the six months ended December 31, 2023 increase of $10 2 million up from $9 $5 million in the same period of 2022.
John Merrill: Take great care of the customer. Grow recurring revenue, rationalizing costs with the opportunity of future revenues. Control costs, increase net income, accelerate EPS, buy back shares both common and preferred, drive cash, and return capital to shareholders in the form of a cash dividend. Turning to the quarterly numbers, fiscal year 2024, second quarter revenue was $5.1 million, up 8% from $4.8 million in the same quarter last year.
Total operating expenses increased 10% from $7 $1 million or seven eight.
Net income increased 11% to $2 $8 million.
Net income to common shareholders increased 12, 4% to $2 6 million.
And earnings per share increased 18% from 12 cents a share in 2022 to <unk> 14 per share for the six months ended December 31 2023.
John Merrill: Effectively, all of our revenue was recurring, more than 99 percent. Recurring revenue contribution from traceability customers increased from one to two percent of total revenue in the June quarter to three to four percent of total revenue in the December quarter. Total operating expenses increased 9% to $3.9 million in Q2 2024, which I already commented on. G&A expense increased 8% due largely to higher costs and employee benefits, liability insurance, and compliance costs associated with security, confidentiality, and other requirements to protect customer data. For the second fiscal quarter of 2024, gap in income was $1.5 million, or 28% of revenue, versus $1.3 million, or 27% of revenue. Gap in income increased year-over-year by 14 percent.
Turning now to cash flow and cash balances.
Total cash at December 31, 2023 was $23 3 million compared to $24 million at the end of fiscal year 2023.
Total cash reflects repurchasing over $2 2 million common shares redeeming 70000 preferred shares in the quarter paying off over $6 million in bank debt and returning over $1 $4 million to shareholders in the form of a cash dividend since inception.
Fiscal year to date, we generated cash from operations of $2 $5 million.
In the second quarter, we repurchased approximately 22000 common shares at an average price of $8 79 per share for a total of approximately $194000.
The company has approximately $8 $3 million remaining on the $21 million total buyback authorization.
During the same period or you purchased 70000 preferred shares the state of the redemption price of $10 70 per share for a total of $750000.
The remaining amount of the preferred stock redemption is $8 $2 million.
John Merrill: Net income to common shareholders was $1.3 million, or $0.07 per common share, based on 18.2 million weighted average shares, versus $1.1 million, or $0.06 per common share, based on 18.4 million weighted average shares. Shareholders should also take note that we have reduced our capitalization by over 10% since we initiated our stock buyback plan some four years ago. Turn in the six-month numbers. Revenue for the six months ended December 31, 2023, increased to $10.2 million, up from $9.5 million in the same period of 2022. Total operating expenses increased 10% from $7.1 million to $7.8 million.
As previously announced the company anticipates redeeming all of the preferred issued in outstanding over the next three years.
We paid out our December 31 quarterly cash dividend on February one 2024.
As we previously announced subsequent quarterly cash dividends will be paid within 45 days of the quarter's end of March 31 June 30 September 30, and December 31.
Again, we will take half the annual cash generated from operations and return it to shareholders in the form of a dividend buying back additional shares of common and preferred shares or increasing the dividend whichever lever makes the most sense at that time.
The other half goes in the bank and will be strategically used to fund initiatives like traceability or M&A M&A opportunities get the right opportunity comes along.
From time to time, the board will continue to evaluate our capital allocation strategy and may adjust the different levers whichever lever is more favorable to shareholders at that time.
John Merrill: Net income increased 11% to $2.8 million. Net income to common shareholders increased 12.4% to $2.6 million, and earnings per share increased 18% from $0.12 a share in 2022 to $0.14 per share for the six-month end of December 31, 2023. Turning now to cash flow and cash balances, total cash as of December 31, 2023 was $23.3 million compared to $24 million at the end of fiscal year 2023.
That's all I have today. Thanks, everyone for your time at this point I will pass the call over to Randy Randy.
Thanks, John.
Traceability opportunity is growing very very quickly certainly faster than we anticipated our decision to clear the decks and focus on a lot of world with traceability could mean for US was clearly the right decision.
We worked extremely hard over the past year to establish our position in the market to secure endorsements in collaboration with industry leaders and capture a foothold with major retailers and distributors. It's working to say the least we continue to be the only company actually doing traceability, while others are still only tau.
John Merrill: Total cash reflects that we are purchasing over 2.2 million common shares, redeeming 70,000 preferred shares in the quarter, paying off over $6 million in bank debt, and returning over $1.4 million to shareholders in the form of a cash dividend since inception. Fiscal year to date, we generated cash from operations of $2.5 million. In the second quarter, we repurchased approximately 22,000 common shares at an average price of $8.79 per share for a total of approximately $194,000. The company has approximately $8.3 million remaining on a $21 million total buyback authorization. During the same period, you purchased 70,000 preferred shares at a stated redemption price of $10.70 per share for a total of $750,000. The remaining amount of the preferred stock redemption is $8.2 million.
In about it.
Meanwhile, the overall opportunities expanding kroger the largest grocery chain in the U S recently announced to its supply chain that all suppliers just those impacted by Fizzler rule tool for that all food suppliers must comply with kroger's traceability framework boom.
This announcement dramatically changes everything because this will set the food safety bar for other retailers.
This is perhaps the most significant change in the history of the retail food industry.
And we are seriously center stage for it.
We're not doing traceability for Kroger per se, but we're helping kroger suppliers meet kroger's requirements.
As we have expected this statement by Kroger demonstrates that large retailers simply arent going to soar incoming deliveries trying to figure out which palette on which truck is impacted by rule tool for and which ones are not.
Labor is one of the biggest cost for these retailers, so adding more people to figure out which box has to be treated one way in which box has to be treated it another way.
John Merrill: As previously announced, the company anticipates redeeming all of the Preferred, Issued, and Outstanding shares over the next three years. We paid out our December 31 quarterly cash dividend on February 1, 2024. As previously announced, subsequent quarterly cash dividends will be paid within 45 days of the quarter's end on March 31, June 30, September 30, and December 31.
Makes no operational nor frankly financial sense. The idea is a nonstarter.
Instead, Kroger and soon others were convinced are mandating that their suppliers are going to trace everything streamlining the process down to one way to handle product as.
As we have believed for some time that will become the standard for the industry. Moreover.
John Merrill: Again, we will take half the annual cash generated from operations and return it to shareholders in the form of a dividend, buy back additional shares of common and preferred shares, or increase the dividend, whichever lever makes the most sense at that time. The other half goes into the bank and will be strategically used to fund initiatives like traceability or M&A opportunities if the right opportunity comes along. From time to time, the board will continue to evaluate our capital allocation strategy and may adjust the different levers, whichever lever is more favorable to shareholders at that time. That's all I have today.
<unk> is mandating this has to be done by June 30th 2025, a full six months ahead of the FDA deadline in short more and sooner.
So what we're doing in the traceability is no longer being driven by regulation alone, but more importantly by the market are far more powerful force retailers care much more about competitive threat and simply regulatory requirements right out of our playbook. So let's look at where we are.
First we said the industry would ultimately move more quickly than the FDA. The stampede is on horizon as I'm sure you've seen illustrated in our numerous press releases in the past few months.
The Kroger date lose the goalpost up rather than back that's really amazing.
Randall K. Fields: Thanks, everyone, for your time. At this point, I'll pass the call over to Randy. Okay, Randy?
Second.
We said that the industry likely needs more time, it's a requirements are technically challenging complex or require significant adjustments to how suppliers and retailers do logistics.
Randall K. Fields: Thanks, John. The traceability opportunity is growing very, very quickly, certainly faster than we anticipated. Our decision to clear the decks and focus on what a world with traceability could mean for us was clearly the right decision. We worked extremely hard over the past year to establish our position in the market, securing endorsements in collaboration with industry leaders and capturing a foothold with major retailers and distributors. It's working, to say the least.
The issue, though is no longer one of F. D. A relief, it's now a market driven problem.
Scope and pressure of market forces will be far far greater than the FDA compliance required.
Think about this.
When Kroger is the only retailer able to say, we'd trace everything we sell to you to ensure that safety.
Randall K. Fields: We continue to be the only company actually doing traceability, while others are still only talking about it. Meanwhile, the overall opportunity is expanding. Kroger, the largest grocery chain in the U.S., recently announced to its supply chain that all suppliers, not just those impacted by FSMA Rule 204, but all food suppliers, must comply with Kroger's traceability framework. Boom.
<unk>.
This will speed up rather than slow down.
Third we said the FDA mandate, which serve only as a starting point and ultimately traceability with impact.
Our largest segment of the industry.
Again, Kroger makes that point moved the bar is now set and trace it all will be the preferred way to do business that is exactly what we expected would happen and it's happening now not later.
As a result, I work with disabilities exploding. It is a monumental task that we have overcome before with our compliance business and we're ready to scale once again with traceability.
As you may recall, when we begin in the compliance business, we moved in the first year from 200 connected suppliers.
Randall K. Fields: This announcement dramatically changes everything because it will set the food safety bar for other retailers. This is perhaps the most significant change in the history of the retail food industry. And we are, seriously, at the center stage for it. We're not doing traceability for Kroger per se, but we're helping Kroger suppliers meet Kroger's requirements. As we have expected, this statement by Kroger demonstrates that large retailers simply aren't going to sort incoming deliveries trying to figure out which pallet on which truck is impacted by Rule 204 and which ones are not. Labor is one of the biggest costs for these retailers, so adding more people to figure out which box has to be treated one way and which box has to be treated another way makes no operational nor, frankly, financial sense. The idea is a non-starter.
Two year, two where we did 2500 in year, three where we did nearly 10000.
And today, we have over 100000 facilities in our compliance network.
The cadence for traceability is likely to be quite similar but the point is we've been there done that before in terms of scaling.
We now have hundreds of supplier facilities on board.
<unk> tracked traceability network, where our T N as we call it and a thousand more in the queue awaiting implementation.
Our current named customers have the potential to bring an additional 3000 or more supplier facilities into the Onboarding Q within the next six months.
And beyond that our pipeline of new wholesalers and retailers is very deep and very wide.
The recurring revenue from this is more than we anticipated at this point, but it is still just 3% to 4% of our revenue.
Randall K. Fields: Instead, Kroger, and soon others were convinced, are mandating that their suppliers are going to trace everything, streamlining the process down to one way to handle the product. As we have believed for some time, that will become the standard for the industry. Moreover, Kroger is mandating this has to be done by June 30th, 2025, a full six months ahead of the FDA deadline.
We have to do on the backend is significant and complex.
And in response, we are laser focused on the internal systems that we're going to need and I'm confident that the team is up to the task as I've said, we've done this before.
At this point the current traceability Q represents about $3.6 million in additional annual recurring revenue that will be booked sometime into next year.
Randall K. Fields: In short, more and sooner. So what we're doing in traceability is no longer being driven by regulation alone, but more importantly, by the market, a far more powerful force. Retailers care much more about competitive threats than simply regulatory requirements, right out of our playbook.
We expect revenues to accelerate and ultimately double our annual recurring revenue within the next two to three years.
Overall opportunity is significantly larger than we expected.
Barring something major in enforcing the next years looks to be very promising for a positive track and its shareholders by the way.
Randall K. Fields: So let's look at where we are. First, we said the industry would ultimately move more quickly than the FDA. The stampede is on the horizon, as I'm sure you've seen illustrated in our numerous press releases in the past few months. The Kroger date moves the goal post up rather than back. It's really amazing.
This might prove to be the biggest understatement of my career.
Keep in mind and to end traceability is not new for US The foundation for its been in our wheelhouse for many years. This is why we've gotten sexually while others are still talking about traceability with future is blockchain buzzwords, an absurd startup type technologies, along with their lethargic balance sheets Thursday cap.
Randall K. Fields: Second, we said that the industry likely needs more time as the requirements are technically challenging, complex, and require significant adjustments to how suppliers and retailers do logistics. The issue, though, is no longer one of FDA relief. It's now a market-driven problem. The scope and pressure of market forces will be far, far greater than FDA compliance requirements. Think about this. Kroger is the only retailer able to say that we trace everything we sell to you to ensure its safety. Ouch.
Little and little if any operating history in our space.
Each day that passes as additional suppliers signed into our network E. R T and extend its lead reinforcing and expanding the moats around our business.
One way to think about our lead is it no one else has done traceability, yet with any suppliers and where.
While at the same time at this moment, we're doing it with hundreds and thousands of facilities.
Dominant doesn't do justice actually to where we are.
Randall K. Fields: Others will speed up rather than slow down. Third, we said the FDA mandate would serve only as a starting point, and ultimately, traceability would impact a far larger segment of the industry. Again, Kroger makes that point moot.
We've been deep in the food supply chain for a long time, there's very little in terms of problems and issues that we haven't already dealt with.
We are unlike anyone else at the Boston Consulting group, let's say, we are way way down the experience curve.
Randall K. Fields: The bar is now set, and tracking it all will be the preferred way to do business. That is exactly what we expected would happen, and it's happening now, not later. As a result, our work traceability is exploding. It is a monumental task that we have overcome before with our compliance business, and we're ready to scale once again with traceability. As you may recall, when we began in the compliance business, we moved in the first year from 200 connected suppliers to year two where we did 2,500, and year three where we did nearly 10,000, and today we have over 100,000 facilities in our compliance network. The point is, we've been there and done that before in terms of scaling. We now have hundreds of supplier facilities on board our RepositTrack Traceability Network, or RTN, as we call it, and a thousand more in the queue awaiting implementation.
Others are simply at this point trying to get to the starting blocks.
It is though important to remember that most suppliers will end up with more than one system that they use and as a result, it's not a pure market share gain so in some sense a competitive threat isn't a real important consideration for us.
It's important for us to get essentially every supplier that exists potentially seriously more than 100000 facilities and that others may get many suppliers as well our business model was built under the assumption that suppliers will likely end up with more than one system at their supply chain requires it.
As you've seen in our numbers, we have and will continue to spend carefully on sales and marketing to support the Rts and we'll do whatever is necessary to stay in a customer centric position alright.
Randall K. Fields: Our current named customers have the potential to bring in an additional 3,000 or more supplier facilities into the onboarding queue within the next six months. And beyond that, our pipeline of new wholesalers and retailers is very deep and very wide. The recurring revenue from this is more than we anticipated at this point, but it's still just three to four percent of our revenue. The work we have to do on the back end is significant and complex, and in response, we're laser focused on the internal systems that we're going to need. I'm confident that the team is up to the task. As I've said, we've done this before. At this point, the current traceability Q represents about $3.6 million in additional annual recurring revenue that will be booked sometime in the next year.
Customer success has always been and continues to be priority one.
While we are laser focused on traceability, it's important to point out that our legacy compliance and supply chain businesses will continue to grow and generate increased cash flow.
The sustainability and predictability of our recurring revenue based business model is clear and very powerful.
Our annual recurring revenue hovers pretty close to two times, our fixed costs and simultaneously supports our return of capital to shareholders.
Despite our sunsetting of certain high touch low opportunity revenue over the past 24 months to.
To the tune of over a million dollars.
So far we've grown annual recurring revenue grown GAAP net income even more grown earnings per share even faster and expanded our cash generation.
Randall K. Fields: We expect revenues to accelerate and ultimately double our annual recurring revenue within the next two to three years. The overall opportunity is significantly larger than we expected. But barring something major and unforeseen, the next few years look to be very promising for Repositrak and its shareholders. By the way, this might prove to be the biggest understatement of my career.
So to summarize one well.
We will continue because we always have to take great care of our customers.
Competitive advantage. This brings to traceability is even greater than our advantage in other services.
Two.
We've built a consistent cash generation machine with multiple consecutive years GAAP profitability cash generation and frankly lots of return of capital to shareholders as I'm sure you know.
Randall K. Fields: Keep in mind, end-to-end traceability is not new for us; the foundation for it has been in our wheelhouse for many years. This is why we've gotten such a lead while others are still talking about traceability, with futurists and blockchain buzzwords and absurd startup-type technologies, along with their lethargic balance sheets, thirst for capital, and little, if any, operating history in our space. Each day that passes as additional suppliers sign onto our network, the RTN extends its lead, reinforcing and expanding the moats around our business. One way to think about our lead is that no one else has done traceability yet with any suppliers end-to-end, while at the same time, at this moment, we're doing it with hundreds and soon thousands of facilities. Dominant doesn't do justice, actually, to where we are.
We continued to deploy our capital allocation strategy buying back stock, both common and preferred paying the dividend and growing our cash as we did last year. The board will periodically review the capital allocation strategy adjusting the dividend and the other levers we have based on our cash generation earnings per share just since they.
But the dividend in November of 2023.
As our results grow we expect to increase the dividend at the same time continuing to add cash to the balance sheet further reinforcing our financial position.
We maintain a fortress balance sheet with more than $23 million of cash and no debt. Even after the last few years of buying back 2 million shares of common stock paying off 6 million of bank and other debt and redeeming the preferred and paying out a cash dividend I think it's safe to say, we have no need for more capital to be successful.
Randall K. Fields: We've been deep in the food supply chain for a long time, so there's very little in terms of problems and issues that we haven't already dealt with. We are, unlike anyone else that the Boston Consulting Group would say, way, way down the experience curve.
Randall K. Fields: Others are simply, at this point, trying to get to the starting blocks. It is, though, important to remember that most suppliers will end up with more than one system that they use, and as a result, it's not a pure market share gain. So, in some sense, a competitive threat isn't a really important consideration for us.
Stead will continue to focus on our customers as John and I have said before our business is efficient easy to model and we're positioned scale. We've done it before we're up to the task of doing it again.
The net financial result is simple.
Recurring revenue growth, even faster net income growth and faster yet EPS growth.
Randall K. Fields: It's important for us to get essentially every supplier that exists, potentially, seriously, more than 100,000 facilities, and that others may get many suppliers as well. Our business model was built under the assumption that suppliers will likely end up with more than one system that their supply chain requires. As you've seen in our numbers, we have and will continue to spend carefully on sales and marketing to support the RTN, and we'll do whatever's necessary to stay in our customer-centric position. Our customer success has always been, and continues to be, our priority one.
Meanwhile, increasing the dividend to shareholders, reducing recapitalization and driving cash so with that I'd like to open it up now for questions operator.
Thank you Jessie we'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be next.
Sorry to pick up your handset before pressing the star keys.
Our first question is from Thomas Forte.
Randall K. Fields: While we are laser focused on traceability, it's important to point out that our legacy compliance and supply chain businesses will continue to grow and generate increased cash flow. The sustainability and predictability of our recurring revenue-based business model is clear and very powerful. Our annual recurring revenue hovers pretty close to two times our fixed costs and simultaneously supports our return of capital to shareholders, despite our sunsetting of certain high-touch, low-opportunity revenue over the past 24 months, to the tune of over a million dollars a year so far. We've grown annual recurring revenue, grown gap net income even more, grown earnings per share even faster, and expanded our cash generation. So, to summarize, one... we will continue, as we always have, to take great care of our customers. The competitive advantage this brings to traceability is even greater than our advantage in other services.
Investor. Please proceed.
Great. Thanks, So Randy and John Congrats on the quarter I have four questions.
They go one at a time and my group the last two.
You talked about this at length.
Just hoping you could maybe simplify and clarify are you getting faster onboarding.
The rate of improvement the linear going forward is there something you can do that will result in a step function improvement in the rate.
The answer is.
Definitely getting faster.
Markedly faster and nowhere near where we need to be.
So we have probably the best minds in the company and focused on.
A nation education strategies to speed up the process.
So we're hoping that a year from now or Onboarding is going at roughly 10 X where we are today, maybe even more.
We've done that before this is a slightly different kind of problem that a little bit more data that has to move than what we were doing our compliance work but.
Randall K. Fields: Two, we've built a consistent cash generation machine with multiple consecutive years of gap profitability, cash generation, and, frankly, lots of return of capital to shareholders, as I'm sure you know. We continue to deploy our capital allocation strategy, buying back stock, both common and preferred, paying a dividend, and growing our cash. As we did last year, the board will periodically review the capital allocation strategy, adjusting the dividend and the other levers we have based on our cash generation and earnings per share, just as they did with the dividend in November of 2023.
We're really really really good at this so I'll be surprised if a year from now the onboarding rate isn't up by 10.
The factor of 10 from where we are today.
Alright, well that was a great answer Andy So maybe I can just throw away the rest of my questions right. So.
And the efforts to upgrade the customer set is that a permanent initiatives or is there a definitive timeframe, where you go through the process and you're done in which case how far along are you.
Well from where we originally set out about two years ago in terms of winnowing out high touch low margin not much upside opportunity, we're pretty much done it will have a significant impact perhaps another few percent but ah.
Randall K. Fields: As our results grow, we expect to increase the dividend, the same time continuing to add cash to the balance sheet, further reinforcing our financial position. We maintain a fortress balance sheet with more than 23 million of cash and no debt even after the last few years of buying back 2 million shares of common stock Paying off 6 million bank and other debt and redeeming preferred and paying out a cash dividend I think it's safe to say we have no need for more capital to be successful Instead we'll continue to focus on our customers As John and I have said before our business is efficient easy to model and we're positioned to scale We've done it before we're up to the task of doing it again The net financial result is simple faster recurring revenue growth even faster net income growth and faster yet EPS growth Meanwhile increasing the dividend to shareholders reducing our capitalization and driving cash So with that I'd like to open it up now for questions operator, Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Given the acceleration that we're seeing candidly in our work.
Work around the issue of traceability.
It will it will not have will not have the kind of impact that one would be concerned about.
So.
As contracts come up that we just don't think have the opportunity will probably.
Continue to window those out but it will not be significant it's mostly behind us is probably 80% behind US now that's just off the top of my head guests.
And it was really strategic as we saw traceability. If you think about what we did we saw the opportunity and traceability, we realize that it would become a food.
Centric kind of opportunity for us. So we looked at lots of things that we were doing not.
Frankly based on food and that's for the most part what we've eliminated.
So it was a lucky decision I think it's fair to say, but.
It's been very impactful.
I think we mentioned in previous conference call that we needed the time to focus people.
On the opportunity on how to onboard the suppliers.
And I think as we mentioned that we're right in the middle of it now.
Operator: You may press star 2 if you 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 star 2. Our first question is from Thomas Forte, and the private investor. Please proceed. Great, thanks. So, Randy and John, congratulations on the quarter. I have four questions. I'll mostly go one at a time, but I might group the last two.
Had we not done this I don't think we'd stand a chance of speeding up the way we are.
With the way we expect so it was a it was a good call maybe a lucky call, but its certainly a good one.
This one sort of piggyback on your comments on food, but it also.
No.
<unk> is a little so I'll go in two parts.
So can you give your current thoughts on expanding into new or adjacent markets such as Q S. Ours. So that'd be food related and then health care, that's not food related but compliance related.
Thomas Ferris Forte: So, you talked about this at length. I was just hoping you could maybe simplify and clarify. Are you getting faster at onboarding? Will the rate of improvement be linear going forward? Or is there something you can do to have a result of a step function improvement in the rate?
Okay I think.
The first thing to realize is.
That when we thought about rule 204, and this was an error, we made and looking into the future.
Rule tool for from the F. D. A covers oh call it 5% to 7%.
Randall K. Fields: um, The answer is... definitely getting faster, markedly faster, and nowhere near where we need to be. So we have probably the best minds in the company focused on. Automation Education Strategies to Speed Up the Process.
Of the food products that go through a supermarket keep that number in mind, 5% to 7%.
What just happened is the industry said, we're going to go from 5% to 7% to 100%.
Randall K. Fields: So we're hoping that a year from now, our onboarding is going at roughly 10x where we are, maybe even faster. As I say, we've done that before. This is a slightly different kind of problem.
So you can work the numbers out its between 15 and 20 time expansion of the size of the opportunity and frankly, a more difficult part of the opportunity because most of the participants.
Thomas Ferris Forte: There's a little bit more data that has to move, doing our compliance. But we're really, really, really good at this. So I'll be surprised if a year from now, the onboarding rate isn't up by at least a factor of 10 from where we are today. All right, well, that was a great answer, Randy. So maybe I should just throw away the rest of my questions.
That are going to have to do traceability had never thought of it.
I hadn't considered it because they were exempt from the rule, but they weren't part of it and now they're part of the competitive aspect of doing traceability.
Just in the grocery space the opportunity is more than one order of magnitude larger than we guessed.
Randall K. Fields: All right, so on the efforts to upgrade the customer set, is that a permanent initiative or is there a definitive time frame where you go through the process, and you're done? In which case, how far along are you? Well, from where we originally set out about two years ago in terms of winnowing out, high touch, low margin, not much upside opportunity, we're pretty much done. It won't have a significant impact, perhaps another few percent. But given the acceleration that we're seeing candidly in our work around the issue of traceability, it will not have the kind of impact that one... so as contracts come up that we just don't think have the opportunity, continue to win, will not, most, of Austin. It was really strategic.
That means that our appetite for.
Other vertical markets is shrinking.
On the other hand, most of the suppliers that we work with in a retail food if you will in the grocery space.
We also do work in each of those other vertical markets.
So we may not be end to end and in the <unk> and other spaces.
We will be end to end in grocery, but we may be.
From end to middle in terms of the other segments of places where food.
Is consumed so it's not a missed opportunity. It's the one that we're in just grew by 10 times made me more effected certainly more than 10 times.
Randall K. Fields: As we saw traceability, if you think about what we do, we saw the opportunity in traceability. We realized that it would become a food-centric kind of opportunity for us. So we looked at lots of things that we were doing not, frankly, based on. And that's, for the most part, what we do. So it was a lucky decision.
Alright, and then I wanted to make this distinct from the last question. So.
And this is more a reflection of the the potential companies you could acquire.
And then given the health of the.
Our economy.
Right.
Inability to raise capital et cetera et cetera. So can you lastly can you give your current thoughts on M&A opportunities.
Randall K. Fields: I think it's fair to say so, but. It's been very impactful. I think we mentioned in one previous conference call that we needed the time to focus on the opportunity to onboard the supplier, and I think, as we mentioned that, we're right in the middle of it. Had we not done this, I don't think we'd stand a chance of speeding up, http://TheBusinessProfessor.com sure. This one sort of piggybacks on your comments on food, but it also, you know, diverges a little.
Well I think for us not much has changed if the right opportunity presents itself it could be somebody who has.
What we might be looking for in terms of our customer set in an adjacent space that wouldn't wouldn't distract our management team significantly.
That would be interesting and opportunistic for us.
Randall K. Fields: So, I'll go two parts. Can you give your current thoughts on expanding into new or adjacent markets such as QSRs, so that'd be food-related, and then healthcare, not food-related, but compliance-related? Okay, I think the first thing to realize is that when we thought about Rule 204, and this was an error we made in looking into the future. Rule 204 from the FDA covers, I'll call it, five to seven percent of the food products that go through a soup.
But.
I mean, we're seeing things all the time now around some.
Bozo, who has some great idea for traceability, a widget that's connected to the block chain that attaches to a spacex rocket that kind of stuff.
That are now running out of money none of that is of interest to us.
So conceptually.
We do have a tiger by the tail, we we said something maybe it wasn't clear in both Johns and Randy's remarks.
Randall K. Fields: Keep that number in mind. What just happened. The industry said we're going to go from 5-7% to 100%. So you can work the numbers out. It's between a 15 and 20 times expansion of the size of the opportunity and, frankly, a more difficult part of the opportunity because most of the participants that are going to have to do traceability hadn't even thought about it. They hadn't considered it because they were exempt from the rule; they weren't part of it.
They did is perfectly reasonable in the next two to three years.
Topline revenue of the company will double we will go from being a $20 million of your company to $40 million two to three years.
That's a lot it requires incredible customer focus.
Requires equally a huge amount of automation of what we're doing so.
So we have plenty on our plate, but our best and brightest star literally day by day working on how do we do this at a much higher level of scale. So it's going to be an exciting time and.
Randall K. Fields: And now they're part of the competitive aspect of doing traceability. So just in the grocery space, the opportunity is more than one order of magnitude larger than wheat. That means that our appetite for other vertical markets is shrinking. On the other hand, most of the suppliers that we work with in retail food, if you will, in the grocery also do work in each of those other verticals. So we may not be end-to-end in the QSR and other spaces. We will be end-to-end in grocery, but we may be from end to middle in terms of the other segments. There are places where food is served, so it's not a missed opportunity.
Hopefully the investors in the company.
See what we're doing and feel good about it it is a huge opportunity much greater than we expected.
I mean seriously it's tenex, what we would've imagined at least Tonight.
That's very exciting.
Thanks for taking all my questions.
Thanks, Tom.
Thanks, Tom.
I would like to turn the call back over to Randy for closing comments.
Okay, well, that's the end of our second quarter call. We appreciate you all taking time to listen to us.
If if you sense that we've never been quite as excited about what lies ahead and and what has to get done. It is a that's a true assessment the.
Randall K. Fields: It's that the one that we're in just grew by 10%, maybe more. It's a fact, certainly. All right, and then I wanted to make this distinct from the last question. So, this is more a reflection of the potential companies you'd acquire, and then given the health of the economy, interest rates, and inability to raise capital, et cetera, et cetera. So, can you, lastly, can you give your current thoughts on M&A opportunities? Well, I think for us, not much has changed. If the right opportunity presents itself, it could be somebody who has what we might be looking for in terms of a customer set in an adjacent space that wouldn't, wouldn't distract our management team significantly. That would be interesting and opportunistic, but, I mean, we're seeing things all the time now around some.
The opportunity is enormous.
The amount of work that it will take and creativity and innovation are part is equally enormous.
But I wasn't kidding, when I said, we're up to the task. So thanks for your support.
And have a good rest of the afternoon. Thank you.
Okay.
To conclude today's conference you may disconnect your lines at this time and thank you for your participation.
Okay.
[music].
Okay.
[music].
Randall K. Fields: Bozo, who has some great ideas for traceability, a widget that's connected to the blockchain that attaches to a SpaceX rocket, that kind of stuff, uh... they're now running out of money, none of that, So conceptually, we do have a tiger by the tail. We said something, maybe it wasn't clear in both John's and Randy's remarks, that it is perfectly reasonable that in the next two to three years, top-line revenue of the company will double. We will go from being a 20 million dollar a year company to 40. 2 to 3.
Yes.
[music].
Yeah.
Randall K. Fields: That's a lot. It requires incredible customers, and equally requires a huge amount of automation of what we're doing. So we have plenty on our plate.
Okay.
Okay.
[music].
Thomas Ferris Forte: Our best and brightest are literally, day by day, working on how we can do this. So it's going to be an exciting, hope, to see what we're doing, and others. Thank you. That's very exciting.
Okay.
Yeah.
[music].
Randall K. Fields: So thank you for taking all my questions. Thanks, Tom. I would like to turn the call back over to Randy for closing.
Randall K. Fields: Okay, well, that's the end of our second quarter call. We appreciate you all taking the time to listen to us. If you sense that we've never been quite as excited about what lies ahead and what has to get done, that's a true assessment. The opportunity is enormous. The amount of work that it will take and creativity and innovation on our part are equally important. But I wasn't kidding when I said we were up to the task.
Uh huh.
Yes.
[music].
Okay.
[music].
Operator: So thanks for your support, and have a good rest of the afternoon. Thanks. Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation. © BF-WATCH TV 2021, ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?