Q4 2019 Earnings Call
Greetings welcome to the Park City group fiscal fourth quarter and year end 2019 earnings conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation. If anyone should require operators to turn the conference. Please press star zero under telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Rob I think.
With Sankay IR Mr. Fink, you may begin.
Thank you operator, and good afternoon, everyone. Thank you for joining us today for park city groups fiscal fourth quarter and full year 2019 earnings conference call.
Hosting the call today are Mr., Randy Fields Park City group, CEO , and Chairman and John Merrell Park City groups CFO .
Before we begin I would like to remind everyone that this call could contain forward looking statements about park city group within the meaning of the private Securities litigation reform that 995.
Forward looking statements are statements that are not subject to historical facts.
Such forward looking statements are based on current beliefs and expectations and are subject to risks and uncertainties, which could cause actual results to differ materially from forward looking statements.
Such risks are fully disclosed in the Companys filings with the security 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 close today the company issued a press release overview and financial results that it will discuss on today's call.
Investors can visit the Investor Relations section of the company's website Park City group Dot Com to access this news release.
With all that said I'd now like to turn the call over to John John The call is yours.
Thanks, Rob as many of you know I served as the CFO of Park City group from 2006 to 2010 I rejoined the company in May of 2008, as the senior Vice President of Finance to drive several strategic initiatives and was later appointed to CFO in May of this year.
I'm truly excited to be back with PCG in Repositrak.
I believe the company has come a long way in 10 years back then we started to build a network limited resources.
We had opportunity, but less financial strength. My days, then were spent convincing prospects and customers. We will be here. This is not the case today, the company's balance sheet and financial position today is the strongest it has ever been.
Park City group had a simple story get retailers and their suppliers compliant give them visibility to actionable information through our supply chain solutions.
And allow the customers to source vet and transact business through marketplace, then repeat grow the network and generate cash.
We service the largest industry sector of the economy, we have a blue growing blue chip customer base, we leverage over a regulatory environment that is increasingly complex with no end in sight.
And we serve as an industry were high volume low margin customers are facing increasing competition and need help to reduce risk improve efficiencies and remain competitive therein lies our sweet spot like Randy I believe the true measure of a successful business is its earnings power and ability to generate cash flow.
With that I would like to now review the financial results for the quarter and the full year of fiscal 2019.
[noise] fiscal fourth quarter revenue was 4.7 million down from 6.3 million in the same quarter in 2018.
The quarter over quarter comparison includes 1.5 million a nonrecurring sales that occurred in Q4 of 2018 that did not occur in the same period of 2019, Randy and I will discuss this in detail on today's call. However, our focus is on growing recurring revenue and placing less emphasis on nonrecurring revenue where it is avoidable obviously the long look the lifetime value of a subscription customers far more valuable to a SaaS company and our shareholders. The nonrecurring transactional revenue, but it comes with the quarterly impact.
There will always be some percentage of our customers that will buy versus rent. Therefore, if it makes sense. The company may do a license if the customer demands it.
In our view, 33% of something today is worth more than 100% of nothing over traditional subscription term.
For fiscal 2019 annual revenues were 21.2 million compared to 22 million for the year ended June 32018.
A 4% decrease.
This $800000 decrease in total annual revenue was driven by lower nonrecurring revenue, which decreased 5% from 8 million in the fiscal year ended June 32018 to 6 million in the fiscal year ended June 32019.
The decrease in nonrecurring revenue was partially offset by growth in recurring revenue.
Total recurring revenue increased 5% year over year total recurring revenue increase from 64% of total revenue to 70% of total revenue fiscal 2018 to fiscal 2019, respectively.
As previously stated our goal is to drive recurring revenue as a percentage of total revenue to 80% or more.
However, we will always have customers that demand to buy meaning license versus rent meaning subscription.
Switching to operating expenses.
For fourth quarter fiscal year 2019, total operating expenses declined from 5 million in Q4 2018 to 4.4 million in the same period in 2019.
This 12% decrease in total operating expenses for the quarter or $600000 is largely the result of lower expenses across the board.
Lower Q4 expenses and cost of services and product support were due to lower marketplace.
Lower quarterly sales and marketing expenses were due to generally lower sales across all categories.
Lower Gionee cost were the result of cheaper rent and the Companys headquarters lower professional fees for accounting and legal lower stock compensation expense and other general and administrative costs.
For the fiscal year, ending June 32019, total operating expenses were down 7% from 18.5 million in fiscal 2018 to 17.2 million in the same period in fiscal 2019.
Let's look at the annual expense numbers and a little bit more detail cost of services and product support for fiscal year 2019 costs of services and product support was 5.8 million for fiscal 2019 compared to $6.6 million in fiscal 2018 again the year over year decrease was primarily the result of lower marketplace costs.
Sales and marketing for fiscal year, 2019 sales and marketing expense decreased 6% to $6 million compared to 6.4 million in fiscal 2018.
This deal this decrease in sales and marketing is due to decreases in sales calls in nearly every area.
GNS.
For fiscal year, 2019, general and administrative expenses was 4.7 million down 3% from $4.9 million in fiscal 2018.
This year over year decrease in general and administrative expense for the full year was primarily due to lower rent and cam charges for the company's new headquarters lower professional fees and an overall decrease in stock compensation expense due to certain stock grants that have fully vested.
Depreciation and amortization.
Depreciation and amortization expense was 601000 for fiscal year 2019 down 5% from 634000 in fiscal 2018.
The decrease in DNA is due to certain hardware another property and equipment that was fully depreciated.
The company spent 1.5 million and leasehold improvements in computer hardware in fiscal 2019.
This was the result of relocating the company's headquarters to a more cost effective cost effective location and upgrading equipment in our data center.
It should be noted that depreciation subsequent periods will increase due to the depreciation of the capital expenditures made during fiscal 2019.
Historically, our annual Capex has trended in the $500000 per year range in fiscal 2020, we expect capex to return to this level and even with the higher levels of investments in fiscal 2019, we still on average maintain this targeted level.
Turning now to net income for the fourth quarter of fiscal 2019, we generated net income to common shareholders of $36000 or zero cents per diluted share compared to 1.1 million or six cents per diluted share in the year ago quarter.
The decrease in net income to common shareholders was the result of lower nonrecurring revenues offset to a lesser degree by lower operating expenses and recognizing a loss on extinguishment of an interest in it investment for certain equipment.
For the full year of fiscal 2019, we generated net income to common shareholders of $3.3 million or 16 cents per diluted share, which was up 16% from $2.8 million or 14 cents per diluted share in fiscal 2018.
Turning now to cash flow and cash balances.
For fiscal year 2019 cash flow from operations was 4.6 million compared to 2.2 million in the prior fiscal year, a 110% improvement.
After capital investments of 1.5 million in fiscal 2019 for leasehold improvements for new corporate facility and upgrading our datacenter total cash at the end of the fiscal 2019 was 18.6 million when compared to $14.9 million in the same period in 2018.
I want to point out that the 18.6 million cash balance also reflects the nearly 500000 common stock we purchased under the stock buyback plan.
87600 shares were purchased at an average price of $5.47 per share in May and June of 2019.
The total amount remaining under the buyback plan for purchase and retirement of common shares is $3.5 million over the next seven quarters.
To clarify the company does not hold any treasury stock, meaning the purpose of the buyback plan is to purchase shares in the open market and subsequently required retire them from issuance, hence reducing the number of common shares outstanding.
Moving forward as cash generation increases the board will strategically review its capital allocation strategy to evaluate the best.
Best use of capital between strengthening balance sheet buying back common shares under our retiring the preferred stock.
I want to point out of the total amount of actual common shares outstanding as of June 32019 was 19.793 million shares.
This is down sequentially from 19.871 million common shares at March 31, 2019.
The decrease reflects shares purchased under the buyback net of those shares issued during the period.
Due to the mathematical calculation of weighted average shares for EPS purposes, and not the actual number of shares readers of the financial state financial statements should recognize there is a delay for actual shares and weighted average shares to converge.
On a final note on cash and cash flow generation.
We generated 3.7 million in additional cash during fiscal 2019 and as a result, we now have over 18.6 million and total cash net of the stock buyback.
Remember balance sheet strength is important to our customers. Therefore, we expect to continue to grow our cash balances through recurring revenue, a well controlled cost structure maximizing profitability and generating value for our customers and shareholders I will now pass the call over to Randy.
Thanks, John the transitioning to the finance team under John's leadership has been smooth and I'm excited to have him with US again, so a little bit about the year end review.
In fiscal 2019, our strategic priorities were to expand our recurring earning power increase our cash flow from operations and continued to improve our margins. We accomplished all three and ended the year with our strongest balance sheet doubled our previous highest cash flow year and delivered the best margins in our company's history.
We did this by the way, while making significant investments in marketplace and temporarily sacrificing our topline growth by reducing non recurring revenue by $2 million.
With that we once again strengthened our platform to better scale. The company for the significant growth that we see ahead of us.
During the year, we made significant operational progress in each of the three revenue streams, we drove a 13% increase in the size of our total network to more than 340000 total connections position is for even more growth in the future.
Our compliance network incidentally increased by more than 40% to nearly 90000 facility level connections for reference sake remember just a few years ago. We had 200, it's important to keep in mind that the real mission that the business is to scale. The network until we touch and connect everyone in the supply chain of US food and then replicate that model abroad.
As you know the economic value of each connection varies as a function of the service offered.
Over the course of the last few years, we've doubled the size of the network and the company's revenue as a result. This may also actually help you to understand why the financial results in any given quarter very frankly, depending on what type of connections we focused on in that particular quarter.
Over the next few years as we continued to drive the scale of our network from where we are today, we can see our way quite quickly to 500000 total connections and then onto a million.
The growth in the scale of our network has obviously been the driver of our profitability and has generated the cash flow that we needed to build out the full platform.
Our buildout is deliberately sequential and we focus on one of three applications. The time, so as to reduce the risk of customer confusion and dependency on outside capital and it's inevitable dilution we're financing each stage of the platform build out with cash generated from the previous components, even when building. This out we're one of the most profitable companies of our size in the entire public universe, we're very proud of that fact.
This year, we have been preparing to drive the scope of what we do across our network with a priority and focus on recurring revenue opportunities.
We have reduced our nonrecurring revenues by 25% from our prior year and we are hopeful that over the next couple of years, our core business recurring revenue will grow to about 80% of total a much higher revenue and up from the mid Sixtys two years ago, and 70% last year. The strategy frankly is simple reduce nonrecurring revenues in dollars at the same time, we accelerate the growth of recurring revenue. This transition, though is not without a bit of pain, but it's important for us to maximize predictable profitability of the business going forward, it's nearly impossible mathematically to overcome nonrecurring revenue reductions over the very short term, we understand that well we've done it before.
If marketplace is successful it will tend to drive our nonrecurring revenue up due to large seasonal orders. That's why it's important that our current SaaS revenue be recurring as much as possible and as quickly as we can.
This is also why we have lower revenues in the quarter and the year. The NAFTA simple just to overcome the 2 million in non recurring revenue, we would need seven to 8 million of new contracted recurring revenue added in a single year in on the first day of that fiscal year, not easy to say at least.
I'd like to review the marketing changes and progress Weve made over the past few months with our tier two initiative.
Obviously, I'm going to talk about compliance and where our current focus is and the focus is on what we call tier two hubs.
First it's important to note that we believe there are 500000 to a million possible entities worldwide in the global food supply chain and therefore millions of possible connections as we said from the beginning of our compliance management initiative. Our goal is to connect them all.
To do that let's dive deeper and deeper into the supply chain from retailers and their suppliers, where we've been at this 0.2 suppliers of the suppliers and then on to the suppliers of the suppliers suppliers and so on and so forth.
Last year, we laid the groundwork for this initiative.
We've hired key people, including the former CEO of another player in this space to drive our effort.
The wins have been accelerating dramatically in fact that began in the last quarter of 2019, we never like for ambition and our ambition. This year is to add 300% more tier two hubs that we started the year with the growth of the tier two hubs even at this astounding rate will not be a huge revenue producer this year because of our subscription accounting is done but if we're successful we will add nearly 15000 more customers to our network of over 23000 customers keep in mind every new customer becomes an up sell candidate.
The opportunity is a mess.
The task of signing them all up is daunting, but we want the mall the immensity of the size of this pyramid is one that we intend to approach and approach. It very successfully interestingly our targets are now exclusively our existing customers.
Our current customers I don't have to tell you. What this means in terms of our long term ability to upgrade them overwhelmingly they love us seriously. They really appreciate what we do for them. So now we are focused on marketing and sales to the current customer base tens of thousands of suppliers and the goal is to almost doubled the number of suppliers not connections in our pond as we call. It over the next couple of years.
Doubling the size of the pond means that at a constant win rate you doubled the new revenue from tier two customers on each round, we have strategically structured we revised our pricing model to be very very low to simplify the sales process and shorten the sales cycle, we need lots of them to build a large stream of recurring revenue, but we're gaining traction and I'm very confident we're on the right track I expect to add as many new hubs. This quarter as we did all of last year, it's working.
Okay on the marketplace.
As we've said before marketplaces potentially the most significant product launch in the company's history.
It is that because of its ability to increase the scope of our engagement revenue per customer.
Across the scale of our network with very little additional touch our first use case for marketplace with sourcing products for retailers in noncore categories. It was conceived and was executed by one of our largest customers not only work the customer loves it and continues to use it were close we believe to adding a second customer for this you can use case fingers crossed no guarantees.
Our second use cases sourcing products to retailers within existing supplier runs out of that product. An example of that success from disability is a customer began with one small emergency order last year. Our success led to acting as a source for the entire buy for that product. This year and now we're working with the wholesaler to that retailer sourcing the same product brilliant execution almost always wins.
Earlier this year, we launched what we believe is the most important use case, what we call similar supplier.
Similar supplier enables a retailer and wholesaler to use marketplace to search for replacement vendors from our entire database of compliance suppliers.
And the last eight months Weve gone from a few hundred to nearly 28000 category participant huge huge effort on our part and now the industry is beginning to see the value in the database. They are taking note.
Ultimately remember we are a company, whose intrinsic value is the scale of its network and the ability to monetize its data.
On the supply chain.
In supply chain. We can do you can you just see industry dynamics driving higher interest and are applications, specifically for our scan based trading in or out of stock management.
We believe in fact, its supply chain could be our standout performer in fiscal 2020.
As online competitors like Amazon expand home delivery out of stocks have taken on a critical importance for food retailers not just for their lost sales, but more importantly.
By virtue of the fact that their customer loyalty is eroded when they don't have a product on the shelf.
Repositrak scan based trading give suppliers visibility to point of sale transactions. So they can replenish store inventory more accurately reducing out of stocks and frankly returns.
Up until this point only large grocers have had visibility into out of stocks and the ability to do scan based trading even day, frankly, didnt do it very well.
Our effective does it reducing out of stocks exceeds even randy's expectations were seen 80% of the suppliers reducing out of stocks significantly in less than their first month views. This as a potential game changer. This will expand our footprint substantially within our existing customers.
Historically, we focused our larger retailers for our supply chain work now we are empowering smaller retailers will discuss same scan based trading tool is the big guys. So they can be more competitive and going after grocery dollars.
Recently as you probably saw we signed a partnership with associated wholesale grocers eight WG is the largest co-operative food wholesaler to independently owned supermarkets and has 3800 stores and its network over the next few years, the WG collaboration could well become our largest single supply chain account and by the way. It was a great cross selling to win remember we began with them with our compliance management capabilities. So let me silver price. We are unique in our ability to help buyers source that didnt transact efficiently with a new supplier, we have a mode around our business led to build out the scale and the scope of our network of buyers and suppliers in this strategic and underline underscore deliberate manner that lets us maximize each component, while generating exceptional profit and cash flow.
Now for my perspective to judge our progress in 2020 I would have you look at the following first we will execute on our tier two initiative in fiscal 2020, we have a goal to increase the number of tier two hubs using repositrak by 300% or nearly 200 additional tier two hubs.
Second.
As fiscal 2020 develops much of our emphasis will be on expanding our footprint with our current customers.
70% of our recurring revenue growth. This year, we believe will come from our existing customers, which is obviously testimony to the importance of our devotion to our customer success. It's important to note that our company could double in size over the next few years by expanding our existing customers use of the same services. They currently have we will.
Focus on doing just that we will be building on our maniacal devotion to our customers. It is paying off third we will introduce new monetization models for the marketplace by the end of 2020, we will have evaluated various monetization models and we'll have a clear path forward for how we generate profitable revenue underscore profitable revenue from all the use cases, we support as an example, we've just introduced Repositrak certified a program that should help suppliers standout with their retail customers for us.
We will shortly conclude our first major win in the UK and this will be the year in which we establish our presence there to a much greater degree we'll have an announcement, we hold about that before too long.
And finally, we will be growing our recurring revenue as a percentage of total revenue.
But we will continue to grow our bottom line and cash generation capabilities. As we said in fiscal 19 the percent of recurring revenues increased to 70% up from the mid Sixtys two years ago, but our goal is to get it into the eightys.
This profitability is strengthening our balance sheet, which is a critical concern for our customers and enabling us to continue to buy back shares without additional borrowing or impairing our growing cash balance.
Very soon we'll be in a place where our need to increase the cash balance will diminish.
So.
This strategic and deliberate execution of our strategy will expand both the scale and the scope of our network of customers Reaccelerate revenue growth. This year, all the while generating growing profitability cash flow and cash and in turn we believe this will enhance shareholder value.
To be clear, while we are acutely focused on our earnings power and cash generation. We expect fiscal 2020 will once again be a year of topline growth so with that let's open the call to questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone. When can your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey one moment. Please while we poll for questions.
Our first question is from Thomas Forte D.A. Davidson. Please proceed with your question.
Great two questions first.
Who do you see today is your primary competition for your three main offering and how has that changed at all during the last fiscal year and then second when we think about your marketplace efforts and we think about your ability we're talking about potentially adding a second customer for the use case on the purchasing the products that aren't in there.
Existing supply chain so to speak how should we think about your I guess go to market strategy for marketplace for additional use cases beyond that core customer.
Okay. So.
Tom. Thank you I think the first question was in general how do we see as competitors.
Does that.
That right and has that changed over the last fiscal year end.
It actually hasn't.
Our primary do we have two primary competitors. The first is what we call roll your own meaning a retailer largely because the CIO tells the CEO . He will say Oh I can do this we don't need anybody that's our primary competitors are what we call a roll your own strategy and the other is inaction, meaning a retailer could reasonably say to US you know I've got a bunch of issues I'm dealing with I'm fighting some fires I like what you're doing I can't do it now.
So to a certain extent our problem is one of getting people to pay attention today to a problem that we can resolve the roll your own thing we've dealt with over many years and it tends to go away, meaning because we are a specialist at what we do.
And because we handle the support because we handle the programming et cetera. There are no retailers that want to run the help desk for their vendors. For example, so ultimately we've had the experience we're very large retailers one point did what we do in their minds turn it back over to us So really in the sense you could say our competitor is our potential customer.
Okay second question on the use case.
Again, I want to say that its speculative to assume that we will get the second user.
But the second use or is going to use us as a platform and interestingly will bring its own vendors to the platform and it will be if you will a private label use of our technology much. It's in a similar sense to our largest customer who is doing this but they would be paying in fact, a recurring annual fee. If they proceed with us so that same technology different way of charging slightly different use case.
Again, we think that has pretty interesting opportunities beyond the one that we're looking at.
To say a little bit more about marketplace.
I continue to feel better and better about it we're looking at a pipeline that is.
Pretty extraordinary I'm skeptical is as you know about this particular area of work for us So I can't imagine that all this pipeline materializes.
My goal is that by the end of the year, we will have sorted this out in either marketplace will drop out of the platform and just become an add on to our compliance management capability.
Where it is sorely needed or.
It will become the Standalone product at all let us think that it could be so, but I'm feeling more it feels more likely that its that case, the optimistic case than the pessimistic case.
Something we shouldn't overlook and maybe Mike since.
Didn't say it strongly enough.
There was an extraordinarily high level of interest in our supply chain activity.
We will see a strong growth rates in annual recurring revenue in that domain. This year.
We think.
The surprise the surprise growth this year will be coming from supply chain. It's the interest is extraordinary.
And the other question I thought if I may one quick.
One quick follow on question. So when you talk about your neck customer will be an existing customer adding another service.
Was that also in reference to the marketplace.
To your other service.
Both let me im going up and again I apologize because sometimes they use a lot of words and that doesn't make it clearer.
We have a huge opportunity with our existing customers with existing products, meaning we're not.
We don't occupy a 100% of the Tam with each customer for the product that they've bought.
Some have three four or 500% growth potentials in revenue with a full penetration.
At the same time same time.
We have opportunities for cross selling the customers to other product areas I mentioned.
In the case of A.W.G., they started out as a compliance customer.
And honestly it built confidence they knew that we are a company that takes care of its customers that have it says it's going to perform does perform.
So that gave us a leg up when we went to them with our supply chain activity. So in other words, we believe.
The missing ingredient in the universe of technology vendors its technology vendors that you can trust.
Five years ago don't hold me to the exact number this company had around 600 named customers 600.
Today, we have 23000.
Named customers.
I suggested if our tier two initiative is successful and certainly we believe it will be.
We'll be somewhere mid Thirtys, 30000, or 40000 named customers well.
Each one of those if we continue with our nickel devotion to taking care of them, which we do not only does our loss rate go stay at absurdly low levels, but our ability to upsell and cross sell gets better and better so.
We feel very good about the cross selling opportunities and the expansion opportunities of the same product.
To our existing customers both of those.
Thank you Randy Thank you John .
You bet.
We have reached the end of the question answer session and I will now turn the call back over to Randy fields for closing remarks.
Okay. Thank you appreciate your all taking the time to hear about our quarter and the year and we are as optimistic as we've ever been about our prospects again, our focus obviously is going to be on the recurring revenue and I think all of us will be very pleased with how this year turns out so thanks for taking the time bye.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.