Park City Group, Inc. (NASDAQ:PCYG) Q4 2019 Results Earnings Conference Call September 12, 2019 4:15 PM ET
Rob Fink - IR, FNK
Randy Fields - Chairman and CEO
John Merrill - CFO
Conference Call Participants
Thomas Forte - D. A. Davidson
Greetings, welcome to the Park City Group Fiscal Fourth Quarter and Year End 2019 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Rob Fink with FNK IR. Mr. Fink, you may begin.
Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group's fiscal fourth quarter and full year 2019 earnings conference call. Hosting the call today are Mr. Randy Fields, Park City Group's CEO and Chairman; and John Merrill, Park City Group's CFO.
Before we begin, I would like to remind everyone that this call could contain forward-looking statements about Park City Group within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are 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 statement.
Such risks are fully disclosed in the company's filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risk. 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 overviewing the financial results that it will discuss on today's call. Investors can visit the Investor Relations section of the company's website parkcitygroup.com to access this news release.
With all that said, I now like to turn the call over to John. John, the call is yours.
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 2018 [ph] as the Senior Vice President of Finance to drive several strategic initiatives and was later appointed as CFO in May of this year. I'm truly excited to be back with PCG and ReposiTrak.
I believe the company has come a long way in 10 years. Back then, we struggled to build a network with 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 has 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 growing blue-chip customer base. We leverage our regulatory environment that is increasingly complex with no end in sight, and we service an industry where high-volume, low margin customers are facing increasing competition and need help to reduce risk, improve efficiencies, and remain competitive, therein lies are 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. 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 of 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 lifetime value of a subscription customer is far more valuable to a SaaS company and our shareholders than nonrecurring transactional revenue, but it comes with a 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 30, 2018, a 4% decrease. This $800,000 decrease in total annual revenue was driven by lower nonrecurring revenue which decreased [indiscernible] from $8 million in the fiscal year ended June 30, 2018 to $6 million in the fiscal year ended June 30, 2019.
The decrease in nonrecurring revenue was partially offset by growth in recurring revenue. Total recurring revenue increased 5% year-over-year. Total recurring revenue increased 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 of 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 $600,000 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 G&A costs were the result of cheaper rent in the company's headquarters, lower professional fees for accounting and legal, lower stock compensation expense, and other general and administrative costs. For the fiscal year ending June 30, 2019, 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 in a little bit more detail. Cost of services and product support. For fiscal year 2019, cost 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 decrease in sales and marketing is due to decreases in sales costs in nearly every area.
G&A, 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 are fully vested.
Depreciation and amortization. Depreciation and amortization expense was 601,000 for fiscal year 2019, down 5% from 634,000 in fiscal 2018. The decrease in D&A is due to certain hardware and other property and equipment that was fully depreciated. The company spent 1.5 million in leasehold improvements and computer hardware in fiscal 2019. This was the result of relocating the company's headquarters to a more cost-effective location and upgrading equipment in our data center.
It should be noted that depreciation in subsequent periods will increase due to the depreciation of the capital expenditures made during fiscal 2019. Historically, our annual CapEx is trended in the $500,000 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 $36,000 or $0.00 per diluted share compared to $1.1 million or $0.06 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 an investment for certain equipment.
For the full year of fiscal 2019, we generated net income to common shareholders of $3.3 million or $0.16 per diluted share, which was up 16% from $2.8 million or $0.14 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 a new corporate facility and upgrading our data center, total cash at the end of 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 500,000 in common stock we purchased under the stock buyback plan. 87,600 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 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 use of capital between strengthening the balance sheet, buying back common shares, and/or retiring the preferred stock.
I want to point out that the total amount of actual common shares outstanding as of June 30, 2019 was 19,793,000 shares. This is down sequentially from 19,871,000 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 statement 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 an additional cash during fiscal 2019 and as a result we now have over $18.6 million in 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.
The transitioning of 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 continue 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 deliver the best margins in our company's history.
We did this by the way, while making significant investments in marketplace and temporarily sacrificing our top line growth by reducing non-recurring revenue by $2 million. With that, we have 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 grow over 13% increase in the size of our total network to more than 340,000 total connections position us for even more growth in the future. Our compliance network incidentally increased by more than 40% to nearly 90,000 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 of the business is to scale the network until we touch and connect everyone in the supply chain of U.S. food and then replicate that model broad. 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 in the company's revenue as a result, this may also actually help you understand why the financial results in any given quarter vary, frankly depending on what type of connections we focused on in that particular quarter.
Over the next few years as we continue to drive the scale of our network from where we are today, we can see our way quite quickly to 500,000 total connections and then on doing 1 million. The growth in the scale of our network is obviously been the driver of our profitability and has generated the cash flow that we needed to build out the full platform.
Our build out is deliberately sequential and we focus on one of the three applications at a time, so as to reduce the risk of customer confusion and dependency on outside capital and its 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've been preparing to drive the scope of what we do across our network with a priority and focus on recurring revenue opportunities. We've reduced our non-recurring revenues by 25% from our prior year and we're hopeful that over the next couple of years our core business recurring revenue will grow to about 80% of total on much higher revenue and up from the mid-60s two years ago and 70% last year.
The strategy frankly is simple, reduce non-recurring 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 is nearly impossible mathematically to overcome non-recurring 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 non-recurring revenue up to the large seasonal orders, that's why it's important that our current SaaS revenue, the recurring is much as possible and as quickly as we can.
This is also why we have lower revenues in the quarter and the year. The math is simple, just to overcome the 2 million in non-recurring revenue, we would need $7 million to $8 million of new contracted recurring revenue, added in a single year and on the first day of that fiscal year, not easy to say at least.
I'd like to review the marketing changes and the progress we've made over the past few months with our Tier 2 initiative. Obviously, I am going to talk about compliance and where our current focus is and the focus is on what we call Tier 2 HUBs. First it’s important to note that we believe there are 500,000 to a 1 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, we must dive deeper and deeper into the supply chain from retailers and their suppliers where we've been to this point to suppliers of the suppliers and then on to the suppliers of the 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 the space to drive our effort. The wins have been accelerating dramatically. In fact, that began in the last quarter of 2019. We never lack for ambition, and our ambition this year is to add 300% more Tier 2 HUBs that we started the year with. The growth of the Tier 2 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 15,000 more customers to our network of over 23,000 customers.
Keep in mind, every new customer becomes an upsell candidate. The opportunity is a mess. The task of signing them all up is daunting, but we want them all. 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 double 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 double the new revenue from Tier 2 customers on each round. We have strategically structured and 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 the 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, marketplace is 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 of marketplace is sourcing products for retailers in non-core categories. It was conceived and was executed by one of our largest customers. Not only worked, the customer loves it and continues to use it. We’re close we believe to adding a second customer for this use case, fingers crossed, no guarantees.
Our second use case is sourcing products for retailers when an existing supplier runs out of that product. An example of that success from visibility is a customer began with one small emergency order last year our success led to acting is 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 retailer and wholesaler to use marketplace to search for replacement vendors from our entire database of compliant suppliers. In the last eight months we've gone from a few hundred to nearly 28,000 category participants, 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 continue to see industry dynamics driving higher interest in our applications, specifically for our Scan Based trading and our out-of-stock management. We believe, in fact, that 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's Scan Based trading gives 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 in out-of-stocks and the ability to do Scan Based trading. Even they frankly didn't do it very well.
Our effectiveness of reducing out-of-stocks exceeds even Randy's expectations. We’re seeing 80% of the suppliers reducing out-of-stock significantly and less than their first month of use. This is a potential game changer. This will expand our footprint substantially within our existing customers.
Historically, we focused on larger retailers for our supply chain work. Now we are empowering smaller retailers with the same Scan Based trading tool as the big guys, so they can be more competitive in going after grocery dollars.
Recently, as you probably saw, we signed a partnership with Associated Wholesale Grocers. AWG is the largest cooperative food wholesaler to independently own supermarkets and has 3,800 stores in its network. Over the next few years, the AWG collaboration could well become our largest single supply chain account.
And by the way, it was a great cross-selling win. Remember, we began with them with our Compliance Management capabilities. So let me summarize. We are unique in our ability to help buyers source that and transact efficiently with a new supplier. We have a moat around our business that let’s to build out the scale and the scope of our network of buyers and suppliers in a strategic and underlying, underscore, deliberate manner that let us maximize each component while generating exceptional profits and cash flow.
Now, from my perspective to judge our progress in 2020, I would have you look at the following; first, we will execute on our Tier 2 initiative. In fiscal 2020, we have a goal to increase the number of Tier 2 HUBs using ReposiTrak by 300% or nearly 200 additional Tier 2 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 customer’s 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 of the use cases we support. As an example, we've just introduced ReposiTrak certified a program that should help suppliers stand out with their retail customers.
Fourth, we will shortly conclude our first major win in the U.K. and this will be the year in which we establish our presence there to a much greater degree. We will have an announcement we hope 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 in cash generation capabilities.
As we said in fiscal 2019, the percent of recurring revenues increased to 70% up from the mid-60s two years ago. But our goal is to get it into the 80s. 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 through the strategic and deliberate execution of our strategy, we’ll expand both the scale and the scope of our network of customers, re-accelerate 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 earning power and cash generation, we expect fiscal 2020 will once again be a year of top line growth. So, with that, let's open the call to questions. Operator?
[Operator Instructions] Our first question is from Thomas Forte, D. A. Davidson. Please proceed with your question.
Great, so two questions. First off, who do you see today as your primary competition for your three main offerings? And how does that change, if 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 purchasing the products that aren't in your 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 customer?
Okay, so Tom thank you. I think the first question was, in general, who do we see as competitors? Does that – did I get that right?
And has that changed over the last fiscal year, Randy?
It actually hasn't. Our primary, 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 competitor what we call a roll your own strategy. And the other is in action, 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 row 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 a help desk for their vendors, for example. So ultimately, we've had the experience where very large retailers who at one point did what we do in their minds turned it back over to us. So really, in a sense you could say our competitor is our potential customer.
Okay, second question on the use case. Again, I want to say that it's speculative to assume that we will get this second user, but the second user 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 in a similar sense to our largest customer who's doing this, but they would be paying, in fact a recurring annual fee if they proceed with us.
So that's 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.
And my goal is that by the end of the year, we will have sorted this out and 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 that all of us think that it could be.
So -- but I'm feeling more, it feels more likely that it's that case, the optimistic case than the pessimistic case. Something we shouldn't overlook and maybe my comments didn't say it strongly enough. There's an extraordinarily high level of interest in our supply chain activity. We will see strong growth rates in annual recurring revenue in net domain this year. We think the surprise, the surprise growth this year will be coming from supply chain. The interest is extraordinary. Any other question Tom?
If I may one quick, one quick follow-on question. So, when you talk about your next customer will be an existing customer adding another service, is that also in reference to marketplace or is that in reference to your other services?
Both, let me want to. And again, I apologize because sometimes I use a lot of words, and it 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 100% of the TAM with each customer for the product that they've bought. Some have 300%, 400%, or 500% growth potentials in revenue, with a full penetration.
At the same time, we have opportunities for cross selling the customers to other product areas. I mentioned in the case of AWG, they started out as a compliance customer, and honestly it builds confidence. They knew that we are a company that takes care of its customers that if it says it's going to perform, it 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 is 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 23,000 named customers.
I suggest that if our Tier-2 initiative is successful, and certainly we believe it will be, it will be somewhere mid-30s, 30,000 or 40,000 named customers, wow! Each one of those, if we continue with our maniacal devotion to taking care of them, which we do, not only does our loss rate 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.
We have reached the end of the question-and-answer session. And now I will now turn the call back over to Randy Fields for closing remarks.
Okay, thank you. Appreciate you all taking the time to hear about our quarter in 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-bye.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.