Earnings Call: Q4 2021

Sep 28, 2021

Greetings, and welcome to Park City Group Fiscal Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Fink. Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group's fiscal Q4 and full year earnings conference call. Hosting the call today are 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 subject that are not subject to historical facts. Such forward looking statements are based on current beliefs and expectations. Park City Group Management are subject to risks and uncertainties, which could cause actual results to differ materially from those forward looking statements. Such risks are fully disclosed in the Company's filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks. Park City Group does not assume any obligation to update information contained in this conference call. Shortly after the market closed today, the company issued a press release overviewing the financial results that will be discussed on today's call. Investors can visit the Investor Relations section of the company's website at parkcitygroup.com to access this press release. With all that said, I would now like to turn the call over to John Merrill. John, the call is yours. Thanks, Rob, and good afternoon, everyone. We continue to execute on our stated strategy, delivering another profitable quarter year of growth. We've established a profit oriented business model with significant recurring revenue, low fixed costs and a growing operating margin. Our business is now easy to model and on an annual basis, we have significant confidence and consistent growth. Each incremental dollar from here largely falls to the bottom line, meaning our profitability will grow substantially faster than our revenue as it did in the 4th fiscal quarter and all of last year. This yields us strong free cash flow. Highlights of the fiscal year ended June 30 are as follows. Recurring revenue for our SaaS business, which includes compliance and supply chain, was up 11% to $17,700,000 Recurring revenue as a percentage of total revenue increased from 80% to 84%. Our annual recurring revenue run rate or ARR as of June 30, 2021 was $18,400,000 a baseline of recurring revenue for fiscal 2022. Marketplace revenue increased 11% to $3,200,000 With across the board growth, total revenue increased 5% to 21,000,000 SG and A expenses decreased 5% against the 5% revenue growth. Net income increased 158 percent to more than 4,100,000 Cash from operations grew to $5,400,000 up 29 percent. And we ended the year with $24,000,000 in cash or approximately $1.23 per share. We have successfully built a scalable, profitable and growing business made up of 2 components, recurring SaaS business transactional marketplace business. We continue to drive both components with a modest SG and A cost structure, which enables us to grow our bottom line faster than our top line. Our marketplace offering has matured and its value to our customers has been proven, albeit with a significantly less contribution margin. In order to improve the margin of Marketplace, we are planning some structural changes to how we go to market to bring its contribution more in line with our SaaS offerings. In other words, we intend to convert Marketplace from a transactional, highly unpredictable business to a software as a service comparable to our compliance in supply chain offerings. We were successful at converting $5,000,000 to $6,000,000 a year in one time license and service revenue to SaaS. So I'm confident over the course of time, we can do the same with Marketplace. In the meantime, Marketplace remains largely transactional and unpredictable. As mentioned, our full year recurring revenue at June 30 was $17,700,000 Our annualized recurring revenue exit rate at June 30, 2021 was $18,400,000 for fiscal 2022 assuming no growth. Our stated goal, as we have said in the past, is to grow recurring revenue by 10% to 20% per year. Since we have experienced very low attrition and we are effectively at 100% recurring revenues for the software side of the business, our base recurring revenue is now highly predictable. Furthermore, our sales team is incentivized on growing recurring revenue beyond the base. We operate our cash fixed cost of $12,000,000 per annum absent marketplace. With $17,700,000 in recurring revenue against $12,000,000 in cash costs, We are structurally a profitable company. This is reflective in our $5,400,000 cash generated from operations. As I have said before, about $0.80 to $0.85 of any incremental SaaS revenue over the $12,000,000 base falls to the bottom line, as we can scale our revenue with very little incremental costs. Marketplace on the other hand roughly provides a 5% to 10% contribution margin. It's not the software side of the business at north of an 80% margin, but it does meet a customer demand despite its long term uncertainty. Our customers really like the service and we think a subscription model similar to an Amazon Prime will be well received. To summarize, we have a combination of solutions that enables customers to be compliant, provide more actionable visibility into their supply chain, replace vendors and source hard to find items. More now than ever before, we are an important resource for our customers, simultaneously driving top line revenue growth, Profitability and cash. Turning to the quarterly numbers. Fiscal year 2021 Q4 revenue was 4,600,000 down 20.5% from $5,800,000 in the same quarter last year. The decrease was due to lower transactional marketplace revenue. At the height of COVID, many of our marketplace customers demanded nitrile gloves and masks. As the larger pandemic concern has abated over the last 6 months, So has the demand for hard to find COVID related items. Again, Marketplace is transactional revenue, highly unpredictable, but it does fill a customer demand. Total operating expense decreased 35 percent from $5,300,000 in Q4 2020 to $3,400,000 in Q4 2021. The decrease in total operating expenses reflects largely a $2,000,000 decrease in the Cost of goods sold associated with lower marketplace revenue. Sales and marketing expenses increased from $1,300,000 in Q4 2020 to 1 point $4,000,000 in Q4 2021. This 8% increase was the result of an increase in sales travel, trade shows and other sales related costs of longer term COVID concerns slowly continue to abate. G and A costs increased from $1,400,000 in Q4 2020 to $1,600,000 in Q4 of 2021. This was primarily the result of an increase in higher liability insurance costs and an increase in the reserve for doubtful accounts. As I have said in previous calls, while we have not experienced a significant customer default, We believe it is prudent to increase our reserves given some delayed payments we received and given the ongoing disruptions in the supply chain have affected some customers more than others. For the Q4 of fiscal 2021, GAAP net income was $1,200,000 or 26.1 percent of revenue versus 480,000 or 8.3 percent of revenue. Net income to common shareholders was $1,000,000 or $0.05 per common share versus 333,000 or $0.02 per common share in the same period in fiscal 2020. Turning to the full year numbers. For the year ended June 30, 2021, total revenue was $21,000,000 compared to $20,000,000 last year. This 5% increase in revenue is due to both growth in recurring subscription revenue and marketplace revenue. Full year recurring revenue growth in the software business was 11%. Marketplace growth was 10.6%. Cost of services and product support was $6,900,000 compared to $7,000,000 last year. This modest decrease is primarily the result of higher expense associated to Marketplace and the sales of PTE, partially offset by lower overall development costs, A reduction in outside consulting services and other cost cutting measures implemented in response to COVID. While we've Experience a significant increase in marketplace revenue and costs during the pandemic due to demand and PPE, it is unclear what level of ongoing marketplace costs we may Sales and marketing expenses were $5,000,000 compared to $5,800,000 last year, a 15.6% decrease. The decrease is due to a reduction in trade show expense, lower overall sales and marketing expenses, particularly travel expense. G and A expense was $5,200,000 compared to $4,900,000 last year, a 5.4% increase. G and A expense increased year over year due to an increase in bad debt expense and higher insurance costs. These increases were partially offset by lower general overhead due to cost cutting measures and natural reductions due to our work from home status since April of 2020. For the year ended June 30, 2021, GAAP net income was $4,100,000 compared to $1,600,000 for the same period of fiscal 2020. This 158% increase in net income is largely due to an increase in revenue and lower SG and A expenses. Fiscal 2021 net income to common shareholders was $3,500,000 or $0.18 per common share compared to $1,000,000 or $0.05 per common share for the same period in 2020. Turning now to cash flow and cash balances. For the fiscal year 2021, we generated cash from operations of $5,400,000 compared to $4,200,000 last year, an increase of 29%. Total cash at June 30, 2021 was $24,000,000 compared to $20,300,000 at the end of fiscal year 2020, an 18% increase. With respect to our stock buyback program, as we said during the height of the pandemic, we made the prudent decision halt our buyback program. We recommenced the program in the 3rd fiscal quarter and continued our activity in the 4th quarter, Repurchasing 126,927 shares at an average price of $6.30 per share for a total of $800,000 As our business and its current and future cash flows have continued to increase in their visibility and likelihood, the Board decided to increase the size of our buyback by $10,000,000 This takes our total authorization to $12,000,000 As I have said before, we believe our stock given the predictability of business Thanks, John. So to sum up the year, we grew our recurring revenue by 11%. We more than tripled our net income to common shareholders. We generated more than $5,000,000 of cash and we ended the year with more than $24,000,000 of cash. Our annualized recurring revenue run rate at the end of the fiscal year was $18,400,000 which more than covers our cash SaaS expenses 12,000,000 and it should be noted that we achieved all of this during the most significant disruption of our lifetime, a global pandemic. The results again demonstrate the progress we've made in building the predictable earnings model of the company. Our model, we believe, This is the definition of sustained profitability and cash flow. There's no doubt that the pandemic is continuing to impact our business. Our customers are once again battling supply chain issues and shortages. And now, they have a new challenge to face. In the last call, we mentioned the proposed FDA food traceability requirement of the Food Safety Modernization Act or FISMA. This is a new and frankly burdensome regulation for our customers. This new rule is proposed with aggressive deadlines, An aggressive phase in period and very few exceptions. In short, the proposed rule imposes new requirements On those who manufacture, process, pack or hold foods on the food traceability list and requiring them to create and to store literally mountains of records. The effect of the rule is to make compliance using paper based systems nearly impossible and simultaneously massively increase requirements for data retention and data exchange. Think literally Tens of billions of new records, our core competency. At the outset, Rule 204 as it's called, We'll only relate to certain high risk products in 15 categories, things like soft cheeses, produce, And it doesn't matter whether they're sold standalone or used as ingredients, think tomatoes, for example. As products using these fruits, vegetables, etcetera, move through the Each step is required to add additional record keeping and or record exchange with other businesses in its supply chain. It's also clear the FDA intends to expand this initiative over time. The FDA has explicitly said they hope the concept is adopted industry wide, covering nearly everything. Simply put, the opportunity here is not just large, but our customers need us to help. And since we already do track and trace affordably and at scale as part of our supply chain platform, this is right in our wheelhouse. In fact, We're the obvious vendor to address it. We have the technology needed to do the record retention and data exchange. We have the industry knowledge. We have the largest in place Our plan for traceability is simple, make it very low cost and very easy to adopt, make it a simple expansion of our existing compliance and supply Chain offerings. In short, it's an add on to what we do now for our customers. But the industry needs this soon and will have no choice but to adopt some technology. The current fiscal year will be about lining this all up. We anticipate little revenue from traceability in this year, but longer term we expect that this initiative could add to our already expected top line revenue Growth of 10% to 20% a year. The uncertainty of the timing, etcetera, is obviously still there, but this is likely to be a win. We are the experts in compliance. We are exclusively endorsed by industry leaders and we have built the industry's largest database of compliance suppliers. We are the ideal partner to help our customers address the challenge. And the FDA's urgent timeline makes us a top priority for us, for our customers Our suppliers, people are concerned. In fact, the press is interested in the problem. Incidentally, there will be a nice interview on Morning Newsbeat Tomorrow, Wednesday, which is really kind of the Food Industry Insider's daily update. It's worth looking at. We've made the prep and the rollout of traceability an all hands on deck priority. There are some differences in our marketing strategy and execution strategy We need to work on and we're organizing ourselves around that. Will this solution become an increasingly important part of our compliance offering? Will it become a 4th leg of our stool? Time will tell. But this will be the key focus of our fiscal year and a possible driver for growth for us in the years to come. To ensure getting proper focus on this product, we're taking a hard look at some of our legacy offerings and make Some calculated adjustments. We're going to sunset one of our offerings that doesn't seem to have the upside potential of track and trace, and we're slowly beginning to convert Marketplace into a recurring subscription offering. In fact, we already have a couple of subscribers so far and obviously we expect more over time. With all of these factors in mind, fiscal 2022 looks very good from where we are right now. Our Tier 2 initiative continues to see growth and our supply chain is also showing favorable signs of being a priority with our customers. We do believe that we're on course to achieve our recurring revenue goal of 10% to 20% for fiscal 2022 barring any worsening supply chain disruption in the global economy. Simultaneously, we've continued our focus on tight expense control. Because of our business model, our bottom line growth will obviously be much higher than our top line growth. After successfully transitioning virtually all of our software one We now enjoy a highly visible SaaS revenue stream that more than covers our fixed cash cost. This does generate a structural, systemic and consistently profitable and predictable cash flow for us. As a result, We've decided to repurchase even more shares. Specifically, the Board has approved a very significant increase in our current buyback Up to an additional $12,000,000 in shares. In short, we're putting our money well, You know the rest. Our key goals for the next fiscal year rather than the current fiscal year are: 1, to perfect the introduction of our track and trace solution To be ready for fiscal year 2023 expansion, continue to work on cross selling to further deepen our relationships with our customers, Continue to add some additional modules to our existing applications. A number of the cross selling opportunities that we've looked at Moving along our out of stock offering, for example, is doing very well. 1 of our largest customers in that domain Has just significantly expanded their work with us. And finally, we're going to continue to generate additional profitability, drive cash and buyback more stock. So in my view, we're in a great position for success in fiscal 2022 and beyond. And as a leader, we're uniquely poised to help the industry address this new Thank you. We will now be conducting a question and answer session. Our first question is from Victoria James with D. A. Davidson. Please proceed. Great. Hi, it's Tom Forte also at Davidson. So Randy and John, the first question I have for you is, You sort of talked about this, Randy, in your opening remarks, but can you give us a sense of the current state of distraction for your core customer, the foodservice retailer? Thank you, Victoria. The sorry, Tom, I couldn't resist. The obvious problem that you're reading about, everyone has seen in supply chain is a distraction. There's no doubt about it. Costco now is limiting toilet paper. So there is a reality that our customers have to take care of their customers 1st and themselves second. So the question is how long will this persist? This is certainly not A new normal as in this last year's. But I would imagine that frankly until spring or so, Their distraction should continue. We've baked that into our view of the year. And at the same time, the FDA Concern with traceability is moving along. In fact, reasonably speaking, it's probably moved as far as it has because people are distracted. And when this set of regulations was actually proposed last year in 2020, I suspect the industry distraction with shortages, etcetera, kept the commentary to the FDA at a very low levels. So it's on its way. It's going to happen. So people will just have to find the bandwidth to focus on it. So we've baked that into our forecast, but clearly the supply chain problems you're reading about are real. We see them everywhere. Excellent. All right. So I have a couple more questions maybe. All right. So the next one is, I think it's interesting that you're Going to pivot marketplace to more of a recurring revenue type model. Can we then assume that any new product introductions in the future will also have an emphasis on recurring revenue? Absolutely. I think really there's 2 or 3 issues to think about. Were it not For this issue of track and trace, which is going to be enormous, it's not just enormous in terms of opportunity, but The changes that it will create in the supply chain are unlike anything we have ever seen. We do not believe that the industry is ready for it. We believe that the perturbations will be large and that the scramble over time to be compliant, do the right thing, etcetera, is going to be a real challenge For a whole industry, the largest industry in the world. So given that, I think our reality is that we just cannot focus on all of the things that we are doing. So we took something that's that has great potential marketplace and we have to find another way to do it for the next period of time, maybe forever, that requires less focus on our part is a little bit easier to execute. Simultaneously, we have a product that we've successfully sold and implemented in the past that's actually quite a good product. And if we had infinite resource from a human perspective, it's not a cost thing, it's just the human part of it. We'd probably pursue it, but for now we're just going to walk away. And you're exactly right. We're in the SaaS business. So Going forward, I think you'll see things that we do have that SaaS component to Really enable us to keep one simple business model in mind. Great. All right. So 2 more, Randy. So I'll ask one, I guess, and then I'll ask the other one. So you mentioned Costco. And if you look at Costco's last three quarters, They've raised their expectations as far as the implications of inflation on their results. So how do you think about inflation Affecting food retailers and then how therefore wouldn't affect Park City Group? Yes. Inflation, I hesitate to contradict experts like Chairman Powell, but It ain't going away. It's now here. It's now been embedded. It's and the future look because of the cost pressures Are also there. I think Powell may have been thinking about the monetary side of inflation. Well, this is going to be cost push. So I saw a recent example where a year ago, the cost of moving a container from Asia to, Let's say New York, pick a number was like $2,000 and that same container today is $16,000 There's a bit of inflation in that. That means that everything that's inside that container is going to have to absorb that very substantial incremental cost. So the fact is transportation costs are going up, you can call it shortages, doesn't matter. So food is Transportation intensive, obviously, those costs as they work their way continue to work their way through the system Are going to have to get reflected? There's not much room in the food business to absorb cost increases. It's a low margin business End to end. So the truth is, as you watch the inputs go up in price, you can expect consumer prices to tag along with it. The implications for us are really pretty much neutral. The reality is inflation is Generally, not a strong negative in the food industry. They're fast turn items. So you have a chance To stock up at today's prices, sell them soon at tomorrow's prices. So it tends to help food retailers. I wouldn't want to be in the business of having slow moving products, but for the most part, this is a fast moving business. So it will generally be good for our customers. Things that are good for our customers therefore tend to be very good for us also. Wonderful. So last one, and I can't think of really the perfect way to ask this question. So I'll ask it imperfectly, so I apologize. So, one of the things Your company has done so well is enable your core customer to better compete against Amazon. So when your core customer, I guess, is less afraid of Amazon, is that a net negative for you? How should we think about the fear of Amazon and how well it's motivating your core customer right now to more warmly embrace technology? And if that's if they're less afraid of Amazon, is that a problem? Well, I'm not sure that it's any longer a Fear of Amazon that began to recede at least several years ago. The fear in the industry was Is on align this going to be the way that groceries are done? In other words, take Amazon out of the equation. It was How much online business are we going to have to do? How do we do that? And now increasingly, how do we do it And not have huge margin contraction, which in the 1% business you can ill afford. Now, mercifully, what's happened is much of the move to online this was driven by the obvious pandemic And that's going to recede a bit. So I suspect that we're going to see the fear of unlineness, meaning It's going to take away from the core business for retailers abate. I think they're going to learn to make adjustments In the online world, and frankly, that creates what's called omni channel, which is really good for us. We're A number of our customers do omni channel, meaning that they've got inventory issues that they have Manage on both the online side of their business in store, there's a lot of complexity with that and we help them with that complexity. So, I'm not sure that there's any real impact. And as I say, I don't think it's really so much Amazon driven as it is. Is the world going to suddenly shift completely to online and how do we compete? I'm sure you saw it, but now Amazon is introducing delivery charges to Whole Foods. So much of what Amazon thought that it Could do or we imagined thought were not psychic, but so much of what we thought and feared from Amazon as an industry, Turns out there is no magicians there that the costs are the costs. They don't have distribution advantages, etcetera. And now they're finding obviously that delivering Whole Foods multiple times per week to people included in Prime Doesn't work out economically. So I think that the Amazon threat per se is less important. Our customers are less fearful, less fear is actually probably good for us on balance. Excellent. Randy and John, thank you for taking our questions. Thanks, Tom. Thanks, Tom. Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the call back to Randy Fields for any closing remarks. No, I really don't have anybody to call on for questions. So we'll wrap it up and thanks everyone for taking your time this afternoon. Take care. Bye bye.