Park City Group, Inc.

Greetings and welcome to the Park City Group fiscal third quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. A question and answer session will follow the formal presentation. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. It is now my pleasure to introduce your host, Jeff Samlis with FNKIR. Mr. Samlis, you may begin.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for Park City Group's Fiscal Third Quarter 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 not subject to historical facts. Such forward-looking statements are based upon current beliefs and expectations. Park City Group management are subject to risks and uncertainties which could cause actual results to differ from those forward-looking statements. 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. 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 we will discuss 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, Jeff, and good afternoon, everyone. Q3 was another strong quarter for the company. We continued our focus on growing our recurring revenue, expanded our product offerings, delivered solid profitability, and drove cash. Highlights of the quarter ended March 31 are as follows. Recurring revenue for our SaaS business, which includes compliance and supply chain, was up 13% to $4.57 million. Marketplace revenue grew 225% to $1.45 million. With across-the-board growth, revenue increased 30% to $6.02 million. SG&A expenses increased 11% against the 30% revenue growth. Net income increased 184%. Year-to-date cash from operations surpassed $3.35 million, and our balance sheet remains strong with $23.2 million, or approximately $1.19 per share in cash. The bottom line is we have built a scalable, profitable, and growing business made up of two components, a recurring SaaS business and a transactional marketplace business. We continue to drive both components with a modest SG&A cost structure, which enables us to grow our bottom line faster than our top line. After two years of transitioning from significant, lumpy, one-time revenue in our mix, our software business is effectively all recurring. Simply put, it is comprised of various food safety compliance and supply chain modules sold on a monthly subscription basis. While we solve complex business problems, our business is relatively straightforward. Let me take a minute to add some clarity on how management views the business and perhaps help you develop a line of sight on how we may look going forward. With our third quarter fiscal 2021 results reflecting $4.5 million in recurring revenue, we internally assign that run rate as our base in the software business out for the next four quarters. Therefore, our next 12 months of base recurring revenue is $18 million, assuming no additional growth. Since we have experienced a very low customer attrition and we are effectively at 100% recurring revenue, and we have a sales team compensated on growing recurring revenue beyond the base, our SAS revenue is highly predictable going forward. This line of sight sets as a goal a 10% to 20% year growth rate. Conversely, before the transition from licensed to SAS, our recurring revenue was less than $13 million per annum, and top-line revenue was highly dependent on generating $5 to $7 million a year in one-time license or services. Predictability on revenue, spending, and bottom line was a challenge to say the least. So over the last several years, our recurring revenue has grown from about $13 million to about $18 million on a run rate basis. Not bad. To get a sense of what management's goals are, you can compound that $18 million run rate at the lower end goal, 10% for the next few years. I believe it is important to point out we are not a quarterly driven company. Why? As we have seasonal customers that may only need our services for three to six months for the summer or during the holiday season. Not a lot, but it's impactful. That affects quarterly subscription revenue. Our sales staff is paid on collections, so that impacts timing of expenses. Then there is non-cash items like depreciation, stock comp, and other accounting items that may create timing differences. These are a few examples. So when we talk about goals, they are annual goals, some quarters higher, some lower. You, our investors, asked us how we could make the business easier to understand and model. Now you have it line of sight. What about profitability in cash? Since we operate our fixed costs on a modest spend, roughly $12 million per annum in cash, and we see the $18 million in recurring revenue, it's relatively straightforward to plan our software bottom line expenses and cash flow. As I've said before, about $0.80 to $0.85 of any incremental revenue over the $12 million base for the software business falls to the bottom line. Since we know our fixed costs, we are able to support higher revenues without meaningful increases to our SG&A line. This is not fuzzy math. The proof is in the numbers. Let's talk marketplace for a moment. As Randy and I have said in prior calls, marketplace may or may not have its place in the company portfolio long term. We are certainly not there yet. In the meantime, at its transactional revenue, albeit highly unpredictable, it does fill customer demand and roughly provides a 10% contribution margin. It's not the software business at north of 80% margin, but it does meet a customer demand despite its long-term uncertainty and lower margin. Marketplace, case in point. During fiscal 2021, as COVID-19 disrupted supply chains and generated shortages of products around the globe, our ability to source hard-to-find items within our network of 25,000-plus customers resulted in an unprecedented demand for personal protection equipment, or PPE. These products included nitrile gloves, N95 masks, freezers, telecommunication devices, and other emergency management equipment. Our customers demanded it, and we delivered through Marketplace. While Marketplace revenue is at a lower gross margin than our SAS revenue, it provides incremental revenue, profitability, and cash flow to the company. While we have experienced a significant increase in Marketplace revenue for PPE during fiscal 2021, It is uncertain whether demand for PPE will continue at what level in the future as the pandemic begins to abate. At this point, it's anyone's guess. Given this uncertainty, we are evaluating options which may include a subscription-based membership to the Marketplace network, similar to an Amazon Prime. Buyers and sellers would pay a recurring membership fee to have access to the network. Should buyer and seller transact business on the Marketplace platform to charge a fee on that transaction? While the pandemic has extended the sales cycle, the 30% growth in the quarter demonstrates that our customers are increasingly focused on both our software and our marketplace solutions. The pandemic also spotlighted the importance of more effectively managing supply chain and customer compliance. Customers suffered from severe shortages in out-of-stock situations, leading to missed revenue opportunities and pushing customers to online retailers. As a result, we believe there is significant pent-up demand for software solutions as things begin to normalize. As I have said before, we have less than 5% penetration with our existing customers, so farming our own customer network remains top priority for opportunity. We can significantly grow our software business just by farming our existing network. 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 company revenue growth, profitability, and cash. Turning to the quarterly numbers. Fiscal year 2021 third quarter revenue was $6.02 million, up 30% from $4.63 million in the same quarter last year. The increase in total top line revenue reflects growth in both our recurring software business and marketplace of 13% and 225% respectively. Total operating expenses increased 20.7% from 4.4 million in Q3 2020 to 5.3 million in Q3 2021. The increase in total operating expenses reflects largely a $1.3 million increase in cost of goods sold associated with higher marketplace revenue. Sales and marketing expenses decreased from $1.7 million in Q3 2020 to $1.2 million in Q3 2021. This 30.2% decrease was the result of lower sales travel, trade shows, and cost reductions partially offset by higher commissions due to higher revenue. G&A costs increased modestly from $1.2 million in Q3 2020 to $1.3 million in Q3 2021. This was primarily the result of an increase in higher liability insurance costs and an increase in the reserve for doubtful accounts. While we have not experienced a significant customer default, we believe it is prudent to increase our reserves given some delayed payments we have received. For the third quarter of fiscal 2021, gap net income was $773,000, or 12.8% of revenue, versus $272,000, or 5.9% of revenue. Net income to common shareholders was $627,000 or $0.03 per common share versus $125,000 or $0.01 per common share in the same period of fiscal 2020. Turning to the year-to-date numbers, for the nine months ended March 31, 2021, total revenue was $16.42 million compared to $14.27 million for the same period of fiscal 2020. This 15% increase in top-line revenue is due to both subscription revenue and marketplace revenue growth. Year-to-date recurring revenue growth in the software business was 8%. Marketplace year-to-date growth was 95%. Cost of services and product support was $6.7 million and $4.6 million for the nine months ended March 31, 2021 and 2020, respectively, a 45% increase. This increase is primarily the result of higher costs associated to Marketplace and the sales of PPE, and to a lesser extent, costs to boost our IT security, update licensing, and other database systems. While we have experienced 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 experience as the pandemic begins to abate. Sales and marketing expenses was 3.6 million and 4.5 million for the nine months ended March 31, 2021, and 2020, respectively, a 19% decrease. The decrease is due to a reduction in trade show expense, lower overall sales and marketing expenses, particularly travel expense. G&A expense was 3.6 million and 3.5 million for the nine months ended March 31, 2021, and 2020, respectively, a 1% increase. G&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 nine months ended March 31, 2021, GAAP mid-income was $2.95 million compared to $1.11 million for the same period in fiscal 2020. This 164% increase in net income is due to an increase in total revenue and lower SG&A expenses. Year-to-date in fiscal 2021, net income to common shareholders was $2.5 million or $0.13 per common share compared to $674,000 or $0.03 per common share for the same period of 2020. Turning now to cash flow and cash balances. The fiscal year 2021, we generated cash from operations of 3.4 million compared to 2.3 million in the prior year period, an increase of 48%. Total cash at March 31, 2021 was 23.2 million compared to 20.3 million at the end of fiscal year 2020, a 14% increase. Total cash at March 31, 2021 was 23.2 million compared to $17.9 million at the same period in 2020, an increase of 30%. With respect to our stock buyback program, as we said during the height of the COVID pandemic, we made the prudent decision to halt our buyback program. In our March 31, 2021 quarter, we decided to recommence the program. Subject to NASDAQ rules, we purchased 84,000 shares of common stock for a total of $508,000 during the March 31, 2021 quarter. As our business and its current and future cash flows have increased their visibility and likelihood, the Board has decided to increase the size of our buyback, moving the commitment from $4 million to now $6 million. We believe our stock, given the predictability of business, continues to be a very, very good investment for us. Thanks, everyone, for your time today. And at this time, I will pass the call over to Randy. Randy?