Park City Group, Inc.

Greetings and welcome to the Park City Group Fiscal Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Stanliss with SNKIR. Mr. Stanliss, you may begin.

Thank you, operator. Good afternoon, everyone. Thank you for joining us today for Park City Group's fiscal third quarter earnings call. Hosting the call today are Randy Fields, Park City Group's chairman and CEO, 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. Park City Group remarks are subject to risks and uncertainties, which actual results may differ materially. Such risks are discussed fully 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. We continue to deliver strong results in the quarter. We're in both total and recurring revenue. growing net income, and growing EPS even faster. We generated significant cash flow, returning capital to shareholders, and once again, strengthening our balance sheet even more. We are achieving this performance despite necessary and strategic de-emphasis on certain high-touch, non-core revenue, creating a modest headwind for revenues in the short term. We are achieving this despite investments in traceability, investments in expanding the depth of our sales force and automation, with only minimal revenue contribution at this point. Simply put, our core business, our compliance and supply chain businesses, are an efficient, profitable, and well-run machine. The proof is in the numbers. While our core business is solid, growing, and profitable, we are positioning the company for the next major growth phase, traceability, and it is coming faster than we expected. I'll let Randy speak to that in a few minutes. Jumping right into the numbers. Total revenue was up 6% year over year for the March quarter. Recurring revenue increased 6%. Even with significant investments in our Reposit Track Traceability Network, or RTN, our SG&A cost declined. Put another way, $260,000 in incremental revenue against $252,000 less in costs, even as we invest in our largest opportunity to date. Gap mid-income increased 53% to $1.7 million. Gap net income to common shareholders increased 61% to $1.5 million. Earnings per share increased 67% from $0.05 per share to $0.08. Year-to-date cash from operations increased 75% to $7 million. And we bought back 74,000 common shares at an average share price of $5.79 per share, paid off our bank debt entirely, and have $22.9 million cash in the bank. As we've said, our profitability and cash flow is and will continue to grow faster than revenue. Consistent with our strategy, our focus is on increasing operating leverage, many times making difficult decisions to drive high margin incremental revenue while keeping costs in line and driving profitability and cash. Companies that focus myopically on unsustainable short-term revenue growth over long-term profitability and cash generation are suffering. We will not follow a short-sighted strategy for short-term gain. Our customers demand flawless execution and financial strength from their partners long-term. Our compliance and supply chain business continue to gain momentum in the quarter despite overcoming the high-touch, non-core, low-margin revenue we de-emphasized that I previously mentioned. The end of the March quarter was an exit rate of annual recurring revenue of $19.4 million, meaning at the end of March 31, 2023, Those contracts in hand billing monthly times 12 will generate $19.4 million in annual recurring revenue in the subsequent 12 months. This is absent any new contracts, future expansion of existing contracts, or anticipated growth. In other words, with nearly 100% of our total revenue as recurring revenue, we have a much clearer line of sight to our top line revenue than ever before. Keep in mind this is generated by organic revenue growth, meaning existing suppliers or retailers that have expanded compliance and supply chain services, adding stores or locations, and cross-selling trading partners from existing business lines in the current fiscal year to date. This does not include any revenue contribution from a projected new customer and no meaningful revenue from traceability. Yes, we have started to generate traceability revenue, but to date it is minimal. I believe the momentum we are seeing initially with traceability customers, faster than I anticipated, will only accelerate. Despite our deep visibility into our compliance and supply chain services, how fast and the timing of how much of traceability is anyone's guess at this point, since we are relatively early in the process. Like what we did with Marketplace, we continue to de-emphasize non-core revenue or revenue with high resource commitment and low upside. Let me be clear. We are not walking away from revenue. We are rationalizing it with the corresponding cost. It is part of our resource allocation strategy and preparation for traceability. It's critically important to understand that we touch every customer, everyone, every month. A telephone call, an email, a follow-up, an upsell, or just a check-in, or all of the above. Customers large and small, seasonal or year-round, all require a touch of some level by our CSMs or support staff or both. With over 28,000 customers, that is a lot of touches on a monthly basis. In some cases, it was necessary to rationalize the touch points. In one case, we chose to sunset a service offering altogether, like we did with vendor-managed pricing back earlier in the fiscal year. It was a high-touch solution that had no application or long-term opportunity for traceability. This resulted in our capacity to shift those human and application support resources to traceability. In other service applications, we chose not to renew customers with very sporadic service who still required high touch, but more importantly, had little, if any, opportunity for traceability. Again, that frees up resources in virtually every part of the business, from support to IT to back office. While this may seem counterintuitive for a company our size, it is part of our long-term strategy for traceability, rationalizing both revenue and cost. As I said earlier, we may have to make difficult decisions in the short term, which may provide some revenue headwinds. However, we were faced with the same choices when we began this journey, deemphasizing one-time license revenue and marketplace over the last two years. Looking back, I believe our results today prove that, too, was the right decision. In conjunction with growing our core compliance and supply chain business, we are focused on traceability. We will not waver. It forces us to evaluate and make difficult, short-term decisions every day to deliver long-term results across our suite of applications. Expense management. Many of you have heard me say before it takes approximately $12 million in cash to run this place. Our annual cash spend excludes non-cash accounting costs such as depreciation, amortization, bad debt expense, stock compensation expense, and other non-cash accounting costs. Going forward, on each incremental revenue dollar, over and above our fixed cash cost of roughly $12 million per year, 80 to 85 cents will fall to the bottom line. With a laser focus on operating leverage, rationalizing the revenue generated with the cost expended, a 6% increase in recurring revenue generated a 61% increase in the bottom line this quarter, meanwhile investing heavily in the Reposit Track Traceability Network, or RTN. We accomplish this by automating as much as we can and utilizing our own proprietary tools. This drives more productivity across our entire business. Automation enables us to take excellent care of our customers without adding significant headcount or other overhead costs. Our customers are priority one. However, we have proven we can deliver superior customer service while at the same time increasing our profitability. Once again, our strategy remains very simple. Take care of the customer, Grow recurring revenue at the same time rationalizing costs with the opportunity of future revenues. Control costs across the board. Increase net income. Accelerate EPS. Buy back shares and drive cash. Turning to the quarterly numbers. Fiscal year 2023 third quarter revenue was $4.8 million, up 6% from $4.6 million in the same quarter last year. Recurring revenue as a percentage of total revenue was 99.7% for the quarter. Recurring revenue in the quarter grew 6% over the same period in fiscal 2022, despite the revenue de-emphasized during the fiscal year. As I said, this frees up resources to prepare for meeting the FDA's food traceability standards. To date, we have overcome the headwind of approximately $600,000 of what I have referred to as high-touch, low-opportunity revenue while still increasing both total revenue and recurring revenue by 6% for the period. Total operating expenses decreased 2% to $3.3 million in Q3 2023. Sequentially operating expenses were also essentially flat. Sales and marketing expenses were up approximately 1% and G&A declined 22% even as we invested in the Reposit Direct Traceability Network or RTN. This is partially offset by payroll tax refunds received from the employee retention tax credit, increases in allowance for doubtful counts, increases in tax reserves, and reduction of capitalized software costs. For the third fiscal quarter of 2023, Gatman income was $1.7 million, or 34% of revenue, versus $1.1 million, or 24% of revenue. Gatman income increased year-over-year by 53%. Net income to common shareholders was $1.5 million or $0.08 per common share based on 18.8 million weighted average shares versus $941,000 or $0.05 per common share based on 19.4 million weighted average shares. You'll note we have reduced our capitalization by over 10% through the repurchase and retirement of shares as we initiated our stock buyback plan. Turning to the fiscal year-to-date numbers. For the nine months ended March 31, 2023, total revenue increased 6% from $13.5 million to $14.3 million. Recurring revenue for the same period grew 7% from $13.3 million to $14.2 million. Total operating expenses increased 2% largely due to investment in RTN. This was partially offset with the ERTC payroll tax refund, increases in bad debt, and lower costs associated with software maintenance fees. Income from operations increased from $3.3 million to $3.9 million, an increase of 19% when compared to the same period of fiscal 2022. Net income was $4.2 million versus $2.9 million, an increase of 45%. Net income to common shareholders grew 53% to $3.8 million or $0.20 per weighted average share compared to $2.5 million or $0.13 per weighted average share. Turning now to cash flow and cash balances. Total cash at March 31, 2023 was $22.9 million compared to $21.5 million at the end of fiscal year 2021. The $22.9 million is inclusive of the payoff of the remaining $448,000 of our revolving line of credit. As of March 31, 2023, the company has zero bank debt. Given rising interest rates and our cash generation, it only made sense to pay it off completely. Fiscal year to date, we generated cash from operations of $7 million compared to $4 million last year, an increase of 75%. In the third quarter, we repurchased 74,150 shares at an average price of $5.79 per share for a total of $429,271. The company has approximately $9.8 million remaining on the $21 million total buyback authorization since inception. We continue to gain momentum in the growth of recurring revenue, delivering 80% gross margins and double-digit EPS growth. We have almost $23 million cash in the bank, no debt, and a shrinking capitalization. As we announced back in September, the company has added an additional lever to our capital allocation strategy in the form of a $0.06 annual dividend, $0.05 paid quarterly. We paid our first dividend in the second fiscal quarter and again on May 1st. Subsequent quarterly dividends will be paid within 45 days of the quarter's end of March 31, June 30, September 30, and December 31. We have said previously our goal is to take half the annual cash generated from operations and return it to shareholders in the form of a dividend and buying back additional shares, hence increasing EPS for all shareholders. The other half goes in the bank or used to fund initiatives like traceability. From time to time, the board will evaluate its capital allocation strategy and may adjust the different levers, including the dividends, buybacks, considering M&A opportunities, paying down debt, or other liabilities based on whichever lever is more favorable to shareholders at that time. Again, it's our ongoing strategy to allocate a meaningful portion of our free cash flow to returning capital to shareholders. That's all I have today. Thanks, everyone, for your time. At this point, I'll pass the call over to Randy. Randy?