ReposiTrak, Inc. Q4 FY2024 Earnings Call

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for the ReposiTrak fiscal fourth quarter earnings call. Hosting the call today are Randy Fields, ReposiTrak's Chairman and CEO; and John Merrill, ReposiTrak's CFO. Before we begin, I would like to remind everyone that this call could contain forward-looking statements about ReposiTrak within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon current beliefs and expectations. ReposiTrak remarks are subject to risks and uncertainties, which actual results may differ materially. Such risks are fully discussed in the company's filings with the SEC. The information set forth herein should be considered in light of such risks. ReposiTrak 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 repositrak.com to access this press release. With all that said, I'd now like to turn the call over to John. John, the call is yours.

Thanks, Rob, and good afternoon, everyone. This was again a milestone year for ReposiTrak. As anticipated, we increased recurring revenue, delivered solid margins, grew net income and our EPS even faster. We added more cash to our balance sheet, now the highest in the company's history. At the same time, we returned over $5.6 million in capital to shareholders through a growing common stock cash dividend, buyback and retirement of common shares and the redemption of preferred shares. At the same time, we invested heavily in sales, marketing, cybersecurity and bolstering our development platform and expanding our implementation resources to further accelerate our traceability solution. We have entered fiscal 2025 with significant tailwinds and an enviable competitive position. I believe we are and will continue to be the leader in traceability, doing it, not just talking about it. I believe traceability over the next three years will double our annual recurring revenue run rate at margins of 80% plus as we have historically delivered, yielding higher earnings per share and more operating cash flow, making us even more profitable than ever before. We eliminated $1.4 million of high-touch low opportunity revenue, which served as a drag on our actual comparative growth for the last 18 months. The decision may not have appeared logical or popular, but it was necessary, and we are moving to a period of better year-over-year comparisons just as traceability revenue continues to accelerate. In fiscal 2024, revenue derived from our traceability solution represented 6% of total revenue or $1.2 million. I believe the decision to free up resources was proper; culling the herd will permit us to capitalize on and continue to accelerate, not just on the traceability opportunity, but our entire suite of solutions. Generating higher levels of ARR, profitability and EPS as we scale. I believe the numbers speak for themselves, so let's get right to it. Fourth quarter fiscal 2024 results are as follows: total revenue was up 8% for the June quarter, $5.2 million versus $4.8 million. Recurring revenue was essentially 100% of total revenue. Operating expenses increased 6%, $3.9 million versus $3.6 million. GAAP net income increased 15%, $1.6 million versus $1.4 million. GAAP net income to common shareholders increased 18% from $1.2 million to $1.5 million in fiscal 2024. Earnings per share was $0.08 per share compared to $0.07 per share last year and we redeemed 81,000 shares of preferred stock at the $10.70 redemption price for just under $870,000. Turning to the full fiscal year 2024 numbers. During fiscal 2024, total revenue was up 7% and recurring revenue was 99% of total revenue. Operating expenses increased 10%, reflecting investments in the ReposiTrak Traceability Network or RTN, cybersecurity and investment in sales and marketing with more participation in trade shows and focus on other awareness campaigns. GAAP net income increased 7%, $5.9 million versus $5.6 million. GAAP net income to common shareholders increased 8%, $5.4 million versus $5 million. Earnings per share was $0.30 basic and $0.29 diluted. This is compared to $0.27 per share last year, both basic and diluted. During the fiscal year, we repurchased 177,000 common shares for a total of $1.5 million. We redeemed 220,000 preferred shares for the stated redemption price of $10.70 for a total of roughly $2.4 million. We continue to reiterate our goal to redeem all the preferred shares in the remaining two years. Again, we hold no treasury stock. Stock is repurchased or redeemed and subsequently canceled. It doesn't matter if it's common or preferred. We fully paid off our line of credit have no bank debt. We increased the quarterly common stock dividend and paid $1.7 million in cash dividends to common shareholders in fiscal 2024, and we have over $25 million cash in the bank. Again, our financial performance of fiscal 2024 reflects a 6% revenue contribution from traceability, net of ongoing investments to bolster our position and net of sunsetting non-core revenue streams. We expect the contribution from traceability will increase sequentially quarter-by-quarter in fiscal 2025 and continue to accelerate as we move closer to the FDA deadline. It remains difficult to forecast the trajectory of enrollment as the FDA mandate requires a complex multistep process for enrolling suppliers. There's a discovery period to establish FDA requirements of the supplier. We then have to explain the requirements that help suppliers identify what and where the required data lives. Data is collected in files and various emails written manually or lives in one of the supplier's several systems and needs to be extracted routinely and accurately. It is not a one-size-fits-all. It's complex. However, that's where we excel. Randy will add more color in his commentary. We continue to educate and automate everywhere we can to facilitate the enrollment process, making it faster and more efficient; that is part of the increased expenses you were seeing. It's a learning process. I believe once suppliers and their parent hubs or retailers are enrolled and implemented, the financial requirements to maintain the network are more in line with our compliance and supply chain offering. I know we spent a lot of time talking about growth and traceability. Be clear, we are simultaneously laser-focused on growth of the entire suite of solutions we provide. Compliance management, supply chain, discovery continue to deliver solid growth figures despite the elimination of high-touch, low-opportunity revenue. The same customers with the traceability problem also have a compliance and supply chain problem. The cross-sell opportunity is not lost on us. In summary, our strategy remains very simple. Take care of the customer, grow recurring revenue, balancing cost with opportunity, traceability, supply chain and compliance offerings, manage costs with long-term opportunity, increased net income and EPS, continue the buyback of common and preferred stock, increase the common dividend and drive more cash. Turning now to cash flow and cash balances. Total cash at June 30, 2024 was $25.2 million compared to $24 million at the end of fiscal year 2023. This was a record cash year for us even after paying off all bank debt and returning over $5.6 million in capital to shareholders on common stock buybacks, preferred stock redemption and cash dividends. For the fiscal year, we generated cash from operations of nearly $7 million. The company has $8 million remaining on the $21 million total common stock buyback authorization. As I said earlier, we have repurchased 220,000 preferred shares at a stated redemption price of $10.70 per share. The remaining amount of the preferred stock redemption is about $6.2 million, and we anticipate redeeming all of the preferred stock issued and outstanding over the next two years. As we have said before, we will take at least half the annual cash generated from operations and return it to shareholders in the form of a dividend, buying back additional shares of common and preferred stock or increasing the dividend, whichever lever makes the most sense at that time. The other half goes in the bank and will be strategically used to fund initiatives, M&A, new products or otherwise. The Board continues to evaluate our capital allocation strategy and may adjust the different capital levers, whichever lever is more favorable to shareholders at that time. As you may have seen in our earnings release today, the Board approved yet again another 10% increase in the quarterly common stock cash dividend starting with shareholders of record on December 31, 2024. So that's all I have today. Thanks, everyone for your time. At this point, I'll pass the call over to Randy. Randy?

Thank you, John. Fiscal 2024 was a significant year for ReposiTrak. Here’s a brief overview of our accomplishments. We rebranded to better align our corporate identity with our leading platform, uplisted to the New York Stock Exchange, raised our quarterly cash dividend, repurchased common shares, and redeemed preferred shares. During the 2024 fiscal year, we returned over $5.6 million to our shareholders through stock purchases, preferred share redemption, and cash dividends while further strengthening our robust balance sheet. We saw increases in recurring revenues, net income, and EPS at an even faster rate. We launched the ReposiTrak Traceability Network, or RTN, to seize the opportunities presented by the FDA's Food Safety Modernization Act, Rule 204. Simultaneously, we phased out certain low-opportunity revenue lines to allocate resources more effectively toward our long-term traceability solutions, while still achieving a 7% revenue growth. We received industry support, formed partnerships with major retailers and wholesalers, added thousands of suppliers to our network, and established ReposiTrak as a leader in the field. This marks a remarkable start to our traceability journey, and I am incredibly proud of the team for our achievements. Traceability has consistently surpassed our expectations in almost every aspect. The market opportunity is larger than we anticipated, and the pace of adoption is impressive. Beyond grocery traceability, we see numerous opportunities in food service, convenience stores, and various verticals, along with several exciting product launches planned for 2025. Currently, we have 4,000 companies and about 5,000 facilities actively enrolling through our retail and wholesale customers, representing a projected $10 million in annual recurring revenue over the next 12 to 18 months. The FDA's deadline is set for January 2026. Notably, traceability is evolving from a regulatory requirement to a competitive market demand. Recent food safety incidents have heightened interest and demand for our solutions. In fact, some large retailers and wholesalers are insisting that all food suppliers implement traceability, not just those required by the FDA. This expands the market significantly. Although we would welcome a delay in the January 2026 deadline to allow the industry more time, to date, the FDA has not changed the timeline. However, many retailers seem eager to expedite traceability even before the FDA requirements take effect, indicating more opportunities for us. We are quick to comply and will continue to do so for traceability. We are fully prepared, and the January 2026 deadline is the current finish line. Retailers are setting accelerated deadlines to stay ahead of potential delays. A retailer that does not require traceability from its suppliers takes on regulatory, legal, and financial risks associated with these products, highlighting the seriousness with which they are treating FDA guidelines. As a result of increasing food safety concerns, we are seeing legal advisors urging their clients to only engage with suppliers who comply with Rule 204. The pressure for suppliers to meet these requirements is mounting, and non-compliance risks losing business from retailers. As John mentioned, traceability currently contributes about 6% of our total revenue, translating to approximately $1.2 million in fiscal 2024. This figure reflects only the portion of suppliers who have joined us in the past 12 to 14 months and are now fully operational and being billed. We are now rapidly accelerating in our growth quarter after quarter due to the enrollment driven by our hubs. For those wondering when revenue growth will begin, the answer is that it is happening now. Our goal is to manage and optimize this process to ensure our customers are satisfied with our performance. Let me explain the traceability enrollment process more clearly. As John noted, onboarding suppliers for traceability is a multi-step process. We start with a discovery phase to identify hub suppliers, categorizing them into those directly impacted by the law and those not governed by the FDA mandate. Over time, the actual enrollment process is initiated, where we work closely with the hub to reach out to each selected supplier, clarify requirements, and assist them in gathering the necessary data. Many suppliers lack the required information or have it spread across multiple systems, making data collection challenging. This complexity is amplified by the fact that around 70% of suppliers do not have dedicated IT teams to facilitate this process. We guide suppliers in understanding what data is needed, collect it, and integrate it into our platform. We continue to enhance our platform, which has accelerated our supplier onboarding speed. Initially, it took a year to 18 months from vendor identification to revenue generation, but we have now halved that timeframe. Market pressures, automation, and the number of hubs are likely to reduce this timeline even further. The 4,000 suppliers who are required to enroll through their hubs represent $10 million in annual recurring revenue for us. While we cannot predict the exact trajectory of full implementation, we do expect to see significant increases in our annual recurring revenue quarter after quarter. The attractiveness of our current market penetration is appealing to additional retailers, wholesalers, and other hubs, largely because many of their suppliers are already part of the ReposiTrak traceability network, simplifying their onboarding process. Our pipeline for new retail and wholesale partners is robust and will further expand the number of suppliers we are enrolling. I’m confident in our competitive position as we lead in traceability initiatives. It's essential to remember that many suppliers have multiple traceability systems, so it's not about competing with others. While traceability is our main focus now, our compliance and supply chain services are also growing and complement our traceability efforts. We are well-equipped to provide traceability solutions, but our customers continue to face supply chain and compliance challenges that we can address. To summarize, we will prioritize taking excellent care of our customers. The current enrollment efforts will naturally boost our recurring revenue growth. We aim for a balanced growth rate that emphasizes execution and profitability over speed, ensuring we maintain our service quality. We will keep automating where we can, enhancing our efficiency while ensuring flawless execution. Our capital allocation strategy will continue to evolve, involving stock buybacks, both common and preferred, maintaining dividends, and increasing cash reserves to instill greater confidence in our customers. As noted in today’s earnings press release, the Board has approved another 10% increase in the common stock dividend, effective for shareholders of record on December 31, 2024. I hope this conveys the optimism and confidence that John and I share about our future. We are excited about the coming years. With that, I would like to open the call for questions. Operator?

Great. Thanks. So first off, Randy and John, congrats on a fantastic quarter and year. Apologies in advance if anyone else is in the queue. I have six questions. I'll go one at a time. The first one is, have you finished adjusting your customer portfolio to remove high-touch low-margin ones, or is that a permanent effort?

Well, the answer to that is from where we are today, yes. However, if, in fact, there is more requirement on our part because of an influx of traceability, we have another layer of the onion that we can deal with. But at this point, we think where we want to be, but that's not to say that it's 100% certain that's where we'll stay.

Okay. And then you teased this, so I don't want to discuss the tease part, who says that for future quarters. But can you give your current thoughts on adjacent regulated markets, restaurants, health care, so not to think your teased on the call, but your efforts in restaurants and then your willingness to expand into health care?

We assess both the market size opportunity and the profitability potential. Follow-on products aimed at the same customers tend to be more profitable for us. We have some new follow-on products launching after the beginning of the year that we find extremely exciting. Our strategy includes expanding into other verticals while simultaneously advancing these products that will enhance our traceability offerings, making us very appealing to potential customers. In summary, we plan to pursue both directions.

Okay. All right. And then next question is, can you give updates on your international efforts and the opportunity?

Well, I think, unfortunately, we are so focused on the execution part of what we're doing today with thousands of suppliers that have to be onboarded. It's too much for us to imagine doing business outside the U.S. It is, however, extremely likely that whatever the U.S. platform that becomes most dominant over the next few years is likely to have the greatest opportunity outside the U.S., and we are sure that that's us. Our approach, however, is much more likely to be in the form of ventures outside the U.S. rather than our execution with our own personnel.

Okay. And then I wanted to ask on the capital allocation, and the dividend increase for the regular quarterly dividend is fantastic. All the other things were fantastic. Would you ever consider a one-time dividend?

John?

I don't think it's off the table, but I think just as an investor, I would want to look at what line of sight quarter-to-quarter. I would much rather have the Board approve a dividend quarterly so that people can count on that as opposed to some dividend in the future? Is it possible? Of course, it's possible, but I'd rather increase the quarterly dividend that gives line of sight to investors.

If the pace of adoption exceeded expectations and you experienced a significant cash influx due to your high contribution margin on additional revenue, what would you do with that money, hypothetically?

We are committed to using at least half of our cash from operations to redeem preferred shares, repurchase stock, and increase dividends, which could also include a special dividend. You would need to consider the cash from operations and assume we would use at least half for these purposes. If we experienced a significant surge in sign-ups and cash flow, we would take that into account as well. This approach remains unchanged.

I won't ask you a third question. All right. So Randy, what are you doing today with artificial intelligence, and how might your artificial intelligence-related efforts improve our future top and bottom line?

Well, most of the work that we do in AI is candidly directed toward our own people, how to allow them to make better decisions, do less what we call administrivia, moving paper and stuff around and better able to focus on their customers. We have a couple of other ideas that we're pursuing aggressively that are AI-based. As you know, we've been doing the AI stuff for many years. We think we have another couple of opportunities that could expand the spans of control of our people. Again, we, I'd say, perhaps another double. In other words, we think we can double the size of the company but not have very additional people executing the workload that comes from a company double. So it's moving along, and we think our customers benefit from having higher-level people always interacting with them.

Okay. And then I apologize, John, if you gave this number on the call, but you're usually pretty specific on how much it costs to run the business. Can you give an updated number there?

I mean it's the same thing. I've mentioned that it takes $12 million to operate this business. This is a stable amount, which means that if we invest in cybersecurity or ramp up sales and marketing for trade shows, that might fluctuate. However, as I mentioned in my comments, once we stabilize and improve our onboarding process, you’ll find it reflects that same percentage: $12 million on $20 million. I can't foresee it exceeding $18 million on $30 million or $35 million; that's not a forecast. I just don't see any extra expenses beyond what we currently have unless we are investing temporarily in sales, marketing, or cybersecurity initiatives. Does that answer your question?

Yes. All right. And then I had my original question, then I have one new one. So can you give your current thoughts on M&A? You have a very strong balance sheet; you're executing at a very high level. I'm imagining you're getting presented opportunities often. What are your thoughts?

Well, I think John and I have the same thought. We are as laser-focused as we can be on the execution part of where we are. It is an enormous workload. And if we take our eye off the ball to do an acquisition or God knows what else, we run the risk that will screw up our execution. If there's anything in the history of the company, where we've been flawless, it is in our execution. We are really operationally inclined. The team is magnificent and they're caring about customers, and that's why we do it. So the risk is, if we go to do an acquisition, we take our eye off the ball. Now that's not to say a year from now that it might not be different, but for now, staying focused on bringing in these 4,000. Remember, the 4,000 are where we are today; in the next month, the odds are pretty good. There'll be another hub in the next month, another hub. And each time a new hub comes in anywhere from a few hundred to 1,000 more suppliers enter that queue. So the 4,000 is just what we've got in our hot little hand. And I would imagine that a year from now, that number will be very significantly larger. It isn't worth the risk of screwing up that opportunity to do a deal.

All right. And then I want to ask you this directly. I was hoping that we could get an indirect answer for my questions, but I think this is really important. So, when I hear the prepared remarks and your answers to my questions, I'm hearing that you have a lot of confidence in hand, meaning that there are sometimes when you're hyper-focused on an initiative, what it feels like, it's all hands on deck about initial initiatives. But this time, it really feels like to me that you're really confident. And the comment you made was the ability to do compliance and supply chain to augment traceability. So I'd like to understand what gives you that confidence.

Well, the reality is, as we described it, we have customers with whom we are contracted that have now established requirements for their suppliers that number around 4,000 customers of ours that will be brought into the network. So in other words, in our hot little hands, as I like to say, we have around 4,000 suppliers, call it, 5,000 facilities that will be brought into the network over some reasonably close in period of time, 12 months to 18 months. We can't screw that up. A year ago, what we were hoping for was that all of the time and effort we've put into traceability get us to exactly where we are now. So the difference that hopefully people are hearing is before we had a good feeling about where we were and what we do; that feeling has translated into contractual obligations that will drive the revenue of the business and the preeminence of ReposiTrak and the traceability team that we were hoping for. So it's a difference between hope and real.

Okay. I've exhausted my questions. Congrats again.

Thank you.

Thanks, Tom.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.