Earnings Call Transcript - TRAK Q4 2023

Operator, Operator

Greetings, and welcome to the Park City Group Fiscal Fourth Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Stanlis with FNK IR. And Mr. Stanlis, you may begin.

Jeff Stanlis, Host

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group's Fiscal Fourth 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'd 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's remarks are subject to risks and uncertainties, but actual results could differ materially. 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.

John Merrill, CFO

Thanks, Jeff, and good afternoon, everyone. Our fourth quarter was a strong end to a solid year in every area of the business: compliance, supply chain, and traceability. As now a SaaS company, the results of fiscal 2023 lead us into fiscal 2024 and beyond. As I've said before, our business is easy to model and highly predictable. I will dive into the detailed results in a minute. However, in fiscal 2023, we delivered growth in both total and recurring revenue, essentially flat expenses, growth in profitability, growth in net income, and growth in EPS. We put up some very meaningful results. We generated just under $9 million in cash from operations, paid off over $2.5 million in bank debt, returned $1.4 million to shareholders in the form of a common cash dividend, and bought back $1.3 million in common stock, simultaneously strengthening our balance sheet. Meanwhile, we delivered $0.20 per share for the year. We achieved this performance while simultaneously navigating a challenging economy of rising interest rates and general economic uncertainty. Meanwhile, we continue to invest in our traceability offering. Randy will speak more to this. However, we already do track and trace for inventory and finance at scale for the leaders of the grocery industry. But the new requirements of FSMA 204 are much more in-depth and in order to be successful, require us to invest further in both technical and customer-facing roles to position Park City Group for the acceleration of FSMA 204 compliance. We have responded accordingly. We had several new members to our commercial, technical, and leadership teams, including industry veterans with relationships and expertise. Be clear, we simply don't add humans because one is good, so two must be better. It doesn't work that way. Instead of throwing money at the issue, we evaluate and assess the predictability and reliability of automation versus the efficiency and innate errors that come with humans. Our response is balanced. The result of this process was eliminating high-touch non-core revenue in return for future growth opportunities, ideally those opportunities in our core food market. In other words, we are rationalizing our customer and product set to allow us to focus on and promote success with traceability and simultaneously placing less emphasis on lower short-term revenue opportunities. Our compliance and supply chain business continues to gain momentum for the year despite overcoming $700,000 of the high-touch non-core revenue we deemphasized that I previously mentioned. Yes, short-term revenue growth rates are impacted. We delivered a 6% revenue growth year-over-year, and this performance includes overcoming net revenue we deemphasized. In short, the strategic focus will free up significant personnel resources to focus on traceability. In my view, giving up a few hundred thousand to pick up $3 million to $4 million in 2025 ARR recurring traceability revenue is the right decision. As I said earlier, our core compliance and supply chain business continues to grow efficiently and profitably. The proof is in the numbers. Total revenue was up 6% for the full year and 5% for the June quarter. Recurring revenue increased 7% for the year and 6% for the quarter. Even with significant investments in our ReposiTrak Traceability Network, or RTN, our SG&A costs were essentially flat for the year and up modestly for the quarter. GAAP net income increased 40% for the year and 26% for the quarter. GAAP net income to common shareholders increased 46% for the year and 30% for the quarter. Earnings per share increased 52% for the year to $0.27 per share and increased 34% for the June quarter to $0.07. Full-year cash from operations increased 45% to $8.9 million, and we bought back approximately 232,000 common shares at an average share price of $5.65 per share, paid off our bank debt entirely, paid $1.4 million in cash dividends and have just under $24 million cash in the bank. As we have said, our profitability and cash flow will continue to grow faster than revenue. You are seeing that today as we grew revenue by 6% and net income by 40%. Meanwhile, cash from operations grew 45%. Consistent with our strategy, our focus is on increasing operating leverage. This requires us to continue to make difficult decisions to drive high-margin incremental revenue while keeping costs in line and driving profitability and cash. Importantly, the customers we have signed so far for our traceability initiatives should generate additional dollars of recurring revenue once fully deployed. Our current estimate ranges from $3 million to $4 million per year just from suppliers we have in hand today, excluding contributions from individual stores. We ended the fiscal year with an exit rate of annual recurring revenue, or ARR, of $20.3 million. Meaning, as of June 30, 2023, those contracts in hand, billing monthly times 12 will generate $20.3 million in annual recurring revenue in the subsequent 12 months. This is absent any new contracts, future expansion of existing contracts, or anticipated growth. Keep in mind, this is organic growth, meaning existing suppliers and retailers that have expanded compliance and supply chain services, adding stores or locations and traceability in the prior fiscal year. This does not include any revenue contribution from any projected new customer. An obvious question one might ask is whether we are generating traceability revenue yet. The answer is yes, but in fiscal 2023, it was minimal, and our $20 million ARR for fiscal 2024 conservatively reflects the same. I believe the momentum we are seeing initially with traceability customers faster than I anticipated will only accelerate. We are confident that traceability will begin to generate meaningful revenue in calendar 2024. Further acceleration in contribution from traceability will only enhance our top and bottom line growth. I've said it time and time again, it takes approximately $12 million in cash to run this place. Going forward, on each incremental recurring revenue dollar over and above our fixed cash cost of roughly $12 million per year, $0.80 to $0.85 will fall to the bottom line. As I just mentioned, our recurring contracted revenue significantly exceeded that $12 million. Our focus on operating leverage rationalizing the revenue generated with the costs expended, so a 6% increase in recurring revenue generated a 46% increase in the bottom line this year, even as we invested heavily in RTN. We accomplished this through automation, 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 overhead costs. Our customers are our priority, and we can deliver superior customer service while at the same time increasing our profitability. Again, our strategy remains very simple: take care of the customer, grow recurring revenue, rationalizing costs with the opportunity of future revenues, control costs, increase net income, accelerate EPS, buy back shares, which now includes the preferred shares and drive cash. Turning to the quarterly numbers. Fiscal year 2023's fourth quarter revenue was $4.8 million, up 5% from $4.6 million in the same quarter last year. Recurring revenue as a percentage of total revenue was 99.5% for the quarter. Recurring revenue in the quarter was up 6% over the same period in fiscal 2022 despite the revenue we deemedphasized during the fiscal year. To date, we have overcome the headwind of approximately $700,000 in what I have referred to as high-touch, low-opportunity revenue, simultaneously increasing both total revenue and recurring revenue for the period. Operating expenses increased 5% to $3.6 million in Q4 2023. Depreciation and amortization increased 55%, which reflects investments in traceability, upgrades to equipment to address cybersecurity and other routine CapEx expenditures. Sales and marketing expenses decreased 1% and G&A expenses increased 5%. These modest increases reflect RTN investments and our sales staff's return to travel as COVID abates. For the fourth fiscal quarter of 2023, GAAP net income was $1.4 million or 29% of revenue versus $1.1 million or 24% of revenue. GAAP net income increased year-over-year by 26%. Net income to common shareholders was $1.2 million or $0.07 per common share based on a weighted average of 18.8 million shares compared to $950,000 or $0.05 per share based on 19.4 million weighted average shares. You'll also note, we have reduced our capitalization by over 10% through the repurchase and retirement of shares since we initiated our stock buyback plan. Turning to the fiscal year numbers. For the year ended June 30, 2023, total revenue increased 6% from $18 million to $19.1 million. Recurring revenue for the same period grew 7% from $17.8 million to $19 million. Total operating expenses increased 3%, largely due to investments in the 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 $4.4 million to $5.1 million, an increase of 15%. Net income was $5.6 million versus $4 million, an increase of 40%. Net income to common shareholders grew 46% to $5 million or $0.27 per weighted average share compared to $3.4 million or $0.18 per weighted average share. Turning now to cash flow and cash balances. Total cash at June 30, 2023, was $24 million compared to $21.5 million at the end of fiscal year 2022. As of June 30, 2023, the company had zero bank debt. Fiscal year-to-date, we generated cash from operations of $8.9 million compared to $6.1 million last year, an increase of 45%. In the fourth quarter, we repurchased approximately 48,000 common shares at an average price of $6.90 per share for a total of $328,000. The company has approximately $9.5 million remaining on the $21 million total buyback authorization since its inception. We continue to gain momentum in the growth of recurring revenue, delivering 80-plus percent gross margin, double-digit EPS growth. We have $24 million cash in the bank, no debt, and a shrinking capitalization. Currently, we are paying a $0.06 dividend to common shareholders. We paid our first dividend in the second fiscal quarter and again in May and once again in August. We also just announced our September dividend, which will be paid on or about November 1. Subsequent quarterly dividends will be paid within 45 days of the quarter's end. As 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, buying back additional common shares, and as we announced recently, redeeming the preferred. The other half goes into the bank or will be used to fund initiatives like traceability. We also carefully evaluate M&A opportunities, but we are selective. We certainly have ample dry powder if the right opportunity comes along. As I said before, from time to time, the Board will evaluate its capital allocation strategy and adjust the different levers, including the dividend, buybacks, considering M&A opportunities, paying down debt, or other liabilities based on whichever lever is more favorable to shareholders at that time. As part of the process, the Board of Directors recently announced our intent to redeem the preferred stock over the next 3 years. After repurchasing our common stock, paying off debt, initiating a quarterly cash dividend, and growing our cash reserves, this was the next logical step of our comprehensive capital allocation strategy. That's all I have. Thanks, everyone, for your time today. At this point, I'll pass the call over to Randy. Randy?

Randall Fields, CEO

Thanks, John. Over the last several years, we've made several key strategic decisions about our course. So far, as you've heard from John's review of the quarterly and full year metrics, these decisions have demonstrated excellent financial results. Our core business is based on compliance and supply chain management with additional services like our out-of-stock offering and scan-based trading. Our core business is structurally profitable and generating very significant cash. You heard John describe the 7% growth in recurring revenue, continued expense management, a 40% increase in GAAP profitability and a 50-plus percent growth in earnings per share. This strategy creates a foundation for the business that we have today and more importantly, supports our objectives for traceability, the next major growth driver of our business. The compliance model gives us tremendous credibility in the industry. We are, by far, the largest and best-respected supplier retailer, wholesaler supply chain network. You see the results in our widespread industry endorsements. As we often repeat on these calls, we are driven by our customers. Not only do we offer technology that works, but we offer an old-fashioned level of human customer service, no bots ever. As we continue to gain recognition as a dominant expert on traceability, we recently announced that we are leading the committee of food industry experts called the ReposiTrak Traceability Network Advisory Committee, or RTNAC. These are very highly respected thought leaders and are working with us to help their particular product categories in the food industry overall to have an interoperable low-cost food traceability solution for compliance with FSMA Rule 204. They are influential figures in the food industry. Our industry presence, including our customer relationships and industry endorsements, creates a durable, very significant competitive advantage for our ReposiTrak Traceability Network, or RTN. This technical and reputational lead of ours is growing. Others talk about traceability with some unproven, untested solutions. But we're actually doing traceability now, live with our customers end-to-end with the technology that we've had in existence for some time, designed in close collaboration with the industry leaders. Our solution is agnostic as to whether customers also use additional systems. We work with any labeling system, any barcoding system, any blockchain system; we don't care. We provide the traceability interoperability layer. This is critical and is value-added to everyone across the supply chain. A supplier, say with 100 customers, can't create 100 different custom labeling systems to help comply with each customer's ability to read a specific label. So suppliers see value in our interoperability approach, immense value. We create inexpensive simplicity for suppliers. A supplier who's already connected to our RTN does not want to create various custom labeling systems; they want to use our RTN with as many clients as possible. Why? They've already done the one-time connection work and paid our unlimited use fee for it. So it’s good for the customer, and it certainly helps us spread the word. Even at this early stage, a number of our new RTN supplier customers are working to take us to their customers and help grow our network organically. Distributors and wholesalers see value in our system as well. Their business is based on speed and accuracy, and frankly, the lack of complication is critical to their success. New logistical complications like Rule 204 could pose a disaster. We streamline those rules and allow them to maintain their current processes and technologies. Retailers also benefit. End-to-end traceability helps them regardless of FDA rules. They've always wanted more visibility into their supply chain and an easier way to recall products, and we provide that for them. We make it easy in every respect, and traceability is currently functional with our customers. That’s a very powerful message. Our approach is live and operational. Since March of 2023, we have signed two wholesalers and two self-distributed retailers—not pilots but deployments. These four customers, along with their twenty-six distribution centers, potentially nearly 1,500 suppliers, and thousands of their stores are entering into the ReposiTrak Traceability Network, RTN. Once again, we are doing this; we have real committed customers. Others are just talking and issuing press releases. We're taking real action. Onboarding just the current business will be an extensive process, likely taking a year to be fully deployed. We have a well-defined process and an amazing team holding our customers' hands as we guide them toward FDA compliance. No one else has our real-life experience and therefore understands the challenges they will face during deployment. Our process continues to be refined and optimized. We are on a path to add additional automation to the methodology over time. So, what can we anticipate from the wholesalers and retailers we've signed? Onboarding these four customers should generate somewhere between $3 million and $4 million per year of additional annual recurring revenue. You might wonder how our customers perceive our traceability program. So far, we are receiving positive feedback from both hubs, retailers, wholesalers, and suppliers. Our customers acknowledge that our technology and team is the right solution. In fact, we are starting to receive referrals from these early users to other retailers and wholesalers. Our trade associations are increasingly vocal in their support for our efforts. Therefore, we are not just optimistic but genuinely pleased with the industry position we hold in traceability. Beyond these early adopters, our pipeline is large and growing. As we engage with the first group of suppliers, distributors, and stores, onboarding is becoming easier as we learn and add more internal automation. We're already seeing an acceleration in processes, and there's much more to come. We have encountered this before when we first started doing compliance. In year one of compliance, for example, we made 200 connections. Two years later, it was in the thousands. Scalability is our strength. As we mentioned last quarter, the traceability opportunity is emerging faster than we had anticipated. RTN revenue in 2023 exceeded expectations, considering our forecast was zero. We believe RTN revenue will accelerate in calendar 2024, making it an excellent year for us, and ‘25 will likely be unprecedented. There’s no doubt about it. However, we anticipate that the effort to implement industry-wide traceability is complex and time-consuming. We would welcome any FDA decision to push back on enforcement by a year to alleviate the rush; it would benefit our business. We anticipate numerous reports of new technologies from start-ups that propose solutions to the FDA rules through labeling or other ideas. We view these entrants as potential customers, not competitors. Labeling alone won't meet the comprehensive needs mandated by the FDA. It can be challenging for even the most experienced grocery store employees to scan the right cases based on new labels; it simply won’t work that way. The landscape of industry-wide solutions is not competitive; we can collaborate with anyone who adopts an alternative system and assist them. We remain confident that we are a key component in making industry-wide traceability feasible and cost-effective. Industry leaders are apparently in agreement with us; the market demands a more complete solution than just labels, barcodes, or blockchains. As for how the RTN initiative impacts our operating costs, while the revenue potential is significant, we do not expect a significant increase in our cost structure. Our automation capabilities outweigh the need for additional personnel costs. We anticipate only a modest increase in expenses as we onboard new customers. We've been utilizing proprietary, AI-driven tools to streamline our internal processes for years, and that work will continue to develop. In summary, we've built a consistent cash generation operation with six consecutive years of real GAAP profitability. We will continue to deploy our capital allocation strategy, buying back stock, paying dividends, growing our cash reserves, and redeeming our preferred shares. We maintain a strong balance sheet with nearly $24 million in cash, no debt, and a current ratio exceeding 6. Our business operates efficiently, is easy to model, and is well-positioned to scale. We will consistently work to reduce the number of shares, both common and preferred, outstanding, and return capital to shareholders through stock buybacks and cash dividends. The net effect should yield faster revenue growth, even more rapid net income growth, and significantly higher earnings per share growth. With that, I’d like to open the call for questions. Operator?

Operator, Operator

And our first question comes from Tom Forte with D.A. Davidson.

Thomas Forte, Analyst

Great. So Randy and John, congrats on the quarter and fiscal year. I have a handful of questions. I'm just going to go one at a time. So Randy, you mentioned that the FSMA delay on compliance could be helpful. Can you expound on that?

Randall Fields, CEO

The background is that, unfortunately, our current position is that the necessary changes cannot be completed by us, but rather by the industry as a whole. There are at least 1.5 million businesses that need to modify very fundamental processes in their supply chain to achieve traceability. We have just over two years until enforcement starts, and given the circumstances, we believe it's reasonable to expect that the FDA will extend the timeline by an additional year. This extension would help us as it would alleviate the rush and allow us to engage with our customers in a more organized way. While I'm not entirely sure it will happen since we’re not in direct communication with the FDA, if it does occur, it would be very advantageous for our business.

Thomas Forte, Analyst

Okay. And then the second question is, I think you've talked in the past about the opportunity at the restaurant level. Can you talk about that opportunity again and where you are on that?

Randall Fields, CEO

Yes. The restaurant business is, in some ways, the opposite of our food business, meaning they have a lot of stores, not many suppliers, whereas the retail food business tends to have many suppliers and fewer stores. So we've made some strong hires and marketing efforts, and I think in the next six months, we're likely to begin some initial work in both restaurants as well as quick-service restaurants.

Thomas Forte, Analyst

And then are there opportunities to expand into other fields where there's a lot of regulations, like oil and gas or pharmaceuticals? How should I think about that?

Randall Fields, CEO

Yes. Fundamentally, if you consider our technology platform, it can measure whether a business conforms to a set of regulations or business rules, etc. What we do could apply to Department of Transportation regulations or EEOC regulations. We have some of our customers beginning to use us for sustainability initiatives. Our only requirement is that they know the rules and can explain them to us. Beyond that, once traceability becomes the dominant standard in the U.S., we believe there will be even broader applications. Already, traceability is expanding from its initial list to likely cover nearly all foods. Interestingly enough, our very first supplier, who signed up for our service, is in the onion business, which is not covered by Rule 204. They are heavily recalled but not on the list. This supplier understands that traceability is better for them and their customers, and they are choosing to adopt it. We believe traceability will expand significantly in the U.S. and eventually become the global standard.

Thomas Forte, Analyst

Great. And then I have a modeling question for John. You mentioned the transition to recurring revenue and SaaS. How should we think about your top and bottom line over the next 12 months, especially with the ramp-up in traceability efforts?

John Merrill, CFO

Sure. So as you heard, our forecast right now based on the contracts we have at hand as of June 30 is $20.3 million. So there's your top line conservative estimate, assuming no growth and modest traceability. This obviously won’t be the case. You heard Randy and I both mention an additional $3 million to $4 million once fully deployed. Not all of these will start in July, as they will be staggered over the next 12 months. Your guess is as good as mine regarding growth, but start with the modest $20.3 million for top line. You heard me say it takes about $12 million to run this operation, and there are about $2 million more associated with accounting, depreciation, amortization, and stock compensation. That essentially outlines the P&L structure, and you can see how revenue conversion translates to EPS. So it's pretty easy to model at this point since we have essentially achieved 100% recurring revenue. Does that answer your question?

Thomas Forte, Analyst

Yes. All right. And then last question for me. You've mentioned high-level comments on strategic M&A. Can you discuss returning cash to shareholders through buybacks and dividends? On the dividend side, have you considered increasing it? I believe the yield is quite modest right now, so how do you think about potentially raising the dividend over time?

John Merrill, CFO

Randy, you can take that one?

Randall Fields, CEO

Well, let me share my opinion as CEO. John mentioned it, and I think it's important to recognize that each year, and even within a year, we will evaluate cash flow perspectives. Our intention is still the same as stated historically. Half of each year's cash flow will go onto the balance sheet to strengthen our position, as our customers are getting larger. The world is becoming weaker, so our customers want to see a strong partner. Therefore, we owe that to them. The other half of our free cash flow will be evaluated between several possible levers. Are we going to increase our cash dividend? That is indeed under consideration, albeit no decision has been reached. Are we going to buy back more stock? That's also under consideration. We conduct this review every year. Lastly, we aim to redeem preferred stocks, which we plan to complete over the next three years. All of these options remain on the table, but an increase in the cash dividend may be likely. John, do you agree?

John Merrill, CFO

I agree. I think the other component is M&A. As we've discussed, should a strategic opportunity present itself, it will also need to be evaluated. To Randy's point, we’ve set aside $9 million for fiscal 2023, meaning roughly $4.5 million in cash on hand and $4.5 million going forward. We don’t hold any bank debt anymore, which naturally suggests an increase in the cash dividend is logical as a low-yield option.

Operator, Operator

Our next question comes from the line of an indiscernible private investor.

Unknown Attendee, Private Investor

Congratulations on the great results. I wanted to ask about the current quarter. Are you expecting a ramp-up in revenue? Or should we consider the current quarter as approximately a quarter of that $20 million you’ve guided for current customers?

Randall Fields, CEO

Well, conceptually, we've often underestimated that we shouldn't focus solely on quarterly performance. We think in annual terms. Our focus is intensely directed towards onboarding traceability initiatives. As we’ve mentioned, we are the only company actively implementing traceability. Others are merely discussing it and issuing press releases. Our endeavor is challenging; it requires significant development, implementation, and customer management. We are deeply engaged in doing this, and every week, we refine our internal processes and technology to optimize efficiency. Therefore, as we onboard paying customers, there will inevitably be a ramp-up in revenue from zero to several million over the next year or 18 months, though it won’t be distributed equally. We just cannot forecast exactly how rapidly we can onboard paying customers. The standard pattern indicates that Q1 is always lower, while Q4 is generally the strongest due to the growth of onboarding.

Unknown Attendee, Private Investor

Yes, definitely. Regarding your traceability customers, how do you decide who goes first? I mean the deadline is 2026; not everyone will want to be at the tail end of compliance. What dictates urgency for them? Is it a first-come-first-serve basis, or do you prioritize?

Randall Fields, CEO

That's a fantastic question and something we often consider. Our extensive experience in compliance means we've established excellent relationships with our customers. We've discussed traceability requirements with them for years, so many have realized that full implementation of traceability can take one to two years of work. Several customers have decided with us that they do not want to finish this work in January of 2026. They intend to be done well before the deadline in order to work out any issues related to processes or procedures. As a result, they are more conservative and plan ahead since, in retail, things often take time given the scale at which they operate. Therefore, their decision to start was based on their desire to ensure they had ample time for such a significant project. Conversely, some potential clients are saying they're not ready to think about that yet and will start a year later. However, we believe that if others wait until the deadline, they may not finish in time. So we expect 2024 to be a busy year for us, and 2025 to be overwhelming. Once the word spreads that traceability is doable but complex, our inquiries will increase significantly. This raises concerns about needing to tell some clients that even though you initiated discussions two years prior, you want it done in just six months—it simply isn’t feasible. Based on our observations, clients who are proactive are eager to start now, while others will follow suit.

Operator, Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to management for closing remarks.

Randall Fields, CEO

Thank you all. I appreciate your time this afternoon. If you have more questions, please contact John or me, and we'll be happy to assist. Thanks once again.

John Merrill, CFO

Thanks, everyone. Have a great day.

Operator, Operator

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