Earnings Call Transcript - TRAK Q2 2025

Rob Fink, Host

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for the ReposiTrak fiscal second quarter earnings call. Hosting the call today are Randall Fields, ReposiTrak's Chairman and CEO; 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 subject to historical facts. Such forward-looking statements are based upon current beliefs and expectations. ReposiTrak remarks are subject to risks and uncertainties. Actual results may differ materially. Such risks and uncertainties are 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. 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.

John Merrill, CFO

Thanks, Rob, and good afternoon, everyone. The second fiscal quarter represented another successful period of execution against our strategy. The growth in all lines of business, including traceability, continues to deliver increases in top line revenue, profitability, and earnings per share, and it's just beginning. Again, our financial strategy is quite simple: take great care of the customer, execute perfectly, grow recurring revenue, increase profitability, use cash to buy back common stock, redeem the preferred, and do it with no bank debt. At the same time, return capital to shareholders through an increase in cash dividend. Meanwhile, we continue to build cash on the balance sheet, now $28 million. Yes, it's really that simple, and traceability results are just getting started. Traceability continues to accelerate understandably as the January 2026 deadline looms. But more importantly, we are experiencing growth in all lines of business: traceability, compliance, and supply chain. This is evident in our total revenue growth and increases in the deferred revenue line item on our balance sheet. I don't want to get into the weeds, but obviously, deferred revenue is an indicator for future revenues recognized in the next 12 months, particularly in a SaaS company. Since June 2024, our deferred revenue has grown 70% from $2.4 million to $4.2 million. If that doesn't raise your investor eyebrow, it should. These are signed customers, fully implemented and who have paid in full. These customers will add $1.7 million of incremental subscription revenue over the next 12 months. Let me add some color. If you divide $1.7 million by four quarters, that incremental revenue adds about $425,000 to each subsequent quarter going forward. That means our quarterly revenue run rate increases from $5.5 million to roughly $6 million per quarter, assuming no additional sales opportunities, which is highly unlikely. I'm not providing a forecast; it's just math. The conversion of this deferred revenue to recognized revenue over the next few quarters will not only provide double-digit quarterly growth but fiscal 2025 as a whole. Again, not a forecast; it's just math. While the revenue growth is coming along as anticipated, Randy and I are simultaneously focused on the contribution margin, profitability, EPS, and cash flow. While our current 64% revenue contribution margin above fixed costs is a good start, our goal is to get closer to 80%. Meaning, for every dollar above the $12 million in cash cost to run this place, as I have said time and time again, our goal is to deliver 80% plus profit on every dollar of incremental revenue. That is our goal. Many of you have asked if the current administration is good or bad for us, meaning what if they delay the traceability law. As we've said before, a latter delay would be good for us. Instead of rushing to onboard thousands of last-minute holdouts, it will allow us to administer an orderly onboarding, not at a hurried pace. The complexity is enormous, and time helps us ensure success. The government did the same thing with Sarbanes-Oxley some years ago; we hope they adopt the same laddered compliance for small, medium, and large companies for traceability. Like a financial strategy, our operational philosophy remains very simple: provide customers with superior solutions, deliver our service at a reasonable price, and execute perfectly. We solve complex business problems, and our customers expect us to fix the issue and not complicate their business in the interim. This drives higher levels of customer success and satisfaction as we have adopted internally: when our customers are successful, they buy more from us. Let's get to the quarterly numbers. For the second quarter of fiscal 2025, total revenue was up 7% to $5.5 million versus $5.1 million. Recurring revenue increased 5% to $5.4 million. Given the amount of one-time setup fees earned during the quarter, the percentage of recurring to total revenue declined from 99% of total revenue to 98%. Cost of revenue increased 3% given increased investment in developer resources to further expand our Wizard, a self-implementing automation platform to allow suppliers to onboard with little, if any, human interaction. Operating expenses increased 7% from $3.9 million to $4.1 million, reflecting our ongoing investment in RTM, higher commissions due to higher revenue, and increases in insurance and other benefit costs for employees. Sales and marketing expenses increased 15% as we continue to invest in marketing awareness of our solution suite of traceability, supply chain, and compliance, and increased commissions and payroll taxes. G&A increased 2%. This increase reflects higher benefit costs and other insurance increases that occurred during the quarter. Depreciation and amortization increased 2%, reflecting purchases of technology equipment for our newest data center that is located at Switch in Reno, Nevada, a Tier 5 data center. For the quarter ended December 31, 2024, GAAP net income increased from $1.5 million to $1.6 million, up 7%. GAAP net income to shareholders increased from $1.3 million to $1.5 million, up 12%. Earnings per share basic and diluted was $0.08 per common share and $0.08 per diluted share. This compares to the same quarter last year of $0.07 earnings per share, both basic and diluted, an increase of 14%. Let's turn to the fiscal year-to-date numbers. For the 6 months ended December 31, 2024, total revenue increased 7.3% from $10 million to $11 million. Recurring revenue increased 6% to just under $11 million. Total operating expenses year-to-date were up 5% due to investment in RTN, increased employee benefit costs, and investment in the development of onboarding tools. SG&A costs were up $225,000 or 4% due to investments in RTN, higher commissions, and higher employee benefit costs. Net income increased 14% from $2.8 million to $3.2 million. Net income to common shareholders increased from $2.5 million to over $3 million, an increase of 19%. Earnings per share for the fiscal year-to-date increased 21%. Basic earnings per share were $0.17 per share and $0.16 diluted. This compares to $0.14 basic and $0.13 diluted in the prior year. Turning now to cash flow and cash balances. Cash on the balance sheet at December 31, 2024, was $28 million, a 12% increase from June 30, 2024. Cash from operations year-to-date was $5.3 million, an increase of 117% from the same period in 2023. The $28 million cash on the balance sheet at December 31, 2024, is after we redeemed $1.5 million in preferred, paid out $700,000 in common stock dividends, and bought back $100,000 in common shares during the 6 months ended December 31, 2024, and we have no bank debt. Since inception, we've redeemed 362,000 preferred shares for a total of $3.9 million. The remaining amount available for preferred redemption is $5.1 million. At our current pace of redemption, we are confident redeeming all of the preferred outstanding on or before September 2027. So all I have today. Thanks, everyone, for your time. At this point, I'll turn the call over to Randy.

Randy Fields, Chairman and CEO

Thanks, John. The grocery industry is continuing to adopt end-to-end traceability, as we've been saying for some time, the forces driving adoption of traceability are no longer just the FDA mandates, but also market forces. In other words, competition is taking over. Retailers are embracing traceability as a solution to address risk, improve recalls, and as a marketing tool to retain customers. While some retailers are going to continue to focus on the FDA regulatory issues, many retailers recognize that traceability is ultimately inevitable. As evidenced by Kroger, Albertsons, Walmart, and Target over time, we are also convinced retailers in the long run are not going to trace just a limited list, but they're going to trace it all. These two different forces are working their way through the system. Certainly, it's true that many retailers are hesitant to commit to traceability until they know what the current administration is going to do. But the sense of inevitability of traceability is sinking into our industry bit by bit. Keep in mind that slower is best for us; slower is smoother, easier, and more profitable for us. We would be surprised if there isn't some delay in terms of the FDA enforcement. We've spent the last two years advocating for some delay, and we fully expect it. That delay does not, however, mean that traceability is going to go by the wayside; it's simply a recognition of the fact that the industry is still not as prepared as it needs to be at this point in time. This timing is lined up exactly as we expected, and we've positioned ourselves as the go-to solution to meet both the FDA demand and the market forces for tracing everything. We are already, by far, the largest operating traceability network in the world. It's pretty amazing if you actually think about it. Our scale is drawing the attention of the industry and of additional players that want to partner with us, but there'll be more about that later. For ReposiTrak, it's driving a growing base of recurring and deferred revenue. Given what we have in hand, we are anticipating accelerating to double-digit revenue growth in the second half of our current fiscal year, bringing the whole year up to our desired 10% to 20% growth of top line range. It's significant to note, though, that it's not just traceability driving our growth. Our core business and traceability are both growing. Think of what we do as having multiple doors of entry, and traceability is simply one of those doors. We continue to improve our automation and onboarding process. The percentage of customers who are now onboarding through the automated Wizard is continuing to increase, but we've got a lot more work to do. This automation initiative is key for us; it's critical to our ability to efficiently grow. More importantly, our customers will need this level of efficiency for themselves. Specifically, we have around 5,500 facilities that are being actively enrolled by our retail and wholesale customers. It will take 18 to 24 months to onboard these suppliers. And those 5,500 facilities that we have in hand today that are being required to enroll by their hubs represent nearly $10 million in incremental annualized revenue over the next 24 months or so. Simultaneously, the addressable market continues to grow, and we continue to strengthen our competitive position. Let me give you an example. Last quarter, I spoke about the opportunity to help suppliers connect with non-customer retailers. Kroger, Albertsons, Target, and Walmart, for example, have mandated that suppliers trace all food products, and they're implementing this mandate well ahead of the FDA's deadline. These large retailers handle traceability internally, as you'd expect, but they work with thousands of suppliers, many of whom are currently in or planning to join the ReposiTrak traceability network. This creates an opportunity because of our technical capabilities to help them connect to retailers and wholesalers that may not themselves be using us as their exclusive traceability portal. Once again, we are data-agnostic. We are positioned as the universal translator for the industry, connecting key data elements to nearly any traceability platform automatically and seamlessly. This gives us a powerful advantage and opens up a very large additional market for us. We are positioning ourselves to take advantage of the fact that we are, by far, the largest database in the world for traceability data. This doesn't just give us a competitive advantage; it actually makes us attractive for others to partner with us. For example, we recently partnered with Upshop, one of the leading providers of store-level receiving solutions and in-store solutions. Every grocery store has some process to scan deliveries as they arrive and put the data into the store systems. Upshop is one of the leaders in this space along with a handful of others. Retailers are requesting assistance from Upshop and others to gather traceability-oriented data as part of their own process. This is something beyond the normal scope for these companies and therefore, partnering with ReposiTrak was an obvious solution. We expect additional partnerships as we expand as well as additional retailers and wholesalers signing up with us as a result of these partnerships. Because we are the largest database of supplier and other traceability information, it's making us attractive to others who want to be part of our growing network. This is a classic network effect where the size of the network itself attracts even more players who want to participate. As more retailers recognize that traceability is an inevitable part of being in the grocery business, the FDA's role in driving timing will continue to diminish. So the likely pushback of the enforcement deadline from the FDA would actually be welcome news for us. As for ReposiTrak, our focus has always been and always will be on meeting the needs of our customers. For our retail customers, this means putting the solution in place that enables them to meet their internal and external requirements without creating a burden or impacting their P&L. For distributors, this means deploying a solution that as much as possible works within their existing processes. For suppliers, this means creating the solution that's workable for smaller entities that may not even have an IT department, rolling it out with as few headaches as possible and pricing that is affordable. So far, the ReposiTrak traceability network or RTN is checking all of these boxes. As we've always said, when our customers do better, we do better. But as excited as we are about traceability, our core business is continuing to do well also. Our growth in the second fiscal quarter was due to growth in all parts of our business. We anticipate our accelerated growth in the second half of the year will also be a combination of growth in our core business as well as traceability. By design, we anticipate that our profitability will continue to outpace our revenue growth. Our business inherently drives cross-selling. Let me give you an example. One of our larger customers started with us doing compliance for a limited number of their suppliers. The success we had in compliance positioned us to be the ideal solution for their traceability problem. So they're doing traceability with us. Now this customer has come back with a significant expansion of their compliance scope. They're effectively doubling their compliance business with us, and this will inevitably lead to an expansion again of the traceability business. The two business lines are inherently connected in the eyes of the customer, and the result of that is that each time we do an expansion, it leads to additional expansions down the line. Importantly, we should all remember that we are not simply a traceability company. Our business model is simple; it enables consistent growing profitability, simultaneously delivering the results that our customers expect. This allows us to continue to return more and more capital to the shareholders. As we continue with our capital allocation strategy, we've redeemed preferred, we've redeemed common, we've paid off all our bank debt, we've increased the common dividend every year, and we still have $28 million cash in the bank, up from just a few million not too many years ago. In fact, it's important to keep in mind that our 5-year CAGR is 30% compounded for net income and earnings per share at 43% compounded; pretty impressive. We know that. We have lots more work to do, but I'm certainly proud of what the team has accomplished so far. I'm sure you can hear how confident we are about our future. So with that, I'd like to open it up now for questions.

Operator, Operator

And our first question comes from Thomas Forte with Maxim Group. Please proceed with your question.

Thomas Forte, Analyst

Great. Thanks. So first off, Randy and John, congrats on the quarter. I have several questions. I'll go one at a time. But I have more questions than normal. So maybe you want to answer it a little more specifically. The first one is, Randy, I think you've given data points in the last couple of calls about that quantify your ability to onboard customers faster. Can you provide an update on that?

Randy Fields, Chairman and CEO

Yes, that was my comment about the Wizard, as we refer to it. I believe we’ve made significant progress, indicated by an increasing percentage of our onboarded users navigating the Wizard from start to finish. We continue to analyze where users encounter difficulties and address those issues, determining the root of the problems and making necessary adjustments. It’s meeting our expectations, and I believe that a year from now, it will be integrated into the business to the extent that 60% to 70% of users will be able to connect without any assistance. It’s important to note that much of the assistance is due to the fact that traceability is a relatively new concept. Our Wizard isn’t new; rather, the entire notion of traceability is fresh. So we are still engaged in a considerable amount of educational efforts as users try to connect to our network. I think we are right on track, possibly even a bit ahead of where I anticipated a year ago. I believe that within a year, questions about it will diminish because it will become a fundamental aspect of how users enter the network.

Thomas Forte, Analyst

Okay. Thank you for that. John, can you help us understand how we should think about your fixed costs compared to your variable costs?

John Merrill, CFO

Sorry, Tom, I was on mute. I think you could consider the fixed costs, which are cash costs around $12 million. When looking at the incremental dollars, the associated costs are minimal, primarily involving commissions and related taxes. It's straightforward; it takes about $12 million in cash to operate without stock compensation or bad debt. On the incremental side, adding more suppliers or increasing revenue by $2 million doesn’t lead to significant additional sales costs. While there are sales costs, there are no extra development, IT, or administrative costs since we haven't increased our staff, which has remained around 67 people for the past three years. Does that answer your question?

Thomas Forte, Analyst

Yes. And then I feel like this quarter and last quarter, you've talked about the success in all three business lines. Can you give a quick refresher on the relative contribution margin of the three business lines?

John Merrill, CFO

It’s largely consistent, with variations of about 3% across the different areas. Supply chain compliance and traceability typically yield similar margins, stemming from the company’s foundational structure. It's not about the number of people or middle management; rather, it's about having an effective approach. As Randy mentioned yesterday, no one in our company is restricted by budget. If a team member requires something and can demonstrate the potential return, they receive it. Our developers and managers express that they don’t want to hire more staff; they have what they need. This reflects our company culture. Consequently, you won’t see a sudden spike in expenses. While we are investing in the Wizard and marketing, any expense growth won’t be rapid as we scale our revenue. It doesn’t matter which revenue stream we pursue; Randy refers to these as "doors." Whether it’s through compliance or supply chain traces leading to traceability or compliance, we’re observing positive outcomes.

Randy Fields, Chairman and CEO

Yes, let me add a small amount of color to that. When we say that we are investing in now fill in the blank, the Wizard or some other piece of automation, that doesn't mean that we've added people to do it. What it really means is we take our development team, and we focus them on that area. What we've done that's uniquely powerful and very few software companies can say this is we have one large application for everything that we do. Literally, it's one piece of technology. It's not 4, 5, or 10 by application. It's one, which means that all we are really doing is, if you think of it as a car, we are saying, okay, well, now let's tune the engine a little bit. Okay, got that done. Now let's do something with the transmission. We don't have multiple cars, which most software companies have. It gives us an enormous advantage in terms of how we go forward and our cost structure. All we are really doing is refocusing the team on one thing or another. So that's why we have a fixed number of people in the business; it tends not to go up very much at all, and our costs tend, therefore, to be relatively flat. There'll be small increments each year on the cash cost side of the business, but we are really a fixed cost business for the most part.

Thomas Forte, Analyst

Okay. And then my second group of questions are a little more industry-related. So I know historically, you've helped food retailers with their efforts to be in stock. Is there anything you can help them do today to manage the current shortage in eggs?

Randy Fields, Chairman and CEO

Likely nothing because that's driven by a phenomenon over which people have little, if any, control. What you're reading is accurate. It's due to whole flocks of animals needing to be used because one of them gets sick. The bird flu issue has persisted for years and is widespread; it's nearly everywhere. People are often seen around chickens in hazmat suits and sanitizing their vehicles to prevent the disease. It's a very challenging problem without an easy solution. In reality, there's not much we can do about it. Essentially, there's nothing that can be done because a flock that’s perfectly healthy and producing 1 million eggs a day can suddenly have one sick bird, leading to the destruction or euthanasia of the entire flock. This situation is a disaster for those in the business. So, I would probably look for some coil—my apologies, I was just joking. There really is no workaround for this.

Thomas Forte, Analyst

Okay. So that helped me understand that very well, and I appreciate that. So you talk a little in your prepared remarks about the implications of the second Trump term. I had a related question on that. So for the second Trump term, is there an opportunity for you to help food retailers navigate tariffs?

Randy Fields, Chairman and CEO

Yes, we are indeed addressing the entire supply chain for retailers and their suppliers. When we integrate with the entire system, it enhances our ability to forecast and manage orders, which offers significant protection. While we have not yet seen this in food, many other commodities are seeing forward buying to mitigate tariffs. However, as we move forward, we anticipate a slowdown that will eventually affect prices, regardless of the tariffs. We believe this issue will be temporary, and in a few months, the confusion and challenges will subside, although it may remain uncomfortable until around June or July.

Thomas Forte, Analyst

All right. So two of my next questions are going to be my most fun ones. How should we consider the implications of RFK Junior leading health and human services and his efforts to reform food and what that means for you?

Randy Fields, Chairman and CEO

There's no definitive way to know, but we have a clear stance. His main focus seems to be on safety, and we are at the forefront of food safety issues. However, let me present some facts. First, based on his comments, safety is his primary concern. We've engaged with many congressional offices to understand their views on food safety. Most believe that food is already being tracked and traced, which highlights a surprising lack of awareness about the industry's current state. When we clarify that this isn't the case, it's shocking. To end traceability would require legislative action, as it's already part of the law. It would necessitate proposing new legislation and successfully passing it through Congress to halt traceability. More likely, Congress might instruct the FDA to relax enforcement of traceability, which would alter the enforcement timing rather than change the legal requirements. Despite possible delays, many companies recognize the inevitability of traceability and are proactively adopting it, creating market forces instead of relying solely on regulations. While we believe RFK Jr. may not pose a threat to us, his focus on food safety could actually be beneficial. The increased attention to food safety is advantageous for our positioning. Many recalls have happened recently, which reflects that food is getting safer. According to recent polls, Americans are concerned about food safety, not just specific issues like food coloring. Highlighting the importance of food safety is favorable for us. A slower implementation process is preferable to ensure a smoother transition. We expect a delay of possibly two to three years, which would greatly benefit us and our clientele.

Thomas Forte, Analyst

Okay. Boring one. So current thoughts on capital allocation, dividend buybacks, and strategic M&A. It looks like in the quarter, you both redeemed preferred shares and bought back common shares in the same quarter.

Randy Fields, Chairman and CEO

And increased dividend. We did all of it and put more cash on the balance sheet. There's no change to our capital allocation strategy. And as John has said, we are sort of opportunistic about it. We look at it quarterly and decide where is the best lever? Is the best lever to increase dividend? Is the best lever to do with stock buyback? What's the best lever? But in general, we still expect half the operating cash flow of the company to go on the balance sheet and ultimately, the free cash on the balance sheet and then the rest somewhere between dividend and stock buyback. No change.

Thomas Forte, Analyst

This is my favorite question, and I have one more after this unless you inspire me to ask more. I'm certain this has no impact on ReposiTrak, but Randy, I would appreciate your thoughts on DeepSeek and any AI-related implications for ReposiTrak, including whether you are increasing your own capital expenditures to focus more on AI.

Randy Fields, Chairman and CEO

Yes, there is no impact at all. We've been involved in AI for many years. The fact that everyone is discussing it makes us want to remain quiet because we are not trend followers. AI is a part of our operations and will increasingly become so, but we approach it in a cost-effective manner. We don’t focus on playful bots. Our investment in AI is separate from our capital expenditures and as we have mentioned, our annual CapEx is generally below $1 million. Therefore, this will not affect our CapEx at all.

Thomas Forte, Analyst

Excellent. Last question then. So where are we today in your efforts to work with restaurants? I think there would be heightened interest on E. coli breakout or outbreak in McDonald's rather.

Randy Fields, Chairman and CEO

Yes. Remember, they're not as lucrative for us as the grocery business because they have fewer suppliers. So I think we are close to having our first few food distributors come on board that work with the restaurant and food industry as you would think about it, fast food, QSR, et cetera. So we are closer to bringing a few of those on, but I'm not as bullish about that part of the business as I am the rest of what we do just because of our business model.

Thomas Forte, Analyst

It's a point of clarification there. So it's not about the number of locations times the number of suppliers, meaning if you had …

Randy Fields, Chairman and CEO

No.

Thomas Forte, Analyst

Okay. So it is truly the hub and spoke that relates to the number of suppliers.

Randy Fields, Chairman and CEO

It's hub, yes, exactly. A typical grocery store usually has around 1,000 suppliers; even a small corner grocery store typically works with about 1,000 suppliers. For a major chain, like one of the largest pizza chains, they have 200 suppliers and operate 6,000 locations. The key point is that our approach positions us in a more profitable market at this time.

Thomas Forte, Analyst

Okay. Thank you for indulging me. Congrats again for the quarter.

Randy Fields, Chairman and CEO

Of course.

John Merrill, CFO

Thanks, Tom.

Operator, Operator

And ladies and gentlemen, this concludes today's conference and question-and-answer session. I would like to turn the call back over to Chairman and CEO, Randy Fields, for closing remarks.

Randy Fields, Chairman and CEO

Well, thanks, everybody, for joining us and taking the time. I think if you said what's the most important takeaway, it's the book of business we have, the contracts we've got in our hot little hand that will move through the revenue account in the second half of our year, will pull the full year up to something between 10% and 20% year-over-year. So it'll be kind of in the groove we like to be in. We feel really good about where we are. So hopefully, all of us will have an opportunity to enjoy the stock benefit of that. So thank you all. Thanks for spending the time. Talk to you soon.

Operator, Operator

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