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Exhibit 99.1
C O R P O R A T E P A R T I C I P A N T S
Todd Mitchell, Chief Financial
Officer
Randall Fields, Co-Founder, President, Chief
Executive Officer & Chairman
C O N F E R E N C E C A L L P A R T I C I P A N T S
Ananda Baruah, Loop Capital
Markets LLC
Thomas Forte, D.A. Davidson
& Co.
Herb Buchninder, Stifel
Nicolaus & Co.
P R E S E N T A T I O N
Operator:
Good
day, and welcome to the Park City Group Third Quarter 2018
Conference Call. Today's conference is being recorded. At this
time, I'd like to turn the conference over to Todd Mitchell. Please
go ahead, sir.
Todd Mitchell:
Thank
you, Bethany, and good afternoon, everybody. This is Todd Mitchell.
Before we begin, I want to read our disclaimer statement. On
today's call, we will be referring to today's earnings release,
which can be downloaded from the Investor Relations page of the
Company's website at parkcitygroup.com.
I also
want to remind everybody that this call could contain
forward-looking statements about Park City Group, within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are statements that are not subject to
historical facts. Such forward-looking statements are based upon
the current beliefs and expectations of Park City Group's
Management and are subject to risks and uncertainties which could
cause actual results to differ from the forward-looking statements.
Such risks are more fully discussed in the Company's filings with
the Securities and Exchange Commission. Information set forth
herein should be considered in light of such risks. Park City Group
does not assume any obligation to update the information contained
in this conference call.
Moreover,
in our earnings release and on this call, we may refer to both GAAP
and non-GAAP financial results, including free cash flow, EBITDA,
Adjusted EBITDA and adjusted earnings per share, which are non-GAAP
terms. We believe these non-GAAP terms are useful measures for the
Company primarily because of the significant non-cash charges in
our operating statement. Reconciliation of GAAP and non-GAAP
results are in the earnings release and on the Investor Relations
website.
Now,
with that done, I'm going to talk a little bit about the financials
for the quarter, and then Randy's going to give you a more
qualitative update. Let's specifically talk about the third quarter
results.
We had
a strong quarter on many fronts. First, we are successfully
launching MarketPlace ahead of schedule. Second, we are
successfully growing the scale of our compliance network and the
scope of our compliance offering. Third, and most importantly we're
successfully executing on our converged business plan. Compliance
drives the scale of our network of customers, and supply chain and
new compliance applications increase the scope of our customer
engagements. MarketPlace is driving a virtuous circle reinforcing
these activities.
-1-
MarketPlace
shifts the sales dynamics for our service from mandate to desire,
or from fear to greed, as Randy would say. MarketPlace compels a
supplier to give us information which we need to provide them with
other service while creating a stronger rationale for them to use
these services. In a nutshell, MarketPlace makes our platform more
attractive for both the buyers and the sellers on our
network.
How do
we know that this converged business plan is working? Retail and
wholesale subs are choosing our compliance services because of the
scale of our network. They're excited to be involved in MarketPlace
and developing new use cases for the platform all on their own.
Suppliers are enrolling for our compliance services and getting
compliance faster. MarketPlace is generating incremental revenue
for suppliers using the service. We are successfully executing
against the objectives of both our HUBs and suppliers at an
accelerating rate, and with a growing degree of efficacy. Randy
will discuss this all in greater detail in a minute. But let me
say, given the accomplishments in the past quarter, our confidence
in our long-term prospects has never been greater.
Let me
talk a little bit about some of the specifics with regards to the
quarter. Revenue, fiscal third quarter revenue was $5.3 million, up
11% from $4.7 million a year ago. This was the second largest
revenue quarter for the Company ever, and we saw growth in every
line of service. However, the interest in MarketPlace was beyond
our expectations, and as result, we had some work to catch up with
our customer demand. We made a conscious decision to shift
resources to this initiative.
Specifically,
we had the Success Team engage their customers on pre-revenue
recruitment for MarketPlace, which pushed other revenue
opportunities for this team out of the quarter. However, as a
result, we now expect MarketPlace to make a meaningful contribution
to revenue in the fourth quarter, which is ahead of plan, which,
when compounded with revenue from pending deals, gives us a high
level of comfort that growth in the fourth quarter will return to
our targeted range.
Profitability:
fiscal third quarter net income was $457,000, or 9% of revenue,
down from $900,000 a year ago. Total operating expenses were $4.8
million in fiscal 3Q, up from $3.8 million a year ago. This
year-over-year increase in operating expenses reflects costs
related to new product introductions, including commercial scaling
of MarketPlace and the expansion of ReposiTrak's compliance
capabilities as well as higher overhead associated with scaling our
execution capabilities.
By
component, cost of services were $1.8 million in fiscal 3Q versus
$1.3 million a year ago. This increase year-over-year was largely
due to investment in MarketPlace on multiple fronts. First, we
rolled out MarketPlace's store ordering platform across one of the
major—one of the biggest retailers in the country. This was a
major endeavor and required a great deal of organizational focus
and resources. Second, we added development resources to improve
MarketPlace's user interface and to streamline our supplier
onboarding capabilities. This helped us to register nearly 700
suppliers to MarketPlace, up from a handful at the beginning of the
year. It supported the addition of nearly 100,000 SKUs to
marketplace, up from less than 1,000 at the beginning of the
year.
Third,
at the request of our customer, we rolled out a MarketPlace use
case which we call Speed Retail, which required significant
investment to get it up and running. Because of the acceleration in
MarketPlace, we now expect cost of service as a percentage of
revenue to be up modestly in fiscal 2018 from fiscal 2017, although
not to the degree that you saw in the third quarter.
Sales
and marketing: sales and marketing expenses were $1.6 million in
fiscal 3Q, up from $1.35 million a year ago. Most of this increase
year-over-year was due to scaling the Success Team. Sales and
marketing expenses were down from fiscal 2Q due to lower variable
compensation. We now expect sales and marketing to be flat as a
percentage of revenue in fiscal '18 versus fiscal '17.
General
and administrative: G&A was $1.3 million in fiscal 3Q versus $1
million a year ago. This increase year-over-year was due to a
number of items, including higher costs associated with finishing
some of the bigger components of our 10x project as well as higher
expenses associated with our plans to expand some facilities so we
have room for the Success Team and some of the strategic
initiatives that we've been pursuing. Nevertheless, general and
administrative should be flat as a percentage of revenue in fiscal
'18 versus fiscal '17.
-2-
With
regards to cash flow and liquidity, we ended the fiscal third
quarter with nearly $15 million in total cash, which was flat with
fiscal 2Q despite redeeming $1 million worth of our preferred
equity. We continue to generate significant amounts of cash, and we
will continue to grow our cash balance. We believe this is a key
measure by which our customers evaluate our strength when
considering us for increasingly large and increasingly
mission-critical engagements, which is a trend we're seeing and
something Randy will talk about more.
I'll
now turn it over to Randy for a more qualitative
review.
Randall Fields:
Todd,
thank you. I want to actually begin today, we're going to go big
picture down to micro, so I can attach what it is that we're doing
here, within the quarter and ongoing, to what's happening in the
world in which we're doing business. There's been two huge
megatrends that have emerged that have had a profound impact on the
grocery business. The first of those is one you certainly know
about, which is the increased social attention on food safety, the
resulting regulatory mandates of the Food Safety Modernization Act.
What that's really done is to increase the risk profile in the
industry as a whole. Everybody is concerned about it.
The
second is the accelerating disruption from Amazon. That's forcing
the industry to think about technology differently than ever before
and to adopt technology more rapidly than they ever have before.
Mercifully, we're a major beneficiary of both of these megatrends.
First, because our solution successfully offset the negative impact
of these trends but secondly, maybe at a more base level, there's
an increased sense of urgency in the industry to adopt solutions
such as ours, not because of just ROI but frankly, because it's
increasingly a means to survival.
What's
the evidence, you might ask, about this set of assumptions and
assertions? Well, last year, as a result of the first megatrend or
increased concerns about food safety, we saw a dramatic
acceleration in the adoption of ReposiTrak's compliance solution.
This year, as a result of the second megatrend, the Amazon, we're
seeing an even faster adoption for MarketPlace relative to its
stage of development and, in fact, please note, even compared to
how ReposiTrak compliance started out years ago.
Admittedly
getting our customers' provisioned for these services because of
the sheer number of connections we're adding to the network, is
causing some near-term variability in our results. But to be clear,
building out the scale of our network and in the process,
delivering on the promise of success for our customers is prima
facie job one, with regard to the ultimate goal of creating
Shareholder value. Let me give you some metrics that support the
assertion. In our compliance business, total connections are up 50%
year-over-year, 50% year-over-year, to more than 50,000 connections
between all of the participants in the network. But at the same
time, and this is perhaps much more important, compliance levels at
the same time that the network got 50% larger, compliance levels,
which is the metric that our customers use to measure how we're
doing on their behalf, is up 18% year-over-year.
I'm
incredibly proud of the team, as you can imagine, because even
though we've gotten larger and larger, our customers' success has
gotten better and better. Rarely do you see that happening, greater
size but much greater performance on behalf of our success with our
customer set. In addition, the time that it takes us to get a new
HUB online and compliant has dropped more than 50% in just the last
two years. We're getting better and better, bigger and bigger and,
strangely enough, faster and faster at achieving results on behalf
of our customers.
-3-
Our
ability to grow scale and successfully execute it is not limited,
though, just to our compliance offering. Now that we have this
converged network that we talk about a lot, you will begin to see
us measure the total connections that we have across the network,
meaning in all three of our buckets of activities.
We now
have nearly 250,000 connections with our customers that exist
inside the network as a whole. That number is up nearly 20%
year-over-year and obviously, suggests that we're adding to all of
our activities. Going forward, our emphasis will increasingly be on
the growth of the scale of the entire network, not any one of the
segments, in particular. We're now actually, as long as we're
talking about MarketPlace, we're seeing that kind of rapid scaling
taking place. As Todd highlighted, we now have more than 700
suppliers registered, about 100,000 SKUs in the MarketPlace, and
clearly this is just the beginning.
We
recognize that so far in MarketPlace, our efforts are not
immediately rewarded with revenue, but we also know that we're
laying the foundation for a very interesting future. Obviously, the
question would be why is this happening? Well, first, scale begets
scale. We're increasingly seeing what you would know as the network
effect. We are seeing more and more, if you will, compliance HUBs,
that part of ReposiTrak, coming to us because they know that we are
the largest network of its kind. That means that they know that we
already have a significant share of their suppliers in our network
and those suppliers have become compliant with other HUBs, and as a
result, they have confidence that we can be effective, rapidly with
them.
We're
also seeing interestingly larger supply chain deals on the same
basis, meaning that they see the scale of our network, and we're
seeing more multiservice deals. We think that's happening because
of the unique capability of this converged platform but, most
importantly, it's our proven ability to execute at scale. If you're
a large company, one of your biggest fears is, if you do business
with a smaller company, can they actually execute against your
scale problems? We've demonstrated that over and over
again.
But
secondly, MarketPlace is changing the sales dynamic for our
services, and we're adjusting to that. As Todd mentioned, I think
of it as going from a fear orientation to greed, or from mandate to
desire, as Todd would say. It's beginning to be, MarketPlace that
is, its own driver of scale for our network and clearly that's
exciting. We must, and will remain very well focused on driving the
MarketPlace opportunity for us. The focus going forward is on
driving the scale of the network from 250,000 connections today to
0.5 million in the foreseeable future, and then 1
million.
But
importantly, at the same time, we're focused not just on the scale
of the network, but we want deeper relationships with our
customers, and we want our customers to experience the same trends
we've seen recently, which is deeper and deeper appreciation of the
success that we've had with them in terms of how they measure us.
MarketPlace becomes a key part of this initiative, because not only
is it helping to drive scale, but increasingly, suppliers want to
be involved, and I'll show you why in a moment. At the same time,
it does require suppliers to give us information about their
business that frankly makes it easier and more rational for them to
use additional of our services. That makes it a pretty cool
business model.
Let’s
talk about some of the activities during the quarter. In terms of
MarketPlace during the quarter, we certainly proved the value of
MarketPlace to our retail and wholesale HUBs. We successfully
launched it, as Todd mentioned, across hundreds of locations at one
of the largest retailers in the country, you could also say, the
world. But secondly, and this is the most important point, we
proved the value of MarketPlace to the suppliers on the network by
driving incremental business to them. I love anecdotes as we call
them.
Let me
share—I'll do three, I think, amazing supplier anecdotes.
These are, by the way, direct quotes. You'll be seeing more of
these quotes in the near future. These are actual quotes from
actual customers. Quote one: "This business model excites me. In
the first two weeks, we experienced 80% growth in sales to this
customer over the previous year. MarketPlace gives us a new avenue
to reach retailers to help them capitalize on our seasonal product
offering, and it expands demand against our product line. I see
MarketPlace as a key enabler of our growth."
-4-
Second
supplier: "Our experience with the MarketPlace has led to better
access and deeper engagement with buyers and incremental sales in
new store locations. In only four months, we've experienced nearly
300% sales growth and the technology combined with the relationship
and support of ReposiTrak has far exceeded our
expectations."
The
third and final: "This program is ramping up quickly, and we're
very pleased with the results. We're up to 30,000 units in sales.
So it's a phenomenal success. We see amazing potential for growth,
and we hope to be one of the first suppliers you think of when you
meet with new retail buyers."
If one
wonders whether or not MarketPlace ultimately will work, I just
gave you about all the evidence that you need. If we can drive the
revenues of the participants in MarketPlace, we have it nailed.
These are clear examples that demonstrate by solving, initially,
the retailers' problem, then driving revenue to the suppliers, and
it makes the whole idea of our converged platform more attractive
to both retailers and suppliers. Now, what's significant is that we
had to prove to ourselves that we could execute operationally in
this new area of business. It's brand-new to us.
It
creates some, let's call them, operational challenges. They are
different than ReposiTrak, they are different than supply chain.
The truth is, I'm terribly proud of the team for having gone, in
the course of this year, to 700 suppliers, 100,000 SKUs, and you
can probably figure out that was a Herculean task to get
accomplished. But the team did it, and it's really amazing. That
means that over the last 12 months, we have executed upon tens of
thousands of connections, not just in compliance but across all of
the areas of our business including MarketPlace, all at the same
time. While we were doing that all by the way, our metric of
success, the quality of the result we've been able to deliver to
our customers has simultaneously improved. I keep saying it, but
it's true. We're getting bigger and bigger, better and better and
faster and faster, all at the same time.
With
MarketPlace quickly becoming a success, we expect to see it scale
dramatically in the coming quarters. We've done the legwork to
develop a very deep pipeline for this new area of our business, and
we're seeing what Todd calls a virtuous circle. As we add more
suppliers to MarketPlace, more buyers want to be in. As we add more
buyers to MarketPlace, it's driving up the sales of suppliers in
MarketPlace and then even more suppliers want to be in, and so on
and so forth. It's too early to give you a size of the addressable
market for this, although we're confident that it's a very large
opportunity. From what we've seen from the discussion with just a
handful of prospects, we can imagine the opportunity to double our
existing revenue base in working with them in just a few categories
to do that.
Okay,
back to compliance. MarketPlace wasn't the only thing that happened
during the quarter. We turned our focus to growing the scale of the
compliance network, that part of ReposiTrak, increasing the scope
of our compliance offer. Now that we've gained critical mass in
retail and wholesale HUBs, we're getting more aggressive with our,
what we call, supplier HUB offering. As a result, we expect to see
a dramatic acceleration in supplier HUB growth in fiscal 2019. It's
already begun. There is a plan that we will be executing, that we
think will drive a significant number of supplier HUBs into our
network over the next several years. Our goal is to get at least
1,500 supplier HUBs as part of the network, which could translate
into 50,000 to 70,000 additional connections in the course of the
next few years. That in turn, will create even more network effect
and allow us to grow the network more rapidly as we
continue.
We also
recently launched a major rebranding initiative to reflect the
changes in how we go to market. You notice that ReposiTrak used to
refer to our compliance offering. Well, all of our products now
exist under the ReposiTrak umbrella, if you will. We've updated the
ReposiTrak.com website, which highlights our converged suite of
applications. Now, it, in fact, encompasses compliance, supply
chain and MarketPlace. We're beginning to make it clear to our
customers that our services are available on a single technology
platform, with a single user interface for suppliers across all of
our applications, with a single source of data for all trading
relationships and, importantly, a single point of sales and service
contact inside our business.
We also
announced during the quarter our first international partnership.
We announced a strategic initiative a couple of quarters ago and
the fruits of that are now beginning to show up. We would
anticipate having other additional international partnerships over
the course of the next year or two.
-5-
I want
to conclude by talking a little bit about our outlook. Obviously,
I'm more excited than at any point in our history about the
outlook. But let me see if I can explain why. Over the last several
years, we've had to simultaneously, one, expand our suite of
applications and platform. Remember, a few years ago, we were a
supply chain Company. We went from a supply chain Company only to
supply chain plus compliance management. Now it's supply chain,
compliance management and, importantly, very importantly, the
MarketPlace. We had to do all of that, we had to build the
infrastructure for scaling the network in its entirety, bring on an
entirely new sales organization, which we now call the Success
Team, and at the same time focus on delivering an increasingly
better customer success and experience; a lot.
Now, as
we look out over the next several years, a piece of our optimism is
based on the fact that much of the heavy lifting is now behind us,
and most of our focus and energy will be focused on growing the
scale of the network and continuing our already terrific legacy of
customer success. Near term, we have several large opportunities in
our pipeline that give us confidence that from a revenue
perspective, you'll see a reacceleration beginning in the current
quarter. Certainly, while the financial performance the past few
years has been a bit variable, quarterly performance isn't a
determinant of our success.
Most
importantly, over the year—over the last year, we have added
thousands of new customers, and more importantly, all of our
customers are experiencing a continuously improving success with
our services. We are getting better as we're getting bigger. Our
customers can see it. The metrics that are going to drive our
success going forward are the underlying growth in scale and scope
of our network, the growth of which has clearly been tremendous,
and the ability to commercialize our converged platform strategy,
while delivering continuously on this promise of customer success
through excellent execution.
I
couldn't be more thrilled about how we're positioned to help our
customers respond to these megatrends that we mentioned, and
everybody in the grocery industry is increasingly focused on how
they will cope. As I've said on perhaps every conference call we've
had, our customer success is the most important factor to creating
Shareholder value, and we're certainly demonstrating that. Okay,
some questions.
Operator:
If you
would like to ask a question, please signal by pressing star, one
on your telephone keypad. If you're using a speakerphone, please
make sure your mute function is turned off to allow your signal to
reach our equipment. Again, that's star, one to ask a
question.
Our
first question will come from Tom Forte of D. A.
Davidson.
Thomas Forte:
Great,
thanks for taking the time to give us all the details on the ramp
of MarketPlace. The question I had was how should we think about
monetization, your ability to monetize all three products and your
ability to focus on one while also monetizing the other two.
Thanks.
Randall Fields:
Good,
thank you. It was a little unclear, Tom, so let me make sure I
understood the question, and I'll answer what I think you said and
if I didn't, just reel me back in. To a certain extent, because we
have a single point of focus with a customer, one sales
organization that maintains our relationships with each of our
customers, there's the appearance, at any moment in time that we
are, if you will, single threaded. The truth is that our customers
want us to sequence them through our product set each time as they
become successful and settled in.
It
would be no different than in the securities business if you had
three or four people from the same firm calling on the same
customer. It's annoying and it doesn't lead to more success. We
have a funnel, if you will, where individual owners of the accounts
are responsible for moving customers from one activity to another.
That's point one.
-6-
The
point two on the MarketPlace, there are several ways that we see to
monetize it. At this point, we want market share, utilization and
success, and over the intermediate term, we think we will be able
to share in incremental sales, one way or another, from the success
of suppliers. In other words, if somebody is coming into the
MarketPlace and they are able to sell more, we will have a
participation in one form or another, in those increased sales.
That will help us monetize, and we think there's several other ways
to monetize that.
But
importantly, because it brings people into the whole of the
network, in the longer term, what happens is that when somebody
becomes a user of MarketPlace, if that's their point of entry into
our world, then we've got opportunities to sell them supply chain
and, ultimately, to sell them on compliance capabilities as well.
The bigger the network, the more self-reinforcing each of the
pieces becomes, and obviously, over time, as our sales force gets
deeper and deeper into the customer relationships they're building,
it will get easier and easier with time to sell more and more of
the range of our products. We are lucky we are a Company that has a
profitable core.
We know
we are making investments in MarketPlace but the success tells us
that we're doing the right thing, and pretty quickly, you will see
us monetizing MarketPlace from both our revenue and, ultimately,
our profitability. In the long run, I want to be clear, we think
that MarketPlace is ultimately a somewhat lower-margin business
than the rest of our core business, but ultimately, could be much
higher volume. It will be very accretive, if you will, to our
dollars of earnings. Is that helpful? Is that the question you were
asking?
Thomas Forte:
Yes,
thank you, Randy.
Randall Fields:
You
bet.
Operator:
As a
reminder, that's star, one to ask a question. Our next question
today will come from Ananda Baruah of Loop Capital.
Ananda Baruah:
Hey,
good afternoon, guys. Congratulations on the MarketPlace event.
It's actually pretty impressive, and it continues to surprise.
Congrats on that. I have a few, if I could. I guess, the first one
is, Randy, you made mention of the expectation for MarketPlace to
scale, I think you said dramatically, in coming quarters. You had
given some metrics during the call as well from 250,000, I think
you said, it's a 500,000 sort of intermediate-term, I’m
paraphrasing here, and then you made mention of 1 million. I guess,
can you put some context around the scaling dramatically remark,
then I have a couple of follow-ups. Thanks.
Randall Fields:
Ananda,
real quick, just to make some clarity here. What we were referring
to at 250,000 was the total connections across all of our platform
for all of our services. The metrics we put forth for MarketPlace
were 700 now suppliers in MarketPlace but I think the real
impressive one is about the 100,000 SKU. Here's what we're saying,
from an increasingly—a metric that others will start to
follow, is how many connections across the whole of the
MarketPlace. Less and less will we talk about individual pieces,
because as we're seeing more people are participating across the
network, and it is the whole of the network that seems to interest
our pipeline, companies in our pipeline. What we're saying is,
today, we have 250,000 connections in the whole of the network.
Within three years, I want to be at 500,000 connections, and within
five years, over 1 million connections.
-7-
We see
a road there and it requires all three of our activities to grow
markedly, and to be self-reinforcing. But we see no reason that we
can't get from there—get there from here. In terms of the
scaling of MarketPlace, it caught us—and I think I've been
candid about this—we anticipated a particular way that people
would use MarketPlace, and we were fully prepared for it. But as it
turns out, people had different uses in mind, and so we've been, in
a sense, sort of we've been pleasantly surprised that the use of
MarketPlace is greater than we imagined, more varied than we
imagined, and is more appealing than we imagined, all of those
things simultaneously.
Even
when we are doing, I want to be careful how I say this—no, I
won't be careful, I’ll just say it because that's sort of the
way I am. It used to be that we would present the Company in the
order of product that we thought they would want. Meaning, if
somebody said tell us about Park City Group ReposiTrak, we would
say, "Well, first, we do compliance management, and then we do
supply chain and then, oh by the way, if you need to replace some
suppliers, we also have this thing called MarketPlace." In the last
number of presentations in the last few months, virtually everyone
that we've presented to, got to the MarketPlace and went, "Oh my
God, that's transformative. Yes." In other words, we've sort
of—we've had to reorient much of our thinking about the
attractiveness of MarketPlace, and we're still trying to adjust to
it.
It's a
really interesting deal. It has lots of applicability. You're going
to see it scale in terms of revenue, et cetera. We said it would be
significant in 2019. Now we're saying it's going to make an
important contribution in the fourth quarter of 2018. Clearly, our
time lines are moving up. We're still responding to how to adjust
to this change.
It
caught us by surprise. I mean there's nothing else to say in the
current quarter, last quarter, it's fair to say, I'm looking at two
people from accounting. People in accounting have been obsessed
with how to react to it, people in service—everybody in the
Company somehow, someway has been focused on, wait a minute, this
is not exactly how we expected it to unfold. What's the right way?
How do we get the process right? How do we get technology, et
cetera? So it was pretty significant and it definitely impacted us.
It's going to be pretty intriguing going forward. If our customers
are correct, the way they will use this will end up being quite
different than we originally imagined, but it will be salutary for
our revenue. We are really solving a problem, I mean, seriously
solving a problem for the industry.
Ananda Baruah:
That's
great answer. Yes, that's fantastic and it actually speaks right to
the heart of the next question but I appreciate it. I guess, just
to follow on that, I believe that there was a comment that you
expect to get back into your target range in coming quarters and
maybe even the next quarter. Can you clarify that? Then, just sort
of remind us what the target range is and what should we think of
as a target range?
Randall Fields:
Yes, I
mean, I think that—and this is one man's view, of course. The
most important thing in our business is our customers, clearly, and
there's nobody has ever listened to one of these calls that hasn't
heard us say that at least three or four times on every call. Our
customers have pulled us in a particular set of directions
involving MarketPlace, supply chain, et cetera, in terms of making
connections with us. We've been satisfying those demands. That's
how we grew 20% in connections year-over-year from a 200,000 base.
What we want now to see, just like everybody else, now we want to
see our revenue catch up with that, and we have enough large deals
in the pipeline that, in the course of the next few months, you'll
hopefully see some announcements that, if they will allow us to
publish them, of some relatively large supply chain deals,
MarketPlace deals and compliance deals.
We feel
pretty good about the revenue outlook from where we are as well as,
more importantly, in the long run, just the growth and scale of all
three pieces of the business across the network. Our target is
still—our target hasn't really changed. Year-to-year, we want
to see 25% to 35% top line and much of that come down as bottom
line. We have also said we will have years above that and we have
years that potentially could be below that. MarketPlace may,
may—I want to say may 12 times here, but I won't bore you
with it—may give us a little bit more upside than we would've
otherwise thought we could execute at the same time that we drive
the customer success result.
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Remember,
the constraint here is the quality of the result we deliver for the
customer. If I were listening to this call, the most important
number Randy gave was an 18% improvement in compliance rate. At the
same time, we increased the size of that network by 50%. Getting
bigger, getting better and going faster, that's what everybody
should be watching. The gate is to make sure that we keep getting
better and that lets us get bigger, faster.
Ananda Baruah:
Thanks,
Randy, thanks so much.
Randall Fields:
You
bet.
Operator:
Our
next question will come from Herb Buchninder of
Stifel.
Herb Buchninder:
Hi,
Randy. I've got two questions. Can you hear me?
Randall Fields:
Yes, we
can hear you.
Herb Buchninder:
Okay,
because I'm on a speakerphone. But do you need more people in your
organization to handle all this because your first comment was that
it sounds like you had to take people off maybe your basic
compliance business to focus on MarketPlace. I'm not sure how
you're going to handle all this if it works out the way you want it
to work out. Are you adding more people and specifically what
people do you need?
The
second question is, if you're going to get some revenue in the
fourth quarter from MarketPlace, I need you to explain how you're
going to get it. To me, the obvious thing is if a transaction
occurs, you can get a fee, but I don't understand how you can
actually get something based upon the revenue of that transaction.
I don't know how you could even know what the revenue would
ultimately be unless you can really control it. Those are two
questions, I guess.
Randall Fields:
Okay,
two good questions. We continue to add people at the point of
customer contact, which is where we need them. It really wasn't a
case of we didn't have enough people. It's that, you
cannot—it's hard well—but I mean, I'm speaking to
somebody from (inaudible). You don't want multiple people calling
on the same customer. You really want a point of contact and the
truth is, we had to get to all of our suppliers, get them in the
network, help them get on boarded. It was just the change in
emphasis in the middle of an environment where the demand for one
of the products that we had was much greater than we anticipated.
It was a stroke of—I think we'll ultimately see it was a
stroke of good luck.
We
listen to the market, we listen to our customers, and we shifted
what people were doing to accommodate them. But we continue to add
to that activity, meaning more people in that particular function.
But it's also critically important, Herb, that when we bring them
in, that they're well trained, they're well seasoned. But the team
is incredible. They're really good, and we do not feel constrained
on bringing people in. There's no sense of constraint on that. We
bring in what's perceived to be needed.
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Todd Mitchell:
Also,
Herb, if I could sort of elaborate on what Randy is saying, look,
if you look at what we've been doing over the last year, we've
converged our product set, and we bought these three sort of
application sets online on a single platform. Now, we've always had
the same technology backbone, right? But what we've done is we put
them on—and we always had the same technology backbone and
largely the same customer base. But now they're on a single user
interface, single source of data, single sales
relationship.
As we
brought that online, what we've done is essentially taken the
supply chain business and built MarketPlace on top of the
ReposiTrak compliance infrastructure. We've taken those groups of
individuals and, essentially, every two quarters, said, here's a
new product set for you to manage. Same customer, same user
interface, but a more complex span of control. We've really had to
create the ideal Success Team member. That's been—that's a
tremendous learning experience for us and for them. Once we get
that right, once we get that span of control right, then we'll
start cloning them. But we really have to get the activity set
right before you just throw bodies at it.
Herb Buchninder:
Okay,
thanks.
Randall Fields:
But
it's moving along, okay, and the answer to your second question is,
we believe the fees can be fees that are percentages of sales. We
don't just say it's $1 per transaction. We're not going to be the
E*TRADE of the business. We will be somebody that says, we want 5%
or 10% of the sales. The higher the sales, the more money we will
make. There's certainly some very interesting opportunities. The
buyers are approaching us from a variety of perspectives too. We're
trying to put together how the buyers want to buy and how the
sellers want to sell. Again, somewhat surprising to us but, oh, my
God, have we responded. The interest is far higher, and we just
need to execute brilliantly. We are no...
Herb Buchninder:
I can't
imagine how the initial contact—you would know how much sales
are going to be generated. Don't they have to ultimately get
together one-on-one and talk to each other to determine what's the
kind of business like?
Randall Fields:
No, no.
Oh, good, that's the best question I've had in a while. It's
actually—think of this as, it looks like Amazon. The orders
are placed inside the system. We see every dollar of order. We
track the whole damn deal, that's our strength.
Herb Buchninder:
Yes,
that answers the question.
Todd Mitchell:
How do
we know it's going to grow next quarter? We have a request to get a
gathering of suppliers for a group of product for a retailer that
has a significant interest. We don't know exactly what they're
going to buy, but they're eager to buy.
-10-
Randall Fields:
I
didn't explain it very well, Herb, so I'm going to hitchhike on
your question, but we see the transactions. We watch it. We fulfill
it. I mean, we know everything end-to-end. But here's what's
happened. This initial retailer that works with us to try this
idea, initially, just one idea that we executed, now has four
different programs by the end of June that will be up and running
within the MarketPlace. They love it. They keep going, oh my God,
here's another idea. In fact, they're doing—one of these just
boggled me. There's something going on in Omaha, Nebraska. I don't
even know what it is. That's not too far from you. I think it's
like the World Series of something.
Todd Mitchell:
Some
weird sport event.
Herb Buchninder:
Yes,
the College World Series is in Omaha.
Todd Mitchell:
Yes.
Randall Fields:
Is that
baseball?
Herb Buchninder:
Yes,
college baseball, right, baseball.
Randall Fields:
Okay,
got it, okay. Well, so how about this? This company came to us, the
same company that's using it, said, wait a minute, could we target
our Omaha stores and just have merchandise that would appeal to
whoever goes to whatever that is. We said, yes, yes. They're doing
it. They are beginning to learn to use the tool in a way that
drives their revenue, the suppliers' revenue, and thank you very
much, our revenue. But we see the whole flow. That's the beauty of
what we really do is, you're right, we see the whole thing. It's
not hard to put ourselves in the middle of the flow.
Todd Mitchell:
But you
see what this use case is, right? It's a database of compliant
suppliers that corporate can pre-approve and then let local store
managers have the freedom to order specifically for their market
where they have the intelligence for their market. It's resolving
this age-old tension between the centralization and scale of these
large retailers and the effectiveness of local
Management.
Randall Fields:
It's
pretty—when we run the idea by people, Herb, people just go,
oh my God, I hadn't thought there was a solution to that. Because
you can imagine, if you were in the headquarters of this retail
company, how do you know that there is the World Series of whatever
it was—of college baseball in Omaha, Nebraska, how did you
know that? We've turned that whole problem on its head and we're
solving it locally and to the credit of our amazing development
staff—I mean, my God, the customers just love
this.
Herb Buchninder:
But how
are you going to figure out what's a fair amount to receive on a
transaction? These are—it's a very low-margin business, the
supermarket business. Do you have to negotiate each individual deal
or you're going to have a set schedule, a set fee schedule based
upon the value of the transaction.
-11-
Randall Fields:
We
don't know.
Herb Buchninder:
But
don't you need to know that if the business is starting up right
now?
Randall Fields:
Well,
what you do is you do price exploration to find it. But what we're
finding, really, is this, and it's intriguing: these are
incremental sales to everybody. We're in the incremental sales
business. Your margins are higher on incremental sales than they
are on the other sales. Without us, you wouldn't get the sale.
People are willing to pay more than you would think, and we're
still exploring how it should work itself out.
Herb Buchninder:
Okay.
Well, let us know how you do it when you do it, when you do
it.
Randall Fields:
We
will. Herb, thank you. There were a couple of other questions. One
question was, how are we coming with our blockchain effort in
tracking and tracing? We're doing 200 companies out there. We're
doing the preliminary work to figure out how it might work, what it
might do and does it do anything at a—some higher benefit
than the way we do it today. We're really still in the early
developmental stages of exploring it and understanding it, et
cetera. As you will, I promise, start reading over the next year, a
lot of the people experimenting this stuff are doing—it's
experimental. We're in that experimental stage, for sure. Then the
question is where do we see the Company in two to three years? Much
bigger, much more profitable with a much larger network is probably
the simplest explanation.
I wish
I could be more definitive than that, but all the pieces are now
working. In the first time in memory, several significant retailers
have come to us in the last few months saying, we have checked in
the market and you guys—in fact I'm going to–let me
tell you another story, I'm sorry. A retailer in the industry,
well-known, 150 stores, called us a few months ago, and said, we'd
like to talk to you because we're trying to get our supply chain
compliant, and we went out and hired some people and we're doing
what we thought you did. We call and we do everything to get people
compliant and after more than a year of effort, we're throwing our
hands up and crying uncle. We can't do it. We've checked around,
you are the biggest network. Many of our suppliers already know
you, and they know how to use your system, and want to get on it
with us.
We've
reached the point where the scale of our network is making us more
attractive to others who want to be part of that kind of a network.
That's a first for us. We're finally there. All the hard work is
now beginning in and of itself to create that network effect. As
people experience MarketPlace—it won't happen in the next six
months, but over the course of the next several years, people in
MarketPlace will opt to use compliance and opt to use our supply
chain applications because it's the biggest and the
best.
We're
just about to that tipping point, and maybe we are already in
compliance, where the scale of what we do is such that it, in and
of itself, will attract new users to it. I think that's
it.
Todd Mitchell:
Bethany?
Operator:
Ladies
and gentlemen, this does conclude today's conference. We thank you
for your participation. You may now disconnect.
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