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Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
C O R P O R A T E P A R T I C I P A N T
S
Rob Fink, Executive Vice President and
General Manager, Hayden IR
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.
Walter Schenker, MAZ
Partners
P R E S E N T A T I O N
Operator:
Good
day, ladies and gentlemen. Welcome to the Park City Group Fiscal
Fourth Quarter and Full Year 2018 Earnings Call. Today's program is
being recorded.
At this
time, I would like to hand the conference over to Mr. Rob Fink,
Hayden Investor Relations. Please go ahead, sir.
Rob Fink:
Thank
you, Operator, and good afternoon, everyone. Thank you for joining
us today. Hosting the call are Mr. Randy Field, Park City Group CEO
and Chairman, and Todd Mitchell, Park City Group, CFO.
Before
we begin, I would like to remind everyone that this call could
contain forward-looking statements about Park City Group within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are statements that are not subject to
historical facts. Such forward-looking statements are based on
current beliefs and expectations of Park City Group’s
Management and are subject to risks and uncertainties which could
cause actual results to differ from forward-looking statements.
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 the information contained
in this conference call.
Shortly
after the market close today, the Company issued a press release
overviewing the financial result that it will discuss on today's
call. Investors can visit the Investor Relations section of the
Company's website at parkcitygroup.com to access this news
release.
In
addition, in our earnings release and on this call, we may refer to
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 its operating statement. Reconciliations of GAAP and
non-GAAP results are in the earnings release and on the Investor
Relations website.
With
all that said, I'd now like to turn the call over to Todd. Todd,
the call is yours.
-2-
Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Todd Mitchell:
Thank
you, Rob. Good afternoon everybody.
Fiscal
2018 was the year that we brought everything together. In the
latter half of last year, fiscal 2017, we began to make strategic
investments to bring new products and new services to market to
round out our offering. In fiscal 2018, our revenue trends grew
progressively stronger and our growth in expenses steadily declined
as we benefited from these initiatives. As a result, our fiscal
fourth quarter was a strong end to a solid year across the
board.
That
being said, the year was clearly headlined by the successful launch
of MarketPlace. This is an entirely new offering that seamlessly
leverages our converged ReposiTrak platform, benefiting from both
our supply chain and compliance solutions. With MarketPlace, we can
now help our customers with every aspect of their workflow across
the supply chain, making us the only end to end supply chain
business that can help a retailer source, vet and transact with
their suppliers. We're seeing the positive results of our
efforts.
We are
deepening our relationships with the suppliers on our network.
MarketPlace is changing the dynamic of our relationship with these
suppliers. We're no longer just a mandated service in their eyes.
We're a partner in helping them to grow their business. Our Tier 2
supplier hub growth initiative is also deepening our compliance
relationships with these suppliers. We're no longer just a way that
they show their customers that they are compliant. We're a partner
in helping them make sure their own suppliers are compliant, and in
helping them complete the myriad of activities they need to become
compliant themselves.
We're
also deepening our relationships with retailers and wholesalers.
MarketPlace is a solution to yet another challenge they face,
helping them source new products faster and more efficiently from
suppliers they know are compliant. At the same time, our successful
compliance engagements are helping us establish a relationship with
every one of our retailers, or wholesalers/suppliers and showing
these retailers and wholesalers we have the resources to execute at
scale. This in turn is leading to bigger mandates across our
business.
I hope
you notice that today, we announce, that after the end of the
quarter, we signed our largest compliance deal ever. This follows
signing three supply chain deals during the quarter for scan-based
trading that were very, very material in scale. In short, we are
seeing greater interest across our entire product
offering.
Looking
at the numbers a little more closely, we are very pleased with our
fiscal 2018 results, and we expect to see even better results in
fiscal 2019. Fourth quarter revenue grew 22% to $6.3 million. As a
result, full year revenue grew 16% to $22 million. As I mentioned,
fourth quarter growth was the highest of the year and we feel good
about our position going into fiscal 2019.
Top
line growth for the year was driven by the scaling of MarketPlace
in the second half of the year with approximately $1 million
contribution to fiscal fourth quarter revenue, and a record quarter
in supply chain growth in the fiscal fourth quarter which drove a
record year for that business. I also want to highlight, we saw
strong growth in subscription revenues for both our supply chain
and compliance businesses every quarter this year.
Looking
to fiscal 2019, we expect revenue growth to continue to be in the
solid double-digit, with the first caveat, we're still not a
quarterly Company. There will be variability in our quarterly
results. As we've said MarketPlace is transactional and is becoming
quite large quite fast. It could add variability to our quarterly
results, despite our growing recurring revenue base. The second
caveat, our Tier 2 supplier growth hubs are much smaller than our
Tier 1 retailer and wholesaler hubs. While we expect to see
significant volumes from our growth initiative here, in aggregate
this will start out small and build progressively.
With
regards to profitability, our fourth quarter net income rose 44% to
$1.3 million, up from $883,000 a year ago, growing at twice the
rate of revenue. This shows we are beginning to see the positive
return from our investment initiatives. This trend will only become
more apparent in fiscal 2019. We are focused on growing profits
above all else.
-3-
Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
In that
vein, expense growth continued to moderate in the fiscal fourth
quarter. Total operating expenses rose just 17% to $5 million,
versus a 23% increase for the full year to $18.5 million. We are
investing where it will translate into profitable growth. We're
supporting our new product initiatives. We're maintaining our high
levels of customer service, whether it be by scaling our success
team or investing in the back office and internal automation. While
we talk of these investments in terms of driving revenue growth and
operating leverage, what they're really designed to do is to drive
customer success.
Looking
at expenses by component, cost of service increased 23% in the
fourth quarter to $1.9 million for a 24% increase for the full year
to $6.6 million. This increase from last year was primarily due to
incremental expenses associated with MarketPlace and incremental
expenses to develop new compliance applications. Cost of service
will continue to grow as we invest in our business. But the last
quarter was a step up. Increases should moderate in fiscal
2019.
Sales
and marketing rose 16% in the fiscal fourth quarter to $1.6 million
for a 26% increase for the full year to $6.4 million. This increase
from last year was primarily due to costs associated with building
out the success team and giving them the tools they need to be
successful. As we saw in the fiscal fourth quarter, we expect
growth in these items to moderate—to continue to moderate in
fiscal 2019.
General
and administrative rose 13% in the fiscal fourth quarter to $1.3
million for an 18% increase for the full year to $4.9 million. This
increase from last year was primarily due to higher spending in
back office and other enabling infrastructure. As with sales and
marketing, we expect the growth of these items to moderate in
fiscal 2019.
With
regard to cash flow and liquidity, we ended the year with $14.9
million in total cash, up $900,000 from $14.1 million at the
beginning of the year. This was against accelerated investment in
MarketPlace, increased investment in the success team and enabling
infrastructure and the redemption of $1 million in preferred
equity.
Looking
into the future, we feel good about the trends going into fiscal
2019. We expect to see continued double-digit growth in revenue,
and we expect to see even faster growth in net income and cash
flow. That being said, we will continue to focus on our customers.
We believe we have the right product set. Now we need to take
advantage of the opportunity in front of us. To do this, we will
continue to focus on execution. We cannot say it enough. Execution
is the key to our success. It's what drives an amazing level of
customer retention.
We have
such high retention because of our focus on customer success
because our customers' success is the bedrock of our Company. If
our customers are successful and they feel in relationship with us,
they will want to buy more from us.
Thank
you. I'm going to turn the call over to Randy now.
Randall Fields:
Thank
you, Todd. Thank you, everybody. My remarks today will be as
scripted as the last few have been, but don't worry there's plenty
of time to ask questions at the end. Obviously, we've just finished
a milestone year for the Company and, frankly, 2019 is poised to be
an even more important year overall for our customers and, frankly,
for our Shareholders. As we've noted before, our customer is
responding to multiple challenges in this environment in food
retailing. This is creating some amazing opportunities for us. I'm
going to discuss several of these trends which are impacting our
customer set and our prospect set.
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Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
First,
most importantly perhaps, are changing expectations from consumers,
and it would appear that consumers don't just want more varied
product choices. They want organic, GMO, non-GMO, more locally
sourced, et cetera. That, therefore, is driving a high degree of
product diversification pressure on retailers. Consumers are also
simultaneously demanding more in stock from this diverse, and for
the retailer, more complex product set. In other words, consumers
are making the job of retailers a harder job. They have to stock
more items, more diversified, more locally sourced and keep them
all in stock, tremendously difficult problem.
Secondly,
retailers have to deal with what we perceive, and I think now the
world perceives, as increasing risk and regulation in their supply
chain. Interestingly, it's the consumer expectation that is driving
that risk, meaning as you diversify your product set as a retailer,
to more and more suppliers who are typically smaller and smaller,
the risk around food safety, et cetera, is going up. Strangely
enough, consumers wanting localization and product diversification
are pushing retailers into a more and more risky position with
regard to their supply chain. It's inherently more
risky.
Now
third, retailers are facing a growing regulatory and tort risk. In
case you didn't notice—and this is not just in the Food
Safety Modernization Act, which got us into the compliance
business. But if you noticed, last year was a record number of
recalls. In other words, for whatever set of reasons, the world is
becoming just a little bit less safe from the perspective of the
kinds of foods and the quantity of foods that are making people
sick, and are having therefore to be taken off the
shelves.
But
here's another example, and this one interestingly is socially
pressed. Prop 65 in California. Prop 65, and I'll come back to
explain exactly what it is, has become an increasingly difficult
problem for our customers and therefore a major opportunity for us.
Perhaps, finally, we should be thinking about new technology which
is becoming more interesting, if you will, to the food business.
This is an important dynamic because it would seem logical, and I'm
sure it does seem logical to you, that businesses would always be
looking for the next big thing to help them get a competitive edge.
But that's not been the case for the food industry
historically.
Remember
this is a risk-averse, low margin conservative industry. They don't
want to do something until they see someone else do it first,
almost a chicken and egg situation. But Amazon's acquisition of
Whole Foods has changed that, has created a frightening problem for
our customers, and has created a huge catalyst for change in the
industry because Amazon is showing them what they need to do. How?
Well, Amazon is addressing the changing consumer demand. If you go
on Amazon and look at the number of food items, it's staggering. It
also offers, frankly, the consumer a wide variety of information
about products, including are they there.
There
is virtually no retailer in the United States that maintains a
perpetual inventory that enables them to know exactly what's on
their shelf. If you've used any of the food delivery services like
Shipped, Instacart, et cetera, you've found frequently that an item
that appears to be in stock, they call you or text you or whatever,
and explain that you'll need to substitute it if you want the order
completed. The reality is retailers have a difficult time with just
knowing what they have on the shelf.
Finally,
and this is really the critical element here, by acquiring Whole
Foods, Amazon is taking the technology that has made it so
successful, and putting it in brick and mortar so it's just down
the street from your local grocer. That's creating that interesting
sense of urgency in the industry. But overall, that's what makes,
for example, our MarketPlace so important.
ReposiTrak
MarketPlace, by the way, isn't just another offering in our product
suite. I think it has a pretty reasonable chance of becoming the
cornerstone of our entire ReposiTrak platform and that enables our
customers to move more rapidly, increase their product choice and
localize their business and simultaneously manage their inventory
with more agility.
-5-
Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Obviously
we think we're a lot more than simply the MarketPlace Company, in
spite of how it's performing. We are clearly the industry leader in
compliance and food safety management. I think it's noteworthy that
we're now coming up to nearly 70,000 connections in the compliance
arena. Our supply chain capabilities, frankly, are unrivaled in
terms of addressing the needs of our customers. I think that our
total customer connection across all of the platform is something
in excess of 250,000. We're at scale and that's critically
important to the kinds of customers that we're doing business
with.
During
the last two years, the team has worked enormously hard to converge
the supply chain and compliance businesses and launch MarketPlace
simultaneously. This introduction of what we call a converged
ReposiTrak platform is, without a doubt, and in the long run will
be seen, as the most important development in the Company's
history. With the platform, we're now uniquely well suited to help
our customers be successful as they face ever increasing challenges
in managing their supply chain.
I'd
like you to think about it this way: while others define supply
chain as simply forecasting and ordering, we think supply chain is
very, very, very different than that. Here's how we would define
supply chain. It's one, sourcing suppliers. We do that. Two, it's
vetting those suppliers to be sure that they are someone that a
company should do business with. Then thirdly, it's that space that
others consider to be the whole enchilada, if you will, it's
transacting business with those retailers.
We've
begun getting new customers, interestingly now, from all three of
those application suites that we have; from MarketPlace, from our
compliance management and from our supply chain business. Frankly,
it's a bit of a surprise but it's a nice one. Our original vision
was that compliance would tend to bring in all of the new customers
but now we're seeing that all three application suites are
attracting net new names to us. We're proud of that and, frankly,
as long as we continue to execute, it should continue to be the
case.
Well, a
little bit on each of these product suites; let's start with
MarketPlace. First point I want to make is that MarketPlace is
incremental on an already strong business. It's different than the
other pieces. The second thing I want to highlight is, although
it's incremental, it's quickly becoming a big deal for us and
therefore it's garnering a lot of focus internally and a lot of our
resource.
I'm
sure all of you saw the announcement that it achieved nearly $1
million of revenue in the fourth quarter. That certainly makes it
our most successful product launch in history. In fact, just for
comparison, it took our compliance management business 12 quarters
to ramp to the point that it's $1 million in quarterly revenue.
Interestingly, so far because we want to make sure that our
execution is absolutely brilliant as we expand the product, there's
really only one buyer in the MarketPlace currently and that buyer
is continuing to expand the use of the MarketPlace tool into other
areas and product categories across their business.
I think
in the long run, and something to note, is this makes MarketPlace
by far the highest revenue per customer product in the whole
portfolio. That's why over time, if we're successful with it, it
will become a very important part of our total business. But while
we are scaling MarketPlace, we do expect to add at least two new
buyer hubs and that's our goal during fiscal 2019. We're going to
go, hopefully, between now and next June, from one to three buyers
in the MarketPlace. But remember, as you heard me say countless
times, we want to scale it based on success not just scale
it.
We're
finding buyers with specific need and then making sure we have
suppliers in the MarketPlace that address those needs. The idea is
that, it’s a dating service, if you will. We're trying to set
up a win-win proposition on both sides of the transaction. Why?
Well, it should be obvious. This approach creates happy,
referenceable customers. Yay.
We're
confident the MarketPlace will be a significant and growth
contributor to fiscal '19. Frankly, it's the center of our plate in
terms of focus. Although, I would be remiss not to remind you that
MarketPlace is going to be seasonal so progress is unlikely to be
linear and it's not a finished initiative yet. We
still
have lots to do to make sure that our execution and how we manage
that business continues to go on the right track.
-6-
Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Now,
for those of you who remember, that's exactly what we did with the
compliance business. In the first year with compliance, we did 200
connections with ReposiTrak Compliance and as you know, recently
we've done, in a typical year, 10,000 or more connections. We're
really good at learning how to use scale of business from an
execution perspective without, in any way, denigrating the quality
of what we do. While speaking of compliance, compliance continues
to be a growth engine for the Company.
We're
still seeing strong Tier 1 meaning retailer wholesaler hub growth.
We added three new Tier 1 hubs in the fiscal fourth quarter and as
we highlighted in the press release after the end of the quarter,
we signed the largest deal for compliance that we've ever done
before. This was a big win for us obviously. We're now seeing
growth from two compliance initiatives, the Tier 2, or Supplier Hub
initiative and the whole Prop 65 mandate.
Let me
address both of those things quickly. With regards to Tier 2, or
Supplier Hub growth initiative, after we had the success team focus
on MarketPlace implementation, if you remember, in the fiscal third
quarter, we shifted more of their focus to Tier 2 upsells in fiscal
fourth quarter and that actually produced results quite
quickly.
We
added as many supplier hubs in fiscal 4Q as we did the entire
fiscal year up to that point in time. With many, many thousands of
suppliers already in our compliance network, this represents in the
long run a huge opportunity within our existing book of business.
We simply have to become more and more capable at delivering the
sales message, the marketing message and converting them from the
kind of users they are to now, to actually becoming what we call a
Tier 2 or Supplier Hub.
On the
Prop 65 mandate, it’s one of those amazing things, Prop 65 is
a California—where else would it be—California
regulation which requires retailers to get their suppliers to
confirm that their products don't contain harmful elements, which
means virtually every product has at least one of those. ReposiTrak
is a perfect solution for monitoring that kind of
information.
We're
starting to get more and more incoming calls from retailers that
weren't even on our prospect list, worried about the impact of Prop
65 on their business. As a result, I'm confident that compliance
will continue to be a significant growth contributor in our fiscal
2019 and beyond.
In
terms of supply chain, as Todd mentioned, we had a record quarter
in terms of supply chain growth, led to a record year for the
business. If you remember a couple of years ago, everybody said,
well, what are you doing in supply chain We said, don't worry, we
tend to focus one product at a time so we don't overstress the
system. Now we're seeing a terrific revival of interest, for
example, in our original product which is scan-based
trading.
In case
you don't know what scan-based trading is, it's really an
application, if you will, or a business process that allows
retailers to do consignment inventories so that they don't have to
invest in the inventory, the supplier does. We help them track it,
manage it, et cetera.
We
invented this process back in the 90s. We enabled retailers to, in
essence, therefore sell more but stock less. It obviously can
remove a significant amount of inventory from the books, improving
the retailers' balance sheet, giving them more flexibility. When
you join it with our forecasting and ordering, wow, it
simultaneously reduces inventory, but interestingly, we can
increase sales by reducing out of stocks. It's sort of a
double-barreled shotgun.
During
the quarter, we signed two deals with large retailers to adopt our
scan-based trading platform, leading to a third deal with a large
national supplier to execute scan-based trading across, I think it
was about 14,000 customer locations. Very exciting because what
this now shows, and this is important, is that all three of our
application suites on the converged platform are attracting net new
customers. In other words, we have three points of entry into the
ReposiTrak suite of application.
-7-
Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Now
this is a slightly different take that I think is important for you
to understand how we think about this. By having three distinct
suites, we appeal to a broader range of perspective customers. We
increase our upselling potential, but at the same time, we reduce
our risk of being dependent on any single application or any
typical competitor.
Very
important, we increase our attractiveness and simultaneously reduce
the risk that, just in case we had a problem in one segment of the
business, it is not the only leg of the stool, if you will. Please
try and remember that as we progress over the course of the next
several years.
With
the introduction of MarketPlace and our ReposiTrak converged
platform, we have a service offering and now a sales structure to
carry us into the future. It's not mature yet. It's a work in
progress but it is coming along. Our customers can use the
ReposiTrak platform to contend with virtually any of the challenges
that we talked about early in our call. That's why we ended the
year on a strong note. It was the highest quarterly growth of the
year. Most importantly, net income grew twice as fast as
revenue.
Our
profitability is obviously important. We know that. It's important
to you as an Investor, but it's also important to our customers.
More and more of our customers are large companies and they want us
to have staying power; so cash on our balance sheet and improved
profitability is important to them as well as to you. That's why we
feel good about our position going into fiscal 2019. We now have
multiple drivers, all three of the application suites are working
together. Think of it this way: we've got MarketPlace resourcing,
compliance for vetting and supply chain for transacting across the
entire business.
As
such, we should continue to see very strong earnings growth. We've
largely completed the investment of new product introductions but
we still have some very exciting additions coming. I'm giving a
little hint here, especially in the area of artificial
intelligence. We've been doing some interesting research around AI
and I think you'll see AI start to appear in a number of our
applications, helping our customers in a dramatically different
fashion than we've been able to. I hesitate to use the word
revolutionize, but I think it's close to revolutionizing how we
interact with our customers in terms of what we can do. More on
that, obviously, later, but we're reasonably close to actually
piloting and testing some of these AI ideas.
We've
largely completed the investment in our back office automation
although MarketPlace is still young so obviously that's going to
require some additional work. But as Todd mentioned, fiscal 2019,
again, is going to be about execution.We have to continue, though,
to tune our cross-selling abilities. We have to continue to improve
our back office management. We have to continue to implement our
supplier hub at an ever-accelerating rate. We’ve got to be
faster and faster and better and better. We have to do that while
continuing to generate superior results for our customers, because,
just as Todd said, if we continue to execute superbly, our
customers will feel in relationship with us and if they do feel in
relationship with us, they’ll want to buy more from
us.
The
execution has been fabulous and that's why I don't know seriously
of any technology company with a lower loss of customers or churn
rate than we have. We really do deliver—we really deliver on
our customer problems. Our goal here, really, then is simple, is to
continue to execute superbly, continue to help our customers be
successful and continue to build a highly profitable
business.
That's
it. Questions.
Operator:
Ladies
and gentlemen, if you would like to ask a question, please press
star, one on your telephone keypad. If you're using a speakerphone,
please make sure your mute button is turned off to allow your
signal to reach our equipment. Once again, star, one for
questions.
Our
first is Ananda Baruah, Loop Capital.
-8-
Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Ananda Baruah:
Hey
guys. Good afternoon. Thanks for taking the question and congrats
on the solid quarter all around. I guess I have a few here, if I
could. You guys did a good job or you did a really helpful job of
kind of walking through the different legs of the stool and where
you are right now with them and the interplay between
them.
Could
you drill down a little bit and just give us a sense, from a
blocking and tackling perspective, what you'll be focused on
through the fall into '19 This is the first time here you've had,
let's say, you have got higher level all three businesses, all
three services, up and going at the same time. How do you guys plan
on mining those three together now That would be helpful and I have
a couple of follow-ups. Thanks.
Randall Fields:
I think
it's fair to say—by the way, I think you should offer a prize
for the first person that pronounces your name correctly. Sorry. I
think the reality is that we're going to be focused, to a great
extent, on what we call the Tier 2 hub initiative. It's a learning
for us. We're going to have to get skilled at it. It requires a
different approach than we've taken before. We're experimenting and
pretty soon we'll have a business process if you will, because
I’m, by nature, process driven, we’ll have a process
that produces the results.
That
business, over the next several years, is very important to scale.
First we have to learn how to do it and the consequence will be,
we’ll scale it. Tier 2-ness, if you will, is a critically
important initiative. Secondly—in fact, it's a lot of my
time, honestly. Secondly, focusing continually on MarketPlace, it's
obviously going well. We're so pleased that the execution has just
been great. There's still significant learnings in the back office
part of MarketPlace that we want to get better tuned. But I would
say if you put those two initiatives to the top, that's a big piece
of the focus inside the business.
Ananda Baruah:
Got it.
Randy, you made mention of the Tier 2 was going to be a strong
focus of your time as well. In what way—I guess, in what ways
what will it require your time and attention?
Randall Fields:
Well,
we're moving from a service-centric organization—in fact, let
me give you—I'm going to put a number out there; I'm not
highly confident that it's correct, but I think it's pretty close.
What if I were to say that our churn rate last year, meaning our
loss of customers, was what, Todd, 2%?
Todd Mitchell:
Right
around 2% in the compliance business.
Randall Fields:
It's
just crazy. I mean, we're really, really good at doing this. The
business reality for us is that we've gone—we're going to
have to move from a service-centric organization to a more
sales-centric organization with that group of people. Now that
takes some training and management and process. But it’s
coming along. It takes time, and everything in this business takes
time and focus if you care about execution.
If all
you care about is marketing and sales, it's actually pretty easy.
But if you care about the customer experience, you better pay
attention to the execution or you will pretty soon screw it up and
lose your market reputation. Huge percentage of our time is
internal on how we're executing with our existing customers and
that activity will take a lot, really will, but I'm getting
excited. Yes, last week has been pretty remarkable.
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Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Ananda Baruah:
Got it.
That's helpful. Then, just last one for me for now, before I get
back in the queue. How would you guys—I mean, you guys did a
great job on the margins this quarter. How would you like us to
think about—and you mentioned on this call and then also on
recent calls about—upon getting the businesses stood up like
they are now, the potential to see pretty attractive incremental
margins as they ramp. Given that you've just put up a really nice
and really solid margin in this quarter, how would you like to
think about that for fiscal '19? Any, I guess, any context would
probably be helpful for us. Thanks.
Todd Mitchell:
I think
we expect to see pretty significant increase in net income in
fiscal '19. Certainly, debt to net income will grow much, much
faster than revenue and we expect to have good revenue trends. In
terms of the revenue mix, I think as we've talked before, that's
what's going to drive kind of the margin mix. MarketPlace is, as we
said, dilutive to gross margin, but accretive to net income.
Ultimately, it will determine what our operating margin looks like,
but the scale in which the revenues are growing there did—and
it is profitable—means that it will contribute to our net
income.
Randall Fields:
Here's
the best way to put it. It's running ahead of our expectations in
terms of its contribution at the margin level to the business, is
that a fair statement.
Todd Mitchell:
To both
the revenue and margin.
Randall Fields:
We're
pleasantly surprised, which means we're going to double down on our
management of it to make sure that we've got it right. At this
point, it's almost self-scaling. We've got a lot of interest from
other people about how can they participate. We know that when we
get aggressive about bringing people into it that we should be able
to—there will be a sales cycle, but we can bring people into
it, but it's doing better than we thought it would. It will never
have the same margins as the rest of the business, but it'll have
very nice margins and contribute significantly to dollar
profitability in the enterprise.
Todd Mitchell:
I think
whatever percentage of this mix it is will ultimately determine our
margins for the year. The rest of the business is largely going to
piggyback off of investments that we made last year. I think that
the core OpEx excluding MarketPlace is—I'm not going to say
flat, but certainly will increase well below the growth in those
businesses.
Ananda Baruah:
Got it.
Thanks. It's helpful context. Thanks, guys.
Operator:
Our
next question is from Tom Forte, DA Davidson.
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Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Thomas Forte:
Great.
Thanks for taking my questions. I have two questions. One, can you
walk through the fixed versus variable nature of your revenue for
your three lines of business? Then, number two, you've talked in
the past about international expansion and potentially looking for
a partner. Can you update us on your thoughts on international
expansion as well? Thanks.
Todd Mitchell:
I'll
take the first question. Across our three application suites,
compliance and supply chain are fundamentally subscription
businesses with recurring revenue streams. That's not to say that
they are 100% recurring revenue, but a large percentage of that
revenue is recurring. It's growth that increases—the faster
they grow, there's a certain amount we charge to bring customers
online and that's basically the only non-recurring
component.
MarketPlace
is transactional. I won't call it recurring. But what we've seen is
that the way that we're scaling this business is not to let it
scale randomly, but instead to bring on a customer with a specific
need, and then suppliers that have products that satisfy that need.
That mitigates some of the randomness to the transactional nature
of that business, because they're essentially buying for what we
would call events, whether that event be a six-month event or a
weekend-long event, but that business is entirely transactional
from a contractual perspective.
Randall Fields:
The
answer to the second part of your question, Tom, we've already
established and announced a partner in the United Kingdom and I'm
envious of their prospect list. It's almost a who's who of UK and
Continental Europe retailers. We're starting to work through the
list, making calls and our fingers are crossed. We're in search for
partners in several other places in the world. As we have
transactional stuff to report, we certainly will. We're pretty
excited about that.
Thomas Forte:
Great.
Thanks for taking my question.
Operator:
Just a
reminder, ladies and gentlemen, it is star, one if you have a
question today. Up next is Walter Schenker, MAZ
Partners.
Walter Schenker:
Hi,
Randy. Hi, Todd.
Randall Fields:
Hi,
Walter.
Walter Schenker:
Three
questions, two are very short, then one is more interesting. One,
why would we have increased line of credit debt with the cash we
have? It would seem we would—it's a negative arbitrage there.
Question two: is the large new compliance contractor a retailer or
a supplier Then, the interesting question, at least from my
standpoint, is you announced a large new 14,000 retailer supplier.
How does one get retailers as a supplier How do you force them to
use this? I understand how a retailer can force it down? How does
the supplier force it up?
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Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Randall Fields:
Yes.
Interesting. Are you okay, Walter, if I answer them in reverse
order?
Walter Schenker:
Your
company.
Randall Fields:
Yes.
Okay. We are finding some large suppliers realizing that scan-based
trading, where they own the inventory, they manage the inventory,
they stock the store, they destock the store, several large
suppliers are coming to a very interesting conclusion that
scan-based trading in that circumstance is not a punishment, it's
an advantage.
Think
of it this way, suppose you are a—I'm making this up. Suppose
you're delivering, let's call it, bread, okay. You're a bread
supplier and you have two retail stores a mile apart. One of the
stores has 500 loaves of wheat bread that you put in. It is getting
toward the end of the week and you absolutely know they're not
going to sell more than 100 loaves. Well, let me tell you the
problem. You're about to literally eat it. If you own the
inventory, instead of the retail store owns the inventory, guess
what you can do? Take it out, move it and put it in the other store
that needs the inventory.
In
other words, if you're a supplier, owning the inventory is not
painful, it's an advantage. It's yours, pick it up and move it. You
don't have to check it into the back of the store. It saves you
labor, gasoline and time. You literally become more efficient in
your route business simultaneously with having greater
control.
We
think, over time, a number of suppliers will recognize this is a
great strategy and it's pretty easy to go to the retailer and say,
oh, by the way, you don't have to pay for my inventory until you
sell it, it's on consignment. Tell me what retailer would say no to
that idea Exactly none. They all love the idea. It's a big thing.
You'll see us constantly increasing our lines of credit. But you'll
actually see the amount of debt outstanding at the end of a quarter
typically remaining about the same. That's kind of not anything
important.
The
other question was …?
Walter Schenker:
Wholesaler
or retailer?
Randall Fields:
Oh,
yes. One of the big accounts that—we've signed some big
retailers and recently also some wholesalers. I don't want to be
any more specific. I'm being evasive. Can you tell, Walter? I don't
want to talk more about it. But there will be—yes. But
there's more to that story than we've said so far, but more of that
information will come out in the next few months.
Walter Schenker:
Lastly,
to allow you to be most evasive, double digit sales ranges from 10%
to 99%. Are you willing to …?
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Park City Group - Fourth Quarter 2018
Conference Call, September 13, 2018
Randall Fields:
It will
be somewhat less than 99%. I'm confident it will be less than 99%.
I'm actually equally confident it will be more than
10%.
Walter Schenker:
Okay.
Thanks a lot, Randy.
Todd Mitchell:
Let me
answer that. I'm confident that it will be at a level which you can
still consider us a growth company.
Randall Fields:
For
sure.
Walter Schenker:
Okay.
Thank you, todd.
Randall Fields:
Walter,
because I know you are one of those guys that sort of likes bottom
line, it's really important that as a company for our customers
and, frankly, for Shareholders, that we focus on the growth at the
bottom line. You will like that.
Walter Schenker:
Okay.
Thank you, Randy.
Randall Fields:
Thank
you, guys.
Operator:
Ladies
and gentlemen, at this time, there are no further questions. That
also does conclude our conference for today. Thank you, all, for
your participation. You may now disconnect.
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