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ReposiTrak, Inc. (TRAK)

Q2 2016 Earnings Call· Mon, Feb 8, 2016

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Transcript

Operator

Operator

Good day and welcome to the Park City Group Second Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Mossberg, Investor Relations representative. Please go ahead, sir.

Dave Mossberg

Investor Relations

Thank you, Shannon. Before we begin, we will be referring to today's earnings release, which can be downloaded from the Investor Relations page of the Company's Web-site, at parkcitygroup.com. I'd like to also let everyone know that this conference 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 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 forward-looking statements. Such risks are more 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. Also, throughout today's conference call, we may be referring to both GAAP and non-GAAP financial results, including the terms, free cash flow, EBITDA, adjusted EBITDA, net debt, net income/loss and earnings per share, which are non-GAAP terms. We believe the non-GAAP terms are useful financial measure for our Company, primarily because of the significant non-cash charges in our operating statement. There is a reconciliation of non-GAAP results in the earnings release and on the Investor Relations section of our Web-site. Our speakers today will be Randy Fields, Park City Group's Chairman and CEO, and Todd Mitchell, Park City Group's CFO. Todd?

Todd Mitchell

Management

Thank you, Dave. Good afternoon, everybody. It was a great quarter for us financially from both the top line and a bottom line perspective. Before I get started, I want to highlight that my comments on the financials will be focused on our pro forma results, i.e., as if we had owned ResposiTrak in the comparable period a year ago. This is because we believe this gives a more accurate view of the underlying performance of our Company. Revenue; total revenue grew 21% on a pro forma basis to $3.5 million from $2.9 million in the fiscal second quarter of last year. This was better than we expected and driven by strength in both our businesses, with our core supply chain business generating double-digit growth and ResposiTrak continuing to scale rapidly. On a reported basis, total revenue was also up 2% in total to $3.54 million versus $3.48 million a year ago. Going forward, we remain confident in our outlook for the year. ResposiTrak's momentum is building and we are comfortable with our target of 8,500 connections by fiscal year-end. The scaling of ResposiTrak will continue to accelerate our overall growth rate and this strong momentum is giving us room to more rapidly consolidate the two businesses. Randy is going to talk a little bit more about this later. Expenses; as we highlighted in our press release, I'm proud to say that we achieved a significant milestone during the quarter in transitioning to GAAP profitability. This was due to a combination of strong revenue growth and strong cost containment as well as the beginning of a shift in our business model to what we believe will be a structurally higher level of profitability. Total expenses declined 23% on a pro forma basis to under $3.3 million from $4.2 million a…

Randy Fields

Management

Thank you, Todd. Okay, it's hard to say anything other than wow, great quarter. We certainly feel terrific about it. And clearly, we're headed for a great year. What I want to talk about really are five, let's consider them key takeaways, for the current quarter. First obviously the 21% growth rate in pro forma revenue, everything we were doing was strong, both of the business sectors. I'm going to come back to that though in a minute. Secondly, ReposiTrak growth is continuing to accelerate just as we would want it to. We ended the quarter with something in excess of 5,000 connections and we're comfortable that our goal that we set toward the end of last fiscal year of 8,500 connections at the end of fiscal 2016 is certainly going to be achieved. And most importantly, the third takeaway, as Todd pointed to, is the change that we've now seen in terms of profitability. It's important that we be GAAP profitable. We're getting exposure to larger and larger companies, more and more potential hubs, meaning retailers and wholesalers. They want us to be here for the long run and therefore being GAAP profitable matters more than having to explain non-GAAP et cetera to people who may just give us a glance and make a decision as to whether or not they should do business with us. So the transition has been important and we've accomplished it, and now going forward quarter to quarter, we're excited that we can present a beautiful set of financials to our prospective customers. Fourth, and Todd also alluded to this, makes me wonder why you need my commentary after Todd said it all, but the reality here is that we are rapidly integrating these two businesses. Certainly our customers interestingly are driving that and…

Operator

Operator

[Operator Instructions] We'll take our first question from Walter Schenker with MAZ Partners.

Walter Schenker

Analyst · MAZ Partners

In listening to the conference call, I assumed I'm on the ResposiTrak conference call, that's the company, there seem to be a shortage of information and basically dynamics of I'd call legacy, because it's a growth business, your traditional business that's not necessarily servicing the food business but the food retailing, drug retailing industry. Can you give us a little more color on what's going on there and what's happening from a growth standpoint and new verticals and continued movement if any into your existing customer base?

Randy Fields

Management

Okay, good question. I feel a little bit like – because I have five daughters and somebody asked me about one of them, I spend 10 minutes talking about the one and naturally it would be, why didn't I talk about the other four? You're right. Good criticism. Well taken. The core business is continuing to grow. In fact, we don't have them inked yet, not inked, but it's fair to say that two of our largest clients are looking at the possibility of very substantial increases in what we do for them. So the core business is doing very well. The reality though here that we all have to be aware of, and maybe this is why psychologically I suppose I skipped over it, in spite of how the core business is going, the reality for the future is, these two businesses are going to come together and very shortly it will be essentially impossible to account for them separately. So the supply-chain business is being folded into ReposiTrak. I think certain characteristics of each of these businesses will survive. That's certainly true. But they will be combined, Walter, and what that gives us is a more unified approach to our customer base, because if you think about it, our supply-chain customers need compliance and food safety for the most part, and vice versa our food safety customers certainly will need more of our supply-chain capabilities. So, our customers are asking us to converge these two and we're working on it at a pretty rapid pace, but both are doing very well. And you continue to see the case studies around the supply-chain business that we publish typically every other week. Those are industry directed. We continue to get better and better at it. So I have nothing but love for the core business, but the truth is, within the next couple of years it will largely be folded into what we currently think of today as the ReposiTrak business. They're going to converge. But there's nothing bad in that. It's only goodness.

Walter Schenker

Analyst · MAZ Partners

Goodness is good.

Randy Fields

Management

Goodness is good.

Walter Schenker

Analyst · MAZ Partners

Having said all that, let me just again, where are you in adding – as an example, you have one large drug chain and adding additional competitors there, I mean it would seem that that – is it a bandwidth problem in Park City, literally in Park City and I think at your corporate offices, or is that business which with the hubs and spokes and all the leverage just doesn't seem to be as dynamic as one might have expected at this point, not that…?

Randy Fields

Management

No, actually it is not. We just don't talk about it as much. That's why I say, I'm not talking about one of my children and it's not fair, it's not accurate. We are still adding hubs, meaning new retailers, to the system. We are growing the hubs that we have. They are adding more suppliers and more categories. And I just didn't talk about it. But there's a lot of vitality to it. If I had not talked about ReposiTrak, everything I would've said about the core business and the excitement around it would have sounded like any other conference call.

Walter Schenker

Analyst · MAZ Partners

Okay. Thank you, Randy.

Operator

Operator

[Operator Instructions] We'll take our next question from Steve Bell, a private investor.

Steve Bell

Analyst

Congratulations, Randy and Todd. I didn't expect that we were going to show a positive GAAP net income this quarter. I was looking for that in third and fourth. So congratulations on that.

Randy Fields

Management

Thank you.

Steve Bell

Analyst

Todd, just quick question for you. On our 21% revenue growth, I don't know if you can or will break it out, but how much of that was up-sell and how much of that was new customer?

Todd Mitchell

Management

I think it's fair to say that most of that was coming out of our existing customer base. I mean if you look at it, ReposiTrak, the growth that's coming there is all incrementally new suppliers. So that's all new but that's still a relatively small portion of the overall revenue base. And in terms of the core business, how do you – it wasn't necessarily pricing, we were adding new suppliers to hubs. As Randy said, we're adding new hubs. But it was largely – so it's new customers but it's I guess that's the way to put it as opposed to up-sell of existing customers, but sometimes it's adding a new supplier to an existing hub.

Randy Fields

Management

So if you look at it from a hub perspective, growth is existing customers. If you look at it from a supplier perspective, we're adding some suppliers. But many of the existing suppliers are also adding their services. So more than half of it, I'm just guessing here, Steve, is coming from existing customers, either hubs or spokes.

Steve Bell

Analyst

But it's new business from existing customers, not necessarily up-sell and going from DSD to VMI or SBT?

Randy Fields

Management

No, that's what we would say we're saying the same thing, meaning we're finding increased adoption of our forecasting and ordering from Scan Based Trading and that sort of thing. So, yes, they are buying new services from us.

Steve Bell

Analyst

Okay. Randy, I don't know if you can talk more about the strategic partnership with Leavitt as to – I understand big picture how it is working, but let me ask you, how are we going to get our revenue from that, where is it going to come from? Is it going to come from them bringing new customers to us? Just describe that to me, if you would.

Randy Fields

Management

It's likely not direct, it's indirect. We believe, how's this for old-fashioned, if we can improve our value proposition to all of our customers, meaning the hubs and spokes, if we can reduce the cost structure of that group of entities, some benefit should inure to us. It makes us stickier and better. So in the long run it improves our reputation. Now, it's also conceptually possible, which I alluded to, conceptually possible that some of the underwriters might want to do stuff with us directly. This just gives us broader and broader exposure and this is what we're trying to do.

Steve Bell

Analyst

Without putting words in your mouth, this is almost a proof of concept thing with Leavitt that can be taken much larger eventually?

Randy Fields

Management

It's not going to be a proof of concept because they can take us anywhere. Remember, they are a broker, so they can go to any underwriter. And what we're expecting is, some of the underwriters as they look at this are going to go, wow.

Steve Bell

Analyst

Want to ask you a question then following up on that. How many quarters before you think you'll know if this is – if they are taking us all the places we want to go?

Randy Fields

Management

We wouldn't have done it with them if we hadn't already had that exposure. We know they are talking to the right people. And what they do, in fact there's two different concepts that we're exposing all of our customers to. One is, is your insurance appropriate? It turns out when we work with a new hub, most commonly that hub will say, okay, here we go, food safety, what do I need to know? And we sort of go, what do you need to know? So we've had to bring in legal experts in terms of how they managed their liability and now our insurance experts for what kind of coverage they should have, what it ought to look like, what kind of coverage should their supply chain have, to help them, the theory being that we want to own top of mind position for food safety. We're going to own it. And over the next two or three years, you will see some things around food safety that when people think of food safety databases, food safety processes, ReposiTrak is going to be where they go. So we're at the really earliest stages of this as we bring the supply chain on. Our goal isn't simply to bring on tens of thousands of connections. That's just the starting point. The question is, how do we monetize that from a shareholder perspective, how do we add value to people whose concern it is to deal with food safety issues? We are headed toward being the one-stop shop for food safety kinds of information processes, et cetera. We're way early in this. And I know you well enough to know that now you're going to go do some homework around it.

Steve Bell

Analyst

It is the nature of who I am. Now on the pharma pilot, we're going to get more information on that next quarter. Can you just generally give us a sense of what categories this pilot has been operating on or what areas of the pharmacy chain this has been operating on, just generally?

Randy Fields

Management

We're obviously working – I shouldn't say obviously – we're working with a large manufacturer, certainly one of the largest in the world of course at the current rate of mergers.

Steve Bell

Analyst

And it's getting larger.

Randy Fields

Management

Right. So it's certainly one of the largest pharma companies in the world. We're doing a project that they need to do to more effectively communicate with their supply chain, and I think we'll know within four to five months are we mutually adding enough value to go to the next step.

Steve Bell

Analyst

Let me ask you a question, you may not be able to answer, but would this large pharma pilot be extending all the way down to perhaps the drugstore chain that we work with, will that be real [indiscernible]?

Randy Fields

Management

No.

Steve Bell

Analyst

Okay.

Randy Fields

Management

And here's the reason. The power in the supply chain in pharma is different than the way power works in the supply chain for food.

Steve Bell

Analyst

[Indiscernible], doesn't it?

Randy Fields

Management

Yes. In food and food retailing, the wholesalers and retailers have most of the power. Strangely enough, in pharma, the manufactures have most of the power, and if you're going to prescribe something that AbbVie makes, you better be able to do business with AbbVie. So there is a difference in the power structure. We're just not as comfortable there yet as we ought to be. We're going to get deeper in it. In the meantime, I think the foodservice business certainly is closer to something that we know that we're going to more aggressively pursue that as well. So there's three big opportunities out there. We're moving along obviously very rapidly in food. I want to see foodservice coming along. I want a foodservice customer before the end of our fiscal year. And just as we have one pharma customer, and now I want to see if that pharma thing has legs. We'll see.

Steve Bell

Analyst

Again, thank you very much for the call. Great news on the GAAP positive earnings and I'll talk to Todd offline about the rate card revamp and stuff like that. So congratulations, guys.

Operator

Operator

[Operator Instructions] As there are no additional questions in the queue at this time, I'll turn the call back to Randy Fields for any additional or closing remarks.

Randy Fields

Management

There's not much to say in closing except that we're internally excited about the progress that we're making. The GAAP profitability thing is important in the long run. I think as I say, so long as we continue to do well for our customers, they will do well for our shareholders. And profitability in the next several years will be one of more interesting metrics for all of us to watch. So, thank you all for your patience and we'll continue to do our very best for you.

Operator

Operator

And that does conclude today's conference. Thank you for your participation.