Good day everyone, and welcome to today's Park City Group Fiscal First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this call is being recorded. It is now my pleasure to turn today's program over to Rob Fink of FNK IR.

Thank you, operator, and good afternoon everyone. Thank you for joining us today for Park City Group's fiscal 2020 first quarter earnings call. Hosting the call today are Mr. Randy Fields, Park City Group's CEO and Chairman; and John Merrill, Park City Group's CFO. Before we begin, I would like to remind everyone, 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 current, beliefs and expectations, Park City Group management 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 not be -- should be considered in light of such risks. Park City Group does not assume any obligation to update information contained in this conference call. Shortly after the market closed today the company issued a press release overviewing the financial results that we will discuss on today's call. Investors can visit the Investor Relations section of the company's website at parkcitygroup.com to access this 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 would now like to turn the call over to John. John, the floor is yours.

Thanks, Rob. During the first quarter, Park City Group continued to build upon its strengths. We have a large and growing network of blue-chip customers in the largest industry sector of the economy. We have a simple story that is resonating with customers. We get retailers and the suppliers compliant give them visibility to actionable information through our supply chain channels and allow the customer to source, vet and transact business through MarketPlace. We provide solutions to our customers in a regulatory environment that is increasingly complex. We provide solutions that address the accelerating threat from online retailers like Amazon that makes our tools not only attractive, but a necessity. We have a strong balance sheet, the strongest in our history and a proven ability to generate cash. Cash balances and cash generation is increasingly important today for our customers' peace of mind. Strategically we remain laser-focused on growing our base of recurring revenue within compliance and supply chain as we advance our MarketPlace solution, which is transactional by its very nature. By design, this initiative will provide us with a more predictable stable and profitable base of recurring revenues. When I became CFO a few months ago and began speaking with the investment community. one of the key pain points I heard was that forecasting and modeling our performance was challenging, particularly since Park City Group does not provide detailed guidance. We listened. We understand that modeling us has been a challenge and that this is in part due to the erratic nature of one-time revenue. It was frustrating for us. And based on feedback it was frustrating for you. More importantly, it made budgeting and forecasting internally more challenging. And frankly, it wasn't an optimal way to run the business. This situation has driven our decision to significantly…

Thanks, John. I recognize that it might be counterintuitive for a CEO to be excited about announcing results when the high-level view shows declining year-over-year revenues for the quarter, but that's exactly what I'm going to do on today's call, frankly for good reason. Our calculated and deliberate efforts to reduce onetime revenue to move our business into a more predictable and profitable recurring revenue-driven model is taking hold. In the quarter, one-time revenue other than MarketPlace was negligible and recurring revenue is growing. The worst year-over-year comparisons of this transition are now behind us and it demonstrates three important facts. First, we have the financial ability and strength to lean more heavily on recurring rather than one-time revenue. It's right for the business and it's right now. Second, it supports our confidence in MarketPlace. And finally, it's based on adding some highly proprietary capabilities to our supply chain applications that should allow us to increase recurring revenue more rapidly. In my view, profitable growth is still something largely overlooked these days. The startups and emerging high-tech companies of all sizes have embraced to grow it at any cost mentality. In contrast, I believe that cash is still king. A strong balance sheet is critical, particularly true on our case as our customers require it. Our balance sheet screams that we'll be here for the long-term. Our balance sheet and deep customer network serves as a very wide moat around our business, a durable barrier of entry for startups or outsiders who might seek to displace this. It's because we have the financial structure that we do that underpins our ability to drive our business toward much higher recurring revenue in the core part of our business. This shift will not take years. We're moving quickly on both forgoing onetime…

[Operator Instructions] And we'll take our first question today from Ananda Baruah with Loop Capital. Your line is open.

Hi. Good afternoon guys. Appreciate the question. Two for me if I could guys. The first is, could you update us on progress of hiring the specialists, I believe you talked about are going to augment the direct salespeople? And I think they are -- in particular, they're and correct me if I'm wrong, but they're to focus on -- is it Tier 2 or MarketPlace, the specialists and then I have a follow-up. Thanks.

Yes. So the numbers speak for themselves. We have two people committed to the effort now over the course of the next couple of months there will be at least one addition. So the marketing pieces, the sales pieces are moving along. And eventually it should become almost like a machine.

And Randy, are they each focusing -- are they focusing on -- is it one on Tier 2 one on MarketPlace? Just a little context here. Are they sort of each focusing on each?

No. Right now the strategy is pretty simple, which is get Tier 2 conversions from being a user, because they are ordered to and they -- to using that for their own supply chain. We call that the Tier 2 hub. And both of these people at the moment are focused on directly selling, developing the marketing materials and strategies and 100% focused on the Tier 2 initiative. In addition to that, however, we've added salespeople to our general sales work, which would include at this point primarily our supply chain activity and our Tier 1 effort in the compliance business. But by the end of the year, if MarketPlace does what we are hoping it will do, then we'll be adding salespeople to that as well. So, for now sales addition and marketing addition on the Tier 2 effort. In addition additional salespeople on the supply chain and Tier 1 effort, and by year-end hopefully some people on MarketPlace.

Randy, that's really detailed and super helpful. Clarification, when you say by year-end is it your fiscal year-end? Or is that…

Sorry. Yes. Fiscal year, June.

Awesome. Thanks. Thanks. And then one for John here. Any large license as you sort of continue on through the transition towards a subscription from license, are there any large license deals in the upcoming quarters that won't recur that we should be aware of that could create some lumpiness?

As far as what we've done in prior years or what's upcoming?

Sorry, prior years John that could create some compares.

There are license deals in the next quarter. But as we've talked about, our focus going forward is not getting involved in when we could avoid it license transactions. But comparatively, there were licenses in the September -- I'm sorry, the December 2018 quarter that will not appear in December 2019 quarter.

Got it. So -- yeah. I got it, got it. And so -- and then that sounds like you guys just -- may -- are you implying that that will be the last quarter where you'll sort of be having the outsized compare at least based on license lumpiness on a year-over-year basis?

Correct.

Got it. Got it. Very helpful. Let me squeeze one more…

Let me add a little – Ananda, let me add a little color to that. It is very -- it is more difficult than anyone can imagine to avoid the one-time revenue, because sometimes people have professional services that they need. That's going to be one-time hopefully. There will be licensing that some larger customers in particular want to do in which case they present us as you can imagine with like a sort of Damocles and say, I'm going to go buy this service that you only offer as a software as a service from someone else on a license basis. That happens in our supply chain business primarily as you can imagine. So sometimes we're just faced with difficult choices. So far it's working, but the reason that we think 80% to 85% is about as much of a penetration into the business that's not MarketPlace that we can get is we really think that's the best guess. Last quarter, it was better than that. And hopefully, we can continue to keep it down. Obviously, it makes it a much easier business to forecast, because you now will only have to get a sense of the growth rate of our recurring revenue, and then you'll have to take a stab at MarketPlace. So we think this grotesquely simplifies the job that Wall Street has in understanding this.

That's really helpful. And so Randy just one last one for me guys. It's a question off of what I'm going to ask is the clarification. I think you mentioned -- that correctly when you mentioned in your prepared remarks a good way to think about progress right now is sequential growth. I thought that I heard that. And then listen I know forecasting isn't art. It's much of a science, but what should we think of in that context with regards to sort of sequential -- potential for sequential growth sort of from this point forward. I'm saying sort of philosophically…

Sure. Yeah. I mean, John, that's a perfect tee up for you.

I mean, we're -- our focus is on the recurring revenue as our recurring revenue grows sequentially and that's compounding. To Randy's point as we add Tier 2s, they don't all start on July one or October 1. So as that percentage increases then obviously the growth sequentially for our quarters is based on that growth in subscription, that recurring revenue. So as Randy said, comp over comp 8% for Tier 2s, but ending the quarter at a 35% growth on the subscription not assuming that that is going to be the growth rate for the year. But you can understand how the recurring revenue makes it much easier for Wall Street to predict based on that compounding growth versus what happened in a prior quarter of $1.2 million that wouldn't happen in a subsequent quarter, if we can maintain that 85% recurring to total revenue percentage. Does it make sense?

It makes perfect sense and it's really helpful guys. Thanks so much. I appreciate it.

[Operator Instructions] We'll go next to Thomas Forte with D.A. Davidson. Your line is open.

Great. Thanks for taking my question. So Randy, I recognize it's early. But how would you say so far your cross-selling efforts are working? Do you any good examples of successful stories so far to date?

Yes. Actually better than planned, but different than planned. Let me give you a couple of examples. One of our largest compliance hubs has now begun to work in our supply chain area, big win and could end up being very, very large in supply chain as well. We have a number of cases and these are really surprising where some of our early Tier two hubs, so that would mean a supplier, who had been asked typically to do compliance work because one of their retailers required it. And this one is actually in process now, so it's fresh, new and exciting. They came to us and said can you help us with our supply chain? Yes. So they became a Tier two hub. Somehow, some way, as we've mentioned from Ananda's question, the salesperson who is working on the account happened to mention to them, as you grow, there's many other things that we're going to be able to help you with, help you forecast, help you reduce your out-of-stocks with your retailers et cetera. And this particular company went Oh my god, really? Yes, really. So they are now in the process of going from a Tier two compliance. So they started as a Tier one spoke. They've become a Tier two hub and now they're exploring moving into our supply chain world. So, this is the kind of account where there's no signed agreement yet, but it's rapidly in process where they went from a few hundred dollars a month to potentially over the next couple of years a few hundred thousand dollars a year. There are a number of those where it's beginning to happen. So we're seeing people go from compliance to supply chain and a reasonable number of those, both from the supplier side and I think in the course of the next two quarters, several of our retail compliance hubs will begin to adopt our out-of-stock management program. So, it's feeling very, very good. The new sales people that we've hired are enjoying the fact that they have more to offer to their customer set, so I'm feeling pretty good about it at the moment.

Great. And then the next question I had was, you've touched upon this in your prepared remarks, but I wanted to know, what you thought this meant to both the industry and what it meant to Park City of the notion now that Amazon is doing free delivery for grocery?

Well, it's -- I want to -- let me clarify, if it's okay, Tom. It's not so much that it's free. It's that it's quick. So in the sense, historically if you had 10 items on your shopping list, then you went into a store to buy the 10, you did it because the odds were pretty good. You would get most of those things seven of the 10 perhaps at the supermarket. And that was that. That was the consumer expectation. What Amazon has done though, is to change the expectations, so that if you go on Amazon for those same 10 items as long as they're not the most perishable items like milk or whatever, but the rest of your list, Amazon would say we can have that to you in a few days. Okay. If I don't need it right now, I guess, that's okay. But once Amazon announced two things, one everything nationwide would be next day by the end of next year. And now, with their new initiative, that it will be same-day for perishable items in many places, we think that's a really significant threat to the industry. What we know is this couple of statistics that are pretty scary, 24% of Amazon's total North American revenue, tens of billions of dollars of revenue comes from people who started on Amazon because there was an out-of-stock at a physical retailer. So, what we know absolutely is that Amazon is being set by out-of-stocks in retail stores. And retailers -- we're all fond of saying generals fight the last war. Retailers are fighting the last war. They are fighting the price war. We don't think that's the war at all. So the reality is, this is a very significant threat to physical retailing and one…

Yes.

Okay.

So last question in two different ways. So, when you get the percentage of sales to be recurring that you want versus nonrecurring, what might your margin look like at that point in the future or -- and/or, how should we think about the incremental margin on recurring revenue versus onetime revenue?

It's not much different. John and I both believe John keep me honest here, that it costs us I'll call it $17 million a year here in the company. And that call it 80% to 90% of what happens after that, becomes cash flow and bottom line. So, to us, there isn't any difference except volumetrically between recurring revenue and onetime revenue. It's a very different financial structure and operating structure than most SaaS companies have. As you know, most SaaS companies struggle with how do they actually ever make money. That is not our issue. We're now at the scale of business, do it carefully, make sure your customers are thrilled level of the business because the making-money part, I think we understand well. So, as we grow from the recurring revenue part of what we're doing, the margins will be what the margins have been. There will be no difference that I can see. Do you agree, John?

Yes. On the recurring revenue spot-on, it's $17 million to run this place. Every dollar after that based on variable costs, I mean you're adding $0.80 to $0.85 to the bottom line. The only color I would add to Randy's comment is MarketPlace is, it depends on what products, what category, what seasonality and the vendors are. But that's again the nonrecurring, but that may impact our overall margin.

Yes exactly. I'm sorry I should have mentioned. That MarketPlace is a different creature.

Good. All right. Thank you, Randy, thank you, John.

And I am showing that we have no further questions at this time. I'll turn the call back for any further or closing remarks.

No. I think we're there. So, I appreciate everybody joining us and we are feeling obviously very good about what we're doing and where it's headed. All the bar indicators feel very good at the moment. So thank you for taking your time with us today.

Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.