Greetings and welcome to Park City Group Fiscal Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Rob Fink with FNK IR LLC. Thank you Mr. Fink. You may begin.

Thank you, operator, and good afternoon everyone. Thank you for joining us today for Park City Group's fiscal second quarter 2020 earnings call. Hosting the call today are 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 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 current, beliefs and expectations. Park City Group management are subject to risks and uncertainties which could cause actual results to differ from those 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 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 press release. With all that said, I'd now like to turn the call over to John Merrill. John, the call is yours.

Thanks Rob, and good afternoon, everyone. As we have communicated on previous calls, we began shifting our focus back in April 2019. Our focus remains as follows, one, grow recurring revenue and reduce the historical reliance on $4 million to $6 million per year in one-time revenue. It is nearly impossible mathematically to overcome one-time revenue reductions all at one-time. But longer term there's significant value to be captured. Two, keep the annual operating expenses flat. As I have said it takes $17 million a year to run this place absent marketplace costs. Three, increase profitability and cash. And four, grow the network, grow the network, grow the network. As we have mentioned, the three initiatives Randy and I believe we can accomplish these goals or the growth in Tier 2 hubs, cross-selling and upselling and our supply chain offering and expanding marketplace. Let me spend a minute our progress. Let's start with the growth in Tier 2 hub. Since June 30, 2019, the company has added 42 new Tier 2 hubs bringing the total to 90 as of December 31, 2019, an increase of 88%. For perspective, just a year ago, the company had less than 25 Tier 2 hubs cumulatively. The increase in Tier 2 hubs was the result of one dedicated seller in order to accelerate our progress going forward and based on the success to date, we've added three additional dedicated Tier 2 sellers in January and February, increasing the total dedicated Tier 2 sales force from one to four. Growing the network, since June 2019, and the company has grown from 23,000 unique supplier participants to over 27,000 at the end December 2019, an increase a 16%. The increase in the supplier network grew largely through Tier 2 addition. Keep in mind, that every Tier…

Thanks, John. We reached an interesting inflection point this quarter, and I think that it demonstrates that our transition to a revenue mix dominated by recurring revenue is definitely accelerating. As most of you know transitions from one time revenue to a SaaS recurring revenue model are challenging for most companies, typically driving losses, upsetting customers incurring debt et cetera until the transitions complete. We're certainly the exception. Through this process, we've continued to generate substantial cash and therefore are seen an increasingly strong balance sheet, the strongest certainly in our history. We remained solidly profitable and we continue to grow our network at top tier sales people and drive shareholder value. The revenue declines from focusing on recurring revenue is transient, is already abating, as the revenue growth from recurring revenue is accelerating. We grew our recurring revenue 3% for the December quarter. Please remember, new subscriptions do not begin on the first day of each quarter, but begin throughout the quarter. But, by the end of the quarter in December, our monthly recurring revenue run rate increased to more than 8%. What should this mean to us as investors? Given the subscription revenue is recurring, our run rate of 8% may provide line of sight to our recurring revenue for the subsequent quarter assuming no incremental growth. Our exit rate in the September quarter, meaning September 2019 versus September 2018, was 4%. So, our pace doubled in the three months clearly, demonstrating interfaces in fact, accelerating. We expect the exit rate in March to be higher than in December, and so on and so forth. We believe investors can view double digit starting rate for our recurring revenue going into fiscal year 2021. Since approximately 85% of our total revenue is recurring now, that growth rate should be…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tom Forte with D.A. Davidson. Please proceed with your question.

Great. Thanks for taking my question. So Randy, I wanted to ask you a couple of questions about the current state of global events, and implications for Park City Group, ReposiTrak and marketplaces. So, when we think about the coronavirus, we think about the food supply chains, the global food supply chain, in particular in China, how does this fit into both the business model and how does it bring attention to your business model? And then when we think specifically about marketplaces and your ability in the past to enable merchants to get products from a verified supplier to short order, actually think about that as well.

Thanks, Tom, good questions. Let me take the first one first. Remember, coronavirus started out as a food problem from what we currently know, meaning it originated in something that somebody ate. The interest in China is increasing and we've been having conversations with potential partners in the Asia to take our platform there. So whenever there is a problem of risk, safety, et cetera, it just generally sensitizes the environment to what do we do to contain our problem, how do we make sure that the suppliers were working with our good guys, not bad actors. So overall, almost every incident that relates to safety, benefits us, at least, in terms of heightening awareness. I think with regard to the second question, there's a huge issue going on with the Chinese supply chain. And we've certainly had a number of inquiries around marketplace on how we can potentially find products that have already landed, that are not stuck now in a port that isn't functioning in China. So, at least over the short-term its neutral to positive, obviously, this is potentially a catastrophe for the people who are ill. We feel obviously awful about that. But, from an economic perspective, at this point, it's neutral to positive for Park City Group, ReposiTrak.

Then Randy, my second question is more structural. So, when we think about your sales force as you fully implement the recurring revenue, is it on a by customer basis, or is it on a byproduct basis, meaning ReposiTrak versus supply chain versus marketplaces, or large food retailer in one individual sales force?

Yes, actually, we technically have two different sales organizations still. We've added capacity, added people to both of those organizations in the last several months. One of those, is if you will, dedicate to the compliance aspect of what we do, in particular to what we've called this Tier 2 initiative, which is to get suppliers to use us for their supply chain. That's going exceptionally well, we feel very, very good about it, and I think over the next several years, it will help us to enormously scale the number of customers we have in the network. At the same time, we've added significantly to our general sales organization, with the intention that we're now going after more top Tier 1 kinds of both compliance and frankly, supply chain retailers, wholesalers. So, between the two different sales organizations, we have more people time over target than we've ever had in our history. And obviously, that's an indicator of what we think both our ability to execute is very importantly. But secondly, just our confidence in how we do it, and how we scale it ought to be. So, at the moment, it all feels very good to us. And frankly, I think, again, we just want to point out that any cosmetic or optical sales declines are only in the one-time revenue, that the recurring revenue is accelerating from 4% at the end of last quarter to 8% at the end of the most recent quarter that we finished. And we obviously have line of sight that gives us a lot of confidence, it will be double digit on a monthly basis by yearend, which tease us up for a double digit revenue growth next year. So the transition, I'm kind of hitchhiking to make sure it's clear, the transition to eliminate one-time revenue, which we originally thought could take up to two years, we think will be largely complete in a single year. So internally, we're feeling very good about how things are building.

Great. Thanks for taking my questions, Randy.

Our next question comes from the line of Ananda Baruah with Loop Capital Markets. Please proceed with your question.

Hi, good afternoon, guys. Appreciate you guys taking the questions here. Few, if I could for both Randy and John. Hey Randy, just a follow-up right there. So, without getting like be physical on the timing of the return to rev growth, is it possible with the compares? And then, with the growth of recurring that you could return to revenue growth this year in calendar '20, or should we really take that being a calendar '21 event so, you guys are trending pretty good yet with your schedule?

Well, let me say this about that, I sound like Richard Nixon. Clearly, we are evidencing optimism that before the end of the year we will be clomping positively, but again, we would argue that the onetime revenue which should be heavily discounted anyway, we're already clomping positive and detect great growth rate, our revenue comp will accelerate. So, we will have a very likely a quarter in this fiscal year that is positive comp all-in, all-in, all-in. And clearly next year, what we're suggesting is, that the growth rate of total revenue, like-for-like will be double digit. So, the elimination of one time revenues, the replacement of that with recurring revenue is largely complete and it'll show up in the total numbers, we think prior to yearend, fiscal 2020. But, not enough that we will overcome for the full year positive sales but, for the quarter, we feel pretty good about that fourth quarter.

That's very helpful. And is there anything that you can tell us about how you're thinking about recurring revenue, I don't know what the right word is tempo or kind of slow growth rate that would be useful for us to think about? What you're expecting, what may be some of the upcoming key levers are, things that are influencing that, so we will continue to get a development year about how that business could develop?

Okay, so let me take your question and reframe it slightly. And so if I'm out of line here, feel free to say so, obviously. If I were trying to understand where we're going from a revenue and bottom line perspective, and it's not my place, but here's what I would do, I would take what we call our exit rate in any given quarter and I would roll that number forward in terms of growth rate of recurring revenue for the next quarter, because it just tends to be a very stable number within a quarter. So, for example, if we just said our exit rate in the month of December is 8%, well, you can probably figure out from that, the growth rate of total recurring revenue in the quarter that we're currently in quarter three is going to be somewhere between 6% and 10%. And we said that by yearend, it will be double digit for a monthly, which means as you exit this year, and look at next year, growth rate of revenue will be double digit. Now, the modifier to that is that, in fact, one time revenue will have been compressed to less than 15% of total revenue, which actually means and that's why I was saying in my remarks, growth rate of recurring revenue will become for all intents and purposes, the surrogate that you need for growth rate of total revenue of the business. So, we've tried to make this about as easy to forecast as possible. So, you can make the assumption that John would give you which is, our cost of being in business is around $17 million a year more or less, even with the people we've added. And that our recurring revenue stream becomes really the revenue stream and that next year, we're going to experience double digit topline growth, minus $17 million of expenses. So, it will be a very good year indeed. Is that helpful?

It is. I appreciate it. And then let me just sneak one more in here. Since you're at the start of the year, look, you've most probably gone over -- in the prepared remarks, in the Q&A so far, some of which are your key initiatives through the year, but I just want to ask the question broadly so that we don't miss anything. How would you like us to think about? What you guys are focused on this? What you guys are up to? Anything you haven't mentioned yet so that we're aware of that, I'd appreciate it. And then that's it for me.

Okay. No, I love that question because that's open ended enough, I can talk about almost anything. The Tier 2 initiative really is a big part of our future has some very interesting impacts for the business. And I'm trying to guide people to look at the growth of the size of the network, because remember, at the end of the day, ultimately, our revenue and our profitability depends on whether the network is growing plus a time lag. So, as I said, five years ago, we had 800 customers, we currently have 27,000, we’ll finish the year in the 30,000s of customers, and I'm sort of guiding people to think that by the end of 2021, we’ll be very close to 50,000 participants in this network. Wow! I mean, even I'm impressed with that scaling. So in a way, what we need to be doing is growing the revenue base from those customers, the cross selling activities, the upselling activities, that's why we are adding sales people to the mix. And we will continue to do that as we add to the size of the network. But the network girth makes us more attractive to others to join. It's sort of like the cell phone business, you wouldn't want to join a network that didn't connect very many people, you'd want to join the network that connected the most people, and that is certainly us. So, as we look at what we're doing, we're feeling very confident about the Tier 2 initiative. Important to note that virtually all of our growth now is coming from existing customers, that's really remarkable, meaning people we already do business with, which means as we grow the size of the network, the cadence should increase and the revenue growth should increase. The constraint…

There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.