Exhibit 99.2
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
C O R P O R A T E P A R T I C I P A N T S
Robert Fink, FNK IR,
LLC
John Merrill, Chief Financial
Officer
Randy Fields, Chairman and Chief Executive
Officer
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
Elliot Alper, D.A.
Davidson
Ananda Baruah, Loop Capital
Markets
P R E S E N T A T I O N
Operator
Greetings,
and welcome to the Park City Group Fiscal Fourth Quarter and Full
Year 2020 Earnings Call.
At this
time, all participants are in a listen-only mode. A
question-and-answer session will follow the formal presentation. As
a reminder, this conference is being recorded.
It is
now my pleasure to introduce your host, Rob Fink with FNK
IR.
Mr.
Fink, you may begin.
Robert Fink
Thank
you, Operator.
Good
afternoon, everyone. Thank you for joining us today for Park City
Group's Fiscal Fourth Quarter and Full Year 2020 Earnings
Conference 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 on
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 Security 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 close today, the Company issued a press release
over-viewing the financial results that will be discussed on
today's conference 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.
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
John Merrill
Thanks,
Rob.
Good
afternoon, everyone.
Today
we report financial results for the fourth fiscal quarter and full
year Fiscal 2020 ending on June 30. Jumping right in, the annual
results reflect recurring revenue for our software business grew
13%. Recurring revenue for the software business is 98%.
Marketplace revenue grew 62%. We grew Tier 2 customers 75% from 60
in 2019 to 105 in 2020. Cash from operations was $4.2 million. We
have the strongest balance sheet in the Company's history, and
recognize continued profitability.
I’m
pleased with what we are able to achieve given the circumstances.
For the full year, total topline revenue was down 5% due to our
planned transition of one-time software revenue in favor of SaaS or
recurring revenue. This was part of our stated strategy. However,
as you will see in the fourth quarter, we delivered top and bottom
line growth while simultaneously strengthening our balance sheet
and generating increasing free cash flow despite significant
uncertainty and challenges given the COVID
environment.
Before
we get into the numbers, I believe it is important to reiterate
that we have three legs of the stool, or products, sold in two
different ways. First, we have a Software-as-a-Service business, or
SaaS, which includes our compliance and supply chain products.
Historically, those products have been sold as software recurring
subscription revenue and approximately $4 million to $6 million in
annual non-recurring one-time license and service
revenue.
As we
said in 2019, we made the decision to focus our efforts on
transitioning non-recurring software revenue to recurring. As of
June 30, 2020, 98% of our software business is now recurring
revenue. To put that in perspective, in June 2019 and June 2018 the
percentage of our software business that was recurring was 77% and
69% respectively. Transitioning was no easy feat.
Despite
our efforts to eliminate all one-time software revenue, as
I’ve previously communicated, there will always be a small
portion of customers who will buy, meaning license, versus rent,
meaning subscription. However, now one-time software revenue in our
business has been reduced to approximately $400,000 in Fiscal
2020.
The
second revenue stream in our business is Marketplace, which allows
buyers and sellers to source hard-to-find things within our network
of 20,000 embedded retailers and their suppliers. Sometimes we act
as the agent, charging a nominal commission or fee; and other times
we are the principal, whereby we buy, hold and sell goods for a
markup. As you know Marketplace is largely transactional and
inherently unpredictable. The size and scope of transactions can
vary from quarter-to-quarter based on seasonality, buyer
preferences, pricing, and the latest demand for those hard-to-find
things.
Because
we sit between buyer and seller, our margin, whether it is a
mark-up of goods or commission, is substantially less than what we
get in the software side of the business. As we have indicated
before, gross margin on incremental revenue over our software
business base is approximately 80% to 85%. Conversely, Marketplace
is on average roughly 5%.
While
both the software and Marketplace components of our business are
difficult to separate from our business strategy and software
suite, our overall offering to our customers is a combination of
solutions that enable customers to be compliant, have more
actionable visibility into their supply chain, simultaneously
replacing vendors, diversifying product offerings, and sourcing
hard to find items.
Why is
this important, you may ask? For Investors, this means that we now
have a more predictable, profitable software business, which fully
covers our fixed cost, and recurring revenue has grown at
double-digit rate. We also have a transactional business,
Marketplace, which is challenging to predict, contributes lower
margin, yet adds incremental revenue while providing value to our
customers, which facilitates cross-sell. I believe it is important
to make this distinction with respect to our
businesses.
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
An
obvious question given the pandemic is, how has COVID-19 affected
the business and customers? COVID challenges have, in the short
term, elongated our sales cycle. Decision making has been delayed,
and some partners have needed extra time to pay. In my view this is
temporary, and we will support our customers where we can while
they focus on stocking their shelves. Nonetheless, the pandemic has
reinforced the supply chain visibility, and effective management is
critical for our customers. We believe, in the long term, this
partnership will benefit PCG.
Furthermore,
we expect to further penetrate and expand our existing customer
base - simply put, farm the network - and we believe that the new
normal post-COVID may offer opportunities of incremental compliance
and supply chain logistics to both new and existing customers. In
the interim, Marketplace has benefited from sales of hard-to-find
goods, including personal protective equipment, which includes
gloves, mask, thermometers, and other items that have been
difficult to reliably source during the pandemic. This resulted in
Marketplace growth in the fourth quarter. Marketplace revenue was
up 177% to $1.3 million in the June quarter.
Despite
COVID, our strategy has not changed. We remain committed to what we
have said before: focus on recurring software revenue and replace
one-time; reduce operating expenses, non-Marketplace costs;
generate cash; strengthen our balance sheet; drive earnings; and
grow the network, grow the network, grow the network. As I've said
before, a solid balance sheet isn't just nice to have: our
customers demand it now more than ever before. The pandemic changes
nothing; it only reinforces our focus.
Turning
to the numbers, let me start with the fourth quarter. Fiscal Fourth
Quarter 2020 revenue was $5.8 million, up 24% from $4.7 million in
the same quarter last year. For fourth quarter Fiscal 2020, total
operating expenses increased 20.8% from $4.4 million in Q4 2019 to
$5.3 million in Q4 2020. The principal increase in total operating
expenses for the quarter of $900,000 is largely a result of
Marketplace. Again, Marketplace is incremental revenue with a lower
margin.
Sales
and marketing expenses decreased from $1.5 million in Q4 2019 to
$1.3 million in Q4 2020. This 15% decrease was the result of lower
sales travel, trade shows, lower commissions, and to a lesser
extent the cost-cutting measures we started at the end of
Q3.
G&A
costs increased from $1.3 million in Q4 2019 to $1.4 million in the
same period 2020. This is primarily a result of increasing our bad
debt reserve to be prudent for our customer default, should it
occur. The increase in bad debt expense is partially offset by a
decrease in cost reductions associated with rent, travel and
professional services fees.
For the
fourth quarter of Fiscal 2020, GAAP net income was $480,000 or 8%
of revenue versus $182,000 or 4% of revenue. GAAP net income to
common Shareholders was $333,000 or $0.02 per diluted share
compared to $36,000 or $0.00 per diluted share.
Turning
to the full-year results, Fiscal 2020 annual revenues were $20
million, compared to $21 million for the year ended June 30, 2019,
a decline of 5%. This decrease in total annual revenue was largely
a result of $3.7 million planned reduction of one-time software
revenue that occurred in 2019 that did not repeat in 2020,
partially offset by growth in recurring revenue and
Marketplace.
Total
recurring software revenue increased 13% year-over-year. Software
recurring revenue is now 98%. One-time non-recurring revenue absent
Marketplace is now immaterial. For the fiscal year ending June 30,
2020, total operating expense increased 8% from $17.2 million in
2019 to $18.6 million this year.
Let's
take a look at the annual expense numbers in a little more detail.
Cost of services and product support; for Fiscal Year 2020, cost of
services and product support increased from $5.8 million to $7
million. The $1.2 million or 20% increase in COGS reflects a 177%
increase in Marketplace revenue and its respective
costs.
Sales
and marketing; for Fiscal Year 2020, sales and marketing expenses
decreased from $6 million to $5.8 million, a 4% decrease. The
reduction is the result of lower revenue, professional fees, and
lower commission related to lower revenue.
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
G&A;
for the Fiscal Year 2020, general and administrative expense was
$4.9 million versus $4.7 million. This 4% increase or $200,000 is
primarily due to an increase in bad debt reserve. While the Company
has not experienced or foresees a material customer default, we
believe it is prudent given COVID that we increase the allowance
for doubtful accounts. This increase was offset with reductions in
rent, travel, and professional fees.
Depreciation
and amortization; depreciation and amortization expense was
$600,000 versus $840,000, 2019 versus 2020. This 40% increase is
attributable to the build-out of the Company's headquarters and
expansion to the new Nevada data center that occurred in
2019.
A brief
overview of Capex; in 2019, the Company expended $1.5 million to
move its headquarters to Murray, Utah and complete its data center
move to Switch, Inc. in Las Vegas, Nevada. In 2020, the Company
expended $650,000 for Capex. The 60% reduction in Capex for Fiscal
2020 is the result of completed projects. As a technology Company,
PCG estimates approximately $400,000 to $500,000 per year in annual
Capex spending for security, licenses, hardware upgrades, and
commuting gear.
Turning
now to net income; the full year of Fiscal 2020 GAAP net income was
$1.6 million or 8% of revenue versus $3.3 million or 16% of revenue
a year ago. GAAP net income to common Shareholders was $1 million
or $0.05 per diluted share, compared to $3.3 million or 16% diluted
share a year ago.
Turning
now to cash flow and cash balances; for Fiscal Year 2020, we
generated cash from operations of $4.2 million, compared to $4.6
million in the prior fiscal year, a 9% decline due to lower total
revenue. Total cash at the end of Fiscal 2020 was $20.4 million,
compared to $18.6 million in the same period in 2019. I want to
point out that the $20.4 million cash balance is net of the
approximately $2.7 million used to repurchase common stock under
the stock buyback plan.
On a
final note, on cash and balance sheet strength, remember balance
sheet strength is a necessity to our customers, they demand it.
Therefore, we anticipate continuing to grow our cash balance
through recurring revenue, a well-controlled cost structure,
maximizing profitability and generating value for customers and
Shareholders.
With
respect to our stock buyback program, in March, during the height
of COVID uncertainty, we made the prudent decision to halt our
buyback program. We did not repurchase any shares during the fourth
fiscal quarter. Since the program began in 2019, the Company has
repurchased approximately 500,000 shares of common stock for $2.64
million at an average price of $5.28 per share. Those shares were
canceled and are no longer in shares outstanding.
The
Company has $1.36 million remaining on its existing buyback program
and given our foreseeability to generate cash and our current cash
position, we may consider opportunistically resuming the program in
Fiscal 2021.
Thanks
for your time everyone today. At this point, I'll pass the call
over to Randy.
Randy?
Randy Fields
Good
afternoon, everyone.
About a
year ago, we announced our strategic decision to focus our future
growth in recurring SaaS revenue. It’s better for the
business as a whole, makes the Company easier to understand, and
frankly easier to forecast yearly changes in revenue and
profitability. We believed then and we believe now that this change
will lead to much better our valuations for us and
Shareholders.
The
change was focused on reducing the one-time revenue that was then
inherent in our software business with both our compliance and our
supply chain offerings, while continuing - and this is important -
while continuing to grow our subscription revenue in those two
product groups.
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
To
reiterate, I'll give you a way of thinking about this. We have
three different product groups sold in two different ways. We have
compliance products and supply chain products that historically had
a mix of subscription and one-time revenue that are now sold almost
exclusively on a subscription basis, what we call are SaaS or
software business.
Second,
we have our Marketplace, which is derived from our customers asking
us to help them solve a problem for which we are uniquely
qualified, locating hard to find suppliers and items. By its very
nature this leads to transactional revenue. Two years ago - and I
think this is an important reference point - we had about $6
million of one-time revenue in our software business. This year
we've reduced that to approximately $400,000, a difficult but very
important accomplishment.
At the
same time - and we should have been talking about this more - the
underlying recurring software business has been growing
substantially, with a compounded growth of 11.4% over the last
three years and up to 13% last year. We're very, very proud of
that.
We knew
this would likely flatten the reported topline revenue levels,
which included all that one-time millions of dollars of software
revenue, as it's impossible obviously to instantly backfill those
millions in one-time fees for subscription revenue. But even though
we understood that, we also shared that this transition would have
many benefits.
First
and foremost, it would make our business more
predictable.
Second,
over time, it would make us even more profitable. Remember our
focus as a Company historically has been to avoid raising cash, to
make sure that we look appealing to our customers and maintain our
profitability.
Third,
it would make us much easier for Investors to understand and model
us. Again at the time, if you remember, we thought it would take
about two years. We assumed that several customers would continue
to prefer to buy rather than rent our solutions.
But
here we are about a year later, well ahead of our plan. We've now
effectively eliminated almost all of our one-time software revenue.
Our one-time revenue last year was less than 2% as of June 30,
2020, and that's down from 23% of the revenue the year
before.
In the
meantime, the recurring part of our SaaS business did grow
substantially, as we said. This success is noteworthy, and frankly
may not have been noticed. As a result, we're going into Fiscal
2021 with a $17 million year base of recurring revenue. That's
important as our fixed cash costs, excluding the variable costs in
Marketplace, are approximately $13 million annually.
Our
recurring revenue now more than covers our fixed cash costs, a wise
and frankly nice place to be given the uncertainty in the world. As
we continue to grow our recurring revenue - and it grew 13% last
year, please remember - each incremental dollar in recurring
revenue in the SaaS side of our business beyond our current $17
million base should contribute about $0.80 in profit and cash flow.
We're very proud of this progress, and we certainly hope that you
are too.
We
ended the year on a positive note. There is no doubt that the
pandemic continues to present challenging circumstances for Park
City Group and our customers. The uncertainty in the world is
obvious. Uncertainty in fact is never a friend. That said, we're
very fortunate that we serve the grocery supply chain, as this
segment of the retail industry has held up much better the most of
the others in retail. Indeed, the pandemic has exposed the
weaknesses of the food supply chain, and those are weakness that
we've been working to address for many years.
As our
customers shift their focus from the crisis and begin thinking
about how to make their supply chain more resilient to meet future
challenges, our offerings will be, we hope, at the top of their
minds. In the interim, Marketplace is helping them source many
items that remain in short supply, source these items from
suppliers they can trust. As you can imagine, trustworthy,
compliant, vetted suppliers have been in really short supply. The
headlines prove this, as you've seen several states and other
municipalities and governments for example sadly having fallen
victim to substandard suppliers for critical supplies.
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
As a
result, Marketplace contributed significant transactional revenue
to our topline this last quarter. This more than offset a $300,000
decrease in one-time revenue, excluding Marketplace from our supply
chain and compliance segment, and proved itself - and this is
interesting - to be counter cyclical to the rest of the business.
The industry dynamics that serve as long-term secular catalysts for
us haven’t changed. In fact, if anything, they've been
reinforced.
During
times of disruption and crisis, food safety is even more critical,
and in fact, it's at the same time harder to ensure. Compliance
remains critical but perhaps less urgent. As retailers focused on
keeping employees and customers safe, they temporarily put their
compliance needs to the side, extending our sales cycle. At the
same time though, there are new regulations that are being proposed
that will increase the need for what we do - and we are
ready.
We
continue to think decision delays will only last a short while,
while our customers deal with this immediacy that they have in
addressing pandemic-induced challenges. Recently, we gained an
endorsement of a major food cooperative that's encouraging its
members to use us. Obviously, all of these kinds of things help
us.
So how
do things look for the year 2021? At this point, even given the
overall economic uncertainty we all face, we're optimistic about
the year. In many cases, but not all, decisions are obviously being
made slower. Why? Our customers are locked into day-to-day battles
to keep product on the shelves. We understand they simply don't
have time for meetings, calls, and taking on new
projects.
However,
overall, interestingly, our pipeline of both Tier 1 and Tier 2 hubs
is now the largest it's ever been. We have numerous possible
up-sell opportunities, a few of which have already closed and been
agreed to, and will be deployed and revenue producing after the
first of the year. What we do is definitely needed, and getting the
attention and focus needed by our prospects is our challenge.
Patience for sure wins here. Even with delays, the number of Tier 2
hubs grew from 60 in Fiscal 2019 to 105 so far this
year.
In
addition, our Tier 1 pipeline has recently grown, as Tier 1s are
beginning to shift from pandemic related emergencies to addressing
their longer-term supply chain, and this obviously will benefit us.
However, as the year unfolds, several more of these we're certainly
hoping will fall into our win column. In addition, we continue to
believe that we can expand our ReposiTrak offering internationally.
Pandemic unfortunately has delayed revenue from our new
relationship in the U.K., but we are effectively deployed and
hopeful revenue will begin in early Calendar 2021.
Simultaneously
and again interestingly, we are getting interest from other
countries, especially South America. Another emerging opportunity
for us involves a reseller channel. Several of our larger
customers, including the distribution co-op, which provides private
label products to retailers, has recently endorsed ReposiTrak and
is beginning to resell it to their members. So we're seeing similar
reselling opportunities even in our out-of-stock offering. It's
early, but we do view this as a potentially lucrative addition in
terms of being a sales channel for us.
The
COVID disruption has also markedly increased the importance of a
strong balance sheet on our part. In fact, it's no longer an option
to be financially strong when you're approaching new customers.
We're aware of a few competitive companies that periodically we see
in the marketplace finding themselves in financial difficulty.
Large retailers cannot afford to do business with vendors or
service providers who could be out of business leaving them high
and dry.
Visibility
in our revenue in short-term certainly remains challenging,
obviously for us and everyone else, but quarter-to-quarter changes
need to be viewed as a whole. We're still a yearly Company. Our
quarters are not how we should be measured. Last year, we had some
great and frankly some not so great quarters, but the recurring
revenue for the year overall nevertheless was up 13%. Our recurring
revenue in the software business, we believe, will grow on an
annualized rate in the low double-digit again this
year.
Given
the COVID uncertainty, our strategy frankly remains unchanged. We
will continue to grow recurring revenue, continue to carefully
watch our expenses, continue to grow profitability and cash, not
only for our customers but obviously for our
Shareholders.
With
that, I'd like to open the call for questions.
Operator?
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
Operator
Thank
you. Our first question comes from Elliot Alper from D.A.
Davidson.
Elliot Alper
Great.
Thank you.
You've
done a great job in maximizing your efforts in recurring revenue,
so congrats on that. That said, how should we think about the next
12 months when it comes to the factors that will drive our
non-recurring revenue?
Secondly,
Amazon reported a 300% increase in the online grocery in the June
quarter. Wondering what the implications are to Park City
Group?
I just
have one follow-up after that. Thank you.
Randy Fields
Okay.
So why don't I take them; and John, then if you have something to
add, chime in.
First,
Amazon. The truth is that Amazon is the enemy of all of our
friends. Everyone in the supermarket industry is worried about
Amazon, and their primary fear for online activity comes from
Amazon. So the better and away that Amazon does, the more that
people recognize that they cannot continue to do business the way
they have. It’s unsettling, and frankly stirring the pond in
this case is in fact good for us.
In
terms of—and I think this is a very difficult question. In
terms of how we expect the non-recurring revenue to do in the next
year, the truth is we don't know yet. We think of the business, and
we would encourage you to think this way, is now we have a fully
recurring software SaaS business that's going to continue to grow,
generates very significant underlining year GAAP profitability -
can you imagine that: GAAP profitability - and an additional
business that’s a service function to our customers that we
call Marketplace.
To a
certain extent, Marketplace is derivative of the fact that our
compliance work causes our customers to have to rethink suppliers
in their supply chain. If we help them uncover a supplier who's not
doing the kind of job they ought to be from a compliance
perspective, they are naturally going to turn to us for finding
other vendors. So we've been doing this as a service.
We
think it has very interesting upside, but the fact of the matter is
we're resourcing it more heavily this year. That means we're
investing in it, but we think it's got interesting upside. We just
don't think that we're in a place yet to forecast it. So it's fair
to say that if shortages continue for some period of time, then we
would expect that hard to find things will be in demand, by
definition, and that our Marketplace revenue would be
up.
So it's
a difficult question to answer. I think if I were an Investor, I
would really mostly be focused on the rest of the
business.
Elliot Alper
Okay,
great.
And
then lastly, just from an operating expenses standpoint, how has
COVID-19 impacted your expenses? John, I think in the past you've
talked about how much money it costs to run your business a year.
Is that figure higher or lower now because of COVID?
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
John Merrill
Yes,
Randy and I had said this on the third quarter call. We had
addressed this when COVID took hold. I have always said, it takes
$17 million to run this place; not to get into accounting, but if
you look at it from a cash standpoint, forget depreciation,
amortization, stock comp and lease amortization, you're just north
of $14 million cash. As I had said on the last call, our goal is to
reduce the operating spend. If you look back, call it June 30,
2021, we will have reduced our cash spend by about $100,000 a
month. I've always said $17 million, but that's been including a
bunch of accounting stuff; but COVID is not affecting us anymore
now than what we've already chosen to do in and have
done.
We’re
focused on recurring revenue that now exceeds our cash cost of
staying in business absent Marketplace and then some. So COVID
really isn’t impacting us, other than what we've done already
to reduce these costs. So as contracts come offline or projects
complete, I'm comfortable saying that you can look back June 30,
2021, look back 12 months, you will see it about $1.2 million lower
absent Marketplace.
Elliot Alper
Okay,
great. Thank you both.
Randy Fields
Elliot,
let me frame it differently from the CEO’s perspective. We've
now created structural profitability in the business, and I have to
tell you as CEO and certainly as a Shareholder, it doesn't get much
better than that. In other words, our costs - cash costs for being
alive, if you will - are now very substantially lower than our
forecastable recurring revenue; and that revenue base will grow for
the year, not quarter-to-quarter, but for the year will grow, we
think in low-double digits. So conceptually, in a way, we think
this is a really important milestone for us.
Elliot Alper
Helpful.
Thank you.
Operator
Thank
you. Our next question comes from Ananda Baruah from Loop Capital
Markets.
Ananda Baruah
Hi.
Good afternoon, guys. Appreciate you guys taking my questions, and
congrats on a second straight solid quarter.
John Merrill
Thanks,
Ananda.
Ananda Baruah
Yes,
tough environment. Look, Randy, John, to that end, Randy your point
about recurring revenue you made a couple of times, when do you lap
the sort of revenue headwind from transactional revenue such that
all the recurring revenues start to show up as overall revenue
growth, you know sort of Marketplace notwithstanding?
Randy Fields
Got it.
That's a terrific question. By next quarter, meaning the quarter
ending in December, I believe we're pretty much pure-to-pure
(phon), and that will as we begin to expose that, you'll see that
our topline grows commensurate with our recurring revenue. So we
are—if we aren't there now we’re damn
close.
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
Ananda Baruah
All
right. Awesome. That's helpful.
Then
you guys—Randy, you mentioned that for Fiscal 2021 you think
a low teens recurring revenue growth sounds good. If I go and dust
of my notes, I believe that when you guys started this, you
actually were thinking, and correct me if I'm wrong, but you
actually were thinking that, maybe even a high single-digit
normalized for return, not for 2021, but kind of the normalized
looked attractive, looks good, wasn't a bad place to think
about.
So the
question is, is that accurate in that recurring revenue is actually
tracking higher structurally then you guys thought that it would
initially? I'm wondering over time, what's the potential for the
growth rate of the recurring revenue, you guys (inaudible)
currently?
Randy Fields
Okay.
Two more really good questions. Yes, our belief in terms of topline
recurring revenue growth have increased. Frankly, it's because our
cross-selling activities are going better than we had seen
historically, largely because in fact we're focused on it. So let
me just give an example. One of our largest and best thought of
compliance customers has come to us and said, “I've heard
about your out-of-stock work. I want to do that now,” and
that will be a significant—have a significant impact. In
turn, they’ve referenced what we're doing to yet another one
of our customers, and told them that they should go from doing
out-of-stock work into compliance.
So
we're seeing more cross-selling opportunities, number one. Number
two, the Tier 2 initiative although slower than we would like, I
think all of us have become what I call true believers in terms of
what that can do for the business. So everything inside the
business that looks like recurring revenue feels very good to
us.
As you
certainly know about us, we're operational in nature. What we care
about primarily is that customer experience. Remembering that if
you grow at 15% in recurring revenue that means you're probably
increasing that customer exposure or number of customers, if you
will, by about double that, 30% plain. Once you are at the 30%
growth rate of customers - not revenue, but of customers - it puts
an enormous burden on the business to maintain that customer
satisfaction and the customer success.
So we
feel as if the kind of revenue that we want to see is low double
digits, and we can maintain that customer experience at that rate.
But you're right: it is higher than we used to think.
Ananda Baruah
Got it.
That's really helpful. How should we think about structural
recurring revenue operating margin? I know it's software, so it
tends to be a little bit higher. But what is the—are you
there yet? If not, sort of what are the sign posts for getting
there? How should we think about what those levels can be over
time?
Randy Fields
I think
John said in his commentary, and certainly all of us agree, that on
the recurring revenue side of the business, which will dominate the
business going forward, we would expect that incremental revenue
produces about $0.80 of earnings and cash flow on every dollar of
that revenue. We think we've matured. We think we’re there.
John's team has certainly done an extraordinary job of cost
control.
The
truth of the matter is, we are feeling very good about our ability
to maintain that profitability. It's becoming a competitive
advantage. I think I mentioned that a couple of other people that
we know that have services somehow like ours, or that are in call
it quasi-competitive space, are in serious financial trouble.
That's causing interest in what we do to increase.
So,
strong balance sheet, maintain our profitability - one more time
GAAP profitability, not non-GAAP - doing that is we think the way
forward; we're going to be conservative in our approach and protect
that profitability and cash flow for the Shareholders.
Park
City Group – Fiscal Fourth Quarter and Full Year 2020
Earnings Call, September 28, 2020
Ananda Baruah
That's
really helpful. One last one from me, how should we think about the
strategic priorities, the next year (phon)?
Randy Fields
The
overall priorities of the business are really the same, more of the
same. We're growing out in terms of adding additional Tier 1 and
Tier 2 hubs. That's historically been a major source of growth for
us. We're on the same track, and perhaps the only thing that's
different is that we are more focused than we've historically been
on expanding our footprint within any given customer cross-selling,
up selling. That is going very, very well.
Our
theory always was, and I want to emphasize it, that when you take
great care of a customer, when you are successful in terms of the
technology, and you've serviced them well so they feel like they
are in a relationship with you, they are far more willing to buy
other offerings. Probably for the first time in the history of the
business, that is a major focus of ours. At this point I'm
surprised at how well we're doing with that. So that's really the
focus.
We will
add some activity outside the U.S., but that will be incidental. We
have begun a couple of other little things that we're doing. As you
know, we did some government work. We're switching how we do that
government work, but still doing a little bit, some pilots, and
we're going to experiment with an idea around how we can monetize
some of the data that we have to the benefit of our customers.
We’re always a little experimental. I don't want it to sound
like a shiny new object, because for us right now, it's blocking
and tackling. As I said, we have a pipeline that's the largest in
history of the business.
Ananda Baruah
Great,
thanks so much. Appreciate it.
Randy Fields
Thanks,
Ananda.
John Merrill
Thanks,
Ananda.
Operator
There
are no further questions at this time. I would like to turn the
floor back over to John Merrill and Randy Fields for closing
comments.
Randy Fields
Well, I
think we feel very good about the year. Please remember, each
quarter will not be terrific - the year will be very, very good.
That's how we see it from today. Lots can happen out there for
sure. The uncertainty of the world is extraordinary. I’m not
saying anything that everyone doesn't already know, but we feel
very good about where we're positioned, and we've got ourselves set
in a way that will produce a very profitable year. So we feel good
about where we are.
John,
anything to add to that?
John Merrill
I agree
100%. For me it's recurring revenue, it's cash, it’s growth,
it’s maximizing the profitability and keeping an eye on
expenses.
Operator
That
completes today’s call. Thank you for your participation. You
may disconnect your lines at this time.