Greetings, ladies and gentlemen, and welcome to the Park City Group Fiscal Second Quarter 2019 Earnings Conference 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, Mr. Rob Fink, with Hayden Investor Relations. Please proceed, sir.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group's Fiscal 2019 Second Quarter Earnings Call. Hosting the call today are Mr. Randy Fields, Park City Group's CEO and Chairman; and Todd Mitchell, 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 context 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 -- 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 information contained in this conference call. Shortly after the market close today, the Company issued a press release over viewing the financial result that I will discuss on today's call. Investors can visit the Investor Relations section of the Company's website at parkcitygroup.com to access the news release. In addition, in the earnings release and on this call, the Company 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. Management believes these non-GAAP terms are useful measures for the Company, primarily because of the significant noncash charges in its operating statement. Reconciliations of GAAP and non-GAAP results are in the earnings press release that are on the Investor Relations website. With all that said, I'd now like to turn the call over to Todd Mitchell. Todd, the call is yours.

Thank you, Rob, and good afternoon, everyone. The key takeaway from our fiscal 2Q results is that our converged business plan, that is to offer 3 application suites that enable the retailer to source new suppliers, get those suppliers and efficiently transact with those suppliers on a single cohesive platform, is delivering the benefits we expected in the form of stronger execution and expanded profitability. Let's look at the numbers a little bit. Revenue. Fiscal 2Q revenue was $5.6 million, which was down modestly from $5.7 million a year ago. I'm not going to dwell on this other than to make 3 points. First, we had a tough year-over-year comparison. We had a large licensing transaction in the comparable period a year ago. We've moved away from this model, but occasionally, customers want to structure deals this way, and we will accommodate. And MarketPlace revenues were down year-over-year as the seasonal program of a marquee customer wound down and comped a couple of large one-off transactions from them a year ago. Second, underlying trends in the quarter were very positive. Fiscal year-to-date revenue was up 10% to $11.5 million from $10.4 million a year ago. And a tough quarterly comparison masked very robust growth in recurring subscription revenues. Third, we remain confident in our outlook for the second half of fiscal 2019. MarketPlace will be a much larger contributor in the second half than the first half. We've already signed up 2 more buyers ahead of schedule. We've launched a second use case for MarketPlace in December, and we expect to launch a third use case in late February. And our compliance and Supply Chain pipeline for the remainder of the year is very robust. For the quarter, where I would instead have your focus is, profitability and cash flow.…

Thank you, Todd. Fiscal 2Q marked an inflection point for us as we solidified our converged business model and began to see the benefits in terms of not just stronger execution but even higher levels of profitability. Before I review our initiatives over the last few months, it might be valuable to look back a bit through a perspective on where we think we are in our journey. Not many years ago, we were a small supply chain business with a great technical platform. We saw a sea change in the regulatory world in which our customers lived so we added ReposiTrak, our compliance application. With a logical adjunct to our Supply Chain base, we thought that it would provide a substantial expansion to our network size. It did. That business is now virtually the same size as the Supply Chain business, which itself is much larger than it was a few years ago. We're doing the same thing again with MarketPlace. We're adding another application that will enhance the value of our now larger network. MarketPlace completes the circle: source, vet, transact. We now address every aspect of the workflow in the Supply Chain. This addition makes us both unique and, frankly, more important to our customers. And as our converged network grows, it becomes more valuable as each new point of contract, each new supplier, each new buyer and each new wholesaler makes the overall network more valuable. And we expect like compliance before, that in short order it will be as large as the other two parts of our business even as they continue to grow. Patience and great execution wins here. But while we bring it online, as we told you, it is, obviously, adding volatility to our revenue profile. So on to the last few…

[Operator Instructions] Our first question comes from the line of Ananda Baruah with Loop Capital.

I have a few if I could. Kind of Randy, Todd, I mean there's handful of several comments about -- and by the way, congratulations on getting two MarketPlace customers in the door way ahead of schedule. So I have a couple of specifics. There's a handful of comments about sort of amplification in revenue, promise of ongoing revenue amplification like that. And if I could just get some context around that, let me just give you a couple of specifics to kick it off. Randy, working backwards, you just mentioned you expect revenue to accelerate in coming quarters. I think based on some of your growth, sort of the percentage of revenue comment around OpEx, it even sounds like you might expect -- and this is more of a clarification -- sequential revenue to increase in one, if not both, of the coming quarters of fiscal year '19? And then just any context around your comment of being able to double the size of the Company? I know that, that's more of a market opportunity comment, probably, but just context around that -- sorry, those 3 things.

Okay. So actually, if it's okay, Ananda let me start from back and then go to the front.

Yes, certainly.

If we are able to get our existing customers, then I apologize. I didn't make this very clear in my commentary, but it's important to understand. If we are able to get our customers connected to each other without bringing anyone else into the fold, any net new names, we can more than double the size of the business. In other words, think of it as simply fully deploying what we currently do to our current customers lets us more than double in size. In a way, we can think of that not quite like money in the bank, but because our execution our execution is so good that, over time, our customers absolutely expand their use of our technology across their business. The reality and I know this is hard to understand, retailers right now, today in this world, are focused on a myriad of tasks. They have lots of things to be doing to try and protect their business much less grow it. In that role, it is very difficult to go to a customer and say, "Hi, let's be more compliance. Oh, by the way, let's talk about MarketPlace. Well you know, as long as we're doing that, let's talk about our supply chain capability." In other words, our customers tend to be more single threaded because of the world in which they live, which means that we have to be sequential with them quarter-to-quarter, year-to-year. There's no value in our overwhelming them. We've been very successful with them. Our churn rate is absurdly low because we are good at the execution aspect of what we do. So over time, they will grow with us. So what that means is typically, quarter-to-quarter, we pick some areas to focus on that won't interfere with what we're doing from…

Okay. Great. That's really helpful, Randy. And then just quickly, it sounds like -- now how should we think about the operating margin dynamics than last -- the next -- kind of the rest of fiscal year '19, it sounds like as you get these 2 new MarketPlace engagements going due to the incremental costs there on the COGS side, but clearly, you guys also still expect to get scale from OpEx. How are those -- how would you like us to think of these 2 balancing out the rest of the fiscal year?

I think you actually, eloquently, just said it. Obviously, as MarketPlace grows and becomes a more important part of our business, we believe it, overall, will be lower margin than the rest of our business. So it will impact margins to a certain extent, but it does that at pretty large scale. So the growth of the business will get much larger with MarketPlace's contribution. Dollars of profit should go up very significantly as a consequence, although margin profit will fall modestly. In the meantime, as we've always done, we're largely a fixed-cost business. And as you'll see those fixed cost now are stabilizing, though, in the last several years we've made pretty heavy investments in what we called our 10x program, etcetera, which had, as its intention, scaling the use of technology to improve in the long run our margin. Now that's worked very, very, very well. Our -- the metrics that Todd brought up and we're terribly proud of those of revenues per person are pretty remarkable over just a couple of years. So I think you'll continue to see those kinds of gains from us. So the core business of not MarketPlace, if you will, will continue to generate superb margins. MarketPlace will add growth to the business, and that growth will come with lower margins but high dollar profits over time.

And so that's helpful context. And so I'm going to ask more, so I'm going to take on asking a more specific question. Todd feel free to jump in. So it sounds like you're saying like -- and just to be clear, Op margins, I think. We're talking about gross, both gross and Op, but I think your comment with regards to overall profitability was Op margins. So it sounds like Op margins might be down somewhat in the March quarter, but you're still expecting Op income dollar growth in the March quarter.

I would expect that operating margins will fall in the third and the fourth quarter versus the second but total dollars will increase. And I would say that the magnitude of the increase in total dollars in the second half will be at least as large as the magnitude of the increase in total dollars of operating income of the first half.

Got it. And then so we're looking at -- I mean, I think you did $0.09 in non-GAAP EPS. So unless it's below the line, we'll be doing at least $0.09 for each of the next two quarters. I know that's getting super specific but...

Let's talk about it offline.

Our next question comes from the line of Thomas Forte with D. A. Davidson. Please proceed with your question.

So two questions if I may. I know you've touched on this, but I wanted to ask it really in a different manner. The first question is, how should we think about the appropriate time frame for great ideas to turn into revenue. You're talking a lot about the new use cases for MarketPlace, is that a 12 month where it goes from a new use case to fit in the revenue line? And then second, it sounds like you're moving into new headquarters and will that mean that also you intend to have your sales headcount when you move into your new headquarters?

Oh, I love this first question in particular. Our way of being in business with a new technology is to test what I call the various use cases to know which of the use cases has the greatest potential. Let me give an example. When we first introduced the idea of ReposiTrak years ago, initially, it was intended to be only a Track & Trace system. And strangely enough, we called on a number of people and found there was very little interest then. Oh, by the way, there's very little interest now in tracking and trading. It turns out that a different used case compliance management was the home run so we kind of put the use case that we originally had intended for the technology Track & Trace off to the side and we run like hell with an obvious success now 75,000 connections, as we call them, with our Compliance Management. So we are used to the idea of take a technology platforms, take the application that comes from that, take that application and show it to users and see, well, because they use to say at IBM, "Well, the dogs eat dog food." Well, the first use case was brought to us by our an existing customer in MarketPlace. It was not the one we intended but it turns out they've done very well with it they continue to use it. Now we're seeing others interested in it. Okay. We introduced a second used case, which we kind of call the spot market use of MarketPlace. And it would appear that, that one also has likes And now we're about to go to the original intended used case, which is to help noncompliant vendors be replaced, if you will, by more compliant vendors by our ReposiTrak…

In terms of the hiring more people for the sales team, or the Success Team, yes, I think it's going to give us more capacity to do that. But we'll do it though in a very cautious manner as we see how their productivity come as we create some more -- a greater part of the mix to deal in terms of cross-selling. What we don't want to do is inhibit our ability to cross-sell.

Very important to us and I know from the outside it's hard to understand. Each customer has a primary point of contact, so we're very good at the relationship management of what we do. We don't have multiple salespeople representing multiple products calling on our customers. It's one ownership of that account by a person somewhere in the Company, and we're going to maintain that. Sometimes it slows us down a little bit, but at the end of the day, it gives us tremendous customer access, and obviously, the results of keeping customer shows up as well. It's important to note because we've sort of pooh-poohed it, but let me hitchhike here. The new offices give us substantial expansion and, oh, by the way, at lower cost. How about that? Moving our corporate headquarters and our annual cost will actually fall. We're more than doubling the size of our data center. We're very proud of our work and how we run the data center. I think last year, we had exactly zero on schedule downtime. So we're adding capacity to make sure that we can handle all of the growth in customers that we see, and we're doing all of that at the same time that we've been executing this last quarter. Something I didn't mention, let me hitchhike. We've been working, as everybody probably knows, at our foreign expansion, and we have a template that we have used during the U.S. in terms of alliances with important trade association and we're running down the road about as fast as we can outside the U.S., and I hope to have some news here in the next 6 months with a comparable arrangement outside the U.S. and that should give us some interesting additional reach. One last interesting note, the last time I checked, we already have a presence, meaning that we manage suppliers in, I believe, 77 countries around the world. 77 countries where the Supply Chain for U.S. food extends backward. So our international growth will really, ultimately, be built on the back of what we're able to do here. I'm sorry, Tom, go ahead and ask another question or 2.

All right. So then my last question then is more hypothetical or theoretical, which is how should we think about for your company the notion that as a result of the trade negotiations between U.S. and China, China may buy more soybean, so meaning that the ultimate outcome of the trade negotiations is greater demand for U.S. products from Chinese consumers. Is that good, bad, indifferent for you?

Well, one of the things that's most interesting, if you were to look at China in particular, and I won't dwell on China too much, if you are above the base poverty line in China you don't want to eat food grown in China. You want foreign food, in particular, you want the safest food in the world that comes from the U.S. So there is a halo and this is one of those oddities maybe it's an unintended consequence of the Food Safety Modernization Act. The world is looking at what we did, and it's making the assumption that this is where food that's safe is produced and grown. So there is we think a pent-up demand worldwide for 2 things: one, U.S. food and U.S. food technology; and then secondly, how did you guys get safer because our citizens, meaning that if you're in a foreign country like China, our citizens are demanding that we also focus on how do we get to a safer standard so that our citizens can feel comfortable buying domestic product. So we think of this whole thing of both the regulatory impact and, frankly, the trade tariff which has heightened attention on both U.S. produced food and, frankly, Chinese produced good, all of that has heightened awareness around what we do. One of the most rapidly growing areas of our compliance business is a kind of an arcane part of the law that's called the Foreign Supplier Verification rule, and that's where the original idea and it's working -- I'm surprised it's working as well as it is, but it is. The original concept that Mike Levitt really had, at the time he was the godfather of law, was you should not be able to move your business operation outside the U.S. and produce food to some local standard, which is lower than the U.S. standard and then export the food back into the U.S. That just seems objectively not fair and unreasonable. So the change in the law was, we don't care where you make food in the world, you have to make it to U.S. safety standards. So the question is how do you do that and how do you verify it, and how do you document it? ReposiTrak compliance. So that's been a very rapidly growing part of the compliance aspect of our business. And honestly, I think we're -- I mean, I hope this doesn't sound immodest, I think we are indeed making a small contribution to overall food safety because we're helping people check all of that documentation that ensures that food that you eat, even your kale, Tom, is grown and manufactured to a higher standard than it would have been without this regulatory thing. I can't believe I'm saying the regulation helped, but it did.

Our next question comes from the line of Walter Schenker with MAZ Partners. Please proceed with your question.

I'm trying to understand not just the year-over-year decline, the sequential decline, having been the person over the last many years who kept asking about what's happening with Supply Chain, given that compliance sequentially as you add many more connections, revenues have to go up, because people pay on a monthly basis, generally. Wouldn't that mean that either you lost a customer or, for some reason, Supply Chain was off, if the whole company was off 10%, Supply Chain was off substantially more than that? And how does that happen in Supply Chain unless you lose a customer?

The answer is none of the above.

Good.

And the reality is remember that the smaller part of the business remains compliant. The larger part of the business is Supply Chain. Supply Chain is sold differently than compliance. It's not all subscription by far. There are services and there are licenses, et cetera, so it tends to be lumpy. And worse than that, people aren't looking as much as I think they need to that, ultimately, market price will be very lumpy. So our business, which is, let's call it, and I'm giving you a rough number here, let's say just slightly north of 70% recurring revenue and 30% not recurring. Several years from now, if we are successful at building MarketPlace into what we think, that percentage will indeed fall. It will be lumpier. So the business is moving towards lumpier but growing levels of profitability. So I would love if that were not the case, but it is the case, and that's one of the reasons we focus as much as we do on profitability. Profitability will grow, we'll have, we think a tremendous growth rate of earnings over the next several years. And we think at the end of the day, that matters a great deal. So quarter-to-quarter, I keep saying it, I wish I didn't have to keep repeating it. There are lumps. There are licenses. There are services, all kinds of things produce one-time variances quarter-to-quarter. We're not a quarterly company, I'm sure you've never heard me say that.

Probably 50 times...

Yes. But at scale, but here's something that is true, we believe when we modeled it. At scale and I've always said I think that's somewhere around 7 million plus a quarter. It will tend to be a little bit less lumpy depending on how the MarketPlace seasonality tends to work. It's also a seasonal business, that we know for sure. So we just don't know yet how all of that impacts what we do. We have to grow and do it, and in the meantime, we're running ahead of wonderful cash flow and tremendous profitability.

Ladies and gentlemen, at this time, there are no further questions. We will now close the call. Thank you for your participation. You may now disconnect your lines at this time.