Greetings, and welcome to the ReposiTrak's Fiscal First Quarter 2023 (sic) [ 2024 ] Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Stanlis, with FNK IR. Mr. Stanlis, you may begin.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Park City Group doing business as ReposiTrak fiscal first quarter earnings call. Hosting the call today are Randy Fields, Park City Group's Chairman and CEO; 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 remarks are subject to risks and uncertainties, which actual results may differ materially. Such risks are fully disclosed 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 would now like to turn the call over to John Merrill. John, the call is yours.

Thanks, Jeff, and good afternoon, everyone. The first fiscal quarter of 2024, again, highlights the simplicity, reliability and predictability of our business model, grow revenue, increase profit, generate cash and return capital to shareholders. In short, in the September quarter, we grew both total revenue and recurring revenue, invested heavily in sales and marketing promotion to increase awareness and Traceability accelerating FSMA 204 education of the looming 2026 deadline for both retailers and their suppliers. We grew net income and EPS, bought back more common shares and continued to issue a quarterly cash dividend to common shareholders. We achieved these results while navigating another period of global economic uncertainty, rising interest rates, political unrest, inflation and at the same time, overcoming the planned elimination of approximately $1 million of high touch, low opportunity revenue since Traceability started. I believe it is extremely important to point out that while we have been more vocal for the last year on Traceability, our compliance and supply chain offerings, particularly in this environment, has experienced growth in every line of business, scan-based trading, compliance and out of stocks only to name a few. I believe we have developed our core business into a well-structured cash-generating engine. It was not easy. And the next phase of our growth, Traceability, is no different, but advancing rapidly and will become even more complex. Nonetheless, we are confident over time that we can add Traceability to the same well-oiled cash-generating machine that our core compliance and supply chain offerings have become. As you can imagine, FSMA 204 requirements are complicated, having a level of uniqueness based on a customer supply chain, the product and ways of doing business. This requires us to invest in technical and customer-facing roles as well as sales and marketing to position our RTN…

Thanks, John. As we end the first quarter of fiscal 2024, the sustainability and predictability of our recurring revenue-based business model is now clear. Our recurring revenue covers not only our fixed cost, but it fuels our ability to return capital to the shareholders. The SaaS transition was completed a little bit more than a year ago, so we're now comparing our results to post-transition quarters. Despite our sunsetting of certain high-touch, low opportunity revenue to the tune of about $1 million a year, we've continued to grow recurring revenue, we've grown GAAP net income even more, and grown earnings per share even faster than that. The flywheel of our business model is delivering as expected, and we think we're creating lasting value. At the same time, though, we're investing in our next major growth opportunity, Traceability and our ReposiTrak Traceability Network, RTN, as we call it. These investments include marketing to expand industry awareness and systems to help us automate the onboarding process. So where are we? Well, so far, we have more than 500 suppliers in the queue to use the RTN, and they're coming into the network based on the requirement of 1 or more of their customers who have chosen to use us to comply with the FDA traceability mandate. Just what we've signed up in terms of retailers and wholesalers so far should generate another 1,000 suppliers ultimately on top of the 500 that are actually in the process of enrolling now. So once fully implemented, and that will take certainly till the end of our fiscal year, maybe even a bit longer, our current hubs and spokes as we call them, should generate $3 million to $4 million per year in additional annual recurring revenue, perhaps even more. This is a very, very good…

[Operator Instructions] Today's first question comes from Thomas Forte with D.A. Davidson.

Randy and John, congrats on the quarter. I have 6 questions, so I apologize to anyone else who's in the queue. One at a time. So number one, I would appreciate your thoughts on capital allocation -- your current thoughts on capital allocation. John mentioned this a little in his prepared remarks, including using free cash flow to buy back preferred, how to buy back to common, pay dividends and for strategic M&A.

Well, it sounded like the answer was inside the question.

That's the menu. No, I need to [indiscernible] priorities.

Okay. So here's how we see it. And admittedly, it is a little vague, but that depends on market circumstances at the time. So clearly, we feel as if our cash flow over the next several years is going to be growing. As a result, we are quite confident that the dividend increase that we put in place could be the first of other dividend increases. So that part of it looks like it's going to continue on that track. We've also committed to redeeming the preferred over a 3-year period. So we'll begin to do that. And so therefore, the loosey-goosey part of it, if you will, would be the sum of those 2 numbers, minus 50% of our free cash flow each year. So that's what we've decided to do. Half the cash we generate goes on the balance sheet to strengthen it and the other half will be divided around those 3 levers; buying back stock, the cash dividend and buying back or redeeming the preferred. Now almost by definition, we would be opportunistic in terms of the stock. When we think the stock represents a better buy and reducing the capitalization moves up, we'll spend more money on that. That's probably the best way to put it. But in general, we see over the foreseeable future, half of our cash flow going against those 3 levers. Question 2.

Number 2. John, last quarter, you indicated you ended the fiscal year with an exit rate of annual recurring revenue of $20.3 million. Can you update that number after 1 quarter?

Yes, in my remarks, it's $20.8 million. So if you were to take what the contracts we have in hand as of September 30 times 12, that number now is $20.8 million. That assumes no new customers. That only assumes the customers that we have in the queue.

Excellent. All right. So where are you today in your efforts to upgrade your existing customers or engage in, I don't think you used the term, but intentional churn to focus your efforts on Traceability?

The answer to that is actually pretty simple. We designated a group of customers that, in our view, are not long-term fit, meaning either that they are very, very small, that they have no food business inherent in what they do so that they will not be doing Traceability, for example. So you can think of them as high touch and limited upside. And the run rate on what we've eliminated is just about $1 million a year. So it's, for the most part, gone. There's a little bit more to go over the next quarter or 2. And we've done this before actually. Periodically, we look at our product set and decide which of those products and services fit nicely into the future we see for the business. And we're not afraid of pruning. Many businesses keep remnants of their past. We choose not to do that because, number one, if a product is not part of our future, it means almost by definition, we are in, I'm going to call it, an ethical bind with the customer. And we choose never to do that. We always want our customers to be first and the best way to do that is to make sure that the product set that they're using is the product set that we're taking into the future and investing with. So it's mostly behind us. There's a little bit more headwind in the next quarter or 2, and then we'll be done with it for now.

Great. And then, Randy, I'd appreciate your thoughts on how your company uses artificial intelligence to improve its efforts.

Well, we're somewhat skeptical about all the hype around AI. It's -- for us, we've talked about it for many years. I don't know, we've been a user of AI-based tools for at least a decade. And we see them as tools for us to do things that humans can do, but a machine can do much faster, and we'll continue to invest in that direction. By and large, our investments in tools like AI are intended to help our people be better with their customers. It's internal productivity measures is the best way to think about it. And it allows us to have better spans of control. It enables us to be much more effective in communicating with our customers. It's just maybe I'm old fashioned, maybe just old. But the reality for us is high touch is how we see ourselves. And when people do work that we call administrivia, and you may have heard me use that term a few times, administrivia gets in the way of customer relationships. So our objective with our own technology is always to get rid of administrivia so that people spend more and more of their time with their customers and less and less of their time with what I call the in-out box syndrome and that sort of thing. So AI for us has a very important contribution, we think, to the future. And the reason if you were to quantify it, we've suggested that the TAM for Traceability as we see it today has the potential for doubling the size of our company in some number of years. I won't be too specific about that. But we think we could do that with the addition of no more than 5 to 7 more people than we have today. That's pretty astounding. And then if you think of one other current statistic, we generate about $300,000 a year of recurring revenue for each and every employee. But if you were to compare us to the industry, John will keep me honest here, but I think the industry is less than half of that, about $140,000-some-odd a year. So our investment in productivity in AI, in particular, has enabled us to double the revenue per employee that we generate compared to anybody else in the business. Honestly, that shows up in our GAAP profitability.

All right. Last 2, and I again apologize to anyone else in the queue. All right. So John, you mentioned inflation in your prepared remarks. It seems like we're seeing signs of abatement. Are you seeing that on your end? And how, if at all, would you be impacted even if there was deflation as an example?

Well, I think we've positioned ourselves as being the low-cost leader. So I think that because of our efficiencies, whether it be AI, people, or moving administrivia, we're positioned as the -- I don't want to say the cheapest, but certainly for our cost structure, we can provide the lowest cost, best solution to our customers. So inflation, I don't think affects us as much as it may affect our customers that if they have higher prices, but that still doesn't change the need for them in a high volume, low-margin business for them to, one, do compliance that has no relationship to inflation, but also they need to get the most value out of the product that they're selling. So we're kind of agnostic to it, but I think that we've positioned our pricing structure to -- it doesn't matter whether there's inflation or not, I think it's a matter of our customers. It's not a matter of the services that we provide at ReposiTrak.

Actually, if I could add a little bit to that, John's explanation is exactly right. But as a matter of strategy, we want to be the low-cost provider. We want to have strangely enough, the best service simultaneously at the lowest comparable price. So when it comes to Traceability, for example, a supplier pays us one time, unlimited use over the course of any given year. So it's a subscription model, but it's an unlimited use model. Everyone else is trying to -- as they think about Traceability, doing it on a per click basis, almost by definition, makes us the low-cost provider. We think that's very competitive.

Okay. Great. All right. So then I would appreciate your current thoughts on entering adjacent markets such as restaurants or other highly regulated markets such as health care.

Well, Traceability is pretty close to a universal problem for anyone that sells food. So obviously, we're most experienced in the supermarket or mass merchant business where they sell food as groceries. But clearly, convenience stores carry foods that would be covered under the Traceability rules as they currently exist, restaurants, absolutely, quick service restaurants, QSR, food service like cafeterias and whatnot. So there's a whole variety of possibilities for us to expand in that area. We're making efforts today in doing that. And hopefully, in the next year, we'll begin to penetrate that market just as we are in the supermarket industry. I think something that maybe didn't come through as clearly as we'd like, our pipeline is extraordinary. We are winning. It's pretty remarkable. I think over the next several quarters, we'll be announcing additional hubs, which are the primary users of our technology, meaning retailers and wholesalers. And I'll be very surprised if we don't see a move toward market dominance that we've always wanted to have in Traceability over the next 2 years. We weren't kidding. It's not a tagline. It's true. Everyone else is talking about Traceability. We would do this, we would do -- whatever it would be, we're actually doing it. We know of absolutely no one else that now at scale is doing Traceability in the world of food. We're pretty excited about it. We've -- our profile is a little bit lower than we'd like. That's why we invested the way we did last quarter. But the truth of the matter is we are winning.

And at this time, we are showing no further questioners in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference back over to Randy Fields for any closing remarks.

Well, I think we've said it all. We feel great obviously about where we are. Lots to do in Traceability. As we mentioned, for us, it's day by day uncovering new obstacles, new solutions, et cetera, so that we can dominate the traceability market to the extent that we desire. So appreciate your support, and we'll talk to you in a few months. Thanks.

Thanks, everyone.