Agilysys, Inc.

Good day, ladies and gentlemen, and welcome to the Agilisys Fiscal 2021 Third Quarter Conference Call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Senior Manager of Corporate Strategy and Investor Relations at Agilisys. You may begin.

Thank you, Liz, and good afternoon, everybody. Thank you for joining the Agilisys Fiscal 2021 Third Quarter Conference Call. We will get started in just a minute with management's comments. But before doing so, let me read the safe harbor language. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to vary materially from these in the forward-looking statements could include the continued effects of the COVID-19 pandemic on our business and the hospitality industry, the success of any measures we have taken or may take in the future in response to the COVID-19 pandemic, the timing of the reopening phase of the hospitality industry, and the risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilisys. Ramesh, please go ahead.

Thank you, Jessica. Good afternoon and good evening, everyone. Welcome to our fiscal 2021 third quarter earnings call. Joining Jessica and me on the call today is Dave Wood, our CFO. For the third consecutive quarter, I'm participating in this call from our Las Vegas office while Dave is in our Atlanta office and Jessica is in Dallas. We hope to get back to our pre-pandemic routine and conduct the next Q4 and fiscal year-end earnings call sometime around mid-May with all of us in one place in our favorite Atlanta conference room. We hope all of you and your families and colleagues are doing well During this time, many of our employees have continued to travel to customer sites Thank you for joining us. grew about 7% sequentially over Q2 to $36.7 million, a 13% year-over-year decline compared to Q3 of fiscal year 2020. Product and services revenue grew 16% and 13%, that is 1.6% and 1.3%. Product and services revenue grew 16% and 13%, respectively, Both product and services revenue levels continue to also be affected by the reluctance of customers to accept product deliveries and start services implementations they have already signed up for. Gap Gross Profit was $3.1 million higher. Almost all of the $3.1 million increase in gross profit can be attributed to the amortization of previously capitalized software development costs which affected Q3 of last fiscal year and was not applicable this Q3. That would imply gross profit was flat year over year when we compare Q3 of this year versus last year despite a $5.3 million revenue decrease. Loss of gross profit from about 7.2 million of decrease in products and services revenue was compensated by gross margin gained from the 1.9 million increase in year-over-year recurring revenue. Given the pandemic cost hospitality industry business headwinds we have battled with during the past three quarters, the 1.9 million increase in year-over-year recurring revenue is remarkable. Our current pace of adding about half a million per quarter sequentially to recurring revenue should increase significantly once business levels return to normalcy and growth resumes. While on the subject of recurring revenue, recurring revenue reached a new quarterly record level of $22.8 million, a 2.4% sequential increase over Q2, and a 9% year-over-year increase compared to Q3 of last fiscal year. Subscription revenue growth levels continue to outpace all other revenue categories, growing 18% year-over-year and reaching 41% of total recurring revenue. Despite considerable pressure from an increased level of property closures resulting in a significantly higher level of customer churn and associated loss of recurring revenue and a string of requests from customers for more one-time recurring fees, relief and credits. Despite all those challenges, the overall year-over-year recurring revenue growth of 9% and subscription revenue growth of 18% are good indicators of the mission-critical nature of our software applications and the continuing steady migration of our customer base Thanks to our improving pace of product innovation and the increased availability of newly created cloud-native SaaS applications which address current compelling hospitality industry needs, we've been successful in maintaining good subscription recurring revenue growth year over year. Such modern software applications are already playing a major role In helping hospitality operators reopen safely and will become must-have during the full reopening phase and beyond to make guest experiences attractive, safe, and comforting. Superior customer service from technology partners like us has never been more important for hospitality customers, and that fits well with what has become our natural DNA during recent years. Now, with respect to sales success levels, sales measured in annual contract value of agreements won, signed, and closed during the quarter remained at only about two-thirds of prior fiscal year levels. This has been a consistent factor throughout the nine months of this fiscal year compared to last year. After the major dip in April and a promising recovery during the June-July timeframe, Sales successes remain more or less stagnant since then. Sales-related product demos continue at a healthy rate, with many customers both big and small impressed, surprised, and even intrigued by our product innovation pace and our ability to be an effective end-to-end, modular, and integrated hospitality software solutions provider. But the decision-making process and the final technology investment actions and many more. In comparison to last fiscal year levels with only slight year over year declines. As of the beginning of this calendar year, we ended our seven year partnership with a major point of sale product reseller who had represented us in certain market segments in Europe and in all of Australia. This action was based on our preference to handle all aspects of customer interaction including sales, implementation and support directly which is our normal practice in all other regions. We've had a direct presence in the EMEA region for many years now. We took steps to strengthen our team in EMEA recently and we are in the process of establishing a direct presence in Australia starting with a couple of recent new hires. During the quarter, We increased our R&D resource strength by 9%, bringing the total number of R&D resources to about 850. Other R&D resources who have accepted their job offers are in the process of joining us during the coming weeks and months. We expect R&D strength to reach about the 1,000-person mark sometime before June and then stay at that level for the foreseeable future. Thank you very much. and many more. During the quarter, we made substantial progress with our core product improvement efforts. While the task of improving products never really gets completely done, In an enterprise software company dedicated to continuous improvement like us, the huge core product modernization projects we got started on a few years ago should be getting completed one by one at various times throughout this calendar year. We expect to see absolutely no trace of any old technology in any of our end-to-end hospitality software solutions product demos One of the crucial implementations recently completed featured the first completely modernized InfoGenesis POS terminal we have released in multiple decades, which can now support devices across all major operating systems like Windows, iOS, and Android, all from a single code base. This will open up a significantly large hardware and payment device selection for our customers to choose from. A few weeks ago, this new IG12 UX modernized terminal went live on iPad devices at a prestigious restaurant in Hong Kong. This is the very first time we've installed an IGPOS terminal on iPad devices. We expect this calendar year to feature several such crucial groundbreaking implementations of our various modernized cloud SaaS native on-prem capable core products, setting ourselves up for a promising future. Apart from the core products, the many add-on software modules continue to perform well from a sales standpoint as an increasing number of customers have adopted them to work with the new contactless and other guest requirements. New modules like our guest express mobile check-in checkout and the remote ordering application on demand continue to see strong sales activity. Other major new software applications like Agilis' golf, spa, and sales and catering have also seen increased customer interest. Beyond all such details, Thank you very much. including major corporations who have known us for quite a while. Being able to deliver on multiple products all across the guest journey has now put us in a unique position to offer features like single itinerary visibility for both guests through the booking engine Argus book and for customers across many of the property management system and other display touch points they use frequently and Aspects like the common profile capability, which provides algorithmic-driven recognition of a guest and their likes and dislikes and upcoming plans to use various resort amenities, and provide guests the kind of personal acknowledgement, offers, and promotions that will play a big role in increasing guest loyalty in the future. We have had three different customers sign up for the newly launched Agilist's Engage software module Just in the past six weeks, Agilis' Engage helps customers manage their loyalty offers and promotions across all the amenities they provide to guests. This product has the enormous advantage of being aware of all the transactions and data from all the other point-of-sale property management systems, golf, spa, and other modules, and bring everything together for a customer to help them manage their various marketing initiatives. It will be difficult for many of our competitors who do not have the strength of being end-to-end with their offerings to compete effectively with such product offerings. During Q3, we signed sales agreements which added eight new customers, 42 new properties which did not have any of our products before, but the parent company was already our customer, and there were 53 instances of selling at least one additional product to sites which already had one or more of our other products. These numbers are consistent with the number of such wins we have seen during the earlier two quarters this fiscal year. Included among the sales wins during the quarter or a little bit before or after were the following, listed in no particular order. 1. A brand new state-of-the-art property in Orland Park, Illinois, the RSLE Hotel and Resort, plans on opening its doors mid-2021 with the comprehensive solution set of Agilis' STAY PMS and Infogenesis POS for their core operations, while also utilizing Argus Express Mobile Check-in Check-out, Digital Keys, Argus Book, and Agilis' PAY, to provide contactless capabilities and great experiences for their guests. Number two, the five-star Colorado-Wyoming luxury retreat, Three Folks Ranch, selected Agilis State PMS, Infogenesis POS, and e-tech inventory and procurement management core products, as well as additional modules, Agilis Pay and Agilis Seat, to help improve their guest service. Number three, After several successful years running their resort and casino with on-premise LMS PMS, Grattan Resort and Casino, located in Ronet Park, California, upgraded their LMS solution to the cloud and added the booking engine Argus Book to manage their operations. 4. Crystal Springs Resort is an expansive New Jersey property offering a variety of amenities and after several years of success, With our Infogenesis POS solution, as well as previous editions of Agilisys Seat and On Demand, their ownership decided to complete their suite of Agilisys products to offer their guests the best possible experience by adding Argus Book, replacing a competitive PMS system with Visual One PMS, including mobile check-in, check-out, and SMS messaging for guest communications, and in addition, Agilis Spa, and Sales and Catering. Number five, located on a private peninsula on the Chesapeake Bay, the Tides Inn Luxury Resort selected our new cloud-native Agilis Spa and Golf, along with retail and Argus Book, to manage guest activities throughout the resort. Number six, the La Valencia Hotel, located on the Pacific Coast, with panoramic views of La Jolla Cove, and just up the street from a prestigious golf course, selected Infogenesis POS and Agilis Pay to process transactions across their property. Number seven, a very new, very special new customer, World Central Kitchen, a not-for-profit organization dedicated to providing meals to areas in need after natural disasters, selected E-Tech, are inventory and procurement application to manage their needs across the globe. Eight, and last, and certainly not the least, we've made substantial improvements to our cloud browser-based data analytics software module, Agilisys Analyze, launching a licensable professional version which pulls in point-of-sale property management system and other third-party data into a single data lake to help customers make comprehensive data-driven decisions from anywhere at any time. This professional version was purchased by four major customers just during the last four months. We expect Analyze to become another significant contributor to our increasing subscription recurring revenue base in the future. Now, moving on to financial guidance. Thank you very much. Thank you for joining us. We have seen no improvement in our sales success close rate. Good promising product demos continue to happen to various customers with excellent customer feedback about our products, integration, end-to-end capabilities, excitement around the contact list, data management, common profile, and single itinerary type possibilities which will help them greatly, but no change in the decision-making slowdown we have struggled with for more than three quarters now. Given the tough circumstances, we expect revenue during Q4 to be only sequentially flat compared to Q3. We anticipate resuming annual guidance beginning with fiscal year 2022. Now, turning to profitability levels achieved during the quarter. Adjusted EBITDA for Q3 fiscal 2021 was $7.6 million, about 10% higher than our original expectations and 135% year-over-year higher than Q3 of last fiscal year. We've made good progress during the past few quarters with improving our internal operational efficiencies. Ensuring our focus areas do not get too scattered, operating efficiently, learning to do more with less while also not compromising on our crucial world-class customer service goals, being accountable for getting things done In as high a quality level with efficient use of resources as possible, all that and more constitutes a profitability mindset that we are becoming a lot better at. We took on that culture shift challenge a few years ago, and now we are quite close to where we want to be. We had a few residual one-time cost-saving items which positively impacted the Q3 quarter. We expect adjusted EBITDA during Q4 to be around the 7 million level, just under 10% lower than Q3, mainly due to a couple of pending cost items coming back into the business and additional hiring, mainly in the product development R&D area. Though the past few quarters have been extraordinarily challenging, we like our competitive and other business positioning now. Thank you very much. And I will then be back for a few closing remarks before opening up the call for questions.