Agilysys, Inc.

Good day, ladies and gentlemen, and welcome to the Agilisys Fiscal 2022 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 Director of Corporate Strategy and Investor Relations at Agilisys. You may begin.

Thank you, Josh, and good afternoon, everybody. Thank you for joining the Agilisys Fiscal 2022 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 forward-looking statements include the continued effects of the COVID-19 pandemic on our business, global supply chain challenges, 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 would also like to note that any references to record financial and business levels during this call refer only to the time period after Agilisys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014. With that, I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilisys. Ramesh, please go ahead.

Thank you, Jess. Good evening. Welcome to our fiscal 2022 third quarter earnings call. Joining Jess and me on the call today is Dave Wood, our CFO. If I were to summarize the quarter results and the current state of our business progress in one sentence, I would call it a roller coaster recovery delayed by a quarter or two. This feels like we are caught in a pandemic-induced storm, can see bright sunshine and glorious days at the next turn on the road, but the path to get there has to be traversed on a roller coaster. Some months during this recovery period have seen high sales success and great business progress, and then some months seem to get overtaken by tough news headlines, infection spikes, heavy travel restrictions, especially across international borders, COVID testing requirements, back to increased work-from-home policies, and stark shortages at customer sites. The answer to the question, Have we made significant progress across calendar years 2020 and 2021 would be? Definitely yes. But has that progress been smooth, consistent, and predictable? The answer would be no. Thanks to the successful product modernization and innovation efforts over the past few years, we continue to operate at record highs in the gaming and destination resort market areas which also happen to be the dominant areas of our business, constituting more than 70% of our overall sales and revenue levels. However, medium to high business environment challenges remain in Asia, Europe, managed food services, cruise ships, and hotel chains. Despite all these hospitality industry challenges, our product strength continues to drive consistently good progress in subscription recurring revenue. One time product and services revenue recovery had been delayed by a quarter or two due to postponed projects. More than 90%, that is nine zero, more than 90% of our new customers and new sites this fiscal year have preferred cloud SaaS solutions leading to a reduction in perpetual license sales affecting one-time software product revenue. Amidst all that, business basics like free cash flow continue to be healthy and at good levels. Now, that would be the short summary. Let me elaborate on the details a bit. Let me cover sales first before moving to revenue. All sales numbers referred to here are measured in annual contract value terms. Our sales success story has remained consistent during the first three quarters of fiscal 2022. Driven by the distinct competitive advantage our products currently give us and strong demand, the first three quarters of fiscal 2022 have been our best period of sales success in gaming, and destination resorts in the US by a fair distance. Our integrated end-to-end cloud-native ecosystem of hospitality software solutions, which help hospitality operators adopt quickly to evolving guest preferences, generate additional revenue, reduce labor requirements, and increase operational efficiency, continue to drive demand in market verticals where businesses are enjoying good success. We are fortunate that our two strongest areas, gaming and resorts, have also been the two markets which have recovered the best so far. On the other hand, we've seen only a partial recovery in hotel chains, with city hotels not yet at pre-pandemic levels, while resort-focused full-service hotels are faring better and a similar partial recovery in the cruise ships market. Managed food services and international regions remain significantly affected by all the up and down uncertainties the pandemic continues to cause. Sales year to date this fiscal year in managed food services has been at only around 60% of pre-pandemic levels. While the business and industry BNI subset of managed food services continues to struggle due to extended work from home policies across many large and small corporations, the higher education and healthcare portions of this vertical have continued to have high demand for omni-channel point of sale POS software solutions. Our ability to enable staff-facing POS terminal functions guest-facing features through the buy kiosk, and guest-driven remote ordering through on-demand, and support for all types of payments, including room charging, use of loyalty points, order only, pay only, order and pay in both full and fast casual service. All of this in one integrated platform for all types of use cases is a growing competitive advantage for us in this vertical. With respect to international regions, our sales levels in APAC this fiscal year have been at only around 40, 4-0, only at around 40% of pre-pandemic levels. International travel restrictions continue to have a serious detrimental effect on the hospitality industry across APAC countries. However, overall sales across EMEA have performed better and are currently operating at pre-pandemic levels. With respect to subscription recurring fee-based software sales, with one quarter still left to go, fiscal 2022 is already our best year ever in EMEA, which is a strong indicator of our increasing presence as a software solutions provider in the region. Despite all these various remaining short-term business environment challenges, Overall global sales levels across all verticals during the first three quarters of fiscal 2022 were at more than 90%, 9-0, more than 90% of the levels seen during the pre-pandemic fiscal 2020, two years ago. With three months still left to go in the fiscal year, as of the end of December, this is already our best year with respect to global sales pertaining to subscription recurring fees. Now that fact deserves to be repeated. Thanks to the current availability with us of modern SaaS-ready software solutions across the entire band of hospitality industry needs, despite all the challenges in multiple market verticals, we have sold more subscription-based recurring fees in annual contract value terms in just three quarters this fiscal year than any other previous full fiscal year. That is terrific progress in our business that we have worked hard to achieve during the past few years. While there is a clear shift towards cloud SaaS products among new customers, our modernization efforts have given us the flexibility to offer the same cloud-native solutions in an on-premise perpetual license model as well of the same code base without having to create different products and software modules for that purpose. We are happy to have had the luxury of designing these new software modules and modernizing the core platforms with that flexibility in mind, giving us the ability to support both forms of implementation without any additional R&D costs or delays in development. Total sales of property management systems, PMS products, and related additional modules during the first three quarters of fiscal 2022 have already surpassed sales levels during all of pre-pandemic fiscal 2020. With respect to signed sales agreements during Q3, October to December, We added 11 new customers with four of them including a SAS-based core PMS product in their list of products chosen. 62 new properties which did not have any of our products before, but the parent company was already our customer. And there were 87 instances of selling at least one additional product to properties which already had one of our other products. Once again, More than 90% of the 11 new customers and 62 new properties added during the quarter were either partially or fully subscription-free license based. While the number of new customers signed during the quarter was below expectations, the overall sales from new customers in annual contract value terms was again high, thanks to high average deal sizes. New customers buying multiple SaaS-based software products and modules have become the new norm for us. Overall, new customer sales measured in annual contract value terms during the first three quarters of this fiscal year is the highest levels we have seen in five years. The first three quarters of fiscal 2022 have also been our best ever in annual contract value of sales of additional products to current sites, what we normally refer to as new product sales. All of that has been driven by the R&D investments over the past few years and our continuing relentless product innovation run. Some of the new customers who signed with us during the quarter include the Hideout Resort in Texas, who purchased modernized V1 PMS, Infogenesis POS, Argus Book Direct Channel Booking Engine, E-Tech Inventory Management, and Argus Seat for managing reservations. The Breakers in New Jersey, who purchased Stay PMS and Infogenesis POS for managing their boutique beach hotel and wedding venue, and the Lake House New York on the shore of the Canandaigua Lake purchase InfoGenesis POS, and the pay module to manage their F&B needs. Now, on to revenue. The revenue narrative falls into two distinct categories. One, recurring revenue including subscription revenue, and two, one-time revenue consisting of hardware, one-time perpetual license software, and services. Subscription revenue continues to drive our overall recurring revenue to march forward at record levels. Given excellent customer retention levels and continuing good progress with adding new customers, new sites with current customers, and selling more new products to current customer sites, that should come as no surprise. The subscription revenue backlog continues to also build to record levels due to project delays. We expect the current momentum in the most crucial portion of our business, subscription recurring revenue, to accelerate further when the business environment improves across all the hospitality market verticals we currently operate in. Overall, recurring revenue was $25.1 million this quarter, getting us to the $100 million total ARR exit run rate level for the first time in our history. Of this, 11.7 million consisted of subscription revenue, a bit more than 46% of overall recurring revenue. Each quarter of fiscal 2022 has been a record for subscription revenue, with this quarter growing by 25% compared to Q3 of last fiscal year, and by 48% compared to Q3 of fiscal 2020 two years ago before the pandemic. Overall, total recurring revenue was 5% sequentially higher than Q2, 10% higher than Q3 last fiscal year, and 20% higher than Q3 of fiscal 2020 two years ago. Fiscal 2022 third quarter overall revenue was $39.5 million, our highest level since the start of the pandemic nearly two years ago, but still below expectations and at the low end of revenue guidance. Q3 revenue was 4% sequentially higher than Q2, 8% higher than the comparable quarter last fiscal year, and 6% lower than Q3 from fiscal 2020 two years ago, which was our last full quarter not affected by the pandemic, and at 42 million was a record for quarterly revenue. The main challenges during this quarter were with one-time revenue. Apart from possible exceptionally large on-premise software customer purchases, which would happen from time to time in the future, we expect one-time software revenue to remain at current levels as more new customers and new properties select subscription fee-based options. Hardware revenue increased sequentially from Q2 as the supply chain situation improved, but was still below our expectations going into the quarter. Overall hardware and software product revenue taken together of 8.1 million was 11% sequentially higher than Q2, 7% higher than Q3 last fiscal year, and 33% below Q3 of fiscal 2020. We expect hardware shipments and related revenue to return to normal levels during Q4. Services revenue continues to be challenged by project delays. Q3 services revenue was 6.2 million, 5% sequentially lower than Q2, about the same as last fiscal year, and 30% lower than Q3 of fiscal 2020 two years ago. It's been a strange situation of good sales levels, but low implementation levels for a few quarters now. Hospitality customers see the value in the integrated end-to-end modern technology-based software products and modules, want to get going, improving their operations and increasing guest experience levels, and are signing sales agreements at a reasonable pace without significant delays. However, when the projects start, stock shortages and conflicting priorities have made it difficult to get software implementations complete in a timely manner. The recent extensive spread of Omicron and the resultant extent of customer and our staff falling sick for a week or two each had a significant negative effect on Q3 services revenue. The fact that many of the current projects involve multiple products tend to be complex implementations and for the most part involve new and recently extensively modernized software products have been additional challenging factors causing implementation timing delays. We are seeing improvements in these areas, have seen an increased urgency to get projects implemented during the past few weeks, and are cautiously optimistic that the coming months are going to be better. Adjusted EBITDA for the quarter was $6.6 million, and about 17%, about 17% of revenue Slightly higher sequentially compared to Q2, 13, 1, 3, 13% less than Q3 of last fiscal year and 104% better than Q3 in fiscal 2020. Q3 was our highest quarter we can recall with respect to cash collections, which is arguably the second best indicator of overall business health after subscription revenue growth. Cash balance increase of nearly 1616 of nearly 16 million in fiscal 2022 so far is our highest cash increase during the first three quarters of a fiscal year in more than seven years, excluding the convertible investment cash gain during fiscal 2021. The acquisition of Resort Suite closed early January as previously announced for approximately $25 million. Consistent with our revenue structure, the thought suite comes with a mix of one-time software product, services, and annual maintenance recurring revenue, which should all together add up to slightly more than one million per quarter for the next few quarters, of which about 70, seven zero, of which about 70% should be annual maintenance recurring revenue. Only a handful of technology providers in the hospitality industry currently have the experience and the expertise to offer robust, comprehensive, end-to-end, integrated property management, PMS solutions, and we are happy two of them are together now. The acquisition-related execution steps have progressed well. The teams are coming together well. Customers have been positive with our combined increased ability to bring them the solutions and innovation pace they need to keep up with their guests and operational demands. and the industry community in general has provided good positive feedback. This acquisition makes us significantly stronger in the multi amenity resort vertical where advancements like common guest profile and common itinerary management are fast becoming must have features and there are very few technology providers who can make that happen. This acquisition opens three major opportunities for us. Use of the Resource Suite product set to fill in some of the gaps in our product portfolio. Two, incorporate and interface with many of the integrated resource application innovations Resource Suite has done well with over many years. And three, and the most crucial, the revenue synergy opportunity to offer Resource Suites base of approximately 150 customers the option to move to cloud-native modernized applications during the coming months and years. This should give us an additional way to improve subscription revenue levels during the next couple of years. With that, let me hand over the call to Dave for detailed commentary on the financial results and additional color on our business progress. Over to you, Dave.