Agilysys, Inc.

Good day, ladies and gentlemen, and welcome to Agilis' fiscal 2022 fourth 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 Agilis. Ma'am, you may begin.

Thank you, Tawanda, and good afternoon, everybody. Thank you for joining the Agilis' fiscal 2022 fourth 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 and other global economic factors on our business, global supply chain challenges and our ability to manage through them, 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 or best ever financial and business levels during this call refer only to the time period after Agilis has 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 fourth quarter and full year earnings call. Joining Jess and me on the call today in our Atlanta headquarters is Dave Wood, our CFO. All the details of the results we are about to cover should be understood keeping in mind the following context. We tend to think of our current business as made up of seven major market verticals. APAC and EMEA are two regional verticals, and in the U.S., hotel chains, cruise ships, gaming casinos, multi-aminity resorts, and managed food services. Three of those verticals Asia, Europe, and U.S. managed food services continue to be adversely affected by lingering pandemic-related and other business environment challenges and are nowhere close to being the kind of sales and revenue drivers for us they used to be during calendar 2019. The hotel chains and cruise ship verticals are showing promising signs of recovery, though not fully back to pre-pandemic levels. with respect to technology investments. The gaming casinos and resort verticals, which typically represent about 70% of our business, that's 7-0, represent about 70% of our business, continue to show exceptional strength. We continue to perform very well in these two verticals. To use the wagon pulled by horses metaphor we have used before, this seven-horse wagon is still being pulled by only two full-strength horses, two other horses which are recovering well but not yet to full strength, and three others which are still way off normal levels. Despite all such partial weaknesses in the business environment, the fact that we still produced all-time record numbers is a testimony to our increasing competitive strength driven by our pace of product innovation and world-class customer service levels. We have positioned ourselves well for the future when the hospitality industry recovers fully across the globe and technology investments return to pre-pandemic levels and then start growing upward from there. Let me cover sales first before moving to revenue. All the sales numbers we will discuss in this call are measured in annual contract value terms. Despite the various business environment challenges, overall global sales level during fiscal 2022 was 44% higher than the previous year and 96% of our best previous year, fiscal 2020, just before the onset of the pandemic. Due to various levels of on and off lockdowns across countries practically throughout the year, sales in the APAC region decreased by 15%, that is 1.5, decreased by 15% compared to last year, and by about 50%, that is 5.0, by about 50% compared to the pre-pandemic fiscal 2020 year. Sales in EMEA showed a 74% improvement over the prior year and was only slightly better than fiscal 2020. Global subscription sales set a new record, beating the previous best year, which happened to be last year, by a whopping 47%. Our current stable of integrated end-to-end cloud-native software solutions are empowering and making it more efficient for customer teams to deliver exceptional guest experiences and enable revenue upsell opportunities. That, in turn... is increasing our software deal sizes and subscription sales. Fiscal 2022 was our best year with respect to subscription software sales of PMS and related modules, 53% higher than the previous best year. With respect to signed sales agreements during Q4, January to March, we added 21 new customers with six of them including a core property management system, PMS product, in the list of products chosen. All but one of the 21 new customers signed this quarter chose the SAS option for at least one of the products they licensed. We also added 58 new properties, which did not have any of our products before, but the parent company was already our customer. Of these 58 new properties added during the quarter, more than 90%, that is nine zero, more than 90% were either partially or fully subscription fee based. There were also 112 instances of selling at least one additional product to properties which already had one of our other products. Overall, subscription sales for the last few quarters have become 70, seven zero, 70% of our software sales during each period. We expect this shift in software sales mix to continue. Now on to revenue. Fiscal 2022 Q4 revenue was a record $46.6 million, 18%, that is one eight, 18% sequentially higher than Q3 earlier this year, and 28% higher than the comparable prior year quarter. $46.6 million is about 11% higher than the previous best 42 million level achieved during Q3 fiscal 2020, October to December calendar 2019 quarter, just before the onset of the pandemic. We were on a run of nine consecutive sequentially increasing quarters then, of which seven were record-setting at the time. Recurring revenue during Q4 fiscal 2022 grew to $26.6 million, driven by a 33% year-over-year increase and a 10% sequential increase in subscription revenue. Subscription revenue grew to 48% of total recurring revenue, the highest level thus far. Overall recurring revenue was 16%, that is one six, 16% higher than the comparable quarter of last year and 6% sequentially higher than the previous quarter. There were also significant sequential increases in product and services revenue this quarter. Quarter product and services revenue were well north of 90%, nine zero, well north of 90% of previous best levels, both achieved during Q3 fiscal 2020, October to December calendar 2019. Our operations team continues to do excellent work improving our supply chain management function. With respect to implementation services, we have seen significant improvements in staff availability at customer sites, and our product implementations are getting close to normal levels now, driving services revenue back close to pre-pandemic levels. Implementation processes of the newer software modules are steadily becoming more efficient. Q4 fiscal 2022 gross margin was 59.5%, higher than pre-pandemic levels, but less than the comparable quarter last fiscal year due to increased levels of product and services revenue. Cross-margin was also affected by the decreasing level of one-time high-margin perpetual software licenses as an overwhelming majority of customers continue to opt for subscription-free-based cloud deployments. We continue to have good success in maintaining our product margins. We should expect gross margin percentages to remain in the high 50s to low 60s range for the foreseeable future and increase gradually in the long term as the proportion of recurring revenue increases. The sequential decrease in gross margin has only to do with revenue mix and the decrease in one-time perpetual software licenses in favor of subscription fee-based arrangements. We expect one-time perpetual license-related software revenue to remain at about current levels. We continue to manage the gradual but accelerating shift from being a company that was once based on on-premise perpetual software licenses to a cloud SaaS-based business without any significant short-term decline. Most enterprise software companies which go through this paradigm shift tend to go through a J curve with their financial performance featuring short to medium term declines, hopefully followed by long term increases. Setting aside humility for a minute, I think we should take a little bit of credit for managing our J curve without the J, as one of our board members aptly described it recently. We are managing to achieve revenue gains while simultaneously managing this transition. While there is a clear preference among new customers for cloud solutions, The modernization efforts over the past few years have also given us the flexibility to offer the same software solutions of the same code base across both cloud and on-premise implementations, which is a distinct competitive advantage in this industry. Some major hospitality customers continue to prefer on-premise implementations, and they are in a good position to satisfy their requirements as well with the same modern world-class products. Fiscal 2022 full-year revenue was a record $162.6 million, slightly ahead of the annual revenue level achieved during fiscal 2020 before the pandemic. Subscription revenue was about 15 million, that is one-five, was about 15 million higher in fiscal 2022 compared to fiscal 2020. Thanks to increasing subscription revenue levels, we are pleased to have achieved a record annual revenue level in fiscal 2022, despite the business environmental challenges faced during the year, which depressed product and services revenue levels during a couple of quarters. In addition to the 11 core software products across point of sale, property management systems, inventory procurement for food and beverage, and document management, which we have modernized during the past few years to be cloud native solutions. We've also added about 20 additional add-on cloud native software modules around the core products in recent years. These add-on modules, which work well integrated with the core modules, are revenue upsell generating and drive operational efficiencies for customers. Subscription revenue from these 20 add-on modules was about 1.3% of total subscription revenue in fiscal 2020, grew to 4.8% in fiscal 2021, and now are 11% of subscription revenue in fiscal 2022. In absolute value terms, subscription revenue from these add-on modules alone during fiscal 2022 was close to three times higher than during the previous year. The hospitality industry remains hungry to implement such long overdue value adding innovative software modules to make their operations simpler and more enriching and empowering for their staff and also help create great experiences for their guests. Our customer retention levels continue to be excellent. Fiscal 2022 was our best year with respect to customer retention going back many years. Adjusted EBITDA for the quarter was $7.5 million, about 16.1% of revenue, that is one-sixth, about 16.1% of revenue, more or less at the same levels as the previous couple of quarters, 6% higher than the comparable prior year quarter, and 110% better than Q4 in fiscal 2020 a couple of years ago. Adjusted EBITDA for fiscal 2022 full year was $27.3 million at about the same level as the previous year, and again, 110% higher than fiscal 2022 years ago. EBITDA numbers for fiscal 2021, the period from April 2020 to March 2021, were helped by artificial one-time salary cuts, staff reductions, and other temporary cost-cutting measures to help us work through the pandemic phase, while fiscal 2022 was a normal cost level year for us. Fiscal 2022 was also our first full year with positive gap net income since fiscal 2014. We've also had the best couple of quarters of cash collections, with Q4 cash collections being even better than Q3, which was by itself a record. That's a good indicator of the overall health of the business. We continue to remain disciplined in everything we do and not go after low-quality or low-margin business just to keep revenue levels up. Cash balance decreased by only $2.2 million during fiscal 2022 despite the approximately $25 million all-cash resource suite acquisition transaction which closed during Q4, and the significant increase in inventory levels throughout the year to give us the required cushion to guard against any short-term supply chain-related surprises. As you can see in our balance sheet, we ended fiscal 2022 with about six times the amount of inventory we had at the end of fiscal 2021. Speaking of resource suite, the resource suite acquisition continues to exceed our expectations. The people culture match has been an almost perfect fit. Frank Pizzicalis, the former founder and CEO of ResourceSuite and current VP of Strategy at Agilis has been a terrific addition to our management team. And customer conversations continue to make excellent progress. Customers have been welcoming of the merger and are beginning to take a more detailed and wider look at future product conversion possibilities. We are in discussions now with about 20% of the acquired customers to either add InfoGenesis POS to their existing product suite or convert one or more of PMS-related products to Agilis' cloud-native solutions. While the equivalent Agilis' products are cloud-native, are based on a more modern technology stack, and are wider and deeper with respect to feature sets, There are several areas where the resource suite products provide better features. We are in the process of filling those product gaps in the Agilis' product sets. We expect product conversion efforts to pick up pace as we make progress with ensuring feature priority. Overall, we could not be happier with this merger of two of the very few software providers in hospitality who have the products and the expertise to offer robust end-to-end integrated core property management solutions and the supporting value-adding additional modules. In summary, we are pleased with our Q4 results, with fiscal 2022 being a record revenue year driven by good subscription revenue growth and our first gap-positive net income year in about eight years. We are also happy that our financial results became less complicated and a lot cleaner during fiscal 2022 compared to previous years, giving us a good basis for comparison during fiscal 2023 and beyond. We will stop our fiscal 2022 practice of providing comparisons across the previous two years and return to normal comparisons versus the previous year beginning fiscal 2023. The combined product recurring revenue and services backlog levels remain close to record levels at about 98% of the record levels we ended the previous quarter with. We expect fiscal 2023 annual revenue to be in the range of 190 to 195 million dollars driven among other factors by year-over-year subscription revenue growth of around 30%, that is 3-0, of around 30%. We also expect adjusted EBITDA for the full year to remain greater than 15% of revenue, that is one side, 15% of revenue, though the EBITDA levels may fall to slightly below 15% during Q1 and Q2 due to incentive comp accrual increases, Vacation balance-related accounting adjustments, which are significant and typically affect Q1 cost levels. Employee salary merit increases. Accounting and other professional fees which tend to occur in Q1. Additional participation in trade shows, including an all-expense-paid hospitality consultants forum being conducted this week to update the industry influences of our current product and services trends. additional hiring, especially in the sales and marketing areas, and additional spend related to internal IT infrastructure improvements. We expect better operating leverage to kick in during the second half of the fiscal year, bringing the overall full-year adjusted EBITDA to higher than 15% of revenue. With that, let me hand the call over to Dave. Dave?