Agilysys, Inc.

Good day, ladies and gentlemen, and welcome to the Agilisys Fiscal 2023 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 2023 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 effects of global economic factors on our business, our ability to continue profitable growth, our ability to execute required product development and other deliverables before our PMS system can be rolled out to Marriott, our ability otherwise to expand PMS market share, and the risk set forth in the company's reports on Form 10-K and 10-Q. and other reports filed with the Securities and Exchange Commission. As a reminder, any references to record financial or 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 Sreenivasan, President and CEO of Agilisys. Ramesh, please go ahead.

Thank you, Jess. Good evening. Welcome to the Fiscal 2023 Third Quarter Earnings Call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, our CFO. Let me first cover sales before discussing revenue and other details. We measure sales and our selling success based on annual contract value of sales agreements signed. Please note that the recent Marriott PMS selection that we announced a few weeks ago is not part of any of the sales and backlog numbers being discussed today. All the sales and backlog numbers being discussed do not have any benefit from that major win. I will come to the Marriott announcement a bit later in this commentary. During the last earnings call, we mentioned that after five consecutive solid good sales quarters, the July to September Q2 of fiscal 2023 was a great sales quarter. That's what we reported last time. Well, October to December Q3 of fiscal 2023 was even better. Q3 was our best sales quarter since the current management team started turning this company around about five to six years ago. We reported last time that our sales trend had picked up significantly since the beginning of August. That positive trend has remained consistent even through the month of January so far. January is normally our slowest sales month of the year coming out of the holiday season. From a selling success standpoint, even with one more week remaining, this is already our best January by a fair distance, and even better than December, which is normally a good sales month for us. And all that despite the APAC and managed food services sales verticals being well short of previous pre-pandemic peak levels. The gaming casinos, resorts, and EMEA sales verticals are operating at exceptionally high levels. In Asia, the number of prospective customer meetings and product demo requests continue to be at good levels, but such positive activities have not translated to good sales results yet, mainly due to greatly delayed technology purchase decision making. Many prospective and current customers in Asia are preparing for the expected upcoming travel surge and are looking at various software solution sets they need today and for the future, but continue to be hesitant to finalize purchase decisions. Given the long way we have come with our software solutions during the last three years, since the pandemic started seriously affecting business in Asia, We think our business levels in Asia will pick up steam soon. We have not seen any significant effects of the recent negative macroeconomic environment. In our view, the hospitality industry has been underserved with respect to world-class software solutions for a long time. This industry has lacked a technology provider who is willing and able to invest in end-to-end, state-of-the-art, cloud-native, integrated software solutions, which can also work on-premise when required. Industry-focused product innovation has fallen short of operator and guest expectations for far too long. On top of that, the operators in the space are also facing escalating pressure from their who are increasingly seeing the benefits of modern technology across many areas outside hospitality. They are enjoying the benefits of technology-enabled self-service and guest service across all channels, including mobile devices and integrated systems, wherein they don't need to enter the same piece of data multiple times. They now expect the same from hospitality as well. Over and above this, Hospitality operators are also faced with the need for integrated systems to make it easier for their staff to serve guests well across all amenities offered within their property. Creating great experiences and increasing guest loyalty now requires both a superior guest service staff culture and integrated technology and solutions which are easy to use. It is now all about the returns operators can get from creating better experiences for their staff and for their guests. From our viewpoint, those needs are now imperative and urgent in the hospitality industry and should overcome any macroeconomic headwinds. Once they see relevant product demos and get to discuss future product plans with us, many customers seem pleasantly surprised by the breadth and depth of what we have to offer today and how much our products and end-to-end integrated software solutions vision can help them operate more efficiently and serve their guests better now and in the future. Further, we continue to operate in an enormous total addressable market relative to our current size. Now that we have made the required R&D investments, and have done the hard yards to create an end-to-end set of state-of-the-art solutions while keeping our focus entirely on one industry, we think we are well positioned, and we have been seeing the selling success benefits starting around August last year. We remain cautiously optimistic in our expectations to continue to do well no matter what the Wall Street Journal news headlines say each day. During Q3 fiscal 2023, October to December, we added 18, 1.8. We added 18 new customers, of which 16, 1.6, of which 16 were fully subscription deals. The deal size per new customer sales agreement during the quarter was the highest we have seen and was more than 50%, that is 5.0, was more than 50% higher than the sequentially preceding Q2 quarter. Compared to a couple of years ago, new customers who sign up with us now have a lot more products they could potentially license from us, which meet their immediate and future needs. And many of them are using this opportunity to buy more from the same vendor partner, thereby reducing the number of vendors they have to work with and lower the cost of interfaces and deployment complexity. This was our best quarter in six years with respect to total annual contract value of sales agreements signed with new customers. We also added 87 new properties which did not have any of our products before, but the parent company was already our customer. Business levels and the pace of technology investments among multi-property bigger current customers are improving but still not back to pre-pandemic levels. Of the 105 new properties added during the quarter across new customers and new properties of current parent customers, more than 85% were either partially or fully subscription-based. With respect to new product sales, there were 58 instances of selling at least one additional product to properties which already had at least one of our other products currently in use. These 58 instances involved sales of a total of 117, that is 117, sales of a total of 117 new products. With respect to overall competitive wins, which is the sum of new customers, new sites of current customers, and new products sold to current customer sites, in annual contract value terms, This was our best quarter for total sales value, surpassing Q2 by about 17, 1.7%, and the next best previous quarter by nearly 8%. The average deal size per competitive win during the quarter was also the highest we have seen so far. We continue to have a long runway of growth available to us within our existing customer base through additional product sales. The number of products installed per customer property improved during the quarter, but it's still only at about two now. There were seven new core property management system PMS wins during the quarter. We are now a credible presence in the PMS space and an increasing presence in most PMS RFP processes. We've had a solid presence in most point-of-sale POS RFPs during past years, but that's not been true with PMS projects. Once included in the RFP shortlist, our end-to-end PMS guest journey product presentations increase our chances of winning exponentially. In addition, the number of credible reference customers on the newer state-of-the-art core PMS products and additional software modules has increased during recent months. Increasing property management system PMS sales will also help us sell more additional software modules because there are about four times more such modules available for PMS compared to POS. With respect to sales across product categories, October to December Q3 fiscal 2023, was our highest ever sales quarter for services sales, software sales in general, and subscription software sales in particular. Q2 and Q3 of fiscal 2023 taken together has been our best two-quarter, six-month period of subscription software and services sales. The high level of sales success this quarter also drove the combined product, services, and recurring revenue backlog back to record levels. Before moving to revenue and financial performance during the quarter, a quick note on the recent Marriott PMS selection announcement. As mentioned in the press release, we were selected for a majority of Marriott's premium luxury and select service properties across US and Canada based on our participation in a global RFP for property management systems, that is PMS. As one would expect, we went through the highest level of scrutiny and analysis possible across product, people, implementation support and other processes, culture, financial strength, and all other organizational aspects before being selected as the PMS provider for a majority of the 900,000 plus rooms across Marriott's luxury, premium, and select service properties in the US and in Canada, replacing, for the most part, several proprietary systems which have been in use at these properties for many years. We think this selection was a commentary of not just the current state of our PMS offering, but also our ability to work with one of the biggest and most innovative hospitality operators and execute well on their specific needs and overall future industry vision. The product development effort during the next one and a half years or so will include a mix of general features, and Mario-specific integration and other needs. This is a transformational win for us and adds immense credibility to what we have been reporting to you all these years about increased R&D investments and enormous advancements in our PMS and related modules, making us an increasingly compelling player in the PMS space to add to our traditional strengths in the point-of-sale POS area. As we have mentioned before, our current PMS products are connected to approximately 300,000 rooms currently. If Agilisys and all others involved in this Marriott project execute well during the next 18 or so months, along with all the other PMS market share expansion success we expect to achieve, we think there is a high probability the number of rooms connected to our PMS products should expand to about three times that size during the next three years. In summary on the Marriott PMS selection topic, I cannot overemphasize the fact there is a lot of focused execution during the next approximately one and a half years that will be required from our product development services and other teams by Marriott and by other involved third party partners that will have to go well before the system can be rolled out at any of the planned properties. That is, before this win can get translated to real and substantial subscription revenue for us. Everyone involved in this project are working on it with the greatest level of diligence possible. And there is a lot to get done and get done right. Assuming all goes well, We expect this project to drive major subscription revenue growth for us beginning sometime during fiscal 2025. While we do expect to recognize services revenue directly attributable to this project during the next few quarters, it is possible that the extent of investment increases required to expand our customer support help desk, software monitoring tools, cloud engineering operations, information security, and other internal systems infrastructure to support the next phase of major revenue growth could happen ahead of the subscription revenue increase timeline, which could reduce our EBITDA by revenue percentage profitability levels by two or three percentage points during the short term. Now on to revenue and profitability. Fiscal 2023 Q3 revenue was a record $49.9 million, the fourth consecutive record revenue quarter, 26.5% higher than the comparable prior year quarter, and sequentially 4.6% higher than Q2. We are on track to exceed our full fiscal year revenue guidance provided at the beginning of the year. We now expect full fiscal year 2023 annual revenue to end up between $195 million and $198 million. One-time product and services revenue combined was $19.8 million, that is $19.8 million, 38% higher than the comparable prior year period and 5.7% higher compared to the sequentially preceding second quarter of fiscal 2023. Services quarter revenue crossed the 9 million mark for the first time. Services sales booking have been at a record or close to record levels during the past couple of quarters, making us cautiously optimistic about future services revenue and margin levels. Fiscal 2023 Q3 recurring revenue grew to 30.2 million, that is 30.2 million, driven by 28.8% year-over-year subscription revenue increase. Overall recurring revenue was 3.9% sequentially higher compared to Q2, and 20% higher than the comparable prior year quarter. We have now added more than 1 million in recurring revenue sequentially, quarter-over-quarter, for five consecutive quarters. Subscription revenue generated from add-on experience enhancer software modules, most of which were developed internally ground up during the past few years, constituted 17% of total subscription revenue this quarter compared to 11% during the full previous year of fiscal 2022. These innovative additional software modules which are becoming increasingly better integrated with the core POS, PMS, and inventory procurement systems, are driving additional sales from existing customers and expanding deal sizes with new customers and new properties. Based on Q3 fiscal 2023 numbers, it feels good that the overall revenue and total recurring revenue annual run rates are now reaching 200 million and 120 million levels respectively. We worked hard and smart to reach this stage from where we were five to six years ago, and in many ways are only getting started on the next growth phase now. Like I mentioned before, while we remain confident that EBITDA by revenue for full fiscal year 2023 will remain better than 15% in line with our annual guidance provided, There is a possibility of a bit of margin compression over the next few quarters as we increase resources across various support, internal systems, information security, and cloud infrastructure areas, getting ourselves well prepared for future major cloud subscription and other revenue growth. Our progress towards previously planned increased adjusted EBITDA levels could get delayed by a few quarters. Such a margin compression may or may not happen. And even if it does happen, should not be more than 2% to 3% EBITDA by revenue. Though there could be a delay of a few quarters in our ability to get adjusted EBITDA as a percentage of revenue levels into the 20s, the current reality makes that kind of profitability level a far greater certainty than before. So delayed, yes, probably yes. but probability of significantly higher profitability levels in the medium term, far higher. We will provide fiscal 2024 revenue and profitability guidance during our fiscal 2023 year-end and fiscal 2024 beginning earnings call around mid to late May. With that, let me hand the call over to Dave. Dave?