Agilysys, Inc.

Good day, ladies and gentlemen, and welcome to the Agilisys 2027 second quarter conference call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Vice President of Operations and Investor Relations at Agilisys. You may begin.

Thank you, Lucise, and good afternoon, everybody. Thank you for joining the Agilisys 2027 second 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 predicted and intended to be made as forward-looking within the safe harbor protections of the U.S. 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 our ability to achieve the increased guidance levels, continue to improve profitability levels, the company's ability to maintain sales momentum, utilize AI to continue to increase competitive advantages, 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. As a reminder, any references to record 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 Thank you, Jess.

Good evening. Welcome to the fiscal 2027 second quarter earnings call. Joining Jess and me on the call today at our Atlanta Alpharetta headquarters is Dave Wood, CFO. Before we get started, just a quick note that I've been on the road traveling quite a bit during the recent several weeks, visiting customers and for other business purposes. and fell sick a few days ago while in Austin, Texas before I got to Atlanta. So apologies for my very scratchy throat and voice today. Let me start with sales. We continue to measure sales and selling success in annual contract value terms and continue to exclude subscription numbers pertaining to the Marriott PMS project from each of the general business update numbers including sales, backlog, and cumulative value of ARR annual recurring revenue implemented during the quarter and they are included of course in all our usual revenue and overall financial results. Fiscal 2027 second quarter was our best ever Q2 July to September period of sales following Q1 which was the best ever Q1 April to June sales period. Sales levels during the quarter were good across the various sales verticals, especially in hotels and resorts. This was the best quarter on record by a fair distance for sales in the domestic HRC, hotels, resorts, and cruise ships vertical. The sales highlight of the quarter was a major seven-figure on steroids, multi-property, competitive replacement winds, in the HRC resource space, featuring property management system, PMS, inventory procurement for food and beverage, and as many as 15 additional software modules. Happy to see our ongoing sales and marketing growth-driving investments in the HRC hotels and resource area beginning to result in such large-scale wins on a regular basis now and making this quarter the highest ever for domestic HRC sales, about 23% higher than the previous highest HRC sales quarter recorded a little more than two years ago. Looking at sales levels during the second quarter of fiscal 2027 compared to the second quarter last fiscal year, Sales pertaining to the domestic HRC vertical was up 33%. Domestic food service management, FSM sales, were up 42%. The modernized and unified POS platform continues to perform well in the field, driving POS sales up across several sales verticals, especially in FSM, which for all practical purposes is a POS-only vertical. and Asia-Pacific sales were up 47% year-over-year during the second quarter, showing continued sales momentum in the APAC region following a record Q1. Fiscal 2027 Q2 property management system PMS product sales, including add-on modules, were also an all-time best record. This is, of course, without counting anything from the ongoing large PMS projects. Overall business momentum continues to be impressively good, fueled by increasing sales levels, which are in turn being driven by the growing product ecosystem superiority and our steadfast focus on the hospitality industry with no distractions whatsoever. Our product ecosystem competitive advantage continues to widen over time. The modernized set of interconnected software solutions has now been in the field for a few years, and we continue to grow the number of reference customers who have converted from our older technology solutions or from competitive ones. Several such customers now have excellent return on software investment stories to share with the industry. Considering we are operating in a total addressable market that is far larger than our current size, The growing comparative superiority of the product ecosystem should continue to drive a long, extensive growth path for us. During Q2 fiscal 2027, July to September, we added 14 new customers, excluding Book for Time Spa, and 24 including Book for Time, and all of them were subscription-based sales agreements. These 14 new customer sales wins included an average of 5.6 products per deal. New PMS customers continue to invest in the multi-product ecosystem from day one of their partnership with us. New customer deals featured an average of 9.3 products per deal when PMS was part of the purchase suite. We also added 83 new sites which did not have any of our products before but the parent company was already our customer not including any of the hundreds of Marriott sites currently installing our PMS product. Of the 107 new properties added during the quarter across new and current customers 104 were either partially or fully subscription based. In addition There are 119 instances of selling additional products to properties already running at least one of our products. This is the fourth consecutive quarter of the number of instances of such new product sales to current customer properties exceeding the 100 mark, our longest such streak. These 119 instances of new product sales involved a total of 331 new products sold, just shy of the previous highest quarter number. The average of 2.8 products per new product sales agreement this quarter is the highest on record. All this data continues to confirm the thesis that nothing drives enterprise software revenue performance like true, meaningful, sustained product innovation. Our investments in R&D, now further fueled by AI-driven productivity and quality improvements, are continuing to provide great reasons for both current and new customers to partner with us, stick with us, and license an increasing number of software modules. In the ultimate analysis, nothing really wins like product innovation. Before we move on to revenue, three quick updates regarding the Marriott PMS project, GHS acquisition, and progress with AI initiatives. The Marriott PMS project continues to make good progress and remains on plan. Just as a quick reminder, this is a huge technology transformation undertaking, one of the biggest ever attempted in the hospitality industry. and such big challenging technology projects cannot be expected to go completely smooth sailing every step of the way. So far, so very good. The second GHS acquisition completed during the quarter was minor to our revenue and profitability levels, but crucial in a tactical sense for a portion of Casillo Gaming customers. Gaming Hospitality Solutions, GHS, is a 30-year-old software company specializing in loyalty and offer management, primarily for tribal casinos, with the main purpose of connecting a casino's loyalty program to its gas pumps, enabling their guests to earn and redeem points across the casino floor, hotel, restaurants, and fuel stations. In addition, GXS offers a loyalty promotions module specifically for Royal Caribbean. The primary developer owner of GHS was planning to retire and he picked up his company as a way to protect the interests of mutual customers. A list that includes about 40, 4-0, includes about 40 tribal gaming casinos and the Royal Caribbean Cruise Line Group. The overall revenue gained from this acquisition during fiscal 2027 We'll only need a few hundred thousand dollars of maintenance revenue. We continue to make good progress with AI initiatives and with our objective to be the AI leaders in hospitality. Earlier this year, during the April Customer User Conference, we announced 30 plus AI-based features, that is 3-0, 30 plus AI-based features, which were in various stages of development and the creation of a couple of entirely AI-native software modules to round out our product ecosystem. These 30-plus features are distributed across the four pillars of AI-driven usage. Egentic AI, multi-module user experiences, guest hyper-personalization, and revenue optimization. Several of these new features are now in pilot testing at select customer sites while several others are already in production use. The initial feedback from customers has been positive and we expect these features to become deeply embedded in the daily operations of hospitality operators. We are now into the development of the next wave of AI features that go beyond AI-based guest and operational insights, voice and chat capabilities. Going beyond those features, into Atlantic Workflow Automation and Cascading Intelligence, which will use demand signals to automate specific workflows to achieve efficient staff scheduling, product inventory levels, connected guest experience offerings, and optimized pricing. Development of a couple of fully AI-native modules, CRS and Revenue Intelligence, that we have recently renamed as Total Revenue Management System is progressing on plan. We expect initial beta implementations of these two new modules to happen at customer sites later this fiscal year. The initial versions of both these modules are designed to work only within the boundaries of our product ecosystem. Now beyond all that, the most crucial AI-related development project completed during the quarter was the AI common framework which provides the control center for AI governance, privacy through tokenization of personal information, security, appropriate LLM model selection, value-based usage for each task, monitoring, and auditing. We believe that the best way to achieve widespread traction with use of AI in the hospitality industry is to deliver rich functionality and feature sets that are also token cost sensitive. We have focused our initial efforts on building a good controlled framework and infrastructure. Based on our recent extensive participation in various hospitality industry AI conferences, roundtables and future looking committees, it does seem like The ecosystem presence is becoming an even bigger differentiator. in today's AI everywhere world. Now on to revenue, profitability, and raising guidance levels. Fiscal 2027 Q2 revenue was a record $93.4 million, the 19th consecutive record revenue quarter. 17.7% higher than the comparable prior year period and 6.5% higher than the sequentially preceding quarter. Overall revenue during the first half of fiscal 2027 Q1 plus Q2 was 181 million, 16.1% higher than the comparable prior year period. Thank you for watching this video. and $4.4 million respectively are both all-time high levels and were driven by increases in subscription revenue. Subscription revenue increased 32.6% year-over-year and 10% sequentially quarter-over-quarter to a record $44.2 million and now constitutes 71% of total recurring revenue, the first time Subscription revenue has been more than 70% of total recurring revenue. This is now the 20th consecutive quarter of subscription revenue growth of at least 23%. Growing subscription revenue each quarter year over year by between 23% and 45% over a period of 5 long years is a remarkable achievement that any enterprise software unit has a right to be proud of. Thank you for watching. Subscription revenue from POS and POS-related add-on modules grew by 18.4% year-over-year, while subscription revenue pertaining to PMS and PMS-related modules grew by 53.8%. We expect subscription revenue growth in POS and POS-related modules to remain in the high teens, low 20s percentage levels for the foreseeable future. Add-on modules across both POS and PMS constitute the 34% of total subscription revenue. Fiscal 2017 Q2 was the best quarter on record with respect to the sum of annual recurring revenue, ARR, of all subscription products implemented during the quarter, not including the Marriott PMS installs. Fiscal 2027 Q2 annual maintenance was also a record $17.9 million. The current high subscription revenue growth levels are coming for the most part from new incremental installations and are not dependent on us pressuring customers to convert from their current on-premises installations to the cloud. Virtually all the modernized software solutions across each current and upcoming product versions are designed to be cloud-native but can also work equally effectively in on-premises installations if that's the customer preference. When the customer preference is for modern solutions and an on-premises install, we are currently almost the only game in town. Fiscal 2027 Q2 product revenue consisting of hardware resold and Perpetual Software Licenses were just shy of $12 million, the highest level in close to three years. Excellent POA sales performance during recent quarters has driven higher hardware shipments during the quarter and has also driven the current quarter end product backlog to a level that is 90% higher than at the same time last fiscal year, giving us good visibility for the second half of the fiscal year. Product revenue during the second half of fiscal 2027 should remain close to the first half level. Fiscal 2027 Q2 July to September services revenue was $19.2 million, that is one line, $19.2 million, 5.3% higher year over year. Contributions to professional services revenue from customer-paid development work continues to decrease and are not expected to be a factor going forward. Implementation services efficiencies continue to increase as the modernized solutions are becoming easier to implement, especially with increasing use of AI tools during the implementation process. We are now selling more software recurring fees for every dollar of services sold compared to previous years, which is a good business trend that makes us more competitive in price sensitivities. We expect professional services revenue to remain around current levels during the second half of the fiscal year and grow steadily in the medium and long term along with overall business expansion. Given the current strong sales momentum, pace of implementations, and near record backlog levels, our expectations for full year 2027 financial results and we are raising guidance levels again. We started this fiscal year with a full year revenue range guidance of $365 million to $370 million and subscription revenue growth expectation of at least 30% before increasing the respective guidance levels to $368 to $373 million and at least 32% at the end of Q1. At the end of Q2, we now expect for the full year fiscal 2027 revenue range to be 374 million to 378 million and subscription revenue growth to be at least 34%. Fiscal 2027 Q2 adjusted EBITDA was the record $24.1 million and 25.9% of revenue. Our first half profitability performance has done better than our original expectations going into the fiscal year and we now expect full year adjusted EBITDA to be 25% ahead of the previous guidance of 24%. We continue to expect to exit the fiscal year with adjusted EBITDA during Q4 Being close to 30% of revenue, though we expect that percentage to be only slightly north of 22% during Q3 due to unfavorable timing of certain costs, including professional fees. With that, let me hand over the call to Dave for further color on our business operations and financial results. Dave?