Agilysys, Inc. (NASDAQ:AGYS) Q2 2024 Earnings Call Transcript

Agilysys, Inc. (NASDAQ:AGYS) Q2 2024 Earnings Call Transcript October 23, 2023

Agilysys, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $0.19.

Operator: Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2024 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, Senior Director of Corporate Strategy and Investor Relations at Agilysys. You may begin.

Jessica Hennessy: Thank you, Victor, and good afternoon everybody. Thank you for joining the Agilysys fiscal 2024 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 predictive and are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation Perform 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, the hospitality industry’s need for technology solutions, our ability to drive sales, our ability to increase profitability, and our ability to improve services margins and manage increased cost investments 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 Agilysys 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 Agilysys. Ramesh, please go ahead.

Ramesh Srinivasan: Thank you, Jess. Good evening. Welcome to the fiscal 2024 second quarter earnings call. Joining Jess and me on the call today at our Alpharetta, Atlanta headquarters is Dave Wood, CFO. As has become the regular practice in our earnings calls, let me cover the selling success summary first, before moving on to revenue and other details. We measure of sales of selling success in net annual contract value, ACV, of sales agreements won and signed. Fiscal 2024 Q2 July to September was one of our best ever sales success quarters. Overall, fiscal 2024 April to September was our best first half of fiscal year sales, comfortably better than the first half last year. Fiscal 2023 last year, was of course our best ever full year of sales and we are off to a significantly better start halfway through this year.

July to September was a good sales quarter for virtually all the sales verticals across gaming casinos, resorts, cruise ships, hotels, managed foodservice providers and international regions. Sales from non-gaming resorts, hotels and cruise ships were particularly stellar and increasing because our market share levels in these areas are still low with major growth possibilities ahead. April to September was also our best first half thus far for international sales across Europe and APAC. As of the end of September, year-to-date APAC sales was already close to the full-year sales level reached across all of last fiscal year. Our competitive positioning strength is increasing with every passing month. An end-to-end ecosystem of software solutions, the breadth and depth of feature sets offered, with more getting added at increasing rates, now that most of the product re-engineering efforts are done and over with, all based on state-of-the-art cloud native technology, which can also work well in on-premise installations, which several hospitality customers still prefer, all that is becoming increasingly compelling value creators and unique selling propositions for us.

The significant pick-up in selling success, which started around the month of August calendar 2022, has continued unabated through the recent July to September period 13 months later. We’ve not seen any noticeable negative effects of macroeconomic challenges. The hospitality industry is global, huge, and has a high need for technology and innovation to help with growing needs, to improve operational efficiencies, enable ease of use for staff users, and help create far better guest experiences that are possible today. We cannot say the technology providers of this industry have done too well keeping up with the innovation needs due to among other reasons, a lack of focus on end-to-end hospitality needs and far less than needed research and development investments.

In the meanwhile, the digital transformation revolution around hospitality is accelerating, raising the expectations of property employees and guests. We think we have done well executing on our strategy to fill the gap and expect our escalating product and technology-driven competitive advantages to continue to drive good business momentum in this huge total addressable market space. We think that momentum will have good staying power even in a possible challenging macroeconomic environment. In line with that assessment, thus far, we are not seeing any growth-threatening clouds in the sky. Our sales win-loss ratios continue to be at impressive levels. One of the highlights of sales success during the first half of fiscal 2024 was the rapidly increasing sales productivity of quota-carrying sales personnel hired during the past couple of years post-COVID.

To place this in context, the average Agilysys tenure of our quota-carrying sales personnel is around 7.5 years now. Of them, slightly less than half the personnel have joined us after COVID, and the average Agilysys tenure of this Group is only about a year. During the first half of fiscal 2024, this group of sales personnel have already won sales measured in annual contract value amounting to close to twice as much as they did all of last fiscal year. While we continue to make prudent and appropriate decisions with respect to increasing sales force strength, current sales staff still have additional capacity to not only maintain momentum but also grow sales from current levels. In addition, the number of marketing-generated sales accepted opportunities focused on new customers and new properties, generated by innovative and effective marketing efforts continues to improve.

During recent months, this number has been twice as high as it was at the same time last year. While our competitive strengths with point-of-sale, POS solutions, continues to improve by leaps and bounds and remains our mainstay, sales wins during the first half of fiscal 2024 have also included several significant Property Management System, PMS, wins. A notable win during Q2 was Black Rock Oceanfront Resort on the Western Coast of Vancouver Island in British Columbia, Canada. This iconic property selected Agilysys PMS and several experience enhancer add-on software modules for their stunning multi-amenity oceanfront resort. There are now close to 20 properties live on the modernized ground-up re-engineered Visual One PMS rebranded as Versa and released for production deployment about 18 months ago.

We are still in the early stages of establishing our state-of-the-art technology-based cloud-native PMS value proposition in the field. There is a long runway of PMS and related modules growth ahead of us. During Q2 fiscal 2024 July to September, we added 17, 1-7 — 17 new customers, of which 76% were fully subscription agreements. 17 new customers is within the 15 to 20 new customers per quarter range, which has been one of the drivers of our revenue growth in the recent past. New customer deal sizes remains at impressively high levels. We also added 70, 7-0 — 70 new properties, which did not have any of our products before, but the parent company was already our customer. The average deal size of new property deals this quarter was about 25% higher than the previous couple of quarters.

Of the 87 new properties added during the quarter across new customers and new properties of current parent customers, more than 90 — 9-0, more than 90% were either partially or fully subscription-based. In addition, there were 67 instances of selling at least one additional product to properties which already had one of our other products. These 67 instances involved a total of 142 new products sold to current customer properties. The average deal size across these 67 instances of new product sales was about 40, 4-0 — 40% higher than the sequentially preceding Q1 quarter. Now on to revenue. Fiscal 2024 Q2 revenue was a record $58.6 million, the seventh consecutive record revenue quarter, close to 23% higher than the comparable prior year period.

The year-over-year quarter revenue increase of $10.9 million is the highest we’ve ever seen. Overall revenue during the first half of fiscal 2024 was 20% higher than revenue during the first half of fiscal 2023. Fiscal 2024 Q2 recurring revenue grew 18%, 1-8 — 18% year-over-year and 6.6% sequentially quarter-over-quarter to a record $34.2 million, driven by a 29% year-over-year increase in subscription revenue. Subscription revenue constituted 53.6% of total recurring revenue compared to 48.9% Q2 of last year. The year-over-year growth in quarter subscription revenue compared to Q2 of last year was a record $4.1 million, consisting of record year-over-year increases in both POS and PMS and related modules. Quarter-over-quarter sequential growth of subscription revenue of $1.6 million and overall recurring revenue of $2.1 million were both our best such sequential increases.

Subscription revenue generated from add-on experience enhancer software modules, most of which were developed during the past few years, grew at a slightly better rate year-over-year than the overall subscription growth of 29%. The value of these models and the — modules and the end-to-end ecosystem we have built over the past few years goes far beyond such numbers. These add-on modules working in conjunction with each other and with the core POS and PMS products are helping customers make tangible measurable improvements in their operations. We heard several such customer stories about positive measurable impact on hotel operations during the recent gaming show, and in Customer Advisory Board meetings held in Las Vegas, and these stories were shared with other attending customers.

Each of these modules are competing on their own at best-of-breed solutions and bringing tremendous value when used, enhanced and innovated together. Services revenue was a record $11.7 million, 44% higher than the comparable prior-year quarter. The increasing pace of implementations being handled by services teams augurs well for upcoming recurring revenue growth. We continue to make good progress with implementing relatively newer software products and modules at a quicker pace now, handling complex multi-product implementations and managing the balance between majority cloud and several on-premise installations. Services margins improved to 23.6%, but still fell short of our 25% expectation. Improving Services margins from current levels remains one of the few business objectives we are falling short of currently.

We remain focused on taking all necessary steps to improve services margins without affecting customer satisfaction levels. One-time revenue consisting of product and services revenue added up to a record $24.4 million, about 30%, 3-0 — 30% higher than the comparable prior-year quarter. Revenue levels during the first half exceeded our initial expectations and we are not happy to be in a position to raise full-year fiscal year 2024 revenue guidance range to $235 million to $238 million. The rate of project implementations has picked up well and subscription revenue growth during the first half of the year was better than we anticipated. We think subscription revenue growth during full-year fiscal 2024 will be 28%, significantly better than the previous guidance of 25%.

Adjusted EBITDA for the quarter was $8.1 million and 13, 1-3 — 13.7% of revenue, a couple of percentage points better than the sequential prior Q1 quarter and ahead of our expectations going into the fiscal year. We’ve done well, managing through a difficult period of increased cost investments, which were required to drive medium-term revenue growth. Increasing revenue and stabilizing cost levels should help us improve profitability consistently going forward. We now expect EBITDA by revenue to be 14, 1-4 — 14% for full-year fiscal 2024, one percentage point higher than the 13% guidance provided at the beginning of the year. With that, let me hand over the call to Dave for further color.

Dave Wood: Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Second quarter fiscal 2024 revenue was a quarterly record of $58.6 million, a 22.8% increase from total net revenue of $47.7 million in the comparable prior year period. All three product lines increased compared to the prior year period, with product revenue of 19.8% and professional services up 43.8%. Recurring revenue was also up 18% with subscription up 29.1% over the prior year period. Sales momentum continued throughout Q2 with total exit backlog remaining strong in near record levels despite revenue being above our expectations. We also remain pleased to see our professional services backlog remain about the same for the second quarter in a row despite strong sales as implementation efficiencies and effectiveness of the services team have continued to improve.

Product revenue increased 19.8% over the prior fiscal year to $12.6 million. Our point-of-sale business continues to perform better than expected, which is increasing our product revenue expectations for the year. We now expect product revenue to stay north of $12.5 million during the last two quarters of the fiscal year. Professional services increased 43.8% over the prior fiscal period to a record $11.7 million. As previously mentioned, we are pleased that implementations are keeping pace with sales velocity and backlog levels have begun to stabilize at near-record levels. We expect professional services to continue to increase sequentially throughout the year and should grow north of 30% for the full fiscal year. Most of our Professional service revenue is related to projects contributing to the acceleration of fiscal year ‘24 subscription revenue.

Development for large projects with the corresponding subscription revenue happening in future years has been less than 10% of revenue. Total recurring revenue represented 58.4% of total net revenue for the fiscal second quarter compared to 60.8% of total net revenue in the second quarter of fiscal 2023. Recurring revenue as a percentage of total revenue decreased slightly because of a 30.3% increase in one-time revenue consisting of products and professional services. Subscription revenue grew at 29.1% for the second quarter of fiscal 2024. Subscription revenue now comprises higher than 50% of total recurring revenue at 53.6% compared to 48.9% of total recurring revenue in the second quarter of fiscal 2023. Subscription revenue increased sequentially $1.6 million and was better than the FY ‘24 expectation for sequential revenue increases.

The subscription backlog remains strong and we expect subscription revenue to continue to increase between $0.9 million and $1.2 million sequentially each quarter for the rest of the fiscal year. Q2 was higher than normal due to timing of completion of a couple large multi-product implementations which were in the backlog and were being worked on during prior quarters. Moving down the income statement. Gross profit was $35.1 million, compared to $29.4 million in the second quarter of fiscal 2023. Gross profit margin was 59.9% compared to 61.5% in the second quarter of fiscal 2023. As expected, gross margin was affected in the first half of the year as we continue to ramp up the services team. Second half gross margin should get back into the 60% range.

Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation, were 46.2% of revenue, compared to 46.1% of revenue in the prior year quarter. Product development increased slightly to 22.8% due to previously discussed additional investments made to prepare for large future deployments, compared to 21.9% of revenue in the prior fiscal year. General and administrative expenses decreased to 12.7% compared to 13.7% of revenue in the second quarter of fiscal 2023. Sales and marketing increased slightly from 10.5% of revenue to 10.8% of revenue, mostly due to timing of expenses. Operating income for the second quarter of $3.6 million, net income of $4.1 million, and gain per diluted share of $0.16, all increased compared to the prior year’s second quarter gain of $2.9 million, $3.1 million, and $0.12.

Adjusted net income, normalizing for certain non-cash and non-recurring charges of $6.6 million, was slightly higher than adjusted net income of $6.3 million in the prior year’s second quarter, and adjusted diluted earnings per share of $0.25 was slightly more than $0.24 in the prior year period. For the 2024 second quarter, adjusted EBITDA was $8.1 million compared to $7.4 million in the year-ago quarter. Adjusted EBITDA in Q2 FY ‘24 was 13.7% of revenue. Profitability for the quarter was better than previous guidance of high single digits, largely due to higher-than-expected revenue levels. Profitability levels remain comfortably ahead of our prior FY ‘24 guidance of adjusted EBITDA as a percentage of revenue of 13%. Moving to the balance sheet and cash flow statement.

Cash and marketable securities as of September 30, 2023, was $107.4 million compared to $112.8 million on March 31, 2023. We remain comfortable with our current levels of cash. Free cash flow in the quarter was a gain of $2.5 million, slightly above $2.3 million in the prior year quarter. For the year, we still believe adjusted EBITDA, less CapEx, will be a good proxy for free cash flows. For our fiscal year 2024, we are raising our revenue guidance range to $235 to $238 million, inclusive of an increased expectation of 28% subscription revenue growth. We are also raising our profitability guidance from 13% to 14% adjusted EBITDA as a percentage of revenue for the year. In closing, we are pleased with the sales momentum, professional service improvements, and revenue growth during the first half of the year.

With that, I will now turn the call back over to Ramesh.

Ramesh Srinivasan: Thank you, Dave. In summary, we do understand the macroeconomic headlines and the drum beat of predictions of possible expected headwinds. We do not want to sound tone deaf to what we are hearing each day when we listen to the news and read what the economy pundits are saying. However, we can only report what our reality is. The truth is, we are not seeing any signs of slowdown in business momentum. To use a crude example, we are a relatively small fisherman, now operating with state-of-the-art modern equipment, with huge growth potential in a large total addressable market pond with a lot of fish around of all possible sizes. It is possible that we may not feel any negative effects even if there are any ripples or the level of the water shrinks a bit, unless it becomes an enormous drought that overwhelms everything.

We have met and spent time with many customers during recent trade shows and other meetings, and have not heard of or seen signs of any reluctance on their part to make the required appropriate technology investments to meet their short-term and long-term business needs. In addition, the massive levels of product innovation we have worked through during recent years, including the creation of around 25 high value creating additional experience enhancer modules, the real tangible value, the modular and integrated solutions are beginning to create for customers, all of that is also providing an additional blanket around us that should protect our growth prospects for the foreseeable future. And we will ensure we remain disciplined managing growth, never getting too far ahead of ourselves.

While our implementation services effectiveness and efficiencies have improved significantly during the April to September first half period of this year, the continuing sales success has kept aggregate recurring revenue, services, and product backlog total at a near-record level, giving us confidence in the raised revenue guidance provided. We will also continue to increase our sales and marketing investments as necessary to keep business momentum moving along. To repeat what we said last quarter, our overall business remains in excellent shape and we are well positioned for all-round progress and growth. With that, let’s open the call up for questions. Victor?

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Q&A Session

Operator: [Operator Instructions] And our first question will come from line of Mayank Tandon from Needham. Your line is open.

Mayank Tandon: Thank you. Good evening. Well, first, congrats on the quarter and great to hear about the record sales performance. Ramesh…

Ramesh Srinivasan: Thank you, Mayank.

Mayank Tandon: Great. Ramesh, let me ask you more just in terms of the growth rate. As you look ahead, how do you break that down between new logo wins, expansion with existing clients, and our full expansion? Could you maybe just parse it out between the three components as we think about growth going forward?

Ramesh Srinivasan: Yeah. So when we think about the first half, Mayank, the sales from new customers, that is, internally we refer to it as new logos, new customer sales, when you compare the first half of this year versus the first half of last year, this year’s new customer sales success was far higher, was significantly higher than last year. So that remains a big driver of growth for us. More new customers signing up with us is definitely a significant driver of growth. The other driver of growth is whether it is new products, meaning current property signing up for new products, or new customer signing up, our deal sizes are giving us a big advantage now. Typically, customers sign up for multiple products compared to a few years ago.

So deal sizes, the fact that customers sign up for multiple products instead of just one, that remains a good growth driver for us. The other growth driver that we expect to get better and better with every quarter is our PMS presence now. Property management systems, where we still — our market share is still very low, we are becoming an increasing presence in all major PMS RFPs, and the products are also a lot more impressive now. That also is driving our growth forward, while the point-of-sale, POS, strength continues to remain and continues to drive forward. Our current customers also continue to make a lot more investments in us, whether it is new sites or existing customers signing up for services and other existing product purchase expansions, that is driving us as well.

And above all, win-loss ratios, right? Without increasing our sales efforts way too much and spending too much, when we participate in an effort, the chances of winning is also much better now than what it used to be in the past. So I would say all that together is driving our growth forward now. And it is all product and innovation driven for now. And our marketing efforts are also getting lot more opportunities to the door now. So I would say it’s a combination of all those factors, Mayank.

Mayank Tandon: That’s a very helpful color. And as a quick follow-up question, I wanted to focus in on the margins. So the outperformance that you saw this quarter and then that you’re guiding to for the remainder of the year, how does that break down between gross margin expansion and leverage on the operating cost line?

Dave Wood: Yeah, so gross margins were about 1 point ahead of expectations, largely just like we talked about due to the higher revenue levels. Certainly the sequential subscription increase of $1.6 million was pretty accretive to the gross margin expansion. So think of it as kind of, one, a point or two ahead on the gross margins. And then, our cost was pretty much settled coming into Q2. I mean, most of our investments for the rest of the year would be incremental. So the higher revenue, obviously, we didn’t incur additional OpEx costs. So most of it was the revenue overachievement and the expansion of the subscription revenue.

Ramesh Srinivasan: And, Mayank, what you should expect, like I mentioned in my comments, is margins, we typically measure our profitability as EBITDA by revenue, to improve consistently from here. We’ve gone through the tough phase when we had to make significant cost investments in order to drive medium term growth and you’re aware of that. So starting now you should see a consistent improvement in profitability during the second half of the year and into the next fiscal year as well.

Mayank Tandon: That’s great to hear. Again, congrats on the quarter and thank you for taking my questions.

Ramesh Srinivasan: Thank you, Mayank.

Dave Wood: Thank you.

Operator: One moment for our next question. Our next question comes from Matthew VanVliet from BTIG. Your line is open.

Matthew VanVliet: Yeah, good afternoon. Thanks for taking the question. I guess when you made a couple comments around, one, your win rates continue to be very strong, And then also the deals, especially in Europe and APAC, that you mentioned, strength there. So I guess as you think about sort of the big drivers there, and I know you went through a couple on the last question, but curious on how much, if at all, it’s been mentioned that the win of the Marriott contract has sort of brought Agilysys more top of mind for potential customers? How much that’s helping versus the re-platform product? And then the sales investments, especially in the international markets, driving that? Anything sort of additional on the international side that you would highlight that might be a little bit of a diverging or I guess at least different driver than in the US?

Ramesh Srinivasan: Yeah, so whether it’s this international or even domestic area where our market share is a bit low, I mean, actually very low, what is driving us to get the opportunities are superior marketing efforts compared to where we were one and two years ago. So those are — the marketing efforts are definitely opening up opportunities for us. And the product — the impressiveness of the product demos is definitely keeping us in contention. Now what we need to do is get more reference customers. There are many countries in the world where we have to establish ourselves more because apart from the product superiority and the ecosystem superiority, they also require customers who will give them the comfort feel that yes, we went with these products and we are doing well.

That’s what we are building now. The product work is more or less done, Matt, and now it is the field work that is beginning in many international regions and even in some domestic areas. So now we are focused on establishing these products, establishing these integrations within our ecosystem in the field and creating more reference customers and then the ball will really start rolling. So the win-loss ratios are very good when customers look at our product demos and nobody else is doing this kind of end-to-end ecosystem innovation. But what we are focused on now is generating more presence in the field, more customers saying great things about our products. That’s what we are focused on now.