Agilysys, Inc. (AGYS) on Q3 2023 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and welcome to the Agilysys 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 Agilysys. You may begin.
Jessica Hennessy: Thank you, Josh, and good afternoon everybody. Thank you for joining the Agilysys 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 risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed within 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 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 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 trends 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 of 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 were 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 this space are also facing escalating pressure from their guests who are increasingly seeing the benefits of modern technology across many areas outside the hospitality. They are enjoying the benefits of technology-enabled self-service and get 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 properties. 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-based. The deal size per new customer sales agreement during the quarter was the highest we've 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 customers. 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 1-1-7, sales of a total of 117 new products. With respect to overall competitive wins, which is a 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 in Q2 by about 17.7%, 1-7% and the next best previous quarter by nearly 8%. The average deal size for 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 to 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 U.S. 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 providers for a majority of the 900,000 plus rooms across Marriott's luxury premium and select service properties in the U.S. 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 Marriott's 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 Agilysys 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 1.5 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's 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 increased timeline, which could reduce our EBITDA by revenue percentage profitability levels by two or three percentage points during the short-term. Now onto 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 quarters and sequentially, 4.6% higher than Q2. We are on track to exceed our full-year -- 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 had 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've now added more than $1 million and recurring revenue sequentially quarter-over-quarter for five consecutive quarters. Subscription revenue generated from add-on experience, enhanced software modules, most of which were developed internally ground-up during the past few years constituted 17%, 1-7, 17% of total subscription revenue this quarter compared to 11% during the full previous year 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've 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%, 1-5, 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 increased 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 level 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?
Dave Wood: Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement, third-quarter fiscal 2023 revenue was a quarterly record of $49.9 million a 26.5% increase from total net revenue of $39.5 million in the comparable prior year period. All three-product lines increased compared to the prior year periods with product revenue up 32% and professional services revenue, up 45.7% over the prior-year quarter. Recurring revenue was also up 20%, with subscription up 28.8% over the prior year period. Sales momentum continued into fiscal 2023 Q3, with sales up sequentially over Q2 FY '23 and at our highest level for a single quarter and well over six years, including another record subscription sales quarter. Onetime revenue consisting of product and professional services increased by 38% over the prior year to $19.8 million in Q3 FY '22. The product backlog decreased slightly compared to last quarter, but is north of 80% of record levels. Professional services revenue increased sequentially by 11% to $9.1 million with sales and backlog at record levels. Total recurring revenue represented 60.4% of total net revenue for the third fiscal quarter compared to 63.7% of total net revenue in the third quarter of fiscal 2022. Increased revenue, professional services implementations, and product revenue coming back into the business drove the change in revenue mix compared to the prior fiscal year. We are also happy with our continued subscription revenue growth, which grew 28.8% during the third-quarter of fiscal 2023. Subscription revenue comprised close to 50% of total quarterly recurring revenue compared to about 46% of total recurring revenue in the third-quarter of fiscal 2022. Add-on software modules comprised 16.8% of subscription revenue in Q3 fiscal year 2023 compared to 11.5% on the comparative prior year quarter and continue to be a meaningful contributor to subscription revenue. As previously mentioned, the penetration levels of add-on software modules still has significant room for growth within our existing customer base. Moving down the income statement. Gross profit was $30.8 million compared to $24.7 million in the third-quarter of fiscal 2022. Gross profit margin decreased to 61.7% compared to 62.6% in the third quarter of fiscal 2022. The gross profit margin decrease was primarily due to product and professional services revenue coming back into the business, causing a shift in revenue mix. Combined, the three main operating line-item -- the operating expense line items, product development, sales and marketing and general and administrative expenses, excluding stock-based compensation, was 45.6% of revenue compared to 45.9% of revenue in the prior year quarter and in-line with our FY '23 plan. Product development has reduced from 22.8% to 20.6% of our revenue. General and administrative expenses have reduced from 14% to 13.7% of revenue, while sales and marketing has increased from 9.1% of revenue to 11.3% of revenue due to our recent investments. Stock-based compensation as a percentage of revenue in Q3 FY '23 is 6.9% of revenue compared to 9.7% of revenue in Q3 FY '22. Operating income for the third-quarter of $3.5 million, net income of $3.4 million and gain per diluted share of $0.13 all compared favorably to the prior year third-quarter gain of $1.6 million, $1.1 million, and $0.04 per diluted share, respectively. Adjusted net income normalizing for certain non-cash and nonrecurring charges of $6.7 million and adjusted diluted earnings per share of $0.26 compared favorably to adjusted net income of $4.9 million and diluted earnings per share of $0.19 in the prior year third-quarter. Fiscal 2023, third-quarter adjusted EBITDA will was $8.1 million compared to $6.6 million in the year-ago quarter. Q3 adjusted EBITDA was 16.1% of revenue and in-line with our FY '23 plans. Moving to the balance sheet and cash flow statements. Cash and marketable securities as of December 31st, 2022 was $105.8 million compared to $97 million on March 31st, 2022. We generated $9.6 million in cash during the third fiscal quarter. Free-cash flow-in the quarter was $11.7 million compared to $9.9 million in the prior year quarter. The change in free-cash flow from the prior year is mostly driven by the increase in cash from operating activities, partially offset by the increase in capital expenditures related to the Las Vegas new office build-out. CapEx expense of several million dollars, that the new office build-out will continue into our fiscal Q4. In closing, we are pleased with our third-quarter financial results and are trending above our stated revenue guidance of $190 million to $195 million. We expect our Q4 results to put us in the $195 million to $198 million range for revenue and adjusted EBITDA was slightly above 15% of revenue for the full-fiscal year 2023. With that, I will now turn the call-back over to Ramesh.
Ramesh Srinivasan: Thank you, Dave. In summary, the breakthrough inflection point we have been building towards during the past five-plus years. That breakthrough inflection point does feel like started becoming a reality during the second half of last year. We continue to run Agilysys with a healthy dose of paranoia and remain cautious and conservative with all our decision-making. Despite our naturally cautious nature, we do have many reasons to feel bullish about our future. We now have the self-confidence to manage with optimism -- cautious optimism despite all the sobering macroeconomic headlines we read and hear about. Among the reasons for our bullish outlook are the following. One, we are operating in a total addressable market which is huge relative to our current sites. Two, we think the hospitality industry has been clearly underserved with respect to its technology needs for a long-time and is hungry for such solutions regardless of how challenging the macroeconomic environment gets. Three, our current record pace of selling success is the reality despite a few sales verticals like Asia managed food service providers and hotel chains not being back to pre-pandemic peak levels. Those verticals are also beginning to show good signs of improvement now. Four, we've created multiple growth path for the future. Our recent expansion of sales and marketing continues to add a steady stream of new customers and new customer properties to the Agilysys family each quarter. Operating expenses attributable to sales and marketing increased by about 60%, during the first three quarters of fiscal 2023 compared to the first three quarters of fiscal 2022. The recent PMS election-related partnership created with the world's biggest hospitality Corporation gives us major subscription revenue growth opportunities in a couple of years from now. With more than 25 cloud-native state-of-the-art software modules in our bag now, which create high-value for customers and current average presence of only about two such products in each customer property, selling more software modules to our current customers remains another big possible growth area for us. Five, our property management systems, PMS journey is only in its first or second inning now. And these PMS wins come with the possibility of high deal sizes, driven by the availability of many add-on software models. Six, our overall product services and recurring revenue backlog levels are again back to record sizes. Seven, we are now in the process of adding research strength across various areas to ensure we take good advantage of the outsized growth opportunities in front of us. Eight, the competitive environment at worst remains the same as it has been for the past few years and at best has possibly become better for us. Seems like we remain a fairly isolated example of serious investments in cloud-native end-to-end hospitality-focused software solutions, innovation. If anything, our R&D investments are underestimated, given how cost-effective our current development efforts up. And nine, a solid balance sheet with no significant debt helps keep the door open for other possible relevant and appropriate growth options. So all that together, overall in terms of the state-of-the business and future prospects, we just could not ask for anything more. It is not every day one comes across in enterprise software unit, with this kind of revenue growth visibility across multiple future years. Despite all the pressure, the current transformation brings all great challenges to have, we remain a disciplined growth business unit. We will remain focused on customer partnerships across all customers around the globe to drive the business forward based on a solid foundation of great team members compelling products and world-class customer service. With that, let me open up the call for questions, Josh?
Operator: Our first question comes from Matt VanVliet with BTIG. You may proceed.
Matthew VanVliet: Hi, good afternoon, thanks for taking the question. Nice job on the quarter. I guess first question, as probably expected. A couple more clarifying maybe comments on the Marriott deal and appreciate all the color you gave and the potential for some near-term margin headwinds. I wonder if you could just dive in a little bit more there. How much of that should be sort of headcount related to build-out the project and potentially deliver it from more of a services component? And how much is sort of longer-term structural R&D or other components that presumably leveraged along the way?
Ramesh Srinivasan: Hi, Matt. So think of the Marriott deal Matt, in sort of three major blocks. The first block of work is over the next 18 months or so which involves a lot of additional development work, which will make the product a lot stronger and also within that is a lot of Marriott-specific needs. And services work preparing for the conversion that will happen at high-speed, once the first property goes live. So the first block of work of development and services should be a profitable part of work for us. Meaning the services revenue, that gets paid for that work should make it profitable for us. So no margin compression there with that block of work. The second block of the project or call it Phase two is when after the property start going live. There, of course, the subscription revenue will increase rapidly and significantly. And the company grows along with that. So that part is also profitable. So block three is preparing the company for being a much bigger cloud SaaS operating company. There's a whole lot of infrastructure buildup that has to get done in customer support, in help desk, in internal systems, in software monitoring tools. So we just are going to a much higher-level now in the next 18 months or so. That work could be margin compressing. Now the rest of the revenue growth that's going to happen during the next say two to six quarters should provide enough provision for that, but we are just warning you, that there could be some margin compression, 2% to 3% of EBITDA by revenue, nothing more than that and, that margin compression, may not happen as well due to the infrastructure and other buildups, as we get prepared to be a much larger-scale cloud SaaS company. So think of it as three blocks. The first block of work development services will be profitable. That's more or less paid, so that's not an issue. The second phase of work is once the go-live starts, subscription revenue will grow up substantially. So no issues there. The third block of work is getting the company to be a far larger-scale cloud company, that work may have to be done earlier, costs incurred earlier before the revenue starts clicking -- it starts coming through. So that's what could cause a 2% or 3% margin compression.
Matthew VanVliet: Okay, very helpful. And then when you look at 900,000 plus rooms across their network that you're looking at what would exclude some of those rooms from moving to the Agilysys system -- and I guess, how much visibility do you have today versus maybe what you expect to gain further over the next couple of quarters?
Ramesh Srinivasan: Yes, I think it's important Matt, we don't get too far ahead of our skis in this. This was a global process for selecting a PMS product. But we were selected for a majority of luxury premium select-service properties in the U.S. and in Canada. So that's what we were selected for a majority of the 900,000-plus rooms. So that's what we have been selected for. That's where our focus is and we want to keep our heads down, focused and make sure we execute about as perfectly as any software project has been executed and keep our focus on that. Now, these kinds of big customer partnerships don't happen every day Matt. You know that better than I do. So we are going to focus on the task given to us, deliver on that as well as possible, and like all customer partnerships, we will see where the next steps go. But our focus currently is on delivering well on what we have been selected for.
Matthew VanVliet: Okay, understood. And then, I guess on sort of the rest of the business you highlighted some areas of strength, I guess where -- where do you feel like in terms of the recovery of business travel, is that impacting maybe the continued momentum especially in the gaming and resort space or is this -- is this really just still kind of pent-up demand that's finally working its way through the system and it's maybe not as reliant on. What could swing back the negative way if the macro impacts travel further?
Ramesh Srinivasan: Yes, so in our opinion, Matt the pent-up demand is more related to the fact that this industry has been underserved with the kind of integrated technology solutions it's always needed the pent-up demand comes from there. Not just from a temporary pandemic-related travel coming back or not coming back. This is a much larger story in a way it is more and more looking to us as we do product demos and we see how customers react to that. Then, a lot of the companies, lot of the vendors who have dominated the space for decades have sort of not carried that innovation ball forward and that is the gap that we saw, which is why we invested so much in R&D, and created an offshore development center. We did all of that, because we saw that gap. The pent-up demand in this industry, we don't think, it's just related to whether travel comes back or goes down, it is a much larger question. They desperately need the kind of integrated tools to keep their staff happier and provide for much better guest experience. That's where the pent-up demand this and that I think is long-term. That I think is here to stay, regardless of whether travel goes up and down a little bit on that. And also, Matt, it's a big total addressable market. Relative to our size, relative to our size, it's a huge total addressable market. So what we are seeing now is the parts of the total addressable market that is hungry for these solutions. There could be a part of that market that we are not seeing, where probably technology decisions are not being considered, but the part of the market that we are seeing is big enough for us. It's huge for us. So we are seeing increasing opportunities, mostly driven by the fact we have improved our products, we have created, like 25 to 30 software modules. We can now cater to-end-to-end hospitality solutions, that's where the pent-up demand is coming from.
Matthew VanVliet: All right, great. Thank you.
Operator: Thank you. One moment for questions. Our next question comes from George Sutton with Craig-Hallum. You may proceed.
George Sutton: Thank you, Ramesh, you gave a very compelling outlook relative to the number of PMS rooms that you will touch or you currently touch. We believe around 300,000 you suggests that number could triple, which by our math would assume another Marriott size addition, in addition to the Marriott room. So with that as context, I wondered if you could talk about the pipeline outside of Marriott, anything that has changed relative to the discussions you are having with hotels and in particular we are all pretty conscious of the fact that there are other large operators with proprietary systems that have been heavily criticized in terms of capabilities, are those the kinds of targets you're talking to?
Ramesh Srinivasan: Hi George. So our current number of PMS rooms, like you said is 300,000. And we expect that to probably triple in the next three years or so and we expect a good portion of that to be based on the Marriott deal now. A good portion of that, but there is also a whole lot of PMS deals we have beginning to win now or are being strongly considered in our traditional strength areas like gaming casinos, and resorts, many of them are seriously considering our PMS products. And also remember, there are many of our current customers who are moving from the old products, they were with, whether it is our own old products or other old products have been using for a long-time. Those conversions to PMS is also beginning to happen more now that they see world-class PMS products that they can choose from. Now as far as the other large operators are concerned, I think there have been underserved with technology for a long-time and as and when they come up for their own RFP processes, the good news now is there is a very-high probability we will be included. Couple of years ago, there was a high probability we will not be included in those. So now as and when those large operators come up with the next cycle of software replacements, we expect to be a player there, right. It would be very unlikely that we have not included in that. And once we are included we fancy our chance is quite high. Because of the state-of-the products now and how impressive those demos are. But this calculation of tripling our number of rooms connected to in the next three years is largely based on the PMS deals we are working on now, plus of course the huge Marriott opportunity. That calculation does not take into account any possibility of another large operator running a similar RFP. Those will only be additions to the Marriott.
George Sutton: Understand. I wanted to hone in on your Block 3 spend that you referred to and you're effectively saying we are going to be a much larger organization, we need to build an expense base and capability based to meet that. I'm curious with this spend specifically what kind of ability, it gives you to serve other customers in particular and also to cross-sell modules into the Marriott and other basis?
Ramesh Srinivasan: Yes, so this Block 3 spend that we talked about, is to make us ready for being a far bigger cloud SaaS company than we are today. So that is to make sure that the number of rooms connected to PMS, the number of terminal endpoints connected to our POS system, with most of them going to the cloud as a subscription-driven SaaS operation that is going to be an enormous increase in our business all towards subscription revenue. That requires taking on infrastructure-level support. Information security, for example. Cloud monitoring tools, it takes a lot of those tools and beefing up our internal systems department. That is going to be a combination of CapEx and operating expenses. To kind of finally take the transformation to becoming a true cloud SaaS big company that requires an order of magnitude jump-in our infrastructure. Those are the expenses, I'm talking about and that prepares us not only for this Marriott hundreds of thousands of rooms going live also for the rest of the business and also for possibly other large operators looking at us like you mentioned. It prepares the company to go to an entirely different level of a cloud SaaS-based software company. For the second part of your question, George that has got nothing to do with selling more to Marriott. Like we are saying, we were selected for luxury, premium, select service in U.S. and Canada and our entire focus is on that. And it's a big partnership, it's a huge partnership. So far there seems to be an excellent culture fit of the two companies working well together. Our focus is on executing what we have been selected for well, what that leads to in the future, we have no idea and that is not our concern now.
George Sutton: All right. Congrats on the execution.
Ramesh Srinivasan: Thank you, Josh.
Operator: Thank you. One moment for questions. Our next question comes from Nehal Chokshi with Northland. You may proceed.
Nehal Chokshi: Yes, thank you, and congrats on the strong quarter and a Marriott deal. That's incredible. With respect to Marriott, are you already seeing any halo effect from the validation that this one should bring?
Ramesh Srinivasan: Yes, Nehal. I mean nothing transformational, but the simple fact that we are getting included in PMS-RFPs now, that possibly before the announcement, we may not have been included in those RFPs because now we have to be taken seriously in the PMS space as well, when the world's largest and most innovative hospitality operators select you, you asked the question, how can we not include them when we do a PMS election. So we are getting those kinds of inquiries that are more than it was before.
Nehal Chokshi: So how does that going to impact your OpEx spend, because presumably, that's going to, materially, increase your opening pipeline here. You only had 3% Q-over-Q increase on your OpEx here in the December quarter, albeit, your sales and marketing was up 11% Q-over-Q. So just how should we think about that from that perspective then?
Dave Wood: Hey Nehal. We don't expect a much of increase in our sales and marketing spend. If you're looking at it as a percentage of revenue. I mean, the way to think about the businesses, we'll stay-in the 10% to 12%. We don't think the halo effect through the increased bookings is going to change that. I mean, obviously, the revenue number is going up, so the absolute dollars will go up, but we'll keep sales and marketing in the 10% to 12% range. So no major increase there.
Nehal Chokshi: Do you worry that you might be leaving demand on the table by not hiring more impressively then?
Dave Wood: Yes, I mean. Good. No, one thing just to keep in mind that we talked about. I mean, with the expansion of sales and marketing this year, going from 9% up to 11% to 12%, we still have a lot of capacity level in our sales team, we haven't hit any kind of capacity where we feel more than incremental hiring is necessary at this point.
Jessica Hennessy: But sales and marketing, Nehal, it's going to continue to expand and -- but as a percentage of revenue, we think we'll stay-in that range for now. That's how it seems like. And I don't think we are leaving much demand on the table, Nehal. Because we are constantly watching, right. The capacity level and how much the current sales teams are contributing and if we need to expand that, if it is very clear that we need to expand that we will not hesitate to do that, Nehal.
Nehal Chokshi: Okay, great. And does the Marriott contract include the add-on modules and if not why not?
Jessica Hennessy: This RFP, Nehal was a global RFP for PMS. And that's it. And in that RFP, our PMS product was selected for the set of properties that we already described. That's all this process was. And therefore we got selected for that plan.
Nehal Chokshi: Got it, what is the opportunity to get your add-on modules included and would it be on a per-property basis or would it be coming through a corporate mandate that opportunity does exist?
Ramesh Srinivasan: We have no idea, Nehal. I mean, we have no way of answering that question, like I said, this was a particular selection process for a particular product PMS, we participated in it and did extremely well with it. That's all we know at the moment.
Nehal Chokshi: Okay and then for the portion of the Marriott properties that are not on a proprietary built with some -- on or in-house build systems that are on a third-party system to no micros, I think they won the deal back in 2013, when does that portion of the Marriott properties come up for renewal and therefore presumably an RFP for you guys as well.
Ramesh Srinivasan: We don't know Nehal, right. We don't know again, we were selected for hundreds of thousands of rooms across premium, luxury, and select service in U.S. and Canada. And that's all we're focused on at the moment.
Nehal Chokshi: Okay, all right, well, great, congratulations again.
Ramesh Srinivasan: Thank you, Nehal. Appreciate it.
Operator: Thank you. And I'm not showing any further questions at this time. I would now like to turn the call-back over to Ramesh for any closing remarks.
Ramesh Srinivasan: Thank you, Josh. Thank you all for your continued interest in our progress. Our next earnings call will be in about four months from now around the middle to end of May when we will be reporting Q4 and full-fiscal year 2023 results, and also provide guidance for fiscal 2024. Until then please be safe, healthy, and happy. Thank you.
Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
