Agilysys, Inc. (AGYS) on Q1 2022 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2022 First Quarter Conference Call. As a reminder, today's conference call may be recorded. I would now like to turn the conference over to Jessica Hennessy, Director of Corporate Strategy and Investor Relations at Agilysys. You may begin.
Jessica Hennessy: Thank you, Cherry, and good afternoon, everybody. Thank you for joining the Agilysys fiscal 2022 first 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 in the forward-looking statements include the continued effect of the COVID-19 pandemic on our business and the hospitality industry. The timing and extent of the recovery phase of the hospitality industry 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.
Ramesh Srinivasan: Thank you, Jessica. Good evening. Welcome to our fiscal 2022 first quarter earnings call. Joining Jessica and me on the call today in our Atlanta office is Dave Wood, our CFO. We hope all of you and your families are fully vaccinated, doing well and staying safe and healthy. We continue to treat the good health, happiness and wellbeing of our Agilysys teammates, customer and partner personnel as our top priority. The productivity and quality of execution levels of our global workforce remain at high levels, despite the personnel and family challenges, the virus has forced for many of us. We are deeply grateful to all our employees for everything they continue to do for Agilysys under challenging circumstances. During narratives, such as this earnings call for the remainder of this fiscal year, we will do our best to offer comparisons to two historical quarters; one, with the comparable quarter from a year ago, and one with the comparable quarter from two years ago. Fiscal 2021, the period from calendar April 2022 to March 2021 was obviously not a normal year. Providing comparisons with both last year and the year before that when there were no pandemic-related challenges should give you a better idea of our business progress. From the standpoint of sales success from around the February end, March timeframe of this calendar year, we have seen good recovery in the gaming and resort market verticals in the U.S. and a partial recovery in the hotel and cruise ships verticals, while managed food services and international regions remain significantly affected by pandemic-related closures. Both the APAC and EMEA regions continue to be impacted heavily by lockdowns and other severe restrictions. Despite the lack of recovery in multiple verticals and geographic market areas, this was our best Q1, April to June quarter with respect to sales success and revenue level slightly higher than Q1 two years ago, when all our markets are operating normally with no pandemic-related challenges. Professional services and hardware sales bookings during Q1 fiscal 2022 were close to even with Q1 two years ago, while software sales was ahead of pre-pandemic levels. This was a record subscription software sales quarter in sales agreements won, signed and closed. Most of these SaaS projects won during the quarter are yet to be implemented and will contribute the future subscription revenue growth. Our product innovation and increased competitive advantage levels have made up for the pandemic related market challenges in several verticals and regions when we compare the current Q1 quarter results with Q1 two years ago.
Dave Wood: Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement, first quarter of fiscal 2022 revenue was $38.7 million, a 29.9% increase from total net revenue of $29.8 million in the comparable prior year period. The increase in top-line revenue largely reflects a 68.8% increase in product revenue and a 63.9% increase in professional services revenue. Recurring revenue increased by 13.2% compared to the prior year period. Q1 FY2022 also represented a 6.6% sequential increase over fiscal fourth quarter of 2021, with all three product lines increasing sequentially over the prior quarter. When comparing to the pre-pandemic period of fiscal 2020, we are encouraged that the current quarter has returned to similar levels of revenue and sales as the comparative 2020 quarter, while the total backlog is at record levels. Total recurring revenue represented 59.9% of total net revenues for the fiscal first quarter compared to 68.8% of total net revenue in the comparable prior year period. Recurring revenue of $23.2 million is a record, $2.7 million higher than the prior year and up $300,000 sequentially. We are also pleased with our subscription revenue growth, which grew year-over-year 33.2% during the first quarter of fiscal 2022 to a record $10.2 million. This also represents a growth of 44.7% over the first quarter of fiscal 2020. As a reminder, subscription revenue in Q1 fiscal 2021 was negatively impacted by several one-time items. Subscription revenue comprise around 44% of total recurring revenues compared to about 37% of total recurring revenues in the first quarter of fiscal 2021. Add-on software modules that build out our product ecosystem beyond the core point of sale, property management and inventory procurement offerings are adding scale quickly and are now contributing to 8% of total sales this quarter, when less than two years ago, the add-on modules were not a meaningful contributor to sales. We have added over $1 million in ARR to increase new products and each of the last five quarters. Add-on software modules made up 9.7% of our subscription revenue in our fiscal first quarter of 2022. Moving down the income statement, gross profit was $24.8 million, compared to $18.6 million in the first quarter of fiscal 2021. Gross profit margin increased to 64.2% compared to 62.2% in the prior year period. This gross profit increase was primarily due to better revenue mix. Recurring revenue continues at record levels while products and professional services revenues continue to increase, but have not yet fully returned to pre pandemic levels. Product and professional services revenue are up 15.7% sequentially when compared to Q4 fiscal year 2021.
Ramesh Srinivasan: Thank you, Dave. Overall, we are happy with the result this quarter, despite many pandemic related challenges that are remaining in the industry, especially in the managed food services vertical and international regions. We are excited with our current competitive position and are confident of a bright future. Agilysys 2.0 is in the process of being launched. We've started shifting our primary focus from R&D more towards sales and marketing, along with growing professional services and support. We continue to expect fiscal 2022 to be our best revenue year, since we converted ourselves into a hospitality software solutions focused business seven or eight years ago. We continue to expect fiscal 2022 revenue to be in the $160 million to $170 million range, with adjusted EBITDA being slightly north of 15% of revenue despite expected increased spending levels in all customer facing areas. The hospitality sector should continue to recover as vaccination rates pick up all across the world. We are well position to ride that recovery wave and take our business to higher limits. With that Cherry, let's open up the call for Q&A.
Operator: Your first question comes from the line of Matt VanVliet from BTIG. Your line is now open.
Matt VanVliet: Yes. Hi, thanks for taking the question and a great job in the quarter. I guess first on the product development side, you made a ton of progress over the last couple years, especially as you've been pushing the SaaS products out there. And Ramesh, you mentioned a couple new products that are sort of to be released very soon. I guess, on a more forward-looking basis, are there any other major product gaps that you're eyeing that need either modernization of what you have in the portfolio already? Or is that customers are now asking about that you expect to have over the next several months?
Ramesh Srinivasan: Hi Matt, thank you for the question. No, there are no new products that we are planning. Our focus during the next year is going to be to settle down all the new software modules we've already created, settle down in the field, all the new products we've already created and all the products that have been modernized. This modernization effort has been a big effort, Matt. It takes redoing major products that have had a 10-year, 20-year, even 30-year history. So it's been a big effort. So we want to focus the next few quarters on making sure all those modules and products, all those cloud applications get settled down well in the field. Before we start thinking about what are the new enhancements and modules we need to expand our total addressable market. I guess that time will come sometime in calendar 2022, but for the next few quarters, we are focused on settling down all the work we have done in the field.
Matt VanVliet: All right. And then you mentioned a few of the deployments have hit a little bit of a delay from time to time. But you expect those to be relatively short-lived. Maybe if you could just give us a little bit more color there, has it been an issue of not having people on site? Is it a customer related issues, just maybe not fully prepared for the delivery? Or was there something more from the technical side on your end that you've now sort of straightened out?
Ramesh Srinivasan: Yes. So you summarize the two reasons well, Matt. But the overwhelming reason, the big majority of the reason why our current combined backlog product, services and recurring revenue is at a record level. The primary reason for that gap between selling and implementing before it gets converted to revenue has been the lack of resources at customer sites. Now that all of us read in the newspapers, we know that many of the properties we are working with are shorter resources and they have a whole lot of other priorities to work with as well. So that has been the overwhelming big reason for the implementation delays. So along with that, a secondary reason has also been that many of these products that we are implementing now are either new modules or have been completely modernized over the last two years or so. So as they get into the field, there are technical issues that we have found during implementation that takes a few days to a couple of weeks to three weeks kind of thing to sort out that has also costs certain implementation delays. And in certain cases that one implementation delay makes us put on hold the following implementations of the same product, because we'd rather settle it well in the first few sites that are going live before we take on all the additional sites. But I would say that is a smaller secondary reason. The big primary reason has been lack of resources at customer properties.
Matt VanVliet: And then just a quick follow-up to that, you reiterated the guidance despite coming in sort of above, at least our expectations for the quarter and talking about sort of record levels of, of bookings and backlog here, is there just an extra element of conservatism given the ongoing uncertainty or have some of these project delays and the delays associated with recognizing revenue just not sort of giving you that extra confidence to raise the guidance range. Thanks.
Ramesh Srinivasan: Yes, sure. So Matt, in terms of record levels of bookings. The one clarification is, this was our best Q1 quarter of sales, meaning this was our best April through June period. And the previous record was two years ago, Q1, April through June of calendar 2019, that was before the pandemic or fiscal year 2020. So this is not our best ever quarter of sales, but it is our best Q1 quarter of sales. So that's a clarification to be understood. That's number one. Number two, yes, a big part of the revenue success this year is going to depend on how quickly we clear the backlog. The record levels of backlog we have now. And that's not going to be easy because our properties are not going to get resources just like that quickly. And this phase of implementing all our new modules is going to cost a little bit of a delay going forward. So fundamentally, I mean, when we provide guidance, we are as realistic as we can be not aggressive, not conservative. That is always our objective. Now, the one thing I will give you, Matt, is that the second half of the fiscal year, October through March we expect a pickup, in all cases, all these products would have been well settled by now. We expect the markets to pickup. We expect the managed food services vertical to pick up as more people go back to offices. We expect international regions to pick up as more as the vaccination rates continue to increase. So we do expect a pickup between October and March, which is the second half of the fiscal year. We just don't know how good that pickup is going to be yet – as yet. Is it going to be delayed by a couple of months, is it going to come ahead by a month or so in September, we just don't have a good enough feel for that. We do expect the second half of the year to be better than the first half of this fiscal year. We just don't have a good enough feel for how much that increase is going to be. So our current guidance is a realistic reflection of where we think we'll end up this year.
Matt VanVliet: All right, great. Thank you for taking all the questions. I appreciate it.
Ramesh Srinivasan: Thank you, Matt.
Operator: Your next question comes from the line of Nehal Chokshi from Northland Capital. Your line is now open.
Nehal Chokshi: Great. Thank you. Great quarter, amazing free cash flow. It looks like that's been driven by great day sales outstanding. So that's actually my first question. Is this DSO level sustainable?
Ramesh Srinivasan: Nehal, yes. The DSO levels are sustainable. I mean, we obviously there was a lot of turmoil last year, but they've kind of settled into the range as they are now. And like, we've talked about the working capital adjustment on free cash flow, really smoothed out over a 12 month period, but the DSOs are in the – and the DPOs are right where we'd like them to be. And so yes, the free cash flow is sustainable.
Nehal Chokshi: Great. So then how should we be thinking about free cash flow relative to the effectively I think it's a $25 million that the guidance for the year?
Ramesh Srinivasan: Yes. Over the year it'll smooth out and be near the same number. I mean, you'll have some CapEx adjustments against that, but the working capital will smoothed out. So keep in mind, Q3 is typically our – is the bumpiest quarter with some large annual invoices that go out, but over the year, it'll the working capital smooth itself out. So it will be relatively close to the profitability guidance.
Nehal Chokshi: Okay, great. And then normalizing for a one-time events’ in the year ago quarter, how did subscription revenue fair on a year-over-year basis? I know on an – as is basis, it was up 33% year-over-year. And you may have said this in the transcript. I just didn't catch it.
Ramesh Srinivasan: Yes. So it was right around the 20%. I mean, a lot of the quarters in fiscal year, 2021. So there was the one-time credit, but there was also several other one-time kind of lumpiness in the quarters with cash collectability and larger deferrals. But if you take out most of that noise, it was around the 20% growth we're used to. So year-over-year, Nehal you should expect subscription revenue to be around the 20% higher than the previous year, when you add up all the quarters of a year – when you add up all the four quarters of the fiscal year and compare it to the previous fiscal year, it will end up around the 20% mark we think.
Nehal Chokshi: Okay, great. My last question is that I know that you've said backlog is at record levels across product, service and then subscription maintenance and support. But within the subscription maintenance support, does that include subscription being backlog at record levels as well?
Dave Wood: Yes, Nehal. So the subscription revenue is near record levels and the professional services is at record levels. So the comp – with the combination of all three is at a record level. But yes, the subscription revenue is at near record levels as well.
Ramesh Srinivasan: And is part of that recurring revenue number image.
Dave Wood: Yes. That’s correct.
Nehal Chokshi: Yes. Absolutely. Okay, great. Thank you.
Ramesh Srinivasan: Thanks, Nehal.
Operator: Your next question comes from the line of George Sutton from Craig-Hallum. Your line is now open.
George Sutton: Thank you. I did hop on late. It sounded like you were getting a lot of quantitative questions. So Ramesh, I wanted to ask you some qualitative questions. You on your message to your customers today at your conference mentioned, you're the most relaxed and happy you have ever been. Just wondered if we can get a perspective of that along with the fact that you now have backward compatibility and software is no longer a constraint. It just seems like a pretty big message in terms of where you've come from and where you are now. And I just wanted to think of it from that angle.
Ramesh Srinivasan: Sure, George. I'm not typically the kind of guy who is ever relaxed and happy, but what I've met was relatively, I'm more relaxed and happy now. What I meant was in all these user conferences since 2017, George, you always make future promises. You say we are going to invest in R&D, we are going to modernize our products. We've always been known for trusted solutions. We've always been known for great customer service. But our products have been old and that's been the truth. So since 2017, you promised that you're going to do this, you're going to modernize it. And you always feel happy when you deliver on that promise. So here after in these user conferences, we don't need to talk about the future that much, we can talk about the present. And that's always a much better state than standing there and saying, we are going to do this, we are going to do that. Now we can say we have done it. And we have kept our promises. Now you can depend on us for both cloud-based applications and for on-premise applications and both of them are based on world-class technology. So we have reached that stage, and that is what I meant by it is far easier to do these presentations now. And we feel that in demos, George, when we do demos and we do Agilysys overview with customers, it's 10x easier now than it was two years ago, because we are talking about the present. And you're telling customers, all we need from you is a chance. Please take a look at the demos. That's all we need. You don't need to depend on any future promises or anything. So that's what I meant. Now, as far as the backward compatibility that we talked about today, George in the event in the next-generation event we had is what we mean is the IG POS terminal modernization we have done is a big deal because now out of one code base, we support all the operating systems, iOS, Android and Windows of one code base. So we don't need a third-party vendor dependency. We don't need all of that. Along with that, customers have the ability to upgrade two of their devices, but leave the rest of it on an older version. That's not the kind of backward compatibility all our competitive vendors provide. It is normally a heavy lift. Sometimes they even force them to change the hardware, while whatever we do, we make sure we protect parts customer investments as much as we can. So that too is a big deal, so happy about that as well.
George Sutton: Got you. Just looking forward to HITEC and G2E in terms of what kind of presence you anticipate having at those events? Obviously, I don't believe either of those really happened last year. And are those going to be live events? And do you think you're going to get the demo numbers that you would hope to get?
Ramesh Srinivasan: I think so, George, we are definitely going to be there in full force and we are looking forward to an in-person event. And the couple of shows we attended over the last few weeks, the attendance has been down compared to pre-pandemic levels. But we think HITEC and G2E are going to be very well attended. All the vendor partners, all our peers and competitors and everyone else in the gaming industry and in the hospitality industry are all eagerly looking forward to participating here. And our feeling is unless there is some bad news, again, of things going backward, we think there is going to be very good presence from the customer end. And we are definitely going to be there in full force, ready to demo our entire range of products. There won't be any trace of old technology shown there in our boot. So we are looking forward to that.
George Sutton: Got you. Great. Thank you.
Ramesh Srinivasan: Thank you, George.
Operator: I am showing no further questions. We have Allen Klee from Maxim Group. Your line is now open.
Allen Klee: Yes. Good afternoon. Question is on how you're thinking about your expenses in terms of how they're going to grow throughout the year? And then somewhat related to that status of your hiring an India Development Center and maybe a little color of just how things are in India? Thank you very much.
Ramesh Srinivasan: Yes. After the second – well, hi, Allen. After the second wave, god done, things have stabilized well in India. In fact, I was there for a couple of weeks – a couple of weeks ago. So I spent a couple of weeks there as well. Things have settled down very well in India. We are still working remote for the most part in our India Development Center, but things are coming back to normalcy a lot faster than we thought during that second wave. Now, as far as expenses are concerned, I'll give you a higher picture answer Allen, and then I'll hand it over to Dave. So starting from now in general, you should see our R&D product development level of expenses stabilizing around where we are today. There could be some something increases when incentive comp increases, when we have better and better years. And you always have the run rate. We built it up to a certain extent that run rate issue is there. But when you take this quarters product development expenses, we should be stabilizing R&D around that area for the next foreseeable future, right? For the next – as we take this company forward in revenue, we don't require any big increase in R&D expenses. And you should expect the sales and marketing expenses as a percentage of revenue to gradually increase over a period of time. So the fact that we save in R&D as a percentage of revenue, by the way, Allen, we are not reducing R&D, but we are not going to increase it any further. We have a lot of operating leverage in R&D now, part of that saving as a percentage of revenue should go towards sales and marketing and should go towards increasing our profitability levels over a period of time. Now, as far as the India Center is concerned, we are pretty much close to peak size now. We're probably about 30 or 40 people short compared to the capacity we have. And I think we’ll be stabilizing there for the foreseeable future. No major hiring coming up in R&D and in our India Development Center, anytime in the near future. Now, our attention is mowed on increasing sales and marketing side. Dave?
Dave Wood: No. I agree, Allen. I mean, I think last year was obviously a little bit lumpy when you look at some of our OpEx as a percentage of revenue. But now we’ve kind of normalized out the stock-based compensation, I think you'll see us go back to ranges you're more familiar with, for example, G&A will probably remain in the 14% to 16% of revenue, product development start coming down into the 28%, 29% of revenue and sales and marketing will start to come up 10% to 12% of revenue. So we'll start working back toward the percentages kind of used to with product development coming down, and like Ramesh said, adding a little bit more here and there to sales and marketing.
Allen Klee: Thank you.
Ramesh Srinivasan: Thank you, Allen.
Operator: I am showing no further questions at this time. I would now like to turn the conference back to Ramesh.
Ramesh Srinivasan: Thank you, Cherry. Thank you for all your continued interest in Agilysys. On behalf of our Board, management team and close to 1,400 team members, I'm grateful for your investments in Agilysys and for your attendance today. Please take good care. Thank you.
Operator: This concludes today's conference call. Thank you all for your participation. You may all disconnect.
