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Agilysys, Inc. (AGYS)

Q3 2014 Earnings Call· Thu, Jan 30, 2014

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to your Agilysys Fiscal 2014 Third Quarter Conference Call. At this time, all participants will be in a listen-only mode. (Operator Instructions) And now, I would like to turn it over to your host, Jim Dennedy. Please go ahead sir.

Jim Dennedy - President and Chief Executive Officer

Management

Thank you, John, and good afternoon everyone. We appreciate you joining us on the call today to review our fiscal 2014 third quarter results. With me this afternoon is our Chief Financial Officer, Janine Seebeck. Before we get started, just a quick reminder that we’ll be discussing some non-GAAP metrics on today’s call, primarily adjusted operating income from continuing operations and adjusted income from continuing operations, which eliminate the effect of restructuring and other items that are either non-cash or non-recurring. Reconciliations to GAAP metrics are provided in the financials of the press release issued earlier today. With that, let me start by commenting on the results for the quarter and year-to-date followed by a review of our growth in investment initiatives. Total net revenue for our third fiscal quarter of 2014 was $26 million versus total net revenue of $28.2 million in the comparable prior year period, a decrease of 8%. The year-over-year decline in third quarter revenue was driven primarily by a decrease in sales of lower margin remarketed products. Our third fiscal quarter of 2013 included $3.2 million of above average remarketed products revenue, which did not repeat in 2014 normalizing the outside contributions remarketed product sales represented in our third fiscal quarter of 2013. Total revenue for our third quarter of 2014 would have indicated an increase of approximately 4% while year-to-date total revenue would have increased by approximately 8% led by an increased participation of higher margin support, maintenance and subscription revenues in our revenue mix. The revenue mix shift to higher margin proprietary product sales and subscription revenues is evident in the gross margin improvement in both the third quarter and first nine months as fiscal 2014 third quarter gross margin improved 590 basis points to 60% and year-to-date gross margin improved 470 basis…

Janine Seebeck - Chief Financial Officer

Management

Thanks Jim. Let me begin by reminding everyone that results of our fiscal 2014 third quarter along with historical periods presented in our press release and discussed today reflect the classification of the company’s former retail solution group as a discontinued operation following the sale of that business on July 1, 2013. Beginning with the income statement, our quarterly revenue decreased 8% year-over-year to $26 million from $28.2 million in the prior year period. The decline in the third quarter revenue was as Jim mentioned earlier the result of a decrease in lower margin, remarketed product sales in the third quarter of fiscal 2013 that did not repeat in the current year period. This is reflected in the 30% decline in product sale compared to the third quarter of 2013. That said we are pleased with the way our product mix is trending. Professional services revenue increased 7% from $3.5 million in the third quarter of fiscal 2013 to $3.7 million in the third quarter of fiscal 2014. More importantly, support, maintenance and subscription revenues of $13.6 million, grew 11% in the quarter from $12.2 million a year ago on the back of strong subscription services and proprietary product support sales. We are very pleased with these results. As expansion in the recurring portion of our revenue is very important to the long-term growth and health of our business, it now represents over 52% of our total revenue compared to 43% in the same period last year. Turning to gross margin, we saw an improvement of 590 basis points to 60% in the third quarter of fiscal 2014 compared to 55% in the prior year quarter, primarily driven by the favorable product shift noted earlier. Going forward we expect margins for the fourth quarter of fiscal 2014 to remain close…

Jim Dennedy - President and Chief Executive Officer

Management

Thanks, Janine. Before opening the call to your questions, I’d like to highlight several customer wins and product launches from the past few months and comment further on our strategy and capital discipline. Let me begin by reviewing some of our more notable business wins. In the restaurant segment, we recently announced an agreement with one of our customers with Duff America, a Dallas-based restaurant group to incorporate the Eatec inventory and procurement system as well as the Workforce Management, WMx to enhance efficiency and reduce costs across the 145 Mimi's Café locations. But Duff America has been using Eatec and Workforce Management solutions at 66 la Madeleine Country French Café locations nationwide for sometime. And following their acquisition of Mimi's Café, we were able to grow this relationship across their new business offering. This follows other important wins such as the Crazy Pita and Rainbow Room, which reflect our focus to grow the restaurant vertical around the more full service, table service establishments. Full service restaurants offer considerable opportunity for us to work together with the owners to increase both traffic and profits. Our solutions are uniquely suited to assist the segment and gain maximum leverage from initiatives such as tasting the events, menu makeovers, social media marketing and loyalty cards. In mid-November we announced that Hotel Ella had selected InfoGenesis point of sale system to help finalize the increased efficiency and enhanced guest service at this recently reopened luxury property in the heart of Austin, Texas. This agreement reflects our ongoing focus on the luxury boutique market as well as the relevance and appeal of InfoGenesis point of sale that hotel operators towards wide array of features, high level of functionality, ease of use and ability to quickly modify menus and pricing. Also in November we announced that…

Operator

Operator

Okay. (Operator Instructions) Okay. So, I do show two questions in the queue. Our first is coming from Brian Kinstlinger from Sidoti. Brian, please go ahead with your question.

Brian Kinstlinger - Sidoti

Management

Thank you. Just start a few high level of revenue I am wondering if there is a seasonal aspect to your business. We saw big sequential downtick from September to December. I think the same thing happened last year as well. Is there something seasonal right now as we just look at your business as a standalone on hospitality?

Janine Seebeck

Management

Sure. Hey, Brian, it’s Janine. I don’t know that we would call it, seasonal I think we talk a little bit about it in the script obviously. We had a couple of deals that happened and come up from time-to-time where our customers request some of the i-Series and other type hardware and that did occur last year and didn’t happen again this year. So that’s really what’s driving it. It’s not part of our core business or what we do, but when someone ask us for we will obviously do it. They happen normally in that fourth or third quarter for us just with the IBM timing, but I wouldn’t necessarily call it seasonal just going to be sometimes they could happen from time-to-time.

Brian Kinstlinger - Sidoti

Management

Now, Janine, you mentioned the growth rate in line or below the 5% to 7% industry rate, does that apply just for fiscal ‘14, are you talking about ‘15 and then is it more than lower remarketed services? Is there something else in there as well, I couldn’t understand if you were saying it was remarketed?

Janine Seebeck

Management

No, I said – yes, it’s definitely just for this year, Brian. Obviously, we have had some big deals that we have been able to close, but just due to the timing and the necessity of the customers of when they take possession with the rev rec rules that’s just going to fallout, so that definitely just applies to this year. Although we haven’t given guidance for next year, we expect obviously to continue to see higher grades of growth going forward.

Brian Kinstlinger - Sidoti

Management

I don’t know, if you were to receive the regular revenue growth that you would have otherwise expected to win for next year to couple with these delayed revenue recognitions, so we see slightly abnormal growth for next year or is that necessary – or is revenue recognition continue to be a problem?

Jim Dennedy

Management

No, Brian, this is Jim. I don’t think revenue recognition is particularly a problem. I think what our investor should expect is that we should continue to grow at a rate that’s slightly better than the market rate of growth in this particular period when you compare year-over-year, in particular, a remarketed product sale. There was an anomalously large deal in the December quarter of fiscal ‘13 and we did have revenue that was up in the December quarter of ‘13 over the September quarter of ‘13 that make year-over-year comparisons just favorable to our current third quarter of ‘14. We try to give indication that absent that if you were to normalize that for the more 4.5ish million of remarketed products that we experienced generally quarter-to-quarter, we would have seen an increased growth year-over-year in ‘14 over ‘13. We expect that trend generally to continue in our core business.

Brian Kinstlinger - Sidoti

Management

Okay. And then can you maybe touch on the tuning what mobile products you announced at the Analyst Day, maybe how many how – what’s the adoption being like maybe a number of clients, what’s the average deal size?

Jim Dennedy

Management

Sure, Brian. With respect to the mobility as we indicated we are still relatively early in the sales cycle. Those products were released at the early part of fiscal – third quarter of our fiscal ‘14. Average deal size has been in the $30,000 to $35,000 range. Most of these have been add-ons to existing implementation. The number of units sold in the third quarter was a little bit in excess of 150 units. We see greater volume in our pipeline. However, some of the prerequisites to enjoy the mobility applications do require an upgrade to your existing InfoGenesis instillation and that upgrade while you move from our prior release to a current release needs to necessarily to occur before you can enjoy the use of our mobility products. So that somewhat retards a more faster adoption, but we do think it’s the appropriate thing in order to move the customers forward in the versioning of our products.

Brian Kinstlinger - Sidoti

Management

Is that upgrading the InfoGenesis part of their maintenance agreement or is that a cost in them?

Jim Dennedy

Management

No, it is – it is part of their maintenance agreement, it is not an additional cost absent maybe some services that they require it for us to do the upgrade versus doing it themselves.

Brian Kinstlinger - Sidoti

Management

Okay. And then what about I think for since you have been at the company, you have talked about cross-selling, you mentioned cleaner comments about doing better on that front, can you talk about today what percentage of your customers have more than one software app versus say last year?

Jim Dennedy

Management

Sure, Brian. In terms of our ability to increase our cross-selling, it is an element that we have been emphasizing since I have joined the business. We are still in that sub one-third or 33% range, but we were able to see a modest growth, sub 5% in the number of customers increasing their use of more than one product in the installed base. And the emphasis in the selling compensation is going to continue to emphasize selling more than one title into our existing installed base.

Brian Kinstlinger - Sidoti

Management

Okay. And then Janine, can you just touch quickly on the restructuring in asset impairment we are seeing while it’s non-recurring about $0.5 million per quarter. I am wondering is that going to continue for a couple of more quarters, is there still something related to the ERP system there as well?

Janine Seebeck

Management

Sure. The restructuring is actually just the timing associated with the charge that we took with the sale of the RSG business and because as employees stayed through the end of the year. Now that the TSA is completed, we are not anticipating anymore cost with that restructuring. The asset impairment was a one-time and that won’t repeat, but the actual intangible asset where you see that amortization that’s going to incur again this quarter through to when we go live on our new ERP in May, so that will be there this year and a little bit into next, but not in just in any other asset charges.

Brian Kinstlinger - Sidoti

Management

Great. Two last questions, the first one what ERP system are you installing?

Janine Seebeck

Management

Sure. We are actually installing NetSuite.

Brian Kinstlinger - Sidoti

Management

Okay. And then the last question I have is with the number of sales people you have and do you think you need to make significant changes meaning additions I guess as a result of (indiscernible) and that’s coming pretty soon?

Jim Dennedy

Management

Brian, that’s a great question. One of the reasons we, towards the middle of the third quarter, went on a search for an executive that could not only unite the missions of sales and marketing at a level below the CEO, but also drive the development of the sales force not only to get more productive around the markets that we are having product today, but also to grow resources anticipation of selling a product that it’s deployment in pricing and business model is somewhat distinct from the way we sell in service today. So from that perspective, there are two initiatives that I think are ongoing in the sales force. One is the continued emphasis and orienting our current sales force of slightly less than 20 people on continuing to cross-sell more products into that existing base that is only using one product from us. Second initiative is to go out and identify additional customers who we should be doing business that aren’t Agilysys customers today. Part of that initiative is not only identifying those folks that can be superior at true business development, but also can talk about and sell multiple business models like a traditional license versus a SaaS while we are going to educate the entire sales force to discuss both business models. So it’s a development and a training aspect as well as adding capacity to the team.

Brian Kinstlinger - Sidoti

Management

Great, thank you guys.

Janine Seebeck

Management

Thanks Brian.

Jim Dennedy

Management

Thank you.

Operator

Operator

Thank you. And our next question comes from Robert Moses from RGM Capital. Robert, please go ahead.

Robert Moses - RGM Capital

Management

Good afternoon guys.

Jim Dennedy

Management

Good afternoon.

Robert Moses - RGM Capital

Management

Just a couple of questions from me. So I guess the recurring revenue growth of about 11% and deferred revenue I think was about 10% increase seemed to be pretty good proxies for the health of the business and I think I understand the remarketed side, which is just kind of lumpy and not kind of almost pass through margin. But getting to a question about this revenue recognition is it that, it’s just a much more complex deal and for the accounting for software just causes it to be more ratable or is it just when you can actually start the billing and actually recognize it in total and maybe some more complex on that I am just trying to understand that?

Jim Dennedy

Management

It’s not more complex and it’s a lot simpler than that, Rob. There were two deals that in size amassed to almost $2 million.

Robert Moses - RGM Capital

Management

Okay.

Jim Dennedy

Management

Those two deals whatever required our customers towards the end of the calendar year in December to bring on several hundred and take acceptance of several hundred InfoGenesis systems as well as the other products that they ordered. They simply didn’t have staff around to accept and store all those systems in order to recognize it we need to have shift. So while they were just favorable contract terms with respect to the current accounting period, they are solutions that will be installed within the first half and they will certainly take acceptance of that equipment throughout the rest of this first quarter of the calendar year. So that’s really what drove it. And we look at year-over-year bookings, the bookings equivalency in the third quarter of fiscal ’14 was approximately the same size is the bookings value in the third quarter of 2013. However, when you account for $3.2 million being drop in shipped hardware, you can pull all that stuff in almost immediately and that’s really the difference.

Robert Moses - RGM Capital

Management

Understood and that’s really why you are tweaking if you are thinking about rather than maybe percent of growth something around 5 or whatever it’s more than new ons that really happened in the third quarter more than anything?

Jim Dennedy

Management

Correct.

Robert Moses - RGM Capital

Management

Okay, great, that’s fine. And the second question just relates to kind of the next gen and I think you said basically year out, I mean public beta third quarter and then maybe revenue recognition either March of next year, so call it a year and a quarter, is there anything you are learning either on private beta discussions with customers, industry trends that would lead you to saying the opportunity is actually different than when you started the project either the upside or downside and why you don’t want to give away any information to competitors maybe listening on this call to say any color you could give us in terms of the opportunities that would certainly be helpful?

Jim Dennedy

Management

Sure, Rob, with respect to the opportunity itself, I think the development approach that we are using and the incorporation of our customers into an advisory board around the development team where we meet with them about every six weeks – 6 to 8 weeks to show them the product, show them the progress, take their feedback on both design and functional requirements has led us to gain more confidence in adoption. But I think more importantly with respect to market opportunity their customers suggestion for how we introduce features and capabilities has led us to a market opportunity in the limited services roadside in business traveler property that we did necessarily anticipate would be a market opportunity for us, because that’s not a core segment that we address today. So that encouragement by our advisors to our mostly luxurious or properties and casinos etcetera to identify a development approach and a feature introduction would not only allow them to start using components of the services of this platform sooner, but also introduces us to a new market segment that we haven’t been able to address well in the past, so that’s probably been the best upside surprise to us.

Robert Moses - RGM Capital

Management

That’s great, Jim, I appreciated, thank you.

Jim Dennedy

Management

Yes, sir.

Operator

Operator

Okay, thank you sir. (Operator Instructions) And we will take our next question from James Lee from (indiscernible) Capital.

Unidentified Analyst

Management

Hi. Just want to follow-up on the two deals that you guys weren’t able to recognize it, if you had been recognized there is $2 million in, if those two just have been completed at the, I guess at the kind of sales that were shipped, would you have been recognized the entire $2 million in the quarter and therefore the product revenue would have been $2 million higher?

Jim Dennedy

Management

Yes. If we were able to ship those products and our customers would have accepted shipment, which is typical for us. That revenue would have come in or a significant portion of that revenue would have come in, in our third quarter.

Unidentified Analyst

Management

And now those business been shipped this quarter or do you expect them to be shipped this quarter?

Jim Dennedy

Management

We do expect them to ship quarter, yes.

Unidentified Analyst

Management

Okay. Then I want to move on to cash flow, I think you guys gave the guidance for the year operating cash flow breakeven. How should we think about capitalized software, especially for next year? Should we start seeing that number trend down as you start rolling out the product with products already been completed?

Janine Seebeck

Management

So James, yes, I think for next year, I think it’s probably going to stay at levels that we are looking at this year. It will be continuing through some of the development cycles, because obviously we are going out with Phase 1, but there is other things to move us up into different levels or different playing fields within that area. And so for next year I would assume it kind of at similar levels and then we will start to see it come down kind of fiscal 2016.

Unidentified Analyst

Management

Okay. What about operating cash flow? And do you expect to be positive?

Janine Seebeck

Management

Yes, obviously the objective is to continue to stay operating cash flow positive, obviously putting as much of the funds back into the business. So we are not trying to make huge amounts of money down to the bottom line until we get the next gen out, but we will stay positive.

Unidentified Analyst

Management

Okay. Would you have an idea so how much cash you would burn before you start getting breakeven on the cash basis?

Janine Seebeck

Management

That’s about 15.

Unidentified Analyst

Management

15, okay.

Janine Seebeck

Management

Yes.

Unidentified Analyst

Management

And then on the – you guys have a big exposure to the casino sites we have heard recently that or seeing that some of the casinos are having slowdown in December, have you start seeing that impact to your business?

Jim Dennedy

Management

We have not yet seen that impact on our business, James.

Unidentified Analyst

Management

Okay.

Jim Dennedy

Management

And our booking statistics in both the second and third quarter, our casino segment led the way in terms of overall bookings value relative to the other segments in the business.

Unidentified Analyst

Management

Alright, thank you.

Jim Dennedy

Management

Yes, sir.

Janine Seebeck

Management

Thank you.

Operator

Operator

Okay, thank you. And I am showing no further questions in the queue. I would like to turn the conference back to your host for any concluding remarks.

Jim Dennedy - President and Chief Executive Officer

Management

Thank you, John. Thank you for your participation in the call today. I would like to take this opportunity to thank the very talented and dedicated team at Agilysys. My colleagues at Agilysys are the people responsible for our success and they are the foundation for our future. I also want to express my thanks to our customers who entrust us with their business and to our partners who value our integrity. Agilysys is a much stronger company today and our balance sheet, positive operating income and focused strategy make us a compelling partner for our customers an exciting place for our people to practice their craft and an attractive investment for our shareholders. Thank you.

Operator

Operator

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.