Good day, ladies and gentlemen. And welcome to the Agilysys’ Fiscal 2021 First Quarter Conference Call. As a reminder today’s conference maybe recorded. I would now like to turn the conference call over to Jessica Hennessy, Senior Manager Corporate Strategy and Investor Relations at Agilysys. You may begin.

Thank you, Liz, and good afternoon, everybody. Thank you for joining the Agilysys’ fiscal 2021 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 differ materially from these and the forward-looking statements include the effect of the COVID-19 pandemic on our business and the success of any measures we have taken or may take in the future in response to the COVID-19 pandemic 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. With that, I’d now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead.

Thank you, Jessica, and good afternoon, good evening, everyone. Welcome to our fiscal 2021 first quarter earnings call. Joining Jessica and me on the call today is Dave Wood, our Chief Financial Officer. I am participating in this call from my home base in Las Vegas while Dave and Jessica are in Atlanta. We hope all of you and your families and colleagues are doing well and staying healthy. I first want to assure you that we've taken every step possible to keep our employees safe and healthy. We've also done our very best using our growing product research and development strength to help our customers with social distancing enabling and other product enhancements and innovation to enable and ensure the safety and comfort of guests visiting their properties. Before our update, as a reminder, please note that unlike many other organizations, we use the terms revenue and sales to indicate two different business metrics. Revenue is of course recognized revenue based on normal revenue recognition rules, which are standard across public enterprise software companies. We use the term sales however, to refer to new sale agreements signed with current and new customers for products and services. We measure such sales in terms of net annual contract value of sale agreement signed. We also tend to use the terms sales, selling activity and bookings though all refer to the same thing, net annual contract value sales. There is a time lag involved in progression from sales to revenue, some happen relatively quickly while others, especially those involving subscription-based licenses happen over time after the implementations are completed. Q1 fiscal 2021 revenue was $29.8 million, a 22% decline compared to Q1 of fiscal 2020. This was likely the most challenging quarter ever faced by the hospitality industry and our business. Considering…

Thank you, Ramesh. There is no doubt the effects of the COVID-19 pandemic have deeply affected our industry in the short-term. However, we remain more competent than ever in our long-term financial health and ability to execute on our growth and profitability improvement plans, deliver mission critical solutions to our customers backed up by world class customer service and to do whatever it takes to support their ever-changing business needs. We are pleased with the strength of our cash position, along with our ability to deliver cost effective product innovation. This should allow us to pick back up with the business momentum we achieved prior to the pandemic. Taking a look at our financial results, beginning with the income statement, first quarter fiscal 2021 revenue was $29.8 million, a 22% decrease from total net revenue of $38.4 million in the comparable prior year period. The top line decrease largely reflects a 52% decrease in product revenue and a 45% decrease in professional services revenue due to the delayed delivery and buying decisions throughout the industry, as well as the one-time COVID relief given to customers, which for the most part impacted the first quarter. The decrease in products and services revenue was offset by a slight increase in recurring revenue. Total recurring revenue represented 68.8% of total net revenues for the fiscal first quarter, compared to 52.3% of total net revenues in the comparable prior year period. The increase in recurring revenue as a percentage of total revenue is primarily due to the lower product and professional services revenue levels. We are pleased with our subscription revenue growth, which grew at 8.6% for the first quarter of fiscal 2021 despite the onetime relief given to our customers. Subscription revenues comprised around 37% of total recurring revenue, compared to 35% of…

[Operator Instructions] Our first question comes from Matt VanVliet with BTIG. Your line is now open.

Hi, guys, thanks for taking the question. Well done in the quarter, given the very difficult operating environment you find yourselves in. I guess first, you highlighted a lot of the good wins, especially with some of the newer products that you mentioned, weren't even available two years ago. Wanted to dig in there a little bit and just kind of get a sense of the bookings trends within the quarter and even into July what level of mix are from, I guess, existing customers buying some of these sort of new normal social distancing elements and how much of the sort of pipeline rebuild is from those versus just sort of ongoing discussion that you had about broader POS modernization or PMS upgrades with existing customers.

Yeah. Hi, thanks for the question. And I'm thanks for participating in the call. We normally monitor our sales in four categories. One is existing products where a customer buys an additional terminal or buy services, things like that where there is an existing product and there is more business around it. Now, what we call as competitive sales is the other three categories. The first one is new logos where a new customer signs up. The next one is a new site where a customer has already signed, already our customer, but they go live in a new site with our product. And the third category is additional products, our new products where a site already has at least one of our products and they buy at least one other product. Now, what we have found and we were – we have all – we have ourselves been a bit surprised since April, that the new logos business and the new logos opportunities we are looking at is reasonably healthy. I wouldn't compare it to the peak time like last January, February or so, but it is quite high. And we were surprised by the number of new logos, number of new customers who are talking to us about system replacements. In fact, there is a seven digit – there's a big deal that we signed recently with a new customer. So the new customer business is doing better than we expected it would in April, that's number one. Number two, what is really doing well for us is new products. And what we mean by new products is additional products. When a customer has one of our products and they are actually buying the other products and many of them are these new products that help with social distancing and the other current needs. And also when they look at those products, they are surprised by how many things we now have to offer and then they take a look at that entire lineup, even products that are not necessarily directly related to social distancing. Now, what has not done well? What has gone down more than we would have bargained for is new sites. Many of our big customers who, let's say in calendar 2019, were going live with our products in many new sites, that business has definitely slowed down. But what has picked up is new products and new customers looking at our systems now.

Got it and very helpful there, I guess as you also look at the OnDemand free trials that you rolled out and really wanted to support customers in a difficult time, but also kind of open their eyes to a lot of these new products. I guess as you think about what 15% sequential growth next quarter looks like and hopefully improvement throughout the rest of the year. What kind of conversion rates are you assuming or thinking about for all those customers that have taken you up on that offer and kind of what that is adding to the pipeline from your expectations?

Yeah. So the 15% guidance of revenue sequential increase Q1 to Q2 and the 25% EBITDA increase is based on general business trends i.e. it is not based on one particular thing. Now, let me answer the OnDemand part of it first. The 90-day free trial is going reasonably well. Many customers love the product. And so we expect a good portion of those customers to continue using that. So we are optimistic, bullish about the fact that that product is going to be a revenue generator, especially SaaS fees generator for us for the long-term. So this is just not a short-term thing. This product is going to be there to stay and it is going to be one of the powerful arrows in our POS kitty, right. So that's going to be helpful. And we expect the majority of the customers, a big majority of the customers to continue using the product. So there we have no doubts. But our guidance of a 15% revenue increase in Q2 over Q1 is not based on any one particular thing. I would not base it just on OnDemand. It is a – it is we monitor pipeline and we monitor our sales opportunities on a weekly basis. And currently opportunities all round including picking up of business in APAC and EMEA is pointing to that kind of sequential growth.

Got it and then lastly for me, if I can slip one more in here, historically you've had a lot of strength in gaming. You've talked about Las Vegas being a huge market for you, but also highlighted some of the regional casinos having a lot of success recently. Is there a push and their move to open as early as possible in a lot of these areas and being located oftentimes in maybe less prevalent hotspots at least in the US from case counts? Would you expect over the next several quarters for that mix of revenue coming from gaming to actually tick back up even as you've had a lot of efforts in diversifying away from that? Are you seeing strength in various pockets in all the different verticals that you've really shown some good success in recently?

Yeah, so let me answer the question in two separate parts. Number one, as far as gaming is concerned, yeah, we have noticed a pickup mostly in the regional resorts and in tribal casinos, where like you said, they are not in the center of the hotspots, and they also have a bit more freedom to operate the way they want to. So the interest in our products and the willingness to invest in technology has been higher with the regional resort casinos than they have been with the destination resort casinos, if you will, if you make that difference. So gaming is a big market for us. I would not say that the kind of business pickup there is anywhere close to peak levels, but it is doing reasonably well, especially in the regional resorts and especially with tribal casinos as they look at the various new product options. Now, regardless of the vertical segment, I will assure you that we are doing reasonably well. And our sales activity is this high mainly because of our product innovation over the last few years. I mean, I shudder to think what would have happened to us if the product innovation and all the new products and all that were not there like they are today that has really helped. And a lot of people are looking at it including the resort casinos. Now, I wouldn't say we are trying to diversify away from gaming. We just have great opportunities in HRC and managed food services because we have such low market shares there. And the industry is so huge, especially in hotel, resorts and cruise ships what we call HRC. Hotels and resorts is a huge market and we have very little market share. Now, all these new products that we have and are improving PMS offering where rGuest Stay now pound-for-pound, feature-for-feature can stand against any other leading PMS product out there. And we have the additional – all these additional modules supporting it. So we are very competitive on PMS. And our POS offerings are getting better with OnDemand. So we have a long runway to go in HRC and that is beginning to show. HRC has done particularly well during the last four months relative to the past. And managed food services in healthcare and in higher education they are new markets for us. We have very low market share. And there is a partner who we work with who's really bringing us a number of deals, so those two businesses are expanding, making up for the temporary short-term lag in destination resort gaming.

Got it, thank you.

You're welcome. Thank you.

Our next question comes from George Sutton with Craig-Hallum. Your line is now open.

Thank you. Ramesh, you ran through a series of new offerings, which I appreciate. I'm wondering if you could talk about that relative to what you're seeing from competitors. Are you bringing these newer offerings into the customers and they are evaluating as either the option they go with or not, there aren't comparable offerings? That's our belief. I just wanted to generally confirm that.

Yeah, I mean, I – George, hi, George. I never want to – I never want me or Agilysys to be overconfident about anything. In general, you're right. One good hospitality solutions provider like us, who provides both the core products and the additional modules is lacking. What a lot of the leading providers do like our peers, our competitors, what they do is they point to third party vendors for the most part, saying, you want to check in checkout mobile or a check in checkout kiosk option or an rGuest Service go to that partner or go to this partner. That's the way they do their business, which works. I mean, there's nothing terribly wrong with that, other than the fact integrations and the lack of one neck to choke and all that becomes challenging for a customer. And what we are noticing now is that as soon as the customer even comes to realize that we have all these additional modules, and that is the main challenge for us George. The fact that we need customers to understand that we are no longer that old company that we used to be that we have all these offerings, once they understand that the fact that all this comes integrated from one vendor, they have been tested together, they add value to each other. And now we have a single demo environment in which we can demo all the products. That is, I think, a big competitive advantage for us George and I think that competitive advantage is growing as well month-over-month.

So you referred early on to the social distance enabling offerings that you have, I believe those are things like Agilysys Seat and rGuest Service and Express Mobile. Can you talk about what kind of demand on a relative basis you're seeing for those kinds of products specifically? Is that mostly just affecting your existing customers taking on more product or is this your Trojan horse entree into new accounts?

Yeah, I wouldn't call it a Trojan horse. Each of them has their own market, like the sales and catering module that came out yesterday that that market itself you can argue runs into billions. And we are not using that necessarily as Trojan horse because sales and catering by itself can be a product that could be a $20 million, $30 million, $40 million product for us by itself, even if that customer doesn't buy any of our other PMS products and so on. And we are talking to a major leading golf course now, just about the golf product. And there was one customer who was about to sign with us. And that deal has got delayed, who were just looking at the Spa product and a few things around it not necessarily connected to PMS. So each of these products do carry – do play in a market of their own. And each of them can be double digit millions of dollars as we go along, so each of them has good potential by themselves. But taken together, it does provide us a chance to sell more to our big current customer base as well. But we are not necessarily viewing it as a Trojan horse kind of strategy. It is just that we have a lot more product offerings now. Each of them has an individually big market and taken together they are also very useful for all our big customers.

Got you, last question if I could, you mentioned that your COVID relief was really a onetime item. I'm curious in your confidence in that there might not be an extended need to help again at some point and if you thought through that.

Yeah, good question, George. I mean, that that is part of the uncertainties that we are working with. What we mean by the phrase onetime is that it applies only for one time, like this is not an extended discount or anything like that and so far, so good. I mean, it feels like it is one time, but we are nervous like you are that there may be future needs as well, right. It is very possible. It all depends on how smooth and how straightforward the recovery is. But whatever it is, even if we make any other future relief offers, they will again be one time for that time, right. So it's still possible jobs, I would not rule that out, yeah.

Okay, thanks very much, I appreciate.

You're welcome. Thank you, yeah.

[Operator Instructions] Our next question comes from Allen Klee with National Securities Corporation. Your line is now open.

Hello, good afternoon. A question on the temporary discounts, could you quantify like, if every one of those customers started paying you when the time period was over, how much quarterly revenue would that represent?

Hi, Allen. This is Dave. So we're not quantifying the amount of discount, but the way to look at it, I mean, you can see that our exit rate of recurring revenue was about 22.3 million in Q4. And our endpoints have continued to grow. So we're adding at little over 20 million this quarter. So the one-time discounts really affected the growth rates on recurring revenue to that extent and without the credit, without the onetime relief credits, our growth rate would have been similar to what you've seen in the past.

Okay, and then the six-month temporary discount of – discount is the wrong word, sorry. Cut in compensation cost, is there a way to think about dollar wise how much that is on a quarterly basis?

So on a quarterly basis it – I mean, the way I would look at it, Allen is, is our operating expense as a percentage of revenue. And we we've historically said for G&A that will remain in the 14% to 16% of revenue and for product development will remain in the 25% to 27% of product development and for sales and marketing will stay in the 12% to 14% of revenue. All of those are slightly down this quarter based on all the temporary and long-term cost savings initiatives. But the way I would look at it is this year will be a little bumpy and some of them will be outside of range. But as we get into next year, they'll start to return to the normal levels you're used to.

Okay and then just bigger picture, as the recovery in some of the hospitality areas is maybe going to be a little slower than what was originally expected. It's very tricky because that's going to affect the number of – some of your demand while you're doing very well with new products. How does that affect, I guess, your just your confidence in the recovery and your ability to return to – stir it to growth?

Yeah, so I would – hi, Allen, I would think of a couple of things there, right. Number one, like we keep repeating, it's a huge market and we are a small player, right, so our recurring revenue, if you take the 20 million or the 22 million per quarter multiplied by four, we are somewhere in the 80s, right? Somewhere in the low 80s to high 80s is where our annual recurring revenue run rate is. And compared to the overall total addressable market that runs literally into billions, right, so we are still a small player. So what that gives us is even parts of, even portions of the hospitality industry recover that should serve as well. So the tribal casino is doing reasonably well. A number of casinos making technology decisions, even the cruise industry making use of this downtime to do upgrades. A whole lot of hotels, resorts in regional areas doing reasonably well, so as pockets of the market recover, I think we can do reasonably well, right. It is not as good as the whole market humming, we understand that, but even pockets of it opening up, we should be able to do reasonably well, right. And the fact that we have all these new products and when a customer really takes a look at us, we are now becoming a more and more compelling proposition that also helps. Our win loss ratio increasing also helps. So if I were you Allen, I mean, we are – I don't want to get too ahead of ourselves, which is why we are only providing quarterly guidance now. And we are saying next quarter we are projecting it will improve 15%. Now as you can do the math that gets us into sort of the region we used to be about a year, year and a half ago. So we are getting there. If that trend continues, we should get back to normalcy so, right and FY '22 should be a sort of a normal growth year for us.

Okay, thank you so much.

Yeah. Thank you so much Allen.

Our next question comes from Ishfaque Faruk with Sidoti & Company. Your line is now open.

Hi, good afternoon guys. Thank you for taking my questions. First of all, Ramesh, thanks a lot for some of the colors that you gave with respect to the onetime credits and concessions. In particular, can you give me a sense for like how – what's the number of maybe customers who have accepted your offer and maybe how many are in the process of executing those contracts? I think the last time you said there was around like 300 or so customer sites were in the mix.

Hi, Ishfaque. So two separate things Ishfaque, as far as the concessions go two – there are various kinds of concessions and each one chose one. Some of them just chose to extend the payment time period and not take any particular recurring revenue onetime credits. They decided not to do that. Some customers took the recurring revenue credits and the accounting part of it, some portion of it we have to apply it for the whole year. That is why you will see a fix of that in the next three quarters as well. But that is one kind of COVID relief. Now, also a different kind of what we offer was this offer for this OnDemand product, which we knew was going to be really required by them immediately. And it turned out to be true, hundreds of sites, I think it's something like 300, 400 sites, picked it up. And there the offer was to do the installation of the first outlet for free, where we don't charge them services, which affected services revenue this quarter and will affect services revenue in the next quarter as well and also 90 day no SaaS fees. So that was another part of the concessions we gave. So two different things, one is recurring revenue onetime credit and the other is free use of our product for 90 days. And both of them are different customers picked it up in different degrees, right, so we can't go into the details of that. But overall, when you look at Q1 of this year versus Q1 of last year was a 22% decline. A good portion of that had to do with these concessions.

That's extremely helpful Ramesh. And in terms of the number of customers, you mentioned that if these 400 sites converted to paying customers maybe in the December quarter, could you give a sense for maybe what the dollar volume of all of these customers subscribed would be?

Yeah, I mean, I don't want to – we don't want to get into those kinds of details Ishfaque and it is important to look at us a little bit more holistically than that, right. Our revenue is going to be driven both in the short-term and the long-term by a whole lot of such products. There's not only this product, so I would not get too held up with just this one product and what it's going to contribute to SaaS fees. But one thing I can generally tell you Ishfaque, our SaaS offerings have really increased now. Virtually all our products now, a big majority of our products are available both SaaS and on-prem and most customers are picking up SaaS. So we are quite bullish about how all these products are going to help SaaS fees in the future, especially this OnDemand product.

Okay and on the – and you also already touched on this in terms of state of some of the casinos. You said regional and tribal casinos are doing well. And Ramesh you being based out of Nevada and Nevada opened in early June, casinos. Are you – what are you seeing in terms of like foot traffic for casinos at casinos and maybe are some of the Las Vegas based casinos looking to – are you seeing more inquiries from that strip?

Yes, I mean, a lot of the major corporate gaming customers are looking at various products. We are having discussions with them. I don't want to comment on one bucket. Generally the foot traffic is reasonably picking up in Vegas because I tend to go on drives. I get in the car and just drive through the strip. And about two Saturdays ago, I was really stuck in a bad traffic jam there and I was really thrilled about it. So the traffic is picking up in Vegas. But in terms of sales decisions, technology investment efficiency, we are noticing it to be relatively more with tribal casinos and regional resorts, non-casino resorts. Those are the kinds of areas where we are seeing more investment decisions being taken. And I think that is only a short-term phenomenon Ishfaque, it will change quickly.

Wonderful, thank you so much guys for asking my – for answer for my questions.

Thank you.

That concludes our Q&A for the call. I'd now like to turn the call over to Ramesh for closing remarks.

Thank you, Liz. Thank you all for joining us on the call today and for your continued interest and support. We look forward to talking with you to report our progress in the next quarter about three months from now. Please take good care. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.