Good day, ladies and gentlemen and welcome to Agilysys Fiscal 2021 Second Quarter Conference Call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Jessica Hennessy, Senior Manager of Corporate Strategy and Investor Relations at Agilysys. Jessica, you may begin.

Thank you, Tewanda, and good afternoon, everybody. Thank you for joining the Agilysys fiscal 2021 second quarter conference call. We will get started in just a minute with management's comments. But before doing so, let me read the safe harbor language. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation 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 in the forward-looking statements include the effect of the COVID-19 pandemic on our business and the hospitality industry, the success of any measures we have taken or may take in the future in response to the COVID-19 pandemic, and the risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. With that, I would 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 second quarter earnings call. Joining Jessica and me on the call today is Dave Wood, our CFO. I'm participating in this call from our Las Vegas office, while Dave and Jessica are in our Atlanta office. We hope all of you and your families are doing well during these challenging times. At the outset, I want to assure you that we have taken every possible step to keep our employees safe and healthy. The work from home arrangements continue to work well for us, with no resultant loss in productivity. Before we get into the details of our update on the quarter, please note that unlike many other organizations, we use the term revenue and sales to indicate two different metrics. Revenue is recognized revenue based on normal revenue recognition rules which are standard across public enterprise software companies like us. 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 the sale agreement signed. We also tend to use the term sales and bookings to refer to the same thing, net annual contract value sales. There is a time lag involved in the progression from sales to revenue. Sometimes that progression happens relatively quickly, while for certain other sales agreements, especially those involving subscription-based license fees, the transition to revenue happens over time after the relevant product implementations have been completed. Q2 fiscal year 2021 revenue was $34.4 million, representing 15% that is 1-5, 15% sequential growth over Q1 and a 16%, that is 1-6, 16% year-over-year decline compared to the comparable Q2 quarter last fiscal year. The difficult circumstances faced…

Thank you, Ramesh. To echo Ramesh's comment, although the impact of the COVID-19 pandemic continues to affect our customers and therefore slow down our short-term progress, we are pleased with the profitability levels we have been able to achieve through one of the most challenging times for the hospitality industry. Our balance sheet remains strong and should continue to meet the liquidity demand needed to invest in our products and other strategic initiatives as we manage through the current challenges. Taking a look at our financial results, beginning with our income statement; second quarter fiscal 2021 revenue was $34.4 million, a 15.3% sequential increase over the fiscal first quarter of 2021 with all three product lines increasing sequentially over the prior quarter. Our second fiscal quarter represented a 35% increase in professional services and a 25.2% increase in product revenue, as well as an 8.8% increase in recurring revenue over the fiscal first quarter of 2021. Second quarter fiscal 2021 revenue was a 15.6% year-over-year decrease from total net revenue of $40.7 million in the comparable prior year period with recurring revenue being the only increase at 9.7%. Total recurring revenue represented 64.9% of total net revenue for the fiscal second quarter, compared to 49.9% of total net revenue in the comparable prior year period. Recurring revenue of $22.3 million is back to record levels and $2 million higher than the prior year. We are also pleased with our subscription revenue growth, which grew year-over-year 23.9% during the second quarter of fiscal 2021 back to record levels of $9.1 million. Subscription revenue comprised around 41% of total recurring revenues compared to 36% of total recurring revenues in the second quarter of fiscal 2020. Add-on software modules that build out our product ecosystem beyond the core POS, PMS and inventory procurement…

Thank you, Dave. In summary, we are overall happy with how we have navigated through the past two quarters, quite possibly the toughest two quarters we've ever faced being a business unit focused entirely on the hospitality industry. To start with, we have secured the future of our business and are well prepared to face even the unlikely scenario of the current crisis lasting a few quarters beyond what we currently expected to last. Excluding the $34 million convertible investment from MAK Capital, net of fees, excluding that $34 million gain, we've added $5 million to our cash balance during the first two quarters of this fiscal year, which is the highest addition to our cash balance during the first two quarters of the fiscal year, since we became the company we are today about seven years ago. In addition, we have worked our way through the past six to eight months without in anyway sacrificing or delaying our medium-term and long-term growth prospects. If anything, we have increased our R&D and product innovation pace and strength during this time. And world-class customer service remains our primary goal regardless of what challenges we face. We've also successfully turned the corner with respect to profitability and have demonstrated the future earnings potential of this business that we are in. While this quarter was a particularly high profitability mark during the short term, we do expect to maintain around a 15% plus adjusted EBITDA to revenue ratio during the next few quarters and then improve on it in the future. As we look ahead to the next year, we are cautiously optimistic that the second half of calendar 2021 could be a culmination of a set of positive stars all lining up well for us. It is possible that around the middle…

Thank you. [Operator Instructions] Our first question comes from the line of Matt VanVliet with BTIG. Your line is open.

All right, great. Thanks for taking my question. Good afternoon and congratulations on getting the model back to the direction of growth and good to see that the outlook is starting to get incrementally better and then the outlook for late next year seems pretty positive. I guess as you think about that ability to get growth back on the right track and thinking about the sort of broader product portfolio here, if you were to kind of break down where you've seen the most success over the last six months and where the pipeline looks for maybe the next six months to 12 months between existing customers expanding your technology to new properties or new use cases, expansion at existing properties of more modules especially some of the newer rGuest and contactless enablement, and then third bucket kind of being net new customers, where has been the most success and where do you expect the most moving forward?

Yes. Hi, Matt. Thank you for joining the call. So in terms of what -- where we have seen the most success during the last six months has been in selling more of our additional modules to our current customers. Now that is in fact increased compared to say last calendar year or last fiscal year. So when you look at the number of instances where we have sold an additional product to a site, which already had one or more of our products before, that number that we reported as 72 for this quarter is actually higher than the last fiscal year average. And in Q1, it was actually even higher. So that is the area where we have seen actually increased success in spite of the pandemic issues, which is quite remarkable if you think about it. Now where it has actually suffered a lot, where it has declined has been in new sites. So one of our major growth drivers in the past has been when a major customer, when a big corporation signs up with us, they tend to like us, they tend to like our products, the robustness, the stability, the phase at which we are improving, and they tend to take us to newer sites. But that has definitely slowed down during the pandemic, and it's slowed down significantly. In fact, most of our sales losses has been in that area. Now when you look at new customers who have signed up with us and, like I told you with about 10 customers that compares reasonably favorably. I mean it compares reasonably with the last year where the average was about 14 per quarter, now it's about 10 new customers per quarter. So the number of new customers is sort of keeping up, though…

No worries. Thank you. That was very helpful. To a long question often needs a long answer, so understood there. And I guess maybe thinking about that just maybe one level more or maybe continuing to highlight a few of the portions of the market where you see the most strength maybe end of the calendar year and into early next year, is it still sort of the regional gaming and regional resorts where people are tending to hop in their car and drive to, are you starting to have more conversations with some of these destination type places with sort of the hopes that maybe early next year traffic will continue to grow? Just kind of what you're seeing from that basis of it?

Yes, Matt. So as far as that is concerned, our narrative has improved slightly, but has not changed substantially from our conversation in the last earnings call about three months ago. A lot of the momentum is still based on the regional resorts and the regional casinos. That is where the momentum is coming from, where people are able to drive to, in order to take a break. So that is where still a lot of -- bulk of our sales is coming from. The destination resorts have improved, but not by that much yet. There is still a lot of uncertainty around that. And of course areas like cruise ships are still struggling because the sailing is not yet started. Now we are very confident of the long-term growth possibilities with our products for cruise ships and areas like that. But short term, it has not improved that much in the last three months. And also our foodservice providers business has also been affected, because a lot of the workplace, they have still not come back to work, and therefore those cafeterias are all still struggling. So, the narrative has not changed substantially Matt though it has improved slightly. It is the way I would phrase it. Long-term, we are confident of all those areas coming back, and there's going to be a lot of pent-up demand that is going to drive demand, but in the short term, the narrative has not changed much in the last three months unfortunately, Matt. That is the truth, yes.

All right, great. Thank you for taking my questions.

Thanks, Matt. Thank you.

Thank you. Our next question comes from the line of George Sutton with Craig-Hallum. Your line is open.

Thank you. Ramesh, I assume you drafted your earnings call comments before today and actually today we were involved in two conferences that you were fairly active and it's certainly a key sponsor of HITEC and G2E, and you were doing some product demos which were frankly pretty impressive. I'm just curious if you can give us any updated thoughts from these two conferences that you participated in terms of what you're seeing in terms of customer interest?

Not yet, George, right. Unfortunately, I'm not yet prepared to address that because as of today, unfortunately, I have been quite focused on this earnings call and preparing for it. So I don't have a complete up-to-date update for you. However, one comment I will make, George, that is related to that. Going into the shows, HITEC and G2E, they're both virtual shows. The confidence level of our sales team, our sales engineering team, our R&D and services teams that are participating has never been higher. The pride with which they are going in, and also our demo capability has improved dramatically because now we do integrated demos. Now, it is no longer product-by-product. We have an integrated demo environment where we are able to show customers the power of connecting the whole thing together and what that can lead to. For example, I'll give you one example, George. One of the things that we are demoing now that is -- that has a lot of promise for us, I don't like to use the word game changer phrase, but this comes close to that, is a single profile, management of a common profile across all the amenities that you have and also the management of a single itinerary. Now the single itinerary is a kind of a secondary fact in that, the fact that every person working in a resort will have access to your itinerary. So if you're in a spa and you have a golf appointment coming up that spa person will know that you are getting late for a golf appointment. And every person in that resort will know what you're next activity is. But what is more important than that is the single guest profile. So when you go to the booking engine now, you…

We did see that demo today, that was very impressive. I do look forward to a near-term visit to a resort with the golf itinerary spa treatment and stake [ph] restaurant reservation; so hopefully near-term. And so you also mentioned small challenged competitors that could make a potential M&A going forward. Could you give us a little bit of a picture of what you're seeing from that universe of opportunities? Are you looking at technology add-ons? Are you looking at logo opportunities or just tuck-ins?

So the calls to us from bankers and others have increased dramatically during the last say, three months or so, and they are all telling us it's going to further increase starting early calendar next year. Unfortunately, we don't feel good about it, but unfortunately, many of our peers and competitors have been quite badly affected by the pandemic. So that is opening up opportunities, and we have looked at a few of them though we stay quite disciplined in our lane because our build costs are quite low now. Like I've told you, George, before, our buy decisions will remain disciplined because our build cost is both low and the pace of innovation is quite high. But having said all that to answer your question, the opportunities we're looking at, number one, is a market share increase. So now that our products are modern and our products will be liked by customers, we could acquire a like-for-like product vendor, and then do a roll up to our product. So there could be a lot of cost synergy opportunities there and then with those customers, we have more products to sell now. So there could be revenue synergy opportunities as well. So we could quickly turn those companies accretive, given that we know now we have become better at how to do cost effective R&D. So market share increased opportunities are there, number one. Number two, the product/technology opportunities are also there to fill up what we are doing now. For example, between our PMS and the OTAs on the website, there is a space in between there with yield management and areas like that where there are opportunities coming up, which could really strengthen our PMS offering. So that would be an addition, an extension to what we are doing today. That is possible. Technology possibilities are also there, right. So these are all cropping up now and we are just taking a careful look at each of them. Now as far as what we are looking at, any one of those that fit us well that come at a reasonable price could add value to what we are doing. And about a year from now, a CRM possibility may be getting into the areas of artificial intelligence, now that we have a lot of common guest data to deal with, all those opportunities also open up about 12 months from now.

Super. Just one other question, you mentioned that your sale of newer customers has slowed, and I'm just curious if you could put that into context of what you're seeing in the industry. I assume that is not a market share loss scenario that's just simply the market dynamic that is the reality we're living through right now.

Yes, George. It's the latter. So it's basically postponed technology investment decisions. It basically comes down to the fact that when we go talk to a customer, say, last year, they really like the direction in which we are going and most of these customers tend to look at your pace of improvement, right, the vendor they are with, the partner they are with is not improving the products months, it has remain there for many years. We like your improvement. We want to partner with you. However, sorry, we'll will get back to you when the purse opens up, and when we can get the required approvals. So, most of it falls in the category of postponed technology investments, that's why. So it is no market share loss or anything like that. It is just that decisions customers come. I mean, for us, it is frustrating, but we do understand the situation they are in. They come close to a decision and then they postpone it by weeks and months. I mean, I can off the top of my head think about five such major decisions, which we have come close to but has been postponed. We have not lost them, but they will all crop up in the next year once there is a little bit of certainty about the environment, about where we are going towards.

Perfect. Thank you very much.

Thank you, George.

Thank you. Our next question comes from the line of Nehal Chokshi with Northland Capital Markets. Your line is open.

Yes, thank you. So your subscription revenue was up $1.5 million Q-o-Q or 19% Q-o-Q, based on my calculations on the disclosures you guys provided, which is quite impressive, given the environment. And Dave, you gave out the metric earlier that's that add-on software modules or adding scale quickly, and you add $1.3 million ARR in each of the past two quarters here. So is it fair to say that the subscription revenue Q-o-Q uptick is actually on new subscription ARR or is there a significant coming back from a low back of the subscription price relief granted during the June quarter?

Yes. So most of the subscription growth from Q1 fiscal '21 to '22 was the COVID relief program; there was obviously a portion that is also organic growth, but the majority of that was just flushing through some of the COVID relief. And the comment around $1.3 million per quarter was -- it wasn't a revenue comment, it was a sales bookings comment. And the way you could take that is we're adding about $1.3 million or more in ARR quarter with these new product. So six months into the year we're $2.6 million -- we have $2.6 million more in subscription backlog related to these new products which virtually weren't there the prior year. But most of these are still going through the process of going live and haven't started to contribute to revenues yet.

I see. Okay, got it. And then regarding the 5% overall revenue guidance growth, can you give us some sense as far as how you expect the subscription portion to fair in the September quarter? And additionally details on how much more rollback is there to go here in terms of the press release?

Yes. So most of that flush through in Q1; I mean, there was a little -- like we said on the last call, there was a little bit of a tail just from GAAP accounting amortizing, but you'll see subscription revenue growth kind of go back into the normal ranges that we were pre-COVID. So getting back to the kind of the 20% plus year-over-year subscription growth.

Okay. And my final question is that for new products, I think you guys -- ACV sales were up 500% [ph] year-over-year. Can you give us a sense as to what percent do new products represent of ACV sales now?

So new products are coming in a little -- little north of 10% of total bookings, but kind of the key -- the key factor there is, last year only about 13% of our deals contained one of these new products. So the last two quarters has been north of 31%. It was 34% of all deals that contains one of these products. So we're seeing an uptick in our price per endpoint on a deal by deal basis.

Okay, great. Thank you and congratulations on a strong subscription quarter and great bottom line results and great cash flow generation.

Thank you.

Thank you, Nehal.

Thank you. Our next question comes from the line of Allen Klee with National Securities. Your line is open.

Hi. Can you talk about what activities you've been involved in internationally to try to grow there as that at least with casinos that seems to be where more strength is today? Thank you.

Yes. Hi, Allen. When you talk about international markets, our strength in international markets at least so far is not in the casino part of it. It is mostly in the -- and it's not even in foodservice providers, it's mostly with the HRC hotel resorts is where most of our strength is in the international areas. And our international, we have not seen a pickup in sales as yet, but we did sign a very significant seven figure bookings deal in the APAC region that hopefully, we should be able to announce that soon. So that was a major win for us in the APAC region. And what drove that is the fact that we are modernizing our POS. If we had not made the kind of progress we have made with modernizing our POS solutions that deal would not have been a reality for us. So the international customers, they are beginning to turn their head towards us now because of how our flagship InfoGenesis product is getting modernized now. Now as far as EMEA is concerned, we have been sitting with at least three major deals in EMEA, which has been postponed now by a few months because the customers have been hesitant to pull the trigger. So international markets is mostly based on hotel resorts. They are taking -- the sales activities has gone up, the demos have gone up, but the decisions are still getting delayed there, Allen, just like in the U.S.

Okay. My last question is, if we look at segment margins and we look at the products segment and professional services segment, we saw improvement in those segment margins, and can you talk about what was behind those improvements?

Yes. So the most of the product improvement was because there was a larger percentage of software sales. So we've kind of over the last couple of years, we've seen our third-party products start to make up about 75% of our product sales, where third-party products stay down a little bit, but our proprietary software sales started to return to the near prior year numbers. So they were only down about 10%. So the mix shift in there has a lot to do with it with more proprietary software compared to third-party products. And then on the professional services, our margins are a little bit inflated this quarter due to some one-time EMEA relief that we got from the payroll, and then there's also some of the temporary salary reductions we've talked about. But the way to think about professional services once these run through and we get back to the normal state starting October 1 will be in that kind of 25% to 30% range like we used to be.

Thank you very much.

Thank you, Allen.

Thanks, Allen.

Thank you. I'm showing no further questions. I would now like to turn the call back over to Ramesh for closing remarks.

Thank you, Tewanda. Thank you all for your time today and for all your support and guidance. Look forward to talking to you again in about three months from now. In the meanwhile, please take care and stay safe. This is wishing all of you a happy and healthy holiday season. May 2021 make you forget 2020 quickly. Talk to you in the New Year. Thank you.

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