Good day, ladies and gentlemen and welcome to the Agilysys fiscal 2022 third quarter conference call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Senior Director of Corporate Strategy and Investor Relations at Agilysys. You may begin.

Thank you Josh and good afternoon everybody. Thank you for joining the Agilysys fiscal 2022 third quarter conference call. We will get started in just a minute with management's comments. But before doing so, let me read the safe harbor language. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to vary materially from these forward-looking statements include the continued effects of the COVID-19 pandemic on our business, global supply chain challenges 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. I would also like to note that any references to record financial and business levels during this call refer only for the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014. With that, would like to now turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead.

Thank you Jess. Good evening. Welcome to our fiscal 2022 third quarter earnings call. Joining Jess and me on the call today is Dave Wood, our CFO. If I were to summarize the quarter results and the current state of our business progress in one sentence, I would call it a rollercoaster recovery delayed by a quarter or two. This feels like we are caught in a pandemic-induced storm, can see the bright sunshine and glorious days at the next turn on the rod. But the path to get there has to be traversed on a rollercoaster. Some months during the recovery period have seen high sales success and great business progress and then some months seem to get overtaken by tough news headlines, infection spikes, heavy travel restrictions especially across international borders, COVID testing requirements, back to increased work from home policies and staff shortages at customer sites. The answer to the question, have we made significant progress across calendar years 2020 and 2021, would be definitely yes. But has the progress been smooth, consistent and predictable, the answer would be no. Thanks to the successful of product modernization and innovation efforts over the past few years, we continue to operate at record highs in the gaming and destination resort market areas, which also happened to be the dominant areas of our business, constituting more than 70% of our overall sales and revenue levels. However, medium to high business environment challenges remain in Asia, Europe, managed food services, cruise ships and hotel chains. Despite all the hospitality industry challenges, our product strength continues to drive consistently good progress in subscription recurring revenue. One-time product and services revenue recovery have been delayed by a quarter or two due to postponed projects. More than 90% of our new customers and new…

Thank you Ramesh. Taking a look at our financial results, beginning with the income statement. Third quarter fiscal 2022 revenue was $39.5 million, a 7.6% increase from total net revenue of $36.7 million in the comparable prior year period. The increase in topline revenue largely reflects a 6.6% increase in product revenue and a 10% increase in recurring revenue. Product revenue improved sequentially over the previous quarter by 11%. The measures we put in place during the previous quarters to mitigate supply chain risk such as increasing our inventory on hand significantly reduced but did not eliminate the impact of the issues still prevalent in our market. Our inventory levels have increased by over 175% since the start of the fiscal year, while logistical challenges with delivering products to the end customer resulted in a reduced topline Q3 product revenue. Recurring revenue increased by 10% compared to the prior year period and remain at record levels. Total recurring revenue represented 63.7% of total net revenue for the third fiscal quarter compared to 62.3% of total net revenue in the comparable prior year period. Recurring revenue of $25.1 million is $2.3 million higher than the prior year and up $1.1 million sequentially. We are also pleased with our subscription revenue growth, which grew year-over-year 24.9% during the third quarter of fiscal 2022 to a record $11.7 million and 5.5% sequentially over the second quarter. Subscription revenue comprised about 46% of total recurring revenue compared to 41% of total recurring revenue in the third quarter of fiscal 2021. The momentum in our add-on software modules that build out our product ecosystem beyond the core point of sale, property management and inventory and procurement offerings continued through our third fiscal quarter, contributing to 6% of total sales this quarter. We continued to add…

Thank you Dave. In summary, despite the various pandemic-related challenges which remain across Asia, Europe, managed food services, cruise ships and hotel chains, we expect Q4 to be our best revenue quarter yet, getting us to the lower end of the fiscal 2022 full year total revenue guidance range. We expect continued sequential improvement in subscription recurring revenue and overall recurring revenue, expect services revenue to improve from current levels and expect a close to pre-pandemic normal hardware product revenue quarter. Adjusted EBITDA should remain at slightly higher than 15% of revenue, including the neutral effect of the ResortSuite acquisition. We came into the fiscal year expecting business levels to pick up significantly during the second half. That recovery has been delayed but the overall recovery direction remains positive and promising. Our products are where they need to be now. Our win-loss ratio and average deal size remain excellent. We are now investing more in sales and marketing while holding the already high R&D levels steady. Now it is a matter of the hospitality business environment improving in all the affected areas and this rollercoaster ride we have all been on for more than a year to start smoothening out and the progress becoming predictable and consistent. Josh, please open up the call for questions.

[Operator Instructions] Our first question comes from Matt VanVliet with BTIG. You may proceed with your question.

Good afternoon everyone. Thanks for taking the question. I guess, Ramesh, first on the overall sort of delayed project backlog continuing to make strong progress on new sales. But as that gets more and more backed up, curious on your commentary around the first couple of weeks of January, seeing a little bit of relief there? Any color on sort of how many projects or what mix of the backlog might finally be being put into motion? Is it still primarily your customers' limitations around staffing or opening of properties? And then kind of as a secondary question, if hypothetically everyone said, okay, we are ready, let's start the projects today, how long would it take to really kind of flush out the backlog in an ideal situation? Thanks.

Yes. Hi Matt. Thank you. So a quick comment on the delayed project backlog. Last few weeks, we have seen positive signs that has since January started and we got past the holiday season and the holiday season, Matt, also added a little bit to the staff shortages because many companies and for all the right reasons, decided to give their staff a break, much overdue break, during the holidays and that also added up to some of the delays. But starting the beginning of January, we have seen real positive signs. So for example, our services staff are pretty much booked now in implementation projects for the next six to eight weeks. And that's a very positive sign for us. So we are seeing positive signs of all the pending projects picking up now and we have noticed that in the last two, three weeks and we are hoping that there is no new variant setback or anything like that. That's what we are hoping for. But so far, so good in January, the projects are really beginning to pick up. Now as far as the mix of backlog is concerned, Matt, a lot of the backlog mix tends to be towards the PMS side of the equation because the POS projects are simpler and have gone through fairly well during the last few months. What has got held up is the relatively more complex PMS software modules, multiple product implementations, which require a bit more work to get it done. So a lot of the backlog mix that is pending now that is beginning to get picked up now, have to do with subscription fees, subscription revenue and have to do with the PMS side of our product equation. The customer limitations that you mentioned in terms of staff shortages have been a problem, but we have seen that they are now getting better, right. They are now able to focus on the software projects as well now that December is behind us. And to a certain extent, our products have been in the field for a while now. A lot of the new modules and the new software products that we were releasing towards the second half of calendar 2021 have all been in the field, 10 to 15 customers have already gone live. So they are also becoming easier to implement and much better to integrate. So all of this together gives us comfort that services revenue should do much better in Q4 than it did in Q3 and also a lot of our backlog should start getting released. And how long will that take? All the backlog getting released is probably a three to six month process.

Great. That's helpful. And then you announced a couple of new PMS deals in the quarter. I guess on one of the larger ones there, what are you replacing? I guess, how are those conversations progressing now that you have got sort of the new version of the product fully ready and a lot of these add-on modules are particularly useful in that sale. I guess, how competitive do you feel like that product is now versus what's available in the market more broadly?

Our PMS products now, especially Stay PMS, which has been in the market in its current state for more than a year now and Visual One, which has been completely modernized and the first three instances of the modernized Visual One being implemented are all slated for February and March. So we have one customer going live mid-February, one more towards the end of February and one more in March. So they will be the first three customers going live on modernized Visual One. So between Stay PMS and modernized Visual One, we are very competitive in the marketplace now. It truly is a matter of getting more add backs and getting more chances to demo the product. And of course, LMS always has its market in the gaming sector and among very big properties. Where there are thousands of rooms properties, LMS is always there. We have modernized the UI of LMS very well. But in the general hotel resort segment where our market share is very low on the PMS side and we really need to make progress, Stay and Visual One now, both of them modernized, both of them cloud-native, Visual One can also be implemented on-premise, we are in good shape as far as competitive advantage is concerned. Now Matt, what adds to that competitive advantage is the fact that we have end-to-end hospitality starting from a direct channel booking engine, all the way through all the needs, the 17 additional software modules we have that are non-core gives us an enormous advantage. Because the products come with an open API architecture, so we can integrate it with third-party modules that some of it even our competitors provide. But the fact that they already come integrated is giving us a tremendous advantage. Now for good or for bad, many of our major competitors did not focus on that. They focused on core products coming with good API architecture so that it can be integrated with other modules. Now we have not only done that. We have also come out with the additional modules that are well integrated. So customers come looking for one product and they end up buying seven products and they love the fact it is well integrated. So the quick answer to your question, the products by themselves are very competitive now and the fact we also provide the additional modules gives us absolutely an extra leg in PMS side.

All right. Wonderful. I appreciate your answering all the questions. Thank you.

Thank you Matt.

Our next question comes from George Sutton with Craig-Hallum. You may proceed with your question.

Thank you. Ramesh, I wanted to bring together two things that you said previously that are actually working for you right now and they are your two largest. But you have also said that the flywheel that you see is a couple of quarters away. So I wanted to bring those thoughts together and maybe look out two, three quarters. How much different might the business start to look at that point? Do you see all of your horses, as you called them, coming together in that kind of a time frame? And then can you give us a better explanation of what you mean by the flywheel effect?

Yes. Hi George. Thank you. So the two horses, gaming and resorts, of probably six or seven we depend on, are working extremely well. So when we look at gaming and resort sales levels, we are at record levels. We have never had a three-quarter stretch where we have done this well in gaming and resource. Now in terms of the other five horses, call it, right, Asia, EMEA, hotel chains, cruise ships and managed food service providers, EMEA is beginning to work reasonably well. They are back to pre-pandemic levels. Asia is still struggling because a lot of border closures and international tourism is struggling there. And managed food service providers, of course, are struggling because there's still a lot of work from home going on in big and small corporations. So those five horses we expect will start working well in the next two, three quarters because the world is getting better, right. Hopefully, the Omicron gets over fast and the herd immunity stage has reached quickly. And like U.K. has now done, more and more countries open up and we just get going with our lives now. We hope that happens within the next three to, say, nine-month period and that is what will really get the other horses kicking for us as well because the products are now there. Compared to the start of the pandemic to now, our products have made enormous advances. Now it is a matter of the market picking up as well. Now the last question you asked about the flywheel, it is a matter of all these new products that we have, all the new PMS modernization we have, getting installed in the field, which is already happening. We are making good progress, creating more reference customers and then spending more in sales and marketing, spreading our message around getting more add backs, it's all a good virtuous cycle that we are seeing the beginning signs of, especially in gaming and resorts that we think will really pick up speed in the next three, six months or so.

So just as a follow-up, relative to your add back theme. I am curious how many add backs do you think you are not getting today that you ultimately could be getting as you make these additional investments?

I think we could easily double the add backs we are getting today. So when we look at our pipeline, which is how you measure the add backs. And we measure our sales pipeline by annual contract value, like we always do, our current pipeline can be doubled with getting more exposure, which we have been a little bit slow about because we wanted these new products to settle in the field, but we are now getting a lot more aggressive with, we should be able to double our pipeline in the next nine months or so. That should be possible, as far as just add backs are concerned. Then it is a matter of winning those deals and really doing better than the competition.

Super. Thank you very much.

Thank you. Our next question comes from Allen Klee with Maxim Group. You may proceed with your question.

Good afternoon. Question is on ResortSuite. Did I understand that most of their revenue is kind of software and maintenance type? And that when you mentioned $1 million in revenue per quarter, is that excluding any potential synergies you could get? And can the synergies go both ways in terms of you upselling your products to them, but also their products getting upsold to you guys? Thank you.

Hi Allen. Yes. Just to confirm, the ResortSuite is mostly on-prem. It's a little over $1 million a quarter in revenue and about 70% of that is recurring on-prem maintenance. So there's absolutely significant synergies with us. I mean just from their 150 customers, there's a subset of those customers that are looking for native cloud products. And that right there creates one to three times ARR opportunity for us. And there's also all the other modern cloud products we have developed over the last two years that certainly create an upsell opportunity into the market. So when we look at it, it's largely on-premise and there's certainly a subset that's looking to go to subscription and looking for our modern cloud products.

And one thing I would add, Allen, is that please remember this acquisition was all about revenue synergies. That's what it was all about. And the revenue synergies we get by selling a lot of our products, about 20 additional modules to their customers, especially on the POS side where our POS product is a lot stronger, it's much higher than the other way around. We are not going to get much revenue synergies by selling their modules to our customers. There are not many of them. The synergies the other way around of selling our products to ResortSuite customers is going to be multiple times higher.

Thank you very much.

Thanks Allen.

Thank you. Our next question comes from Nehal Chokshi with Northland Capital. You may proceed with your question.

Yes. Thank you. Staying on the ResortSuite. Ramesh, you mentioned that fills some gaps in the PMS suite. What are those gaps?

For example, for a lot of our key resort customers, they have a specific ski resort-based product that so far we have not built in our product suite. They have now other than ski, just coming to the normal resort customers, they have created excellent mobility-based options like a resort app, for example, like you go to a resort and you get an app and that covers all your needs across booking engine, across spa, golf and everything else. So that kind of resort app, a lot of the mobility options they have created are very sleek and very creative, highly innovative. So those kinds of products have high demand with the customers. So what we are doing now is making sure that we also have that kind of a resort application, resort app, that connects to our products as well. So that kind of modules that ResortSuite has created are excellent additions to our product suite as well. And also in the club membership area, where you have owner portals, right, where you have certain resorts that consists of villas which are owned by different people, in those kinds of areas, ResortSuite has developed very good applications that we are still a few months away from getting done. So we are learning a lot of lessons there as well. So in terms of PMS innovation, there's a lot of sleek things that ResortSuite has done that we are now integrating with our product set as well.

Got it. Okay. That's very helpful. In response to Allen's question, you implied that the synergies really coming from, that you are also selling into the ResortSuite customer set, which could be potentially consistent with the start of a roll-up strategy. Is that actually how we should be interpreting this acquisition?

Yes. Absolutely, Nehal. I mean, it will be incorporated into the business. And just to clarify, the revenue synergies are not only on what we can sell into their product base, meaning new products, but it's also on converting on-prem products to our cloud platform. But yes, this is absolutely a roll-up strategy. The teams are already integrating through our normal services and support and G&A teams.

I mean, to be clear, when I said is this a start of a roll-up strategy, meaning that there are other relatively small targets like ResortSuite that you would expect to be able to acquire at an attractive multiple and then get revenue synergies out of that by selling the more complete suite of Agilysys products into those?

I wouldn't look at it as a start of a roll-up strategy. Certainly, our M&A discipline hasn't changed at all. This one was just a good fit based on revenue multiple, the products, obviously the talent and the people and it was a profitable company. I Our M&A strategy and roll-up strategy hasn't changed from what you are familiar with. This one was just the right fit at the right time.

And we will remain opportunistic, Nehal. This was a perfect fit. I mean, starting from their CEO, Frank Pitsikalis, all the way down, just a perfect culture fit. We really like each other. We like working with each other. They are in the perfect sweet spot, very creative solutions, excellent customers set, many big names in their customer set. So this is just one of those absolutely perfect fit and we sort of hit it off from day one and this got done over a five or six month period. But overall, we will remain very opportunistic and very disciplined, like Dave said, right. We are not going to get too caught up in this M&A thing, but we will remain disciplined. If good opportunities like this come up, we will absolutely take a serious look at it.

Okay. Great. And then my last question is that, I believe that you guys have been hiring sales capacity at a reasonable clip. Where is your sales capacity today relative to a year ago and two years ago?

In terms of quota-carrying sales personnel, we probably increased by about 15% during the last five months or so. So probably closer to 20% is where the increase has been compared to nine months ago or one year ago and we are aiming to do a lot more. So compared to where we were one year ago, we should be 50% to 75% higher in the next six months or so. We are continuing to hire and most of those hires have worked out well, One or two of those hires have not worked out well for us. But we are continuing to hire in sales and not only in sales, in marketing. Within the next six months to 12 months, we expect to double our marketing budget and our marketing resources and to carry that forward as well. So sales and marketing is going to be a much bigger team six to 12 months from now. And we are doing the hiring every day, every week as we go.

Okay. So it does bring up a follow-up question for me then. I think what I heard you say is that sales capacity is up about 20% from a year ago. But when I look at the subscription revenue, it's up 25% year-over-year. The revenue was up 6% Q-over-Q. And you can expressly say that backlog was also up for the subscription ACV, which then would imply that subscription bookings is trending well above 25% year-over-year. So in my book, that basically means that you are actually getting more sales per mature rep than you were a year ago, a lot more. Is that a correct assessment?

Yes. Correct. So that is correct, Nehal. In terms of, for example, I will just try to break down the math a bit. Our subscription fees sales in just three quarters this fiscal year, just from April through December, with January, February, March, not even happened yet, is the best year we have ever had by quite a distance. Now that is not fully reflected in the subscription revenue yet because of the project delays and the building backlog, which is again at record levels. So you are right. Our growth has been good, mostly driven by products. So to answer your question another way, even if we don't do any expansion of sales, we expect to increase our software selling because the products are much better and we have given a lot more ammunition to our current sales staff to sell a lot more. So yes, our sales staff are contributing a lot more, especially with respect to subscription software sales. And you add more salespeople, it further adds to that.

Okay. Great. Thank you Ramesh.

Thank you Nehal.

Thank you. We have another question from Allen Klee with Maxim Group. You may proceed with your question.

I know you have answered this, but your guidance implies to get to consensus, it's like over 10% of sequential revenue growth in your fiscal fourth quarter. And that's even if you back out the $1 million contribution from ResortSuite. So could you just simplify, if you were going to say what was behind that sequential increase? Is there one or two things that you could sort of mostly point to that's going to be that driver?

Yes, Allen. So most of the sequential increase, when you think about, call it, $4 million to $5 million, is about half of that is product revenue. And the product revenue is a mix of, obviously, a strong backlog and the sales momentum we are seeing through the quarter. The other 50% is largely professional services and recurring. The professional services are largely, like Ramesh talked about, we are seeing installations and customer and labor shortages loosen up a bit. So think of it as half products and half services and recurring.

Thank you.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Ramesh for any further remarks.

Thank you Josh. Thank you all for your time this evening and your continued interest in Agilysys. We look forward to speaking with you regarding our fiscal 2022 Q4 and annual results in a few months from now, around the third week of May. Until then, please continue to stay well. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.