Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2023 First 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, Justin and good afternoon everybody. Thank you for joining the Agilysys fiscal 2023 first quarter conference call. We will get started in just a minute with management's comments. But before doing so, let me read the Safe Harbor language. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although, the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to vary materially from these forward-looking statements include the continued effects of the COVID-19 pandemic and other global economic factors on our business, our ability to continue profitable growth, 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. As a reminder, any references to record financial and business levels during this call refer only to the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014. 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, Jess. Good evening. Welcome to our fiscal 2023 first quarter earnings call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, our CFO. Let's cover sales first, before moving to revenue and other details. We've had five consecutive quarters of solid good sales results measured in annual contract value terms. We continue to have good success in the gaming casinos and resort verticals. Business level from hotel chains and cruise ship verticals are improving. Sales from the managed food services division, especially within the higher education and healthcare areas of managed food services are recovering and improving well. Business from Europe from EMEA is okay, but not growing as much as we would like it to. While the hospitality industry in Asia continues to struggle with various levels of lockdowns and travel restrictions across several countries. So, the short summary would be improving business environment across all areas other than in Asia. Our sales levels have remained solid and consistent at a good level for more than a year now. Our sales win/loss ratios would make any enterprise software business unit proud. We are investing in sales and marketing to get ourselves more opportunities and at best. And we have plenty of reasons to be happy with our progress. Having said all that, given the several sizable sales opportunities that we are currently working on, we are more than a bit impatient to break through to the next gear of growth. With respect to sales deals won during Q1 fiscal 2023, April to June, we added 22 new customers with three of them, including a core PMS product in their list of chosen products. 20 of the 22 new customers chose the fast option for at least one of the licensed products.…

Thank you, Ramesh. Taking a look at our financial results beginning with the income statement. First quarter fiscal 2023 revenue was a quarterly record of $47.5 million, a 22.7% increase from total net revenue of $38.7 million in the comparable prior year period. All three product lines increase compared to the prior year period, with product revenue of 25% in professional services revenue of 30.9% over the prior year, as we continue to return to a more normal implementation schedule. recurring revenue was also up 19.5% with subscription of 29.5% over the prior year period. Fiscal 2023 First Quarter total sales have remained at consistent levels with FY 2022. We expect to see momentum from our sales and marketing investments start to pick up throughout the year as our new marketing efforts take hold and our recently hired additional sales team members continue to ramp and add incremental bookings. Subscription sales remain well above pre pandemic levels, and we expect that current subscription sales level will become the new baseline moving forward. Total recurring revenue represented 58.3% of total net revenue for the fiscal first quarter, compared to 59.9% of total net revenue in the first quarter of fiscal 2022. increased revenue from professional service implementations and product revenue coming back into the business drove the change in revenue mix, and the drop in recurring as a percentage of total revenue compared to the prior fiscal year. We are also happy with our continued subscription revenue growth, which grew 29.5% during the first quarter of fiscal 2023. Subscription revenue comprised around 47% of total quarter recurring revenue compared to about 48% of total recurring revenue in the fourth quarter of fiscal 2022. Add-on software modules comprise 15% of subscription revenue in Q1 fiscal year 2023 compared to 10%, in the…

Thank you, Dave. In summary, as evidenced by our second consecutive record revenue quarter, we are now solidifying our business at a higher revenue level than before the pandemic. We've added more to recurring revenue during the last three quarters than during any other three-quarter stretch in our history. The combination of product and services revenue at close to $20 million this quarter is close to the previous record level of $21 million during one of the calendar 2019 quarters. Despite lingering pandemic related industry challenges in a few business verticals, sales levels have been at solid good levels during the past five quarters. We have witnessed a few prolonged and delayed technology purchase decisions during the past few months, but nothing that would cause much anxiety. If anything, the current macroeconomic circumstances have created a greater need for technology solutions, which help in improving operational efficiencies, enhance guest experiences, and provide hospitality industry operators the tools necessary to compete better for attract and retain guests as consumers become more careful and calculated about their spend and the value they get for it. We continue to invest in sales and marketing efforts to move sales levels to the next higher gear. We are managing through the current cost pressures of increased sales, marketing, and professional services spend with good balanced decision making, optimizing between being disciplined on the one hand, and not missing out on driving future revenue growth on the other. Product development spend this quarter was roughly the same level as it was pre-COVID close to three years ago. While we are facing demands to increase our R&D resource strength to meet the additional innovation requirements of several sizable new growth opportunities, we remain confident no major increase in product development spend will be required, like during previous years. Some major increases may be required during the short-term, but we do expect product development as a percentage of revenue to continue declining over the medium and long-term. So, in conclusion, we are pleased with our overall business progress. We have every reason to be bullish about our future. With that, Justin, let's open up the call for questions.

Thank you. [Operator Instructions] And our first question comes from Matt VanVliet from BTIG. Your line is now open.

Hey, good afternoon. Thanks for taking my question. I guess first Ramesh curious what you're hearing from customers as they look towards the back half of the calendar year here. With sort of the crosscurrents we're seeing in the economy, obviously business travel is starting to come back a little bit, but it seems like maybe leisure travel might be under pressure, both from inflation, but also people's concern about the economy slowing. So, curiously, you're hearing from customers what they're thinking about on sort of multiyear plans and some of the bigger projects as they balance the return of some travel but concerns that things might slow.

Yes, hi, Matt. So, what -- see one thing to keep in mind, Matt, as I work through my answer is we only work with medium and higher level hotel properties and resorts and chains and managed with service providers and so on. So, though the customers who we deal with are seeing very good visibility and they have good clarity on bookings going into the summer months and beyond. So, they seem quite confident to us, but then again, our customer base does not represent the entire hospitality customer base. We are dealing with the medium to the highest level customers and they are not feeling any -- there is no anxiety in them. They are continuing to make good decisions. And according to what we are hearing all travel is coming back quite well and the headlines about inflation and possible recession and all that don't seem to be affected them much so far as far as we can tell. They are continuing to make big multiyear technology -- multiyear, relevant technology changes. There are some pretty big opportunities we are working on now where customers now are under pressure that they need better technology now, because their guests have higher expectations of technology, and for driving operational efficiencies, working through staff shortages, they just need better products. They cannot survive with the products they have had for the last 10, 20 years. But our main challenge in terms of driving greater revenue growth is how quickly can we facilitate the transfer from the old to the new. Because even though the newer technology has a lot of additional features and additional help for them, there are still some particulars of the old products are their views that have to be built into the new products and each of their requirements are different. So, it's anything that is the challenge. So, the quick summary, yes, we are looking -- we are working with customers who are looking at long-term technology decisions to provide themselves the kind of technology they need for the next five, 10 years, we are working with those opportunities and we are seeing plenty of them out there. And most of the customers, we are talking to have good visibility clarity on bookings for the months to come and for the rest of the calendar year.

All right, that's very helpful. And then with a fairly recent launch of the cloud base PMS products widely available, you highlighted a couple of new wins for both Stay PMS and InfoGenesis. Just curious in terms of what the feedback early on from some of those customers have been? And how is that helping with new sales cycles as other companies maybe didn't want to be the earliest adopters, but are willing to jump on that product as they see it scale and work effectively at some larger deployments? Thanks.

Yes. So, they're going well is the short answer for you, especially if you are referring to the recently modernized Visual One, the product we call V One, product, it's now live in about six installs or so and all of them have settled on quite well. They did go through a few months of settling down process, but they all settled down well, and they are beginning to work well now. And with that we are -- we have plans to expand the sales of V One while Stay continues to do well as well. Stay is in the front end of many big opportunities we are working on now. So, the PMS and additional modules, if you add the core PMS and the additional modules into one bucket, Q1 FY 2023 is the best quarter we ever had. But that number is still not big enough for us. We still have to grow it a lot more and so far, so good. We are making good progress. The new modules modernized V One, Stay is settling down well. Stay continues to improve. So, we are placing ourselves in a good position to keep pushing this PMS. I think every quarter now will be a new record with respect to both PMS sales and PMS revenue. It's progressing well, but it is going to reach that flywheel effect, which is what we are impatient for, I mean it really drives growth into the next year, right. That is the stage that has not come, but steady progress is definitely happening.

Right. Great. Thank you for taking the questions.

Thank you, Matt.

And thank you. And one moment for questions. And our next question comes from George Sutton from Craig-Hallum. Your line is now open.

Thank you. Ramesh my questions are all around the pipeline. So, there is some impatience relative to breaking through to some of the pipeline opportunities. I wondered if you could give some additional perspective there. I think it relates to the prolonged and delayed purchase decision you mentioned, some have made, but can you give us a little bit more of a picture into that?

Yes, sure. So, it all comes down to, George, if I can just summarize it down to one thing, it is the time it takes to move from the old to the new, right. If you look at cost pressures on our business, the main cost pressure we face in this business is we have to maintain and continue improving all the old versions of the products and also continue to improve the newer versions of the products. It's almost like maintaining, two sets of products, till the customers move to the newer products. Now, what happens is and what we refer to as a little bit of impatience is that the customers love the new products. They like the fact that for the first time, a hospitality vendor is actually providing end-to-end technology. We're starting from a direct channel booking engine all the way to the end of the restaurant. Now, you can meet most of your needs through one vendor, they love that. But when you have to replace old products and even when we replace our own products, or, for example, we go to the resort suite customers, and they want to move to the cloud native products, in all these well-established products that have been there for a long time, there are always a set of nuances and each one is different. There will always be a set of 10 things that they want it done exactly the way they are used to for many years, while they also want the benefit of the hundred new things that the product gets them and they want to move to the cloud as well. So, getting those 10 things done causes delays, whether it is replacing a competitive product, whether it is replacing our own old product with a new one, whether it is replacing the resort suite products with a new one, it all comes down to the same thing that transferring -- we are now moving this industry from the old to the new. There are many well-established vendors like you know, that have been doing the same product for a decade, two decades. Customers want to replace those products. They are talking to us in bigger and bigger numbers. But there are a few things to get done before they are willing to make the switch. So, that is the impatience I'm referring to. Now, is the process going well? It is going well. Many customers are making the switch; our products are improving; it's happening well, but we would like it to be faster. That's what I mean by that impatience.

So, one other follow-up question there. You mentioned that you have several sizable new growth opportunities that could cause some increased R&D spending. I think separately, you said that each of your customer requirements are different. How much customization are you required to be doing right now to win some of these deals? And once you're doing any sort of customization, can that be added in to the broader platform and offered to other customers as well? Thanks.

Yes, George, no customization, what I mean is each customer has a slightly different set of requirements to be added to the base product. So, I'm sorry, if I didn't say it correctly, there's no customization, there is no customization issue in this business. We are a product company and we are going to be improving our products. But the next set of product improvements that are required. There are different ideas that come from different customers. And they are slightly different. There's a new report, there's a new screen, there is a new integration point, all of which needs to be done to the product, it is not as if you're going to do it custom only for them. And also, all I was trying to say as with respect R&D is there could be some minor increases. There is no major R&D expansion, like we had to do. You know, a couple of years ago, before the pandemic, there is no such requirement. But there are some pressures to do a little bit more so that we finish this process of helping customers to move to the newer products. But all their requirements are product requirements. There are no -- it's not customization, I'm talking about George. The -- each of them require a slightly different set of requirements that have to be done and we are working through all of them pretty quickly. They're all progressing well. Many customers are making the switch, as you see, right, record revenue comes from all of that. But we can -- it is going to reach a stage where it is going to become much faster and most of the requirements are already going to be built into the product. No major R&D increase, we are not expecting anything spectacular, but some slight increases could be possible here and there.

All right. I appreciate the clarity.

Thanks George.

And thank you. And one moment for questions. And our next question comes from Nehal Chokshi from Northland Capital.

Yes. Thank you, Congrats on a strong set of result. I heard the data point on a strong 95 plus percent customer retention rate. And the strict definition around that. I think that is a new metric you guys are, is that correct?

No, it's a -- that's a metric we've given in the past. We've -- it's consistent, we've always taken the definition that Ramesh gave us 95% or greater.

Got you. Okay, and then are you able to provide some visibility to the breakout of this 30% subscription growth between new customers versus upsell?

I don't think we break it down that way Nehal. The 30% subscription growth is just a direct map of the subscription value that was there -- the total subscription revenue we had last few months versus this Q1, we have not broken that down into subscription for new customers versus current customers. It's a combination of the two, but I don't think we have an exact breakup of that between the two. Both the factors contribute to that, right. So customers, new customers, most of them are choosing cloud based products anyway, so that absolutely helps the number. And current customers buy new products. So that definitely helps a number as well. And many of the hotel chains and food service providers kind of big customers you have when they go to a new site, when they take our product to a new site, we don't count it as a new customer. But for all practical purposes it is they generally tend to be subscription based. And there are many customers who are moving from our old products to our newer products, which are more cloud-based, it's a combination of all of them together, that our subscription revenue is 30% higher. We've never broken it down into each of those categories.

Okay. Understood. And for multiple quarters, you've been talking about the strong momentum you're seeing in the property management market, is that translating to increase win rates, resulting in increased assets? And does that have to do with the add on module work as well?

Absolutely. PMS is definitely contributing to increase win rates and when we, when we talk about win loss ratios, we talk about it across all our products; that is PMS point of sale, inventory, procurement, all our products, and it's at very impressive high levels. I've been in enterprise software for three plus decades now. And I've not seen win loss ratios like this. So, now really, it is a challenge of marketing and getting more at bats and getting more visibility. So, to answer your PMS question, absolutely. PMS is also contributing to those to those winds. And PMS is playing a greater and greater role for us. Now that modernized V1, Visual One has settled down, that also helps us. So now we have three World Class PMS products in our giving. So all that is definitely helping our momentum. Unknown Speaker 17:25 Okay, great, then, Unknown Speaker 17:27 you guys have talked about in the past that you're adjusting the $5 billion AR? Unknown Speaker 17:33 Is that inclusive of the value of the add on modules? Or does that not include the add on modules? If it doesn't care, or what that might be worth?

Yeah, it does include the add on modules. And of course, in your previous question, you had also asked about add on modules that I missed, I'm sorry. So, the PMS and to a large extent, the point of sale momentum has a lot to do with the add on modules. Like for example, with our InfoGenesis Point of Sale system, the fact we have the remote ordering on demand product is a big strength for us. The fact we have the buy kiosks that helps with guest facing functionality as well is a big strength. All that together helps him for InfoGenesis sales as well. So, similarly on the PMS side, all the additional products that we have built around it, the Mobile Check-In, Check-Out and the rGuest Service and all these products, make our PMS a more compelling proposition. So, it definitely helps. Now as far as the total addressable market question, we think it is somewhere between $3 billion, $4 billion, $5 billion, Nehal, they always struggle with putting an exact number on it. All we know is we are only $100 million and our company units, so we have a long way to go. And the add on modules during the last three years have definitely expanded our total addressable market, no question about it. And we have not even started selling them standalone, Nehal. At the moment, most of our sales is along with our core product. The process of selling some of these add on modules standalone connected to other core products. We have not even started their processes yet. So, definitely the $5 billion total addressable market you're talking about includes that add on modules as well and it is becoming bigger as we go along.

Thank you.

Thanks Nehal.

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

Thank you, Justin. Thank you all for your interest and attention. Please enjoy the rest of the summer. We look forward to talking to you again in about three months from now when we will report on fiscal 2023 second quarter results towards the end of the second quarter results towards--.

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