Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2023 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 2023 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 effects of global economic factors on our business, our ability to continue profitable growth, our ability to execute required product development and other deliverables before our PMS system can be rolled-out to Marriott. Our ability otherwise, to expand PMS market-share and the risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed within the Securities and Exchange Commission. As a reminder, any references to record financial or 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 the fiscal 2023 third quarter earnings call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, our CFO. Let me first cover sales before discussing revenue and other details. We measure sales and our selling success based on annual contract value of sales agreements signed. Please note that the recent Marriott PMS selection that we announced a few weeks ago is not part of any of the sales and backlog numbers being discussed today. All the sales and backlog numbers being discussed, do not have any benefit from that major win. I will come to the Marriott announcement, a bit later in this commentary. During the last earnings call, we mentioned that after five consecutive solid good sales quarters, the July to September Q2 of fiscal 2023 was a great sales quarter. That's what we reported last time. Well, October to December, Q3 of fiscal 2023 was even better. Q3 was our best sales quarter since the current management team started turning this company around about five to six years ago. We reported last time that our sales trends had picked-up significantly since the beginning of August. That positive trend has remained consistent even through the month of January so far. January is normally our slowest sales month of the year coming out-of-the holiday season. From a selling success standpoint, even with one more week remaining, this is already our best January by a fair distance. And even better than December, which is normally a good sales month for us. And all of that despite the APAC and managed food services sales verticals being well short of previous pre-pandemic peak levels. The gaming casinos, resorts, and EMEA sales verticals are operating at exceptionally high levels. In Asia,…

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Third quarter fiscal 2023 revenue was a quarterly record of $49.9 million, a 26.5% increase from total net revenue of $39.5 million in the comparable prior year period. All three product lines increased compared to the prior year periods with product revenue up 32% and professional services revenue, up 45.7% over the prior-year quarter. Recurring revenue was also up 20% with subscription up 28.8% over the prior year period. Sales momentum continued into fiscal 2023 Q3, with sales up sequentially over Q2 FY'23 and at our highest level for a single quarter and well over six years including another record subscription sales quarter. Onetime revenue consisting of product and professional services increased by 38% over the prior year to $19.8 million in Q3 FY'22. The product backlog decreased slightly compared to last quarter, but is north of 80% of record levels. Professional services revenue increased sequentially by 11% to $9.1 million with sales and backlog at record levels. Total recurring revenue represented 60.4% of total net revenue for the third fiscal quarter compared to 63.7% of total net revenue in the third quarter of fiscal 2022. Increased revenue from professional services implementations and product revenue coming back into the business drove the change in revenue mix compared to the prior fiscal year. We are also happy with our continued subscription revenue growth, which grew 28.8% during the third quarter of fiscal 2023. Subscription revenue comprised close to 50% of total quarterly recurring revenue compared to about 46% of total recurring revenue in the third quarter of fiscal 2022. Add-on software modules comprised 16.8% of subscription revenue in Q3 fiscal year 2023 compared to 11.5% on the comparative prior year quarter and continue to be a…

Thank you, Dave. In summary, the breakthrough inflection point we have been building towards during the past five plus years. That breakthrough inflection point does feel like started becoming a reality during the second half of last year. We continue to run Agilysys with a healthy dose of paranoia and remain cautious and conservative with all our decision-making. Despite our naturally cautious nature, we do have many reasons to feel bullish about our future. We now have the self-confidence to manage with optimism -- cautious optimism despite all the sobering macroeconomic headlines we read and hear about. Among the reasons for our bullish outlook are the following. One, we are operating in a total addressable market which is huge relative to our current size. Two, we think the hospitality industry has been clearly underserved with respect to its technology needs for a long time and is hungry for such solutions regardless of how challenging the macroeconomic environment gets. Three, our current record pace of selling success is the reality despite a few sales verticals like Asia managed food service providers and hotel chains not being back to pre-pandemic peak levels. Those verticals are also beginning to show good signs of improvement now. Four, we've created multiple growth path for the future. Our recent expansion of sales and marketing continues to add a steady stream of new customers and new customer properties to the Agilysys family each quarter. Operating expenses attributable to sales and marketing increased by about 60% during the first three quarters of fiscal 2023 compared to the first three quarters of fiscal 2022. The recent PMS election-related partnership created with the world's biggest hospitality corporation gives us major subscription revenue growth opportunities in a couple of years from now. With more than 25 cloud-native state-of-the-art software modules in…

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

Hi, good afternoon, thanks for taking the question. Nice job on the quarter. I guess first question, as probably expected. A couple more clarifying maybe comments on the Marriott deal and appreciate all the color you gave and the potential for some near-term margin headwinds. I wonder if you could just dive in a little bit more there. How much of that should be sort of headcount related to build out the project and potentially deliver it from more of a services component? And how much is sort of longer-term structural R&D or other components that presumably leveraged along the way?

Hi, Matt. So think of the Marriott deal Matt, in sort of three major blocks. The first block of work is over the next 18 months or so which involves a lot of additional development work, which will make the product a lot stronger and also within that is a lot of Marriott specific needs. And services work preparing for the conversion that will happen at high speed, once the first property goes live. So the first block of work of development and services should be a profitable part of work for us. Meaning the services revenue that gets paid for that work should make it profitable for us. So no margin compression there with that block of work. The second block of the project or call it Phase Two is when after the property start going live. There, of course, the subscription revenue will increase rapidly and significantly. And the company grows along with that. So that part is also profitable. So block three is preparing the company for being a much bigger cloud SaaS operating company. There's a whole lot of infrastructure buildup that has to get done in customer support, in help desk, in internal systems, in software monitoring tools. So we just are going to a much higher-level now in the next 18 months or so. That work could be margin compressing. Now the rest of the revenue growth that's going to happen during the next say two to six quarters should provide enough provision for that, but we are just warning you, that there could be some margin compression, 2% to 3% of EBITDA by revenue, nothing more than that and, that margin compression, may not happen as well due to the infrastructure and other buildups as we get prepared to be a much larger-scale cloud SaaS company. So think of it as three blocks. The first block of work development services will be profitable. That's more or less paid, so that's not an issue. The second phase of work is once the go-live starts, subscription revenue will grow up substantially. So no issues there. The third block of work is getting the company to be a far larger-scale cloud company, that work may have to be done earlier, costs incurred earlier before the revenue starts clicking -- it starts coming through. So that's what could cause a 2% or 3% margin compression.

Okay, very helpful. And then when you look at 900,000 plus rooms across their network that you're looking at what would exclude some of those rooms from moving to the Agilysys system -- and I guess how much visibility do you have today versus maybe what you expect to gain further over the next couple of quarters?

Yes, I think, it's important Matt, we don't get too far ahead of our skis in this. This was a global process for selecting a PMS product. But we were selected for a majority of luxury premium select-service properties in the US and in Canada. So that's what we were selected for a majority of the 900,000 plus rooms. So that's what we have been selected for. That's where our focus is and we want to keep our heads down, focused and make sure we execute about as perfectly as any software project has been executed and keep our focus on that. Now these kinds of big customer partnerships don't happen every day Matt. You know that better than I do. So we are going to focus on the task given to us, deliver on that as well as possible, and like all customer partnerships we will see where the next steps go. But our focus currently is on delivering well on what we have been selected for.

Okay, understood. And then, I guess on sort of the rest of the business you highlighted some areas of strength, I guess where -- where do you feel like in terms of the recovery of business travel, is that impacting maybe the continued momentum especially in the gaming and resort space or is this -- is this really just still kind of pent-up demand that's finally working its way through the system and it's maybe not as reliant on. What could swing back the negative way if the macro impacts travel further?

Yes, so in our opinion, Matt the pent-up demand is more related to the fact that this industry has been underserved with the kind of integrated technology solutions it's always needed the pent-up demand comes from there. Not just from a temporary pandemic-related travel coming back or not coming back. This is a much larger story is the way it is more and more looking to us as we do product demos and we see how customers react to that. Then, a lot of the companies, lot of the vendors who have dominated the space for decades have sort of not carried that innovation ball forward and that is the gap that we saw, which is why we invested so much in R&D and created an offshore development center. We did all of that, because we saw that gap. The pent-up demand in this industry, we don't think, it's just related to whether travel comes back or goes down, it is a much larger question. They desperately need the kind of integrated tools to keep their staff happier and provide for much better guest experience. That's where the pent-up demand is and that I think is long-term. That I think is here to stay regardless of whether travel goes up and down a little bit or not. And also, Matt, it's a big total addressable market. Relative to our size, relative to our size, it's a huge total addressable market. So what we are seeing now is the parts of the total addressable market that is hungry for these solutions. There could be a part of that market that we are not seeing, where probably technology decisions are not being considered, but the part of the market that we are seeing is big enough for us. It's huge for us. So we are seeing increasing opportunities, mostly driven by the fact, we have improved our products, we have created like 25 to 30 software modules. We can now cater to-end-to-end hospitality solutions that's where the pent-up demand is coming from.

All right. Great. Thank you.

Thank you. One moment for questions. Our next question comes from George Sutton with Craig-Hallum. You may proceed.

Thank you. Ramesh, you gave a very compelling outlook relative to the number of PMS rooms that you will touch. You currently touch, we believe, around 300,000. You suggest that number could triple, which by our math would assume another Marriott size addition, in addition to the Marriott room. So with that as context, I wondered if you could talk about the pipeline outside of Marriott, anything that has changed relative to the discussions you are having with hotels and in particular we are all pretty conscious of the fact that there are other large operators with proprietary systems that have been heavily criticized in terms of capabilities are those the kinds of targets you're talking to?

Hi, George. So our current number of PMS rooms like you said is 300,000. And we expect that to probably triple in the next three years or so and we expect a good portion of that to be based on the Marriott deal now. A good portion of that, but there is also a whole lot of PMS deals we are beginning to win now or are being strongly considered in our traditional strength areas like gaming casinos, and resorts many of them are seriously considering our PMS products. And also remember there are many of our current customers who are moving from the old products, they were with, whether it is our own old products or other old products have been using for a long time. Those conversions to PMS is also beginning to happen more now that they see world class PMS products that they can choose from. Now as far as the other large operators are concerned, I think there have been underserved with technology for a long-time and as and when they come up for their own RFP processes, the good news now is there is a very-high probability we will be included. Couple of years ago, there was a high probability we will not be included in those. So now as and when those large operators come up with the next cycle of software replacements, we expect to be a player there, right. It would be very unlikely that we have not included in that. And once we are included we fancy our chances quite high. Because of the state-of-the products now and how impressive our demos are. But this calculation of tripling our number of rooms connected to in the next three years is largely based on the PMS deals we are working on now, plus of course the huge Marriott opportunity. That calculation does not take into account any possibility of another large operator running a similar RFP. Those will only be additions to the Marriott.

Understand. I wanted to hone in on your Block 3 spend that you referred to and you're effectively saying we are going to be a much larger organization, we need to build an expense base and capability base to meet that. I'm curious with this spend specifically what kind of ability it gives you to serve other customers in particular and also to cross-sell modules into the Marriott and other basis?

Yes, so this Block 3 spend that we talked about, is to make us ready for being a far bigger cloud SaaS company than we are today. So that is to make sure that the number of rooms connected to PMS, the number of terminal endpoints connected to our POS system, with most of them going to the cloud as a subscription-driven SaaS operation that is going to be an enormous increase in our business all towards subscription revenue. That requires taking our infrastructure level support. Information security for example. Cloud monitoring tools. It takes a lot of those tools and beefing up our internal systems department. That is going to be a combination of CapEx and operating expenses. To kind of finally take the transformation to becoming a true cloud SaaS big company that requires an order of magnitude jump in our infrastructure. Those are the expenses, I'm talking about and that prepares us not only for this Marriott hundreds of thousands of rooms going live also for the rest of the business and also for possibly other large operators looking at us like you mentioned. It prepares the company to go to an entirely different level of a cloud SaaS-based software company. For the second part of your question, George, that has got nothing to do with selling more to Marriott. Like we are saying, we were selected for luxury, premium, select service in US and Canada and our entire focus is on that. And it's a big partnership, it's a huge partnership. So far there seems to be an excellent culture fit of the two companies working well together. Our focus is on executing what we have been selected for well, what that leads to in the future, we have no idea and that is not our concern now.

All right. Congrats on the execution.

Thank you, Josh.

Thank you. One moment for questions. Our next question comes from Nehal Chokshi with Northland. You may proceed.

Yes, thank you, and congrats on the strong quarter and the Marriott deal. That's incredible. With respect to Marriott, are you already seeing any halo effect from the validation that this one should bring?

Yes, Nehal. I mean nothing transformational, but the simple fact that we are getting included in PMS RFPs now, that possibly before the announcement, we may not have been included in those RFPs because now we have to be taken seriously in the PMS space as well, when the world's largest and most innovative hospitality operator selects you, you asked the question, how can we not include them when we do a PMS election. So we are getting those kinds of inquiries that are more than it was before.

So how is that going to impact your OpEx spend because presumably, that's going to, materially, increase your opening pipeline here. You only had 3% Q-over-Q increase on your OpEx here in the December quarter, albeit, your sales and marketing was up 11% Q-over-Q. So just how should we think about that from that perspective then?

Hey, Nehal. We don't expect a much of an increase in our sales and marketing spend. If you're looking at it as a percentage of revenue. I mean the way to think about the businesses, we'll stay in the 10% to 12%. We don't think the halo effect through the increased bookings is going to change that. I mean, obviously, the revenue number is going up, so the absolute dollars will go up, but we'll keep sales and marketing in the 10% to 12% range. So no major increase there.

Do you worry that you might be leaving demand on the table by not hiring more impressively then?

Yes, I mean. Go ahead.

No, one thing just to keep in mind that we talked about. I mean with the expansion of sales and marketing this year going from 9% up to 11% to 12%, we still have a lot of capacity level in our sales team, we haven't hit any kind of capacity where we feel more than incremental hiring is necessary at this point.

But sales and marketing, Nehal, it's going to continue to expand and -- but as a percentage of revenue, we think we'll stay-in that range for now. That's how it seems like. And I don't think we are leaving much demand on the table, Nehal. Because we are constantly watching, right. The capacity level and how much the current sales teams are contributing and if we need to expand that, if it is very clear that we need to expand that we will not hesitate to do that, Nehal.

Okay, great. And does the Marriott contract include the add-on modules and if not why not?

This RFP, Nehal was a global RFP for PMS. And that's it. And in that RFP, our PMS product was selected for the set of properties that we already described. That's all this process was. And therefore we got selected for that plan.

Got it. What is the opportunity to get your add-on modules included and would it be on a per-property basis or would it be coming through a corporate mandate if that opportunity does exist?

We have no idea, Nehal. I mean, we have no way of answering that question, like I said, this was a particular selection process for a particular product PMS, we participated in it and did extremely well with it. That's all we know at the moment.

Okay. And then for the portion of the Marriott properties that are not on a proprietary built system that are on or in-house build systems that are on a third-party system to no micros, I think they won the deal back in 2013, when does that portion of the Marriott properties come up for renewal and therefore presumably an RFP for you guys as well.

We don't know Nehal, right. We don't know, again, we were selected for hundreds of thousands of rooms across premium, luxury, and select service in US and Canada. And that's all we're focused on at the moment.

Okay. All right. Well, great, congratulations again.

Thank you, Nehal. Appreciate it.

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

Thank you, Josh. Thank you all for your continued interest in our progress. Our next earnings call will be in about four months from now around the middle to end of May when we will be reporting Q4 and full fiscal year 2023 results and also provide guidance for fiscal 2024. Until then please be safe, healthy and happy. Thank you.

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