Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2024 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, Justin, and good afternoon, everybody. Thank you for joining the Agilysys fiscal 2024 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 hospitality industry's need for technology solutions, our ability to drive sales and increase market share, our ability to increase profitability, 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 the fiscal 2024 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 selling success and sales in annual contract value terms. With respect to sales, I don't want to confuse matters between calendar and fiscal years, but please allow me to make one quick comment. Calendar 2023, that is the period from January to December, was our best-ever calendar sales period. Calendar 2023 was an extraordinarily successful 12-month period for selling success and we think the pace of sales will only get better in the future. Now, switching back to fiscal year. As we have reported before, the previous fiscal year FY 2023, the period from April calendar 2022 to March calendar 2023, was our best fiscal year for sales success. Sales at the end of the first three quarters of this fiscal year FY 2024 is progressing ahead of last year's pace. Compared to the first three quarters of the previous fiscal year, sales during the first three quarters of fiscal 2024 has seen significant year-over-year, year-to-date improvements across the Asia Pacific region; and in the U.S., across the hotels, resorts, and cruise ship verticals. Sales from gaming casinos continues to be a major strength area for us and remains the number one vertical in terms of overall sales value. We've also seen significant year-over-year sales increases during the first three quarters of fiscal 2024 compared to last year's first three quarters, in the value of non-competitive wins, meaning sales to current customers, where there is no competition involved, and in the value of new customer wins. Sales of POS, point of sale software solutions, InfoGenesis, guest-facing…

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement, third quarter fiscal 2024 revenue was a quarterly record of $60.6 million, a 21.3% increase from total net revenue of $49.9 million in the comparable prior year period. All three revenue lines increased compared to the prior year period, with product up 18.5%, professional services up 40.9%, and recurring revenue up 16.4%, including subscription revenue increases of 29.9%. Sales momentum continued throughout Q3 with total exit backlog remaining strong and at comfortable levels to reach our FY '24 revenue expectations. We also remain pleased to see our total backlog increased by 6% over the comparable prior-year period, despite a decrease in product backlog. Implementation efficiencies and effectiveness of the services team have continued to improve, driving more subscription revenue earlier in the quarter. Products revenue increased 18.5% over the prior fiscal year to $12.7 million. The Point-of-Sale business continued to perform better-than-expected for the fiscal year. However, we expect product revenue as a percentage of total revenue to continue to decline slightly and be in the $11 million to $12 million range during our fiscal Q4. As more customers choose commercial-grade devices and other all-in-one handheld devices to run our modernized POS software solution, we expect less contribution as a percentage of revenue from the one-time product revenue line. Professional services increased 40.9% over the prior period to a record $12.8 million. Professional services continued to be a strong leading indicator for the health of the business. Professional services backlog increased slightly back to record levels despite record professional services revenue during the quarter. We expect professional services revenue to increase sequentially in Q4 and grow north of 30% for the full fiscal year. Most of our professional services revenue is related to implementation projects…

Thank you, Dave. Our progress over the past six to seven years has involved, among other things, a massive overhaul of core products and the creation of an ecosystem of state-of-the-art world-class software solutions focused on the hospitality industry. The past years have therefore been a product development R&D story for the most part. We also took massive strides forward in many other areas, but the highlight was clearly product development. Product development strength is going to remain and grow in a more tempered fashion in the future, but starting now, our R&D efforts are going to be a lot more focused on customer acquisition and winning innovation now that the pressures of massive re-engineering efforts are no longer there. Now, the already built-up product development strength will focus on increasing our competitive advantages in each of the products and modules as they compete for best-of-breed selection versus a variety of competitors, and on enhancing the integrated ecosystem capabilities that very few competitors can match with us today. We cannot think of many other competitors who can match the breadth and depth of our solution ecosystem, all based on modern cloud-native technologies with a versatile ability to also work at customer sites who want to remain on-premises for a while longer. We have done well to fill the technology and functionality feature set innovation gap giant hole in this industry and are now well-positioned to translate that into growth and business success. Also, now the business evolution will shift to the field. Now the focus will be more on services' implementation efficiencies and helping customer properties realize operational gains and guests and staff experience improvements through the use of these new integrated product versions. As we create more such successes, we expect quicker progress towards the flywheel stage in our business when this steadily improving engine will become an unstoppable force. Our total addressable market remains huge relative to our size and this industry and market is hungry for world-class technology solutions. We are seeing good sales growth across sales verticals and product verticals where our market shares have been low in the past. We are now a credible presence in the PMS arena, where our journey is only in the initial beginning stages. Our balance sheet remains clean and strong and we remain disciplined with our growth plans. We believe all that adds up to a great probability of continued future success in creating solid good shareholder value during the short, medium, and long-term. With that, let's open up the call for questions, Justin.

And, thank you. [Operator Instructions] And our first question comes Mayank Tandon from Needham. Your line is now open.

Thank you. Good evening. Ramesh and Dave, I was just curious on the outlook for 4Q. You obviously called out very strong sales momentum. But if I look at the guide for 4Q, I think, it calls for maybe a modest deceleration from 3Q levels, and then also the margin guide would be below 3Q levels. So -- and I'm picking a little bit here, but would just be curious if you could walk through some of the data points that is reflected in your 4Q guide after the very strong sales momentum that you called out in the 3Q beat.

Yes. Thanks for the question. So, we are expecting an acceleration in revenue in Q4. The commentary was really around the product line. We're seeing more of our products run on off-the-shelf products. So, we're seeing a little bit of a decline in the product, but we are still expecting professional services to increase sequentially and our subscription should still increase between $900,000 and $1.2 million, basically all leading to revenue being up probably around $1 million over where we are today. So, we're still expecting a sequential increase in revenue, but there will be a little bit of a pullback on the product revenue line.

So, Mayank, when we started the year, our revenue expectation was $230 million to $235 million. We then raised our guidance last quarter, $235 million to $238 million and nothing has changed there, that still remains the case that we expect revenue to be $235 million to $238 million just like how we guided at the end of the last quarter.

And on the margin side, there will be a little bit of a pullback in margin. I mean Q3 is just -- from an OpEx standpoint, is just a lower cost quarter. We just -- there's not as many trade shows. There is less accruals for unused PTO, and all that stuff kind of kicks back in our fiscal Q4, there is more trade shows. So, again, it will pull back a little bit, but leaving the year higher than we exited last year, so north of the 15%.

And again, as a reminder, we started the year thinking it will be 13%, Mayank. And then we increased guidance to 14% EBITDA by revenue and now we expect it to be 15% of revenue. So, the margin, our capabilities of the company have steadily improved throughout the year.

Got it. That's very helpful. And then, as a quick follow-up, Ramesh, on the international side, I'm just curious, I'm sure the competitive landscape is different. The growth challenges are different. So, what are the investments you're making to ensure that you win internationally? And you've had already good success, but to replicate what you've done in North America, so maybe if you could just talk about the investment levels and what are some of the key initiatives to, again, ensure that you have success abroad just like you've had in North America both on the PMS and the POS side.

Yes. So, the biggest investments we've made over the last six, seven years, has been in the products, because we wanted to make sure that the products are capable of competing effectively in international regions. And we built the products so that they are configurable, easily adaptable to the particular requirements of various countries, while the core product remains the same. So, the first part of the answer to your question, the biggest investments we made in order to be more competitive and do better in APAC and EMEA, especially has been with the products. So, that's where we started. So, now, the next stage of that evolution is greater investments in the services area, where we are doing one successful implementation after the other. And in our kind of business, right, in our kind of B2B enterprise software, you need reference customers, right? You need more and more reference customers and we do have a lot of reference customers with our older versions, but we needed them in the newer versions. So, that's what I mentioned, that INSPIRE Resort, Korea, is a big example of that. They went live in all our modern versions and they have been -- they are one of the top resorts to go live, to get started in the recent past. So, we are now focused on implementations and generating more high referenceable customers. In the meanwhile, we are also increasing our marketing investments in international regions and we have recently expanded our sales staff, especially in the APAC region, where a couple of senior sales personnel, one of them from one of our competing companies has joined us. So, we are now investing in sales and marketing as well. So, we have gone in that order, right. First, improve the products, make sure they are capable of being implemented and doing well in international regions, so, that process is done. Now we are focused on creating successful implementations there. In parallel, we are also increasing our sales and marketing investments.

That's all very helpful. Again, congrats on the quarter, and thank you for taking my questions.

Thank you, Mayank. Yes.

And, thank you. [Operator Instructions] And our next question comes from Matthew VanVliet from BTIG. Your line is now open.

Hey, good afternoon, and thanks for taking the questions. I guess as you look at, specifically on the PMS side of the pipeline here, I guess, how much of the build and sort of record levels that you're seeing there would you attribute to just sort of the product now being more modern and more easily deployed and integrated with other systems? And would you lend any I guess support to the more halo effect of having won the Marriott deal and sort of getting into opportunities that might not otherwise have materialized?

Yes. Hi, Matthew. Yes, the Marriott deal has definitely given us credibility in the PMS area, no question, right? Because now, there was a time before when we were not included in many PMS RFPs and I can't blame customers for that. But now, with the Marriott deal, we have credibility, now it is tough to exclude us, and which is all we wanted. Now in the meanwhile, there are also two other factors, Matt. One of them is the fact the product is in a much, much better state now and you cannot ignore it, and once you see it, you get very interested in it. So, that's one factor. And a couple of other factors I would mention is, number one, the market is hungry for innovation. So, at least in our opinion, the providers who had dominated the space, the innovation speed has not been that great during the past few years. So, someone had to fill that innovation gap and customers find these products to be far ahead of the competition once they take a look at it. And the biggest factor also is, we built an ecosystem of PMS products. It's not only the core PMS. It's also all, it's about 15 to 20 add-on Experience Enhancer modules around it, and many customers are preferring to reduce the number of vendors they deal with. It is not just a matter of making integrations easier, it is also a matter of pace of innovation. Like you come up with a good idea in golf or spa, and you want a corresponding change in the PMS, it's much easier for us to do all those changes in the next release and customers love the fact. So, I would say that the momentum that is building for us in PMS is attributable to all those reasons. One, the Marriott deal gave us credibility; two, the product is competitively at a much better state and we can answer yes to both being in the cloud and on-premise; third, this industry has always been hungry, it's become hungry for those kinds of good products; and fourth, of course, the ecosystem of PMS products we have built. All that is contributing to our momentum now, Matt.

Okay. Very helpful. And then, Dave, you mentioned that less than 10% of services revenue is coming from, I presume Marriott. But the contracts, that subscription will be in later years. Is that sort of the appropriate level we should think about in terms of the mix over the next several quarters as you get closer to the rollout there or should that uptick? And I guess with that, how would you correlate that with utilization rates across the services organization more broadly?

Yes. So, I mean it just stayed less than 10%. I mean as you would imagine, it will go up and down on a quarterly basis, but the far majority of our 90%-plus is non-large deal services working toward our subscription revenue. But yes, it will go up and down, but we're not expecting it to get larger than 10% in the next couple of quarters. And utilization of the services team has been really well. I mean, the best thing to point to there is the margin, right. I mean we've seen over the last couple of quarters, roughly a 10% margin increase in the professional services team and a lot of that is just more billable -- obviously, more billable work and less non-billable work as we work through some of our prior implementation efficiencies and just work through the backlog.

And the crucial thing to keep in mind, Matt, is this would have been a record services quarter for us regardless, even without the influence of that product development-related revenue, it would have been a record quarter for us. And year-over-year, it's improved by 41%, so only a part of that can be attributed to this product development work that we are doing. The main indicator here, Matt, the crucial thing is, it's an indicator that our new products are settling down well in the field and are becoming easier and faster to implement, which is the biggest thing we take out of our services revenue quarter.

Great. And then one last one quickly, if I could squeeze it in. As you look at the longer term, I guess, upside to margins that's potentially in the model here, anything limiting further upside as growth continues on the top-line? Any major investments that you foresee having to make that could impede that or should we expect, with appropriate top-line growth, a fair amount of leverage going forward? Thanks.

Yes, Matt. With continuing top-line growth, you should expect improving leverage across practically all our operating expenses categories. You should expect improving operating leverage as we go along. But remember, from a quarter to quarter, I would not apply those rules. But on a year-over-year basis, this fiscal year, the next fiscal year, and so on, you should expect profitability levels to continue improving as our revenue levels improve. And especially on the R&D side of it, we have a fair amount of leverage. I mean, it is not as if R&D is going to go down, but it's going to be tempered. The R&D increases are going to be tempered compared to the revenue growth. And also, our gross margin is improving now. As recurring revenue becomes a higher proportion of our total revenue and our services revenue becomes a higher proportion as well, you should expect, overall, our profitability to continue improving as our top-line revenue increases.

Great. Thank you.

And, thank you. [Operator Instructions] And one moment for our next question. And our next question comes from George Sutton from Craig-Hallum Capital. Your line is now open.

Thank you. Ramesh, you mentioned that you grew subscription revenues 29.9%. I would like to give you a sell-side roundup and say congratulations for your 30% growth. I wanted to make sure, given that both Marriott and Hilton put out pretty positive indications about room growth today. So, obviously, the industry is growing very healthy. But with Marriott specifically is, they're announcing these big room increase numbers, can you just walk through how we think of that relative to what that means for your ultimate contract?

Yes. I mean, I tried to convince some of my manager team members to buy a little bit more subscription from us to push it over the 30% mark, but it didn't happen, George. It ended up at 29.9%. But yes, that trend continues to be good. Subscription revenue growth continues to be good, all jokes apart. It is going well and we are encouraged by the direction. Now I did listen to that CNBC snippet today of the Marriott CEO commenting on the rooms growth and all that means, George is, is expanding opportunities, alright? Nothing has changed as far as our Marriott PMS agreement goes. We continue to work towards it and both parties, both Marriott and us, continue to very diligently monitor and manage the project and it continues to progress well. But all this extra room announcements, Hilton on the POS side, Marriott on the PMS side, means more opportunities for us. That means if we execute well, if we do well with the opportunities we have today, there are more opportunities to be had. We are in a good industry that is doing well, where there is a dearth of innovation, not much innovation going on. So, I think we are sitting on some very good opportunities and now that the major product work is done, we can actually focus on customer acquisition and innovation and those kinds of activities. So, I see that report as encouraging, George, and I see that report as more opportunities opening up for us, possibly, if we continue to do well.

So, in your prepared comments, you mentioned that we think the pace of sales will only get better. And you talked about it from a product perspective on why you do think things will get better. Can you talk about it from a sales efficiency/productivity or just go-to-market totality, give us a sense of why things will get better from that perspective?

Yes. So, starting with sales efficiency, just some anecdotal data for you. Our new reps, right, the recently joined new reps, their productivity has tripled in the nine months this year compared to the nine months last year. So, that's a good indication that as we continue to increase our sales staff, and by the way we have, in the hotels, resorts section, in managed foodservice providers, in that vertical, and in Asia, we have improved -- we have increased our number of sales staff and our experience with the new sales staff who have joined us over the last couple of years, is that their productivity tripled this year. Now, they are contributing about 25% of overall sales this year so far. So, the productivity thus continue to improve because they get excited when they see the new products. They typically come from within the industry. They have worked with our competitors before. And their eyes just open up saying, we had no idea that this kind of ecosystem of state-of-the-art technology products are there. So, that we continue to do and we will continue to improve sales, the number of sales personnel, and that productivity gains are continuing to increase and that's one reason why I think our sales will continue to improve. Now, go-to-market, marketing spend and all that is increasing. We took one step forward this year and we will continue doing that as we go along. Because we are seeing good results. Our name is out there a lot more now and a lot more thought leadership contributions, and lot more participated in trade shows, especially in Asia, and EMEA, and other regions. So, all that will continue to increase. Now what is crucial, George, is we need more field successes in order to establish our credibility and more and more customers talking about the success stories about us. That's the next crucial step and that will be aided by adding more to sales and marketing as well.

Perfect. Thank you very much.

Thank you, George.

And, thank you. [Operator Instructions] And our next question comes from Nehal Chokshi from Northland Capital Markets. Your line is now open.

Good afternoon, and thank you for taking my question. Congratulations on a solid set of results here. Ramesh, at the beginning of your prepared remarks, I think you said fiscal year '24 year-to-date sales is progressing ahead of last year's pace. So, just wanted to make sure, when you say pace, you mean year-over-year growth, is that correct?

Correct, Nehal. So, just to expand on that answer a little bit, Nehal. FY '23, right, which is April '22 to March '23, was a record fiscal year sales for us. And this fiscal year, which is April '23 to March '24, at the end of three quarters, at the end of Q1, Q2, Q3, is ahead of last year's pace. That is correct.

Okay. So, basically, you're seeing accelerating sales pace, which is your definition of sales, I call it bookings, but you're seeing that accelerate independent of the…

Correct, correct. We are [Multiple Speakers] I'm sorry?

Independent of the [Indiscernible] deal.

Correct. Yes, Nehal. Just to reiterate that, that deal is not counted in any of our sales numbers as yet. That we will start counting in sales when the individual properties start signing up with us. So that's not in any of our sales or backlog numbers that we generally report to you. So to come back to your original point, fiscal year 2024, when you compare Q1 to Q3 with fiscal year 2023, Q1 to Q3, this year is ahead. And by the way, fiscal year 2023 was our best fiscal year up to then.

Great, fantastic. And Dave, thoughts on free cash flow for fiscal year ‘24 now that we're basically 10 out of 12 months through fiscal year ’24?

Yes, I mean, no change to expectations in free cash flow, and that being free cash flow, less CapEx over the year should be pretty close to adjusted EBITDA. Certainly, there's a little bit more headwinds with timing of billing this year. So most of the free cash flow, typically, we get some pretty favorable working capital adjustments in Q3. And it wasn't the case this year, but no concern there, it was just timing of billing. We billed things earlier in the year, and we expect to collect on those next quarter. So no change to free cash flow. I mean, over a period of time, free cash flow less CapEx is, it'll remain pretty…

Adjusted EBITDA less CapEx.

Yes, adjusted EBITDA less CapEx will be free cash flow.

Yes. So, just a bit of guidance is around, I think, like $36 million, $37 million. CapEx is trending around $9 million. And so, talking about $27 million free cash flow for fiscal year ’24?

Yes, that's right. And most of that will come just from working capital specifically related to accounts receivable.

Okay. And, you know, I mean, for fiscal year ‘21, fiscal year ‘22, fiscal year ‘23, $27 million of free cash flow each of those years. Yet your adjusted BITDA, you know, is going to have increased about $10 million over that three-year period. And so your working capital requirements are increasing essentially then?

Well, this year there was a lot more CapEx related to our office moves. We talked about our office moves. We moved offices in our Chennai office, Alpharetta, and Vegas. So it's kind of the -- there was just a lot more CapEx this year related to office moves than there has been in the past. And obviously, you know, we'll be in these offices for a while. So the CapEx just starting normalizing back down next year.

Got it, great. And then look, your cash balance continues to accrete really nicely. You're doing a small level of share repurchases, but I mean, it's nowhere close to the rate of free cash flow generation. And you've proven to have a very prudent M&A task that you did a nice acquisition three years ago, but I mean, it's nowhere close to the three years of free cash flow that you generated since those last three years there? Why not go ahead and accelerate the rate of buybacks here?

So, Nehal, we are comfortable with our cash balance now, and it is not high enough to do anything significant, Nehal. And we have acquisition opportunities do come to us now and then, but we tend to be very conservative and we're very careful with what we look at. And organic growth is good for us, so we are not going to use inorganic growth as a crutch. But there are opportunities that now and then can come to us. So we are comfortable with our current cash balance, but as cash flow generation continues to accelerate, all options are open in front of us, right? We will be prudent, we will do the right thing for shareholders, and at the moment, we are at the early stages of accelerating our cash generation. At the current level of cash balance, we are comfortable with. In case there is a rainy day, or in case a good tuck-in acquisition kind of thing comes our way, we are well positioned to take advantage of it.

Okay, great, Thanks for taking my questions.

Thank you, Nehal.

And thank you. And I am showing no further questions. I would not like to turn the call back over to Ramesh for closing remarks.

Thank you, Justin. Thank you for all your interest and support. Best wishes to all of you for a very happy, cheerful, healthy, and successful 2024. 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 2024 results. Thank you.

This concluded today’s conference call. Thank you for participating. You may now disconnect.