Good day, ladies and gentlemen. Welcome to the Agilysys 2025 Third Quarter Conference Call. As a reminder, today's conference may be recorded. [Operator Instructions]. 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, Towanda, and good afternoon, everybody. Thank you for joining the Agilysys 2025 Third Quarter Conference Call. We will get started in just a minute with managed 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 actual results to differ materially. Important factors that could cause actual results to vary materially from these forward-looking statements include our ability to meet the provided guidance levels, our ability to increase sales, our ability to maintain profitability levels 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 2025 Third Quarter Earnings Call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, CFO. As is our usual practice in these calls, let me cover sales first before discussing revenue and other details. We measure sales or selling success in annual contract value terms. Fiscal 2025 Q3 was our third highest sales quarter ever, slightly below the sequentially preceding Q2, which was the second highest. Just like how the previous quarter was our best ever July to September sales period, this one was the best ever October to December sales quarter. Fiscal 2025 Q3, October to December, was a successful sales quarter despite point-of-sale POS sales coming in below expectations. Sales of POS and POS-related products during Q3 was better than Q1, but less than Q2. Fiscal 2025 sales and revenue levels fell well short of our expectations, mainly due to disappointing POS sales levels in the managed food services vertical. The very tough process of crossing the technology old to new transformation bridge turned out to be a lot more challenging with POS than we bargain for. We are currently working on several significant near-term POS sales opportunities. We remain confident we will get past this current challenging phase soon. We expect POS sales to return to normal levels during the next few quarters and then improve further on from there. With the exception of installations for one customer who has not approved the newer versions for their properties yet, virtually, all our current POS implementations involve only the combined modernized and unified new versions and are going very well. As we move into the new calendar year, many customers are coming back to the table for conversations on moving from old to…

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Third quarter fiscal 2025 revenue was a quarterly record of $69.6 million, a 14.9% increase from total net revenue of $60.6 million in the comparable prior year period. Onetime revenue consisting of product and professional services was down 1.1% compared to the prior year quarter, while recurring revenue was up 26.4%. We continue to work through challenges of transforming the new versions of our modern products. We are also seeing revenue impact this quarter as we move beyond the development phase and start planning for the rollout of a major customer. However, our sales momentum remains strong with Q3 bookings at healthy levels for future revenue growth. Our total backlog remains at near record levels. Onetime product revenue, which has been a significant challenge during the second half of the fiscal year, will continue to be the biggest headwind in the business through the fourth quarter. The full fiscal year product revenue will be 15% to 20% down compared to the last fiscal year, a larger year-over-year reduction than we originally expected. Although short of expectations, point-of-sale bookings are still up over the low point in Q1 of fiscal year '25. Professional services increased 13.5% over the prior year quarter to $14.5 million with services gross margin at 26.7%. Professional services reduced by $1.8 million when compared to Q2 fiscal year '25. The drop was largely related to the large development effort we've been working on during the past couple of years. We have now wrapped up the majority of the initial development requirements. We are moving past the major development phase and shifting our focus to the rollout phase of the project. We will continue to see some development services-related revenue associated with the…

Thank you, Dave. In summary, let me reiterate that the top line revenue-related headwinds we have faced this fiscal year are only related to the tough transition phase we are in now as we leave behind older technologies we were dependent on for a couple of decades and have entered a new era of cloud-native modernized technologies using which we have created an integrated set of a unified ecosystem of hospitality-focused software modules, which have given us a distinct and tough to duplicate competitive advantage. Fiscal 2025 was a pivotal year in that massive transition, and we underestimated the sales challenges on the point-of-sale POS side of the equation. We should keep in mind that fiscal 2025 is still a record sales year for us but could have been a lot better. In addition, we could have also done a lot better with the speed of hiring for the implementation services teams. We are focused on that now and expect professional services revenue to return to more realistic growth levels moving forward. We cannot blame these challenges on any other significant reason. There are no external headwinds that have caused these challenges, no macroeconomic issues, no changes in the competitive environment, no structural issues, our business fundamentals are stronger now than ever before. Nothing that will require us to rethink any of our ongoing business and growth investment strategies, none of any of that. Our profitability levels are good and can be improved further as our operating leverage continues to be steadily more effective over the medium and long term. We have not sacrificed any growth-related needs to fuel profitability. The total addressable market size remains huge. We have now a credible presence in the PMS property management systems arena, where our growth journey is only getting started. We remain confident in our ability to run a world-class enterprise software disciplined growth organization, which knows how to balance growth and profitability. The major PMS project we've been working on continues to progress well. We are working through this transition phase and are in a good position to thrive and grow. We underestimated some of the short-term old to new transition challenges this fiscal year. That is it, nothing more and nothing less. The newer modernized unified versions of our product sets are doing well in the field. They are easier to implement, support and enhance. They give us excellent reasons to be very bullish about our future for our employees, customers and shareholders. With that, Towanda, let's open up the call for questions.

[Operator Instructions]. Our first question comes from the line of George Sutton with Craig-Hallum.

Ramesh, I wondered if you could just walk through this development process that you talked about that we're now going to be in with our major project. What does it tell us about the overall project? Have there been any scope changes? I believe we were pursuing a train the trainer model, which would suggest at some point, we have less services component to this. But if you could just give us a little sense of that. And then also, you mentioned that there will be a few test properties, then a pilot phase. Can you just give us a little more detail on the significance of those phases?

Yes. George, the good news about this project is there are no major changes from what we have been telling you all this time. Given how big a project it is with a major customer, it's a massive transformational project for them that involves multiple vendors. And considering all the moving parts, it has gone remarkably well so far and almost exactly on plan. So there was a lot of development needs -- product development needs that needed to get done, which are all substantially over now. And we are now moving into the ecosystem system performance testing and deployment planning phases, which is exactly what -- where we thought we would be at this time. And what we expect in the second half of this year is test properties followed by pilot sites to go live in the second half of calendar 2025, and then we proceed from there. So all that is going exactly the way it was planned. And one thing to note that it is being managed very well by Marriott. There's a lot of transparency across all parties. There are obviously multiple vendors involved in this. And we and the other vendors have good seats at the table. We are all aware, the details are transparent. We're all aware of what is going on. And there's a remarkable degree of cooperation and coordination among all the parties. So things are going on well.

You mentioned that you won't be surprised if international is a record this quarter which would be suggestive of some near-term pipeline opportunities. What is that dependent on this quarter? Is it dependent on you winning something that you are anticipating winning? Or is it the timing of the decision that's more important?

See, the characteristic of international sales for the last few quarters, which is sort of both good news and bad news, George, is that it is still dependent on a few home runs and not enough singles and doubles. And there are a couple of significant sales opportunities that we have been working on that I think hopefully should come to fruition during the next few months. So there is a chance that this quarter, January through March, could be a record quarter for international sales, but that still doesn't get out of the doldrums. We still need to build a solid pipeline of singles and doubles, which we are working on. We are building our reputation. We are increasing our relationships. But these kinds of big wins when they happen, do matter because it increases our presence. But the dependence is still on the big hits, the big home runs we need to develop more singles and doubles in the international regions.

One other thing, if I could. You mentioned the new Agilysys is still not necessarily appreciated as broadly as you would like. I'm curious if you can bifurcate that to domestic versus international. Do you feel you're known better domestically and therefore, seeing the opportunities you should see? And then on the other side, on the international side, my assumption is you're not seeing as many opportunities as you think you should based on the new Agilysys?

Yes. In terms of the repetition of the new Agilysys, George, we do have 2 hills to climb, one domestic and one international. And there is no question that the domestic hill is a lot shorter to climb. We already have a reputation domestically. We are well known, reasonably well known. Now we are trying to spread the message of the new Agilysys. And for that, a lot of the new installations, meaning installations based on the new modernized and unified versions, we are getting more and more of them done. And as they continue to go well, the message of the new Agilysys, the modernized cloud-native solutions keeps spreading. Internationally, that hill is a lot higher to climb because we just didn't have that much of a reputation before. Not only do we have to establish the name of Agilysys there, and then we have to establish the name of new Agilysys as well. And a lot of the big projects, the big sales opportunities we are working on will provide us that news, right, will provide us those referenceable customers around whom we can build. To answer your question, it is definitely an easier process domestic than in international.

I'll leave it to others.

Please standby for our next question. Our next question comes from the line of Sam Salvas with Needham & Company.

I'm just stopping on for Mike here tonight. I wanted to touch on the POS sales in the quarter. I know you said they were better than the first quarter, but they still declined sequentially. So I'm just curious if you guys could talk about what gives you the confidence that these trends are going to get better in the coming quarters and throughout the coming year?

Yes. So our confidence that POS sales will continue improving is based on the pipeline we are working on now, Sam. Like we told you, there is one crucial metric of pipeline that we manage internally that we refer to as demo plus pipeline. So our sales pipeline runs into hundreds of millions of dollars. But within that, we focus on a subset that we call demo plus, which is the pipeline of sales opportunities where we have at least reached the product demonstration stage, where the customer has asked for product demos and those product demos are going on. Now that pipeline for PMS is something like 37% higher than the same time last year, meaning compare December end calendar 2024 with December end calendar 2023, PMS is like 37% higher, but POS is 22% higher. We are working through a lot of significant POS sales opportunities. Now I would not put too much focus on the fact comparing sales of Q1 versus Q2 versus Q3. One thing is clear to us, Q1 was the definite bottom point. we have struggled with POS sales for a couple of quarters. Q1 hit a low point. And since then, we are climbing back upwards. And there are significant POS sales opportunities we are working on now, which gives us the confidence that things will improve reasonably quickly during the coming few quarters.

Got it. Okay. That's helpful. And then just a quick follow-up on the 11 new subscription logos you guys signed in the quarter. Could you just quickly talk about what markets these were in, which verticals and maybe parse out how many were POS versus PMS?

A good portion of them were POS, like it usually is for us. Many of them involve both POS and PMS together. And probably the main highlight of that was that each of them involved purchase of 6 products, which is a record high for us. We have never been anywhere close to that 6 number on an average across all the new customers and 6 was a record high for us. So each customer who came to us purchased several products and most of them involved both POS and PMS. So POS was more than PMS in that. In terms of verticals, I don't know exactly which vertical they were more of, but it involved all verticals. There was no particular vertical where I could highlight for you. It involved all our sales verticals. There were new customers across all of them.

Yes. Okay. Good to hear. All right, thanks. I'll jump back in.

Our next question comes from the line of [ Ivan akin ] with Oppenheimer.

This is Brian Schwartz for Oppenheimer. Ramesh, in terms of the point-of-sale bookings weakness that you talked a lot about, is that mostly contained in the Managed Foods Category or is it happening in those other categories?

It was -- to answer your question, Brian, it's mostly of large part, huge majority of it is mostly because of the Managed Food Service vertical. Though I would say that in the other verticals, which are doing well, it could be better. But in terms of the challenges we have had, they have been for the large part in the managed food services vertical. And in that vertical and also in the lower end of the markets in the other verticals as well, these are all major restaurants, caferas, F&B places that don't have the greatest IT support, right? They cannot afford huge IT departments. So the products have to be simple to install. They have to be simple to support. They have to be very simple to upgrade. Those are all requirements in the POS. Now that's how our POS systems used to be, but we took on this massive transformation of reengineering it completely into cloud-native products and also unify staff-facing and guest-facing feature sets. And it became more complicated than it should be, and that caused pause in some of the opportunities coming through, which we are now getting past since a lot of the new installs are back to being simple to upgrade to enhance and support. But it was -- the damage was mostly in the managed food service vertical.

Okay. Moving on, Ramesh, in your introductory comments, sounds like you're putting a greater focus on the go-to-market on the new customer acquisition. And I know that, that's hasn't been the primary source for bookings, more of that comes from the installed base. My question for you is, does that change the cadence of your sales rep hiring for next year? Are you looking to scale up the capacity of more hunters or are you planning to make any other changes either in the organizational structure or the leadership to support a greater focus on the customer acquisition motion next year?

Yes. So Brian, the customer acquisition focus, yes, is more on getting more newer customers. And the fundamental thing we are doing now we are focused on is ensuring full territory coverage, which is where we have been lacking before. Now we are continuing to -- we are going to get a lot of sales from our current customers. We have great relationships with them. They're all very happy that we have modernized our products, and they have been with us for a very long time. So the new product sales, selling more products to customers with at least one of our products is going to continue to increase. Like I said in my opening remarks, in 3 quarters this year, this is already our best year. We have 1 quarter to go, and we are far ahead of full previous year. So that is going to continue. But our success has to come a lot more from new customers and new sites as well. Now a couple of things. Number one, we have plenty of room for sales growth with the current sales team. We did expand our sales team over the last 1 or 2 years. And we still have what I would call the second half of the sales team that can do a lot better than they are doing today. So the focus is on that. They've all gone through the ramp time. And now that the products are there to sell, we are expecting a lot more from them. So the first thing is there is plenty of room for sales growth with the current sales team. Now Joe Youssef is also focused on expanding the sales teams, especially in the hotels and resorts area. And we are focused on making sure we cover the territory. There are still thousands of properties that we are not touching properly at the moment, and we are focused on expanding our sales team to ensure full territory coverage. Now the rest of all the teams are focused on helping sales. We want to make sure we create a lot more referenceable customers with the newer versions so that it becomes easier for sales to sell. So we are focused on all those areas, Brian.

And one follow-up for Dave. Just on the guidance, are you taking the same methodology as you've had before? Or are you injecting a little more conservatism given the guidance has been walked down here a couple of times. Just getting a lot of questions whether this is a new guide or still kind of the new pipeline that you're looking at. If you could share any color on that methodology, I'd appreciate it.

I think it's a consistent way of guiding. I mean we feel very strong about the short- and medium-term opportunities through the pipeline. I mean, Ramesh gave a lot of commentary about how well our pipeline is doing. But obviously, with only a couple of months left in the quarter, we're likely not going to make up some of the services shortfall and some of the product shortfall. I mean I would expect product revenue to kind of remain about where it is today, maybe up a little bit. Services obviously will improve next quarter as we -- without the holiday impact and then the normal subscription growth you're used to seeing to kind of get you to the 25% guide. But I would say there's not a change in methodology. I mean we feel as strong as we ever have about our pipeline in the medium and short term of Agilysys. But with just quarter left, it's going to be hard to make up the onetime revenue.

Please standby for our next question. Our next question comes from the line of Nehal Chokshi with Northland Capital Markets.

Ramesh, in your prepared remarks, you said something was up 70% year-over-year. I didn't catch what that something, but could you repeat that, please?

We said -- are you referring to the sales pipeline comment we made, Nehal?

I believe so, yes.

Yes. So.

Thinking about the PMS bookings or some sort of bookings?

Yes. We are referring to the sales pipeline or you're referring to the bookings or you're referring to the subscription revenue growth. So let me just cover that very quickly. Let's talk about bookings first. PMS and PMS-related add-on modules sales booking at the end of 3 quarters is already a record full year for us. So in terms of sales bookings of PMS and PMS-related add-on modules are a record for us, a record as far as full year is concerned. Now without book4Time, you remove Book4Time numbers out of it, the sales of PMS and related modules is about 70% higher this Q3 than last Q3. So you take this October to December and just add up all our PMS. By the way, there is no Marriott PMS sales included in all this because we have not yet started including that in sales. The sales of PMS and add-on modules this Q3 was 70, 7-0, 70% higher than sales during last year's Q3. That's one thing we mentioned. We also mentioned that including Book4Time, Sales of PMS and related modules in 3 quarters is already our best ever year, higher than 33% compared to the previous best full year. We mentioned both those aspects. And we also said that sales pipeline, and we only count pipeline that have reached the demonstration stage of products, PMS this year is about 37% higher than PMS at the same time, December end last year. I think those are the 3 things we mentioned.

Yes, that's great. And just to be clear, PMS bookings, excluding Book4Time is up 70% year-over-year, which is tracking way ahead of your pipeline growth. Is that just a result of timing? Or is that a result of increased run rates?

It is because of additional signings with new customers. That is customers who didn't have our PMS products before signing up to buy PMS products. Yes, you compare Q3 this year that we just completed with Q3 last year, it is 7-0, 70% higher in terms of actual sales signed with customers. And that is tracking ahead of pipeline. And that is where we wish POS sales had also done well, we would be flying a lot higher now.

Yes. And then in the past, you talked about module attach rate for PMS bookings. Can you give out that metric again for the December quarter?

Yes, mostly for the newer customers, what we said the new customers we have signed bought an average of 6 products from us, which is a record high for us. And generally, the PMS attach rate of ad modules is about 8 modules. It's about 8.5 modules per PMS deal that we sign. Every time we sign a PMS deal, it goes along with about 7 to 8 attached add-on modules.

Okay. And then my last question is that...

And we have more -- sorry, you may have -- we have more add-on modules with PMS than we have with POS. Go ahead.

Yes. Understood. And then you've got a new TAM slide where you're going from what used to be a $5 billion ARR TAM that you used to cite 6 months ago to now $16 billion. Can you take us through the confidence level that Agilysys really is addressing this incremental $11 billion and whether or not the expectations of the type of market share you think you can get in your core markets is the same for these adjacencies that you've identified?

Yes. Nehal, we feel like the new TAM represents our current market. I mean the old TAM we had not rolled in a lot of the add-on modules. I mean, keep in mind, most of these add-on modules are -- we call them add-on modules, but they're really stand-alone products that are competing with 5 to 10 people in the market at any given point. So we had kind of that as a practice-weighted tool, they were have the ability to compete on a best-of-breed to roll that in. But most of the TAM expansion is really just rolling in our add-on modules that after 3 or 4 years are now competing on a best-of-breed methodology.

Okay. And then implicitly, currently, you have lower market share on this incremental [indiscernible] that's expected. But on a longer-term basis, would you expect the market share on incremental TAM to continue to be far less than your market share of your core markets, current core markets?

No. I mean, we expect -- I mean, whether you're talking about add-on or PMS core, I mean we're such -- we have a low market share today. I mean we still have less than 300,000 rooms in a near [ 2 million ] room market. So there's plenty of expansion in our core solutions. And obviously, like we've talked about a lot over the last couple of years, we're just starting to compete on the best of breed in our Tier 2 core and our add-on modules. So we don't feel like we're butting up against any kind of market penetration limitations, and we think across the board, we'll take more market share over the short and medium term.

Out next question comes from the line of Stephen Sheldon with William Blair.

You have Matt Filek on for Stephen Sheldon. I wanted to start with a couple of quick model questions for Dave. Number one, how should we be thinking about gross margins in the fourth quarter and into next year in light of the challenges with the point-of-sale, sales activity? And then two, can you just clarify what you mean by more normalized growth rates for the professional service line item looking into next year?

Yes. So I mean, for us, we kind of look at the business has been -- the gross margin has obviously been growing over the last 4 or 5 years as we've made the transition to more of a subscription base. I mean, we went into this year kind of thinking they would cross over into the 60% gross margins for the first time. Now I mean, we're trending closer to the 63% gross margin. That feels more normal to us. I mean, so going into next year, I would assume you would see gross margin expansion incrementally. I don't think there's going to be a 5% or 6% jump, but I would think gross margins would continue to grow up a point or 2 from where they are today at 62%, 63%. So with the change in product mix, I don't think we'll go back down to the low 60s or high 50s in gross margin. And then the normalized service is -- I mean, so really, the way we think about professional services is professional services is a line that kind of grows with top line revenue. And obviously, the last couple of quarters, we've had the major development, and we've had some 37%, 39% type services growth, which is not normal for us. We expect professional services to grow in line with top line. So if top line is growing 15% to 20%, professional services probably grows around the same level, obviously, once kind of backing out some of the onetime anomalies we've had this fiscal year.

Got it. Dave, Helpful context on both of those. And then this question was somewhat addressed already, but I just wanted to circle back on it. So for the Marriott rollout, is there anything you can share on the planned pace of rollout from a location perspective? And then are there any regions in particular that you may initially focus that deployment?

Unfortunately, Matt, no, we cannot. So the best we can tell you now is the project is going well. There's a high degree of transparency across all the parties, and it is being managed very well and what we expect in the second half of calendar 2025, are test properties and following that pilot sites to go live. That is the best we can tell you now, unfortunately.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Ramesh for closing remarks.

Thank you, Towanda. Thank you for all your interest and support. Best wishes to all of you for a very happy, healthy, safe and successful 2025. Look forward to catching up again around the middle to end of May when we will be reporting Q4 and full fiscal year 2025 results. Thank you.

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