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Agilysys, Inc. (AGYS)

Q3 2026 Earnings Call· Mon, Jan 26, 2026

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the Agilysys 2026 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, Vice President of Investor Relations and Operations at Agilysys. You may begin.

Jessica Hennessy

Management

Thank you, Lisa, and good afternoon, everybody. Thank you for joining the Agilysys Fiscal 2026 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 U.S. 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 our ability to achieve the provided guidance levels, increase implementation efficiencies, the company's ability to convert the backlog into revenue 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.

Ramesh Srinivasan

Management

Thank you, Jess. Welcome to the Fiscal 2026 Third Quarter Earnings Call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, CFO. I hope all of you are staying warm and safe. As is our usual practice on these calls, let me cover sales and selling success first before discussing revenue, profitability, guidance increase and other business updates. We measure sales in annual contract value, ACV, terms. Q3 fiscal 2026 was the second best Q3 October to December period sales quarter. This was the best Q3 sales quarter on record for the hotels, resorts and cruise ships, HRC sales vertical, highlighted by several significant new customer wins including Bolt Farm Treehouse in Tennessee, a 5-star luxury nature immersive wellness retreat property who selected Agilysys' property management system, PMS, Agilysys' web booking engine, Spa and 5 other Agilysys software solutions. To provide their guests the seamless exceed expectations experience we are looking for and [ Sands ] resort in Northern Myrtle Beach, South Carolina, who also selected various software solutions from our ecosystem of products, including PMS to help improve guest experiences at their Oceanfront Gateway property. Q3 sales also included a couple of big brand properties switching from a competing system to the Agilysys' POS platform ecosystem. Casino gaming, our strongest sales vertical for several years now witnessed a relative sales slowdown during the months of October and November, pulling down global sales levels during those 2 months but recovered well during the month of December. With respect to overall global sales, this was the best December month in our history. On a year-to-date basis, Foodservice management, FSM, sales over the first three quarters of fiscal 2026 is already higher than full year sales during each of the previous two years. Full fiscal 2026…

Dave Wood

Management

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Third quarter fiscal 2026 revenue was a quarterly record of $80.4 million, a 15.6% increase from total net revenue of $69.6 million in the comparable prior year period. Onetime revenue consisting of product and professional services was up 12.7% over the prior year quarter and in line with our expected 5% to 10% increase in onetime revenue for the fiscal year. Recurring revenue was up 17.2% on the back of strong subscription revenue growth. FY '26 year-to-date revenue is $236.4 million, up 17.4% over the prior year-to-date period. Q3 sales kept us on pace toward reaching the higher end of our annual revenue targets. Through the first 3 quarters of FY '26, subscription bookings have increased by 37% compared to the same period last year. Despite increasing subscription revenue growth guidance from the original 25% to 29%, the subscription backlog is still about 88% of it's all-time high. Thanks to our robust backlog and strong sales momentum, we continue to have considerable insight into our business for the final quarter of fiscal year 2026 and into fiscal year 2027. Professional services revenue increased 22% over the prior year quarter to $17.7 million as we continue to see year-over-year improvements in backlog deployment compared to the low point during Q3 fiscal year '25. Professional services revenue remains a good leading indicator for future subscription revenue growth as the vast majority of services revenue is contributed from normal implementation type projects and activities. Professional services performed much better than expected in Q3 fiscal year 2026. We expect Q4 FY '26 professional services revenue levels to return to the $18 million range like prior quarters. Total recurring revenue represented 64.7% of total net revenue for the fiscal third…

Ramesh Srinivasan

Management

Thank you, Dave. In summary, the business continues to march along the revenue and profitability growth paths we have created for ourselves like a relentless well-oiled machine. The modernized cloud-native product ecosystem and our top-notch sales leadership teams are opening up many exciting hospitality industry doors for us that were inconceivable a few years ago. The multiple growth path ahead of us are based on a solid foundation of a world-class product set and an ecosystem of hospitality software solutions that, taken together, has virtually no match in the industry. We only need some of these growth parts to work out well to feed our increasing revenue and profitability growth ambitions. What gives us our current growing competitive advantages has taken us several years of sustained high-quality product development work to build and will be very tough to duplicate anytime soon. We are not seeing any signs of anyone else even trying to create such an ecosystem. And our pace of innovation is only getting faster with the availability of AI-based tools that are increasing development speed and providing us with product enhancement possibilities, which did not exist before. And there is absolutely no question about the fact that the total addressable market remains huge relative to our size and growing. There are several PMS competitors whose installed base is currently many, many times our size. The extent of growth possibilities ahead of us in the coming years, especially on the PMS side of the business, which is completely software-based, is staggering. I could sit here and bore you with details of various sales successes accomplished during this quarter, including a global POS hunting license master sales agreement signed with one of the largest hospitality corporations in the world, major PMS and multiproduct ecosystem deals signed with several casino gaming…

Operator

Operator

[Operator Instructions] Our first question for today will be coming from the line of Mayank Tandon of Needham.

Mayank Tandon

Analyst

Ramesh, I wanted to start with your comments around some weakness that you saw in the gaming and casino space during the months of October, November. I wonder if that coincides with the government shutdown? And if that is the case, just given maybe some of the thought right now of a potential government shutdown in the next few weeks. Could that be something that might cause some of that December momentum to maybe slow down again? Just curious on some of your thoughts around that, what were the reasons and if that is the reason then something that we should be at least aware of as we go into the next few weeks and months?

Ramesh Srinivasan

Management

Yes. I wouldn't speculate, Mayank, about what -- it was only for a couple of months. I guess it was due to happen in -- casino gaming sales has had such a good run across so many years. And then it came back -- it came rolling back in December. So I mean, there are various different reasons, Mayank, that could have caused this, but we are not going to speculate. We can't put our finger on it. So I'm just going to assume this was just a temporary slowdown. Sometimes the holiday period can be a little bit easy for us. But it was back in December, and we are back to normal levels now. So I don't think I would speculate on any particular reason, Mayank.

Mayank Tandon

Analyst

Understood. Okay. I thought I would just ask just to get any insights into it. For my follow-up question, I wanted to just see how much you could share in terms of your expectation on the Marriott PMS mass rollout expectations? Do you have a sense of timing? I know it's underway in some capacity. And then also maybe if you could comment on, should we expect any impact on margins in the short term as you begin the mass rollout? Or has that already been absorbed into your expectations?

Ramesh Srinivasan

Management

Yes. So Mayank, as far as Marriott is concerned, we are a little shy about sharing too many details because all that should come from the customer, not from us. But I think what we can tell you is the pilot phase went off very successfully, our products work very well. And once again, I will never get tired of reiterating how well it is being managed. I've been in -- like you know, Mayank, I've been in enterprise software for close to 3 decades now. And this is one of the best, most collaborative projects that I've seen managed by a customer. So excellent job by Marriott personnel. So the pilot phase was successfully completed. So now we are into the process of implementation waves and these waves, meaning number of properties that go live each time will steadily increase over the coming months. So this is an exciting phase. So the rollout is going to get going now and we are very excited what this calendar year or the coming fiscal year is going to bring for us. Most of the costs and other elements are well provided for, Mayank. So all I will tell you, I don't want to get ahead of ourselves and give you profitability guidance for FY '27 yet. We are not in that stage. But it is fair to believe that if this year is going to be 20% adjusted EBITDA by revenue, next year is going to be better. That much I will assure you. But I won't go that far to tell you exactly how much more it will be better. But we do expect our profitability levels to continue increasing on a fiscal year basis. Here and there, there could be a quarter up or around, Mayank, when we are forced to invest in some infrastructure more than the other quarters. But if you take profitability of FY '27 as a full fiscal year compared to this fiscal year, it should definitely be higher. And this project will only be one of the contributing factors.

Operator

Operator

Next question is coming from the line of Matthew VanVliet of Cantor.

Matthew VanVliet

Analyst

I wanted to narrow in a little bit on the international performance this quarter. You mentioned maybe a little lackluster. Curious if there was anything specific there, the holiday season, maybe just put more of an impact on selling than it historically has in the U.S.? Or are there more sort of selling capacity additions that you expect to make in the team maybe in local markets where you're seeing traction that could help revive the performance in the fourth quarter and into next fiscal year?

Ramesh Srinivasan

Management

Yes. Matt, so let me address the sales capacity frame. We have no sales capacity issues in any of our verticals, Matt. We have done a lot of sales hiring during last year. And sales capacity wise, we are in good shape. We are focused more on sales productivity increases. And in any of the verticals, including international, if we find that sales capacity reason, we will quickly hire. So we are ready to hire. We did a lot of hiring last year. But at the moment, there is no sales capacity issue, not only in international, but in any of our other verticals. So that's not an issue. Now as far as international, I wouldn't assign any particular reason to it, like holidays or anything. We are now working on more bigger-sized deals internationally than we've ever done before. We've never had this kind of a big customer in terms of multiproduct ecosystem. It's definitely working very well internationally. There are multiple bigger opportunities we are working on now. But it is going to be a little bit up and down quarter-wise internationally. We've had a great year so far. Like we told you just in three quarters, this is already almost our second best fiscal sales year. We are doing well but you should expect some of these quarter-by-quarter ups and downs because currently, international sales is still dependent on the bigger ecosystem deals where we have a significant competitive advantage, not enough singles and doubles, if you will, to even it out. So these kinds of ups and downs could happen, Matt. But overall, international sales, this is going to be a very good year for us.

Matthew VanVliet

Analyst

Helpful. And then as we get into the end of the year and you finalize all of the fiscal '27 outlook, curious on how you're doing at the very top of the funnel, how much of an impact have Joe and Terrie had since they've been in their roles now for a little bit in terms of generating that initial demand, generating the brand awareness that maybe was lacking in certain markets in the past?

Ramesh Srinivasan

Management

Yes, Matt. So when you think of our sales pipeline, Matt, you divide it into two broad categories. One is the singles, doubles and triples, right? That's what generally gets counted in the pipeline. That pipeline remains steady and continues to move forward. Now on the other hand, what we don't know how to include in the pipeline are some of these big doors that people like Joe Youseff have been so effective in opening for us. Those are all opportunities that are taking shape that are moving along the sales process. We don't include those in the pipeline because we just don't know what value to assign to them. These are the super big deals that we are working on. We announced one of those in the last quarter. So those doors -- those bigger doors are really opening up well thanks to Joe and his team and the sales team really opening them up. Now outside of those bigger opportunities, which is higher than we have ever seen in our company's history, the normal single double, triple pipeline continues to steadily move along and increase.

Operator

Operator

And the next question is coming from the line of Allan Verkhovski of BTIG.

Allan M. Verkhovski

Analyst

Could you discuss how AI capabilities across the platform are resonating with customers? What shifts you're seeing in the competition as a result and maybe how that's potentially impacting sales cycles? And then I've got a quick follow-up.

Ramesh Srinivasan

Management

AI is permeating all through the business, Allan. I wouldn't say that -- first of all, we are not seeing anything from the competition that is related to AI, nothing significant at least. But given that we modernized our products and now these modernized products are anywhere from 2 to 4 years old, it gives us a good scope to permeate AI all the way through. So you divide any of the AI into a couple of areas. One, improving our own operations, where all across the -- we now have a dedicated team on and we have a dedicated couple of leaders who wake up every day to AI-ize the company, if you will, more and more. So that's our internal operations. But as far as our products are concerned, there are various different ways in which we're implementing AI. There is natural language processing in our data analysis tool. There's automatic voice recognition in a lot of our tools, which lends itself to that like when you go to book a spa reservation or you go to a Kiosk and order F&B items or you go to our web booking engine, where we have enabled guests to book multiple amenities at the same time. So there is a lot of ways in which we are beginning to use AI in our new product releases they are there. We can help with intelligent room upgrades. When you do it on your phone or you do it in a Kiosk and image recognition in our Kiosk. So there's a lot of different areas now where we are using AI, and we recently won an innovation award whereby -- when a resort does complex packages, instead of the guests calling the call desk and going through the process of what spa appointment they need, what golf appointment they need, how many rooms -- nights they need to stay in, an AI tool can manage all that. So these are all things that we are working on. Some of these have been released. Some of these have not yet been released. In general, they are increasing our competitive advantage. So I wouldn't assign things directly to AI as yet but it is permeating all our products, and it is making our competitive advantage a lot stronger.

Allan M. Verkhovski

Analyst

That's helpful color. And then as my follow-up, the reiterated guide for 29% subscription revenue growth for the fiscal year suggests about 20% growth in Q4. Can you just talk through what's driving that implied deceleration for Q4? And then as we think about growth for next year, excluding potential contribution from the Marriott, what would you highlight as we consider extrapolating that Q4 implied growth for next year?

Dave Wood

Management

Thanks, Allan. Yes, the implied growth will be a little bit north of 20% for Q4. And a lot of that is just related to the Book4time acquisition. The core business is still growing at north of 25% or 25%, but the Book4time year-over-year comps are kind of pulling that down into the lower 20% range. And really going into next year, I mean, no change to how we talked about the story in the past. I mean, we'll stay in the 20% range with obviously some of our larger projects on top of that.

Operator

Operator

The next question will come from the line of Brian Schwartz of Oppenheimer.

Brian Schwartz

Analyst

Ramesh, I wanted to switch over to the POS business. That business seems to be improving here in the numbers that you're showing. And I know it's not like there's a lot of new opportunities that come up every year in the U.S. because those are longer duration contracts so it sounds like your win rates are going up there. My question for you is maybe you parse what's driving that? Is there something changing in the go-to-market you're doing? Is it the maturity of the POS? The modern product now? Or is it the reference ability like winning the Boyd Gaming that's having an impact on the win rates in POS? And then I have a follow-up.

Ramesh Srinivasan

Management

Brian, I wouldn't say that the waiting time or the sales process time is any higher for POS. If anything, it's actually a bit faster than POS than PMS. But our POS business, like we explained to you like a year, 1.5 years ago, went through a tough phase when we were going through the modernization process. When we had an old system, and we completely modernized it and we had to do it part by part. But that is all done. Now the modernized solution has been in the field for now pretty close to two years, probably a quarter short of two years. It has settled down well and we are one of the very few vendors, Brian, maybe a couple of vendors who are capable of providing guest facing and staff-facing feature sets where normally POS is a staff-facing system, but now more and more guest facing, like you can order food on your phone, you can go to a kiosk and all that for us, they are combined into one system. And when a waiter is carrying an iPad in the hand, so we support iOS, Windows and Android, all in one code base. There are no competing systems to that. Now this did not show up as an advantage till recently because the modernized system had to settle down. Now that it has settled down, it gives us a massive technology advantage over competing POS systems. So we do expect our POS business to continue to do well. The fact it has improved from subscription revenue growth rate used to be in the 15% to 19% for a year or so is now back to 20% is a good sign, especially in FSM. We are expanding the business to higher education and health care as well and not just depending on business and industry. So the POS opportunities are growing as much as our PMS opportunities are growing. The only difference is PMS carries with it a much larger ecosystem. There are about 20, 25 additional modules around PMS while POS has a smaller ecosystem, about 5 or 6 products around it. That's the main difference you're seeing in terms of PMS growing faster. Other way, there's a lot of promise in our POS business. We have turned the corner like Boyd Gaming, like in FSM, we are winning a lot of competitive deals now. And there is a lot of market share we still have to take from our competition in POS as well. So I wouldn't understate the promise of our POS business in any way.

Brian Schwartz

Analyst

And the one follow-up I had is maybe following up on Mayank's question in the beginning. Just kind of understanding on the gaming segment for the business. Is it your expectation that maybe the slower demand that happened in the beginning of the quarter that got caught up in the month of December, do you feel like all that demand got caught up in that December? Or is there opportunities that there still could be some catch-up demand in the gaming segment as we enter here the first half of the calendar year?

Ramesh Srinivasan

Management

Thank you, Brian. There is a lot of catch-up still left. All of it was not caught up in December. December was back to normalcy. December was a good sales month for gaming. And I wouldn't read too much into this October, November slowdown. I don't know the exact reasons behind it, and there is really no point wasting energy speculating with it. Gaming still remains a very strong sales vertical for us. It's done well for several years. Maybe it was due for a slowdown in October, November. We couldn't really pinpoint -- we have some guesses, but there is no point spending time on those speculations. But to answer your question, December came back to normalcy, but no, all of it was not made up. And just to be clear about one thing, Brian, it was not lost deals. We did not lose -- I mean, we do lose deals here and there in all our verticals, especially in the lower end. But in general, there was no major losses or anything like that. Just a lot of deals got postponed, part of which we made up in December, part of which we will make up during coming months. All of it was not caught up in December.

Operator

Operator

Our next question will be coming from the line of George Sutton of Craig-Hallum.

George Sutton

Analyst

Ramesh, there was a good amount of discussion in your script on the implementations, and it sounds like that has started to improve. I know one of your challenges had been if you're out selling new business and you're behind on implementations, you have to push out the schedule of rollout. Now that you've done a better job on implementations, I'm curious, is that making its way into your ability to pitch new business?

Ramesh Srinivasan

Management

Yes. To a certain extent, yes, George, but it was never coming in the way of sales, right? Our implementation efficiencies, we've always wanted to improve it. Now AI is helping it a lot. A lot of the configurations, product to product integrations and all that can be done much faster using AI tools, and we are beginning to get all that into the field. Now to answer your question, what I would say is implementation efficiency is getting better is helping us with converting bookings to revenue faster. Normally, it's a one or two quarter gap between selling and implementing, which is what creates revenue. So that is becoming a bit faster because implementation efficiencies have increased. Now one other way it actually helps increase sales is when your implementation efficiencies increase and you can implement using lesser hours, our services costs decreased, and we become even more competitive because we are not the lowest priced vendor. So that way, it is contributing to improve sales. So just to summarize, implementation efficiencies increasing thus help increase sales because our services costs reduce. That is on the one hand. On the other hand, the fact we can implement faster, reduces the time it takes between booking and conversion to revenue.

George Sutton

Analyst

Got you. So you did discuss -- and I know in past calls, you've talked about reference challenges. You had relatively new products out in the market, therefore, didn't have reference customers. You specifically referenced that some of your largest customers were now taking reference calls. Can you just give us a little bit more of a picture of that process?

Ramesh Srinivasan

Management

Yes. The reference -- in general, the volume of customers willing to take reference calls, especially on our modernized solutions because we sort of lost hundreds of customers who would take a reference call on our older versions because we don't sell those older versions anymore for the last couple of years, and we sort of had to rebuild that world of reference customers which has now expanded in size, and it is expanding exponentially every month and every quarter. There are more and more customers who are willing to talk about our modernized solutions. So that is one aspect of it. The other aspect, George, if there are customers who are getting real value from the ecosystem. They used to be dealing with 7 or 8 vendors. Now they are dealing with 1 vendor and a lot of the things we've automated, the modernized solutions are producing real business results, and customers are more willing to talk about. That is the second aspect to it. The third aspect to it is the kind of customers who are now willing to take reference calls is becoming more and more prestigious. More and more, the prestigious big names are willing to take calls and talk about how good a partner we are and how easy it is to work with us. So in all those aspects, the need for reference customers is becoming better in the -- is becoming more and more fulfilled. So our reference customer situation is improving dramatically every month now.

Operator

Operator

And our next question will be coming from the line of Nehal Chokshi of Northland Capital Markets.

Nehal Chokshi

Analyst

Yes. Thank you for the question. Just following up on that prior questioning here. As you know, your best and biggest customer's willingness to take prospective customer calls as similar size this past quarter was one of your biggest takeaways. Is this because it's a newfound wellness from these customers? Or is it because you now have these new big type of prospective customers are in your pipeline that necessitate getting these large reference customers to take those calls?

Ramesh Srinivasan

Management

I don't think it necessitates it, Nehal, but it is just a better situation we are in now. Because a lot of the successes we've had, Nehal, in the recent past, let's say, the last few quarters have involved ecosystem, multiple products working together has produced great value and by nature, they tend to be the bigger customers who have used our ecosystem products, and they are willing to take calls and tell them how much value they have created. So both the quality of the reference calls in terms of real value that they have got and also the prestige level of the customer, the bigger sized customer taking the calls are both being very helpful for us now.

Nehal Chokshi

Analyst

And is there anything to do with the indentation that you now have a lot more grand plan type of customers in the pipeline, too?

Ramesh Srinivasan

Management

Yes, generally, I mean, our pipeline involves both customers. There are some I wouldn't call it grand slam, there are some bigger sized customers, Nehal, in the pipeline, and there are also the single doubles and triples in the pipeline. So our pipeline continues to have a good mix of both. And the reference customer availability has increased now for our modernized solutions.

Operator

Operator

Our next question will be coming from the line of Stephen Sheldon of William Blair.

Matthew Filek

Analyst

Matthew Filek on for Stephen Sheldon. It looks like professional services gross margins came in around the mid-20s this quarter, which was just a bit lower than we had expected. Curious if that was related to the use of more costly third-party labor to support product implementations or if there were other factors at play driving that compression?

Dave Wood

Management

Matt, there's -- no, it was really just with all the hiring we've had over the last year, we still have plenty of ramps and plenty of capacity left on that team. Obviously, with the holidays, billable hours and utilization is a little bit lower than some of the other quarters. So a little bit of seasonality in the number, but no third parties. I mean the far majority of all of our professional services is done by Agilysys' employees. So it was just mostly a utilization around the holidays.

Matthew Filek

Analyst

Okay. Perfect, Dave. And then just one more, if I may. In the past, I think you have talked about product development spend declining from the low 20s to mid-teens as a percentage of revenue over time. And given you're now seeing a boost in product development speed from leveraging AI, could that operational leverage materialize sooner than initially expected? Just curious on when exactly we may start to see that play out, especially in light of the AI efficiency benefits?

Ramesh Srinivasan

Management

Yes. Matt, as the AI efficiency benefits are increasing, so is the pressure, the innovation pressure from customers, right? So in general, a lot of the customers are using our modernized solutions are also coming up with a lot of new ideas, enhancement ideas, and we are able to get a lot more of them done that we've ever been able to do before because of AI tools, but the operating leverage in terms of using lesser R&D for the products is still a little bit of a moving target for us because the demand from customers -- because there are not many technology vendors innovating in this space. So that demand for innovation continues to be high. We are getting a lot more done than we have ever done before. And our products are 2 to 4 years in the field now. So they're fairly young. So that pressure continues to increase. So we think we will, in FY '27 and the year beyond that, we'll start increasing their operating leverage. But the pressure on us to continue innovating at a faster rate is reasonably high.

Operator

Operator

Thank you. And this does conclude today's Q&A session. I would like to turn the call back over to Ramesh for closing remarks. Please go ahead.

Ramesh Srinivasan

Management

Thank you, Lisa. Thank you all for your interest in Agilysys and support. Best wishes to all of you for a very happy, healthy, safe and successful 2026. Look forward to catching up again around the middle of May when we will be reporting Q4 and full fiscal year 2026 result and providing guidance for fiscal year 2027. Thank you.

Operator

Operator

Thank you all for joining today's conference call. This does conclude today's meeting. You may now disconnect.